Japan's Financial Services Minister Offers Advice for U.S.
Submitted by
CalculatedRisk on Sun, 03/23/2008 - 3:38pm (130 comments)
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Cr, I think you've provided a Fine Horse to ride.
NYTimes hand two big stories about credit-default swaps. I didn't see any revelations, but maybe it might be worth a thread.
The comparison between GDP and RE asset values doesn't seem very enlightening. One is a flow and the other is a balance.
I remember reading that Japanese RE turnover was almost zero during the bubble. Since they didn't have American financial know-how, the bubble probably didn't bleed into the economy as successfully as the American bubble did (think refi's and MEW as well as turnover).
What would be useful would be a comparison of bubble financing between the two bubbles.
Two big differences with Japan and US.
But the Japanese also had savings to ride out their economic downturn. I do not believe the average American could function without credit.
I wonder what that GDP to real estate value would be if one included all the leveraged derivatives based on US real estate?
Good to know that we are in slightly shallower gutter than the Japanese were in those times.
CR you do a great job of trying to provide balance and reason, but pardon me if I am somewhat less than reassured by the GDP ratios.
Japan's housing bubble may have been larger relative to its GDP but there are several mitigating differences. One the savings rate and two the gross consumer debt rates. I hesitate to add a third; the honor rate. Not just the cultural difference to honoring obligations but the 18 subsequent years of global decay of those traditions.
.Billy Hill - It seems to me that after this is all over, credit default swaps will be the biggest part of the story..
Thats good advice.. If we are trying to 'save face' for bank management. Which is not a priority.
There are many other differences between Japan's asset bubble of the early '90s, and the current U.S. asset bubble - but it does appear that Japan's bubble was significantly larger (relative to their economy).
The biggest difference is they were (and are) a nation of savers & producers... we are a nation of debtors & consumers.
They funded their meager injections from a position of a net positive savings rate (even though their gov't ran large deficits - the net was positive due to large private savings).
If we inject we will have to borrow from others (like the Japanese) to do so OR create that money supply out of thin air.
Not a good thing IMHO.
Looks like everyone took a swing at the Japan as savers, we as spenders softball...
One other thing - maybe Watanabe talking his book... please America, pump up consumption or we have another lost decade if we no export to USA.
Can Anyone recommend any good books about the Japanese crisis? They are few and far between.
Thanks!
CR,
There are a lot of market related bets in leveraged CDOs, CLOs, CDSs that didn't exist in the 90s, so the second and third order effects of the real estate downturn could be very magnified even though the ratio of aggregate real estate value to GDP are not as onerous as Japan's in the early 90s.
Best,
Public funds? What part of a $9 Trillion deficit does he not yet understand?
What effect did the loss of US $ valued assets held by Japanese have on their prolonged liquidity crisis?
As I recall the Japanese put huge amounts of 1980's dollar holdings into US Re.
That devalued at the time.
Is Japan facing a similar issue and helping themsel;ves with a taxpayer provide asset value support?
No joy there.
Sorry that should be debt not deficit... and yes there is a huge difference.
Where would the public funds come from, and where in the financial sector would/should they be injected?
Public money that enables an orderly unwind is good.
Public money that simply helps to support an overpriced asset is bad.
Best of luck telling them apart until about 5 years after the money is spent.
"He said the worlds huge excess liquidity has started flowing out of the US. If that flow were to be extended, it could lead to unprecedented problems."
Any ideas on what he is trying to say?
"What part of a $9 Trillion deficit does he not yet understand?"
Better update that 10.2 and counting
Hi, awgee. I read today that the swaps are half a quadrillion dollars.
I have read nobody who has explained how those swaps are going to unwind on the "real" economy. Surely there will be immense pain. But I can't figure how who will be hurting or why.
I also understand that there are a lot of things that most would consider savings which are not in the savings calculation.
Yep, he's talking about the Yen carry collapsing, draining liquidity and strengthening the Yen.
Any ideas on what he is trying to say?
Ya I know exactly what he is saying... if something doesn't change we could get 25 yen to the dollar and nothing the BOJ or fed can do about it. Once the private FX markets stampede there is little the central banks can do but watch (and provide the liquidity required).
Hey Liz, the total credit default swaps are estimated to be $40T to $50T. The total amount of over the counter derivatives which includes at least one member bank to the BIS is estimated by the BIS to be $516 trillion.
I do not know what exactly the effect of $40T of paper assets unwinding would be, but as little as I know tells me that alot of "money" would disappear. And how does money dissappearing effect us regular shmoes? If the big boys money dissappears, they don't have money to lend, like mortgage money. If money dissappears from the balance sheets of all sizes of banks and hedge funds, then the banks would be exposed to be insolvent and the hedge funds would be worthless. Bear Stearns had a run on it. If CDSs collapse, I guess all banks and hedge funds and ... will have runs on them. Just a guess.
liz:
why do you think the swaps market is going to unwind?
d
david,
What are your thoughts on the current quotes for 3 month and 6 month T bills?
dryfly:
just for informational purposes japanese public debt to gdp is about 160%.
for the US that number is about 60%.
i am not sure why based on these figures one would expect the us dollar to go to 25. as for the yen carry trade, which japanese housewife do you think still has it on?
"If the big boys money dissappears, they don't have money to lend, like mortgage money."
Replace "they" with helicopter Ben.
FR open window to people with decent projects and fire the IB's.
Why depend on "big boys?"
We got the fed, why save the "big boys"?
With modern IT and a few auditors there is no need for big banks.
Other than to turn the financial markets into gambling dens.
Wild guess here - the swaps market may unwind now that the Fed has shown it's hand, bailing out any institution before defaulting, thus rendering credit default swaps worthless.
Big oversimplification, but close to the mark I think.
France and UK to press banks over debt
[No sources cited, caveat lector!]
FT.com / Europe - France and UK to press banks over debt
An Anglo-French summit on Thursday will put renewed pressure on banks to agree to “full and immediate disclosure” of the scale of their bad debts, reflecting heightened political concerns about instability in financial markets.
Gordon Brown, the British prime minister, and Nicolas Sarkozy, France’s president, will make the call for greater bank transparency a central element of their talks in the UK this week. European finance ministers said in January that slow and inconsistent disclosure of bad debts by banks exposed to the subprime market was damaging confidence.
Carrington Capital Management solicits for 200m preferred investment @ 18%. Claims no problems w/repo lenders but wants to cut back. Investors' redemptions frozen. [Carrington bought into a number of NEW deals and bought their servicing platform last May]
FT.com / Europe - France and UK to press banks over debt
energy:
i really don't have a clue. i suppose it could have to do with some sort of end of quarter squeeze but i really just don't know. i would be very hesitant to blame it on some unknown financial disaster, certainly not after 48 hours and the index futures being up a bit here.
central: "Big oversimplification, but close to the mark I think."
Yhe swaps market, is a market in which participants exchange future cash flows from varying debt streams. the plain vanilla is fixed for floating.
the cds market is more of an insurance market although credit risk plays a part in swaps pricing. just google swaps market and you should find a lot of good in depth articles.
ust for informational purposes japanese public debt to gdp is about 160%.
for the US that number is about 60%.
i am not sure why based on these figures one would expect the us dollar to go to 25. as for the yen carry trade, which japanese housewife do you think still has it on?
First off comparing US public debt ONLY vs Japanese public debt ONLY is a canard, always has been.
Compare total US savings/debt (public, private, corporate AND future liabilities like SS & Medicare) vs same in Japan... then those numbers look a tad bit less favorable to the US. I've seen them worked every way but Sunday with the same result: Japan a net positive, US a net negative. In only one column does US beat Japan (public debt where we have less debt than Japan per capita GDP).
Item two - carry. Private Japanese investors have not been carrying dollars to a great extent for some time - they like other currencies with wider interest spreads like NZ dollars. Its been the BOJ that's been trying to hold the dollar up vis a vis the yen to protect Japanese exports to US. Watanabe is saying they can't do that much longer without fed help & fed has other issues.
Yen:USD 25:1 is just a WAG on my part - point is the number will be 'bad' if this condition 'extends'.
That's my read.
It's not the size of the underlying bubble that maters (the total value of real estate) but the absolute value of the leveraged bubble.
One other thing - maybe Watanabe talking his book... please America, pump up consumption or we have another lost decade if we no export to USA.
Right on Dryfly, he worried about the home turf!
dry:
i dont know enough about the state of economics in japan to hold up my end of an argument but lending any government money in their own currency for 10 years at 1.3% ain't my idea of a good bet.
There are many other differences between Japan's asset bubble of the early '90s, and the current U.S. asset bubble - but it does appear that Japan's bubble was significantly larger (relative to their economy).
This time, however, we have a global bubble across all assets, not just Japanese stocks and real estate.
Just for informational purposes japanese public debt to gdp is about 160%.
Japan plays of lot of off-balance-sheet games with public finance. Money from savings, insurance, and pension funds held by the Post Office is funneled into the Zaito.
BW Online | July 2, 2001 | Can Koizumi Tame This Tornado?
The Zaito is "off-budget" but most of the loans are guaranteed by the government and a good number of the loans are in trouble.
After almost two decades of "stimulus packages" Japan's "private debt trap" has been replaced by a "public debt trap".
The economy is now so dependent on government spending (on and off-balance sheet) that the functioning of the BOJ is now highly politicized.
When the BOJ started to talk about "normalizing" interest rates (and threatening to force major cut-backs in public spending) the ruling party jiggered the CPI to make sure that official stats still printed deflation. It's a big reason the BOJ doesn't currently doesn't have a chairman.
I'm sorry, but I don't know enough about swaps to have a valid opinion. It just seems that a number that big in today's economy is scary.
energy:
upon reflection i do have one WAG as to the t-bill rates. i seem to recall that margins were recently raised on all sorts of commodities. in general the funds must post collateral for futures trades in bills. if the margin limits were raised enough it could have caused a general scramble for the bills.
As an American saver, I think the issue of Japanese having relatively large amounts of savings when their bubble burst compared to Americans now is not just a worry because we have much less of a savings cushion but because of the implications for the government's policy response.
Presumably, inflationary policies designed to bail out debtors and penalize savers wouldn't be very popular in a nation of savers, but in a nation of debtors, punishing savers to bail out lenders and debtors might be good politics.
Kicker--we have lots of off balance sheet stuff in the US, no?
After almost two decades of "stimulus packages" Japan's "private debt trap" has been replaced by a "public debt trap".
The economy is now so dependent on government spending (on and off-balance sheet) that the functioning of the BOJ is now highly politicized.
Contrast that with the rapid economic growth in the US beginning in 1933.
Which is better? What Japan went through, and is still going through, or what the US went through?
liz:
sometimes large numbers are scary with good reason and others not so, i think it is a mistake to paint these with a broad brush of scary unless you get into the specifics. same as with notional derivative numbers. if someone here goes and buys some out of the money puts on wamu with a delta of 5, then that would show up in a report as having a notional value 20x whatever was 'invested'. scary but generally meaningless.
Kicker & lawyerliz:
see the estimates for unfunded public debt:
United States public debt - Wikipedia, the free encyclopedia
US$60 Trillion!
That's 435% of GDP....
On saving and spending, something just occured to me: some tax treatments that would encourage saving instead of spending. First, eliminate the mortgage interest deduction. Second, replace the capital gains tax with a capital gains tax credit.
Off topic, and apologies if someone has already linked this:
Last hope in a weak economy? Mom and Dad
Only anecdotal stories so far, but the ages involved are surprising. Paging Rob Dawg, he's been predicting an increase in household size for some time now. If so, more bad news for demand for housing. And more likelihood of people "walking away", as that free rent will be very enticing indeed, especially for those out of work.
Economically speaking, the estimate of total land valuation during the bubble is deceiving since as mentioned above the transactional levels were never that high in Japan. Total land valuation is an extrapolation and not a real number, nor is it particularly economically significant (other than for its "wealth effect").
Ie. the only damage is done when somebody borrows money to purchase the asset -- low transaction volumes usually heighten total valuation, but the resulting debt overhang from a bubble crash is proportional to how many actual purchases with borrowed money were made.
From this chart you can see the extent of bubble lending in the US, 2003-2006.
Can Anyone recommend any good books about the Japanese crisis?
I found Christopher Wood's The Bubble Economy in a used book store a couple of years ago.
Much of the unsolicited advice to the Japanese, during their decade long reversion to the mean, was to the effect that they were only prolonging the agony by bailing out dead institutions, rather than letting them fail. The Fed has not, so far, shown any inclination to take this advice. As so many have said, this is not a liquidity problem, its a solvency problem. You can't fix it by pretending that its just a matter of time before the markets are willing to assign a greater value to all of the shite on the books. The current mortgage default rates aren't forecasting an improvement in the value of the securities that are at the heart of this crises, quite the opposite. So, rather than taking the current Japanese advice, which amounts to suggesting that the US should throw good (public) money after bad (private) money, wouldn't it be better to take the advice the Japanese were given, and let the insolvent institutions fail (sooner rather than later). Taking the current Japanese advice seems likely to lead to the same place it led the Japanese, to ten years of painful reversion. Better to let the guilty fall on their swords.
Karl Denninger is calling for articles of impeachment to be filed against the President of the United States of America for the illegal Fed action to bribe JPM to purchase Bear Stearns.
The Market Ticker
Petition To Impeach George W. Bush
Kicker--we have lots of off balance sheet stuff in the US, no?
Think about the worst revenue-backed municipal bonds issued in the US and then think about how bad they would have been if all the loans had an explicit government guarantee, were arranged by politicians, and had access to all US savings (Las Vegas mono-rail bonds x 10).
Other than the PBGC the majority of the US governments off-balance-sheet liabilities aren't currently non-performing (FDIC, FNMA, FRE, GNMA). FNMA/FRE aren't even explicit guarantees.
Now, we can argue about if we should include all the "promised" benefits as "off-balance-sheet". My feeling is that those will last until SS & Medicare start to become a net drag on Government spending.
The big difference between the US and Japan's debts is that the majority of US debts are private while the majority of Japans debts are public. Private debts can be discharged through bankruptcy while public debts can only be discharged through ruinous taxes or inflation.
Awgee, why don't you ask your congressman to propose ending the mortgage deduction. Unless it's Ron Paul, I don't see it happening.
The economy is now so dependent on government spending (on and off-balance sheet) that the functioning of the BOJ is now highly politicized.
Extremely so. Japan's problem isn't just the debt though - its their currency. They need their currency to rise - wipe out export industry & their economy... then their currency falls & they are back 'in business'.
Sort of what we're doing ex-Rubin. Our currency is resetting pretty close to where it should be (far weaker) than in Rubin years... only trouble is a few pesky bubbles in between have to be 'blown off'... and of course that means all the savings and assets that everyone else has too since they are all marketed to bubble somehow.
Japan's got a very similar problem... and like here the folks with the assets (that be a whole lot of us) don't want to see them go poof. And since my debt is your asset there is no painless way to scrub this one down.
So look for a lot more BOF-like money creation inflation in the meantime.
david,
Must be one king hell of a margin call to print like this for the 3 month and 6 month notes...
T Bill Rates
So look for a lot more BOF-like money creation inflation in the meantime.
Make that BOJ... though I kinda like BOF.
Private debts can be discharged through bankruptcy while public debts can only be discharged through ruinous taxes or inflation.
Ummm. Hate to split hairs but my debt is your asset. Massive waves of private BK causes more BK and cascades into cross defaults. In that respect at some point 'public' indebtedness is less problematic than 'private'.
The question is... has our private indebtedness become a bigger problem than their public indebtedness... and if so will our eventual 'nationalization' of private indebtedness work out better than their attempt?
I'm not optimistic given our savings rate and aversion to taxes - sounds like we always want to supersize our free lunches.
It seems that the advice to allow large insolvent banks to fail is advice that can given but never taken.
When Nouriel Roubini advocated the nationalization of all toxic mortgage waste a few days ago, he urged that government purchases be done at deep discount. I believe that this will happen with fiat money, but I wonder how deep the discount will be.
RGE - The Worst Financial Crisis Since the Great Depression is Getting Worse…and the Need for Radical Policy Solutions to the Crisis
I vote for japanese housewives buying up MBS and the japanese government injecting public funds into wall street. thats globalization right?
CR - you are right that the Japanese bubble was much larger. additionally, the Japanese are culturally less prone to walk away from a mortgage. the wildcard, however, is that the typical Japanese household actually had savings, lots of it, to buffer the hit of their deflating asset bubble. our households, of course, typically do not.
My god, the 6 month T-bill yield is at 0.01%... one hundredth of one percent right now. Essentially zero. What is going on?
I read today that the swaps are half a quadrillion dollars.
A quadrillion here, a quadrillion there, and pretty soon you're talking about real money.
Quadrillion is the new trillion.
My god, the 6 month T-bill yield is at 0.01%... one hundredth of one percent right now. Essentially zero. What is going on?
The global banking cartel is trying to stampede U.S. investors back into equities.
Karl Denninger quotes John Hussman, of The Hussman Funds, in a letter with a publication date of tomorrow:
"In my view, the deal would be palatable if J.P. Morgan was to remain fully responsible for any losses on the 'collateral' provided to the Federal Reserve, assuming shareholders were to consent to the buyout. As it stands, Congress should quickly step in to bust the existing deal and demand an alternate resolution, by clearly insisting that the Fed's action was not legal.
The Fed did not act to save a bank, but to enrich one. Congress has the power to appropriate resources for such a deal by the representative will of the people the Fed does not, even under Depression era banking laws. The 'loan' falls outside of Section 13-3 of the Federal Reserve Act, because it is not in fact a loan to either Bear Stearns or J.P. Morgan. Bear Stearns is no longer a business entity under this agreement. And if the fiction that this is a 'loan' to J.P. Morgan was true, then the only point at which the 'collateral' would become an issue would be in the event that J.P. Morgan itself was to fail. No, this is not a loan. It is a put option granted by the Fed to J.P. Morgan on a basket of toxic securities. And it is not legal."
[emphasis mine]
Alan,
I am curious myself - david speculated commodity margin scramble - but who knows?
Whodathunk we would see rates like this?
I read recently that Japan's GDP/cap rose at a higher rate than the U.S.'s because their population was shrinking and ours growing. Lost decade?
ot Times seems to say JPMorgan has seven trillion of the CDs, CDO, etc. Doesn't give one a lot of confidence.
Two big differences with Japan and US.
Also, it's possible that the real Japanese economy was in much better shape in 1990 than the US is in now.
AFAIK there wasn't the same huge surplus of real estate built in Japan as there has been in the US, and the US is more dependent on domestic consumption and so presumably more susceptible to the bursting of local asset bubbles.
O/T - I'm hearing 8K in layoffs in BSC - anybody else hear this??
My god, the 6 month T-bill yield is at 0.01%... one hundredth of one percent right now. Essentially zero. What is going on?
Oh my God it's full of t-bills.
One of the most strange but true is the US barrelling into a real estate bubble with the Japanese depression still under way.
It always appeared to me that Greenspan felt compelled to stimulate the US consumption to pull the Japanese and European economies out of the dumpster. Japan's single minded, mercantilist self interest compelled it to take advantage of the situation.
Greenspan only managed to import the Japanese bubble. The San Franciso Fed published a paper on the "conundrum" of the value of the yen in FX markets. The value of the yen has remained suspended far below the expected price, providing a risk free return to hedge funds and such. At the same time, the carry trade has been a fundamental force in the bubbling the US economy. Free markets indeed.
O/T - I'm hearing 8K in layoffs in BSC - anybody else hear this??
How soon, tomorrow? If so I hope some reporters are there - might make good video.
I ask because I worked for an ag processing company that bought a failing rival in the 80s farm crisis and handed out about 1200 pink slips to hard core union factory workers the first day - literally at the gate as they tried to punch in. I'm still surprised there wasn't a riot.
Paging Rob Dawg, he's been predicting an increase in household size for some time now. If so, more bad news for demand for housing. And more likelihood of people "walking away", as that free rent will be very enticing indeed, especially for those out of work.Ain't been gettin' a lot of love lately so thanks. I see three things that really worry me and this is just the first to start getting so much as anecdote. One household out of ten adding an additional occupant is 4 million surplus houses. That's what your link describes. Second is migration. Notorious for bad data but even stories of better traffic are appearing. Third is reproduction. This time more than anytime in history the downturn is going to affect birthrates. While not located where needed we are facing a decade of extra houses in some places.
Cr, I think you've provided a Fine Horse to ride.
And all the people here are complaining they don't have free ponies,...
"Awgee, why don't you ask your congressman to propose ending the mortgage deduction."
jmay - Good idea. Can I tell him you are on board with me? Anybody else?
.
If anyone can provide a link to the NYT story on credit default swaps that would be excellent. Can't find it in the Sunday online section...
But, did Japan have :
The "negative equity certificates" would be tradable, and creators of the proposal anticipate there would be a market for them. Initially the certificates would be worth pennies on the dollar, but as the housing market recovers and home values rise, so too would the value of these certificates.
AC:
Thanks for the 2001 reference
I wonder if we are at the financial point of "DAMMIT HAL! Open the POD bay doors!" (The pumpers trying to save us from the inevitable correction).
Capitulation being the blasting of the explosive bolts and ejection into the vacuum of space in the emergency airlock.
Sorry, too much time on my hands a also my favorite movie of all time.
SDM
Really sweet deal Ben engineered for BSC employees - first they wipe out your equity and then you lose your job. Echoes of Enron. Except nobody made a fortune taking over Enron (in fact, I think UBS took a bath on the deal).
If I was BSC employee, I'd buy myself a carton of eggs and pepper a few Chase bank branch windows around Manhattan. Childish, but no less sporting than Dimon's takedown of BSC.
dryfly
Saw that yesterday in a UK paper Times or maybe Telegraph. Only other info was # of Brits involved < 500 as I recall
Off-topic:
"Pay day" loans exacerbate housing crisis
CLEVELAND (Reuters) - As hundreds of thousands of American home owners fall behind on their mortgage payments, more people are turning to short-term loans with sky-high interest rates just to get by.
While hard figures are hard to come by, evidence from nonprofit credit and mortgage counselors suggests that the number of people using these so-called "pay day loans" is growing as the U.S. housing crisis deepens, a negative sign for economic recovery.
CR
Yes, I think the Japanese RE bubble was bigger as a share of GDP than the US bubble, BUT . . .
How was the bubble financed?
You and Tanta have been giving us all a great education on how the RE bubble was inflated by CDOs, SIVs, and on and on.
In other words, isn't the US RE bubble multiplied by the way it has been leveraged with more leverage, and then supposedly protected with a regime of credit default swaps and the like that are, loosely, so to speak, a little like the doomsday device in DR Strangelove?
I think this key difference in how the bubbles were funded with credit helps explain why the burst of the Japanese bubble caused few international shockwaves, but the bursting of the US bubble has already shaken banks in small Scandanavian towns, etc.
Japan had banks - regular old banks - holding lots of bad paper. We've got instruments no one can track in largely unregulated invetment houses.
Japanese banks tried to hide their problem. We've got what some have called "where's Waldo," but isn't it really more like a minefield?
(second try, didn't seem to post first time)
but,
TODAY/Gallup Poll shows that 32% of respondents approve of the way George W. Bush has performed as president.
Nearly two-thirds -- 64% -- say they don't think he's been doing a good job.
Those numbers are identical to the ratings USA TODAY found earlier this month, and similar to the approval ratings that the two-term president has drawn over the last six months.
With few exceptions, his approval rating has been in the low 30s for the last year.
Tyrone writes:
Off-topic:
"Pay day" loans exacerbate housing crisis
CLEVELAND (Reuters) - As hundreds of thousands of American home owners fall behind on their mortgage payments, more people are turning to short-term loans with sky-high interest rates just to get by.
While hard figures are hard to come by, evidence from nonprofit credit and mortgage counselors suggests that the number of people using these so-called "pay day loans" is growing as the U.S. housing crisis deepens, a negative sign for economic recovery.
Tyrone
Fun fact: Payday loans cannot now be offered legally to U.S. servicemen and women--at least not on the same terms that other people get. The military brass told Congress that debt worries partly fueled by payday lending were affecting combat readiness.
Dryfly
"I ask because I worked for an ag processing company that bought a failing rival in the 80s farm crisis and handed out about 1200 pink slips to hard core union factory workers the first day - literally at the gate as they tried to punch in. I'm still surprised there wasn't a riot."
Only in the US are workers so docile that they let themselves be so treated.
Most other countries including China, there would have been burnt cars, buildings and maybe worst.
Hello vader - how ya been.
And 'yes' you are correct. I was absolutely astonished these guys didn't blow up.
Maybe the bankers will be different... lol.
I'm just beside myself, we've passed by trillion so quickly.
Re: GWB Approval Ratings
... and those are the same approval ratings for Congress... so I don't see the point other than we have zero faith in our political leaders...
I don't know who in the world has positive approval ratings besides successful sports franchises, movie/music/tv starlets (thanks to the children) or insightful blog posters...
Two words re impeachment: President Cheney
Meanwhile, at this moment, gold is down, Japanese and Taiwanese stock markets are up, the yen is weaker, the dollar is stronger, and the investment pimps are calling a turning point in the credit crisis and the return of the bull market.
It's all so.... cute.
Tyrone
In the 1950's I worked in an office on the Brooklyn docks. Many colorful characters including Mr.3 for 4. He'd give you three till payday when you gave him four.
His collection methods probably more effective then the current internet ones.
I have seen a lot of comments infering that there is no "moral hazard" from bail-outs such Bear Stearns since the share-holders get wiped out. However, whatever the moral hazard of customers? If investors and banking customers feel confident that their trades, or money, will never face counter-party risk then there is no incentive for them to make sure they do business with safe institutions.
The same rule applies to retail banking. Why not put your cash in the bank offering the highest interest rate, even if they have a weaker balance sheet than competitors? So long as you aren't putting in more than $100K the government guarantees your cash anyway, so you'd might as well take advantage of the highest interest rates around.
I would argue that what we really need is for customers to get burnt BADLY with one of these financial failures, to instill some real fear amongst investors that they really do need to be careful about who they do business with. Customers are part of the problem and should NOT be bailed out.
energy, david, alan:
Re: T-Bills
This article has a good explanation, very prescient:
Kitco - Commentaries - Antal Fekete
Here's a piece:
"The curse of negative discount rate
If you think this is fantasy, think again. Look at the charts showing the collapse of the yield on T-bills. While it may bounce back, next time around the discount rate may go negative. You say its impossible? Why, it routinely happened during the Great Depression of the 1930s. Negative discount rate means that the T-bill gets an agio, the discount goes into premium even before maturity, and keeps its elevated value after. This perverse behavior is due to the fact that T-bills are superior to FR notes in that they earn a yield while they are just as acceptable (if not more acceptable in very large amounts) as are FR notes. Yes, people will clamor for money they can fold, the kind that is in demand exceeding supply, the kind people and financial institutions hoard, the kind foreigners have been hoarding for decades through thick and thin: FR notes. Thus T-bills are a substitute for the hard-to-come-by FR notes. Mature bills may stay in circulation in the interbank market, in preference to electronic dollar credits. Why, their supply is limited, isnt it, while the supply of electronic dollars is unlimited! The beauty of it all is that we have an accurate and omnipresent indicator of the premium that cannot be suppressed like M3: the (negative) T-bill rate. It is an indicator showing how the Federal Reserve is losing the fight against deflation."
tranche water .... yup
posted similar yesterday.
This will push some fools back to equities, then, well, I will try to show some sympathies when it's over.
Although there were some differences between Japan and US, the results were basically same: Banks got bad debts, borrowers went under water.
Oh, by the way, I'm from Japan and my house lost more than 60% of the value, yet I paid off all my loan... So, ask me anything about DEFLATION!
One more note.
It wasn't a solution that government injected capital into those troubled banks. The fact was that government and banks just bought time. Now Japanese economy is plunging again, yet there is (almost) no room to cut the rate.
I think we should have chosen hard landing.
Huge differences between US and Japan. USA may be toast in comparison.
(1) Japan had much higher lending standards. NINJA loans are American innovations. Downpayments were much higher lowering lender exposure. Social stigma of default much,much higher. Reduced tendency to speculate in Japan. Fewer jingle mail, fewer MEWs, leaving hollowed out (upside down) loans.
(2) Japan did not securitize their mortgages leading to much easier trading. No securitizing meant fewer "liar" loans, fewer marked to model phony constructs, no monoline insurers creatively lying about underlying creditworthiness of mortgages.
(3) Japan did not, by the combination of above AND low interest rates, conspire to create a glut of housing due to abnormally easy credit and absence of regulation.
(4) Japan's consumer leverage was of smaller multiples. Fiscal discipline kept Japanese consumers with much larger savings and equity stakes. (Not US false equity runups and artificial sense of wealth). Banking/Investment Bank leverage was much less than the 16, 25, 40 multiples now in USA.
(5) Their institutions did not engage is ill-advised risk trading i.e. Credit Default Swaps. Now USA has many trillions of US$ in notional value swaps at high risk as mortgages defaults exceed all modeling. CDSes will work well, so long as counterparty risk is contained. So long as the liabilities caused by this extreme downturn don't render a counterparty completely insolvent--A OK. But it won't. Huge stresses and domino affect when firms BK out.
(6) Stronger industrial base to contain pressures on employment. Cohesive social structure which dampened unemployment and social unrest. NeMawari investing structures dampened equity downturn.
(7) Underdeveloped options market reduced the virulency of trading potentials. USA exposed to high volatility inducing phenomena and deep contractions due to power of options and derivatives.
(8) Japanese multigenerational mortgages spread risk among several creditworthy individuals. This reduced likelihood of default.
(9) Japanese RE never reached the massive glut status of USA. Ability to absorb supply in USA severely constrained.
(10) Stable, strong currecy and Central Bank encouraged confidence and mitigated panic. USA just the opposite.
That Hussman piece is definitely worth reading. I read his market comment every week, and I've never seen him fly off the handle like that. Usually he's sober, occasionally glib and wonkish.
Nice print on those 3 and 6 month T-bills. What's that put the TED spread at? 2.6? Wow. I love the smell of deflation in the morning.
Tranche:
Trying to wrap my head around the concept of electronic dollars. If, for instance, my paycheck is electronically deposited into my account each two weeks, does that constitute electronic dollars?
Or is this guy saying that the electronic dollars are simply massive figures plunked into the system that never wind their way downwards? In essence hoarded by capital starved financial institutions?
Thanks
Tranche:
Trying to wrap my head around the concept of electronic dollars. If, for instance, my paycheck is electronically deposited into my account each two weeks, does that constitute electronic dollars?
Or is this guy saying that the electronic dollars are simply massive figures plunked into the system that never wind their way downwards? In essence hoarded by capital starved financial institutions?
Thanks
Some relevant Japan links:
http://knowledge.wharton.upenn.edu/papers/158.pdf
http://www.fdk.or.jp/en/pdf/rej2007.pdf
For folks who want more info on Japan and are willing to do some digging:
Publications
RIETI - Research Institute of Economy, Trade and Industry (RIETI)
OT: Must post bookmark:
Acclaimed Music
thanks to all those who posted
on this thread... lots of good info..
i continue to get educated
(10) Stable, strong currecy and Central Bank encouraged confidence and mitigated panic. USA just the opposite.
Jumpin' Jack | 03.24.08 - 12:16 am | #
JJ I agree with everything but the last one - they had 'stability' but not real strength. Well I suppose you could say their currency 'got stronger' after Plaza but it was never 'strong' - BOJ intervention made sure of that (else Japan would have had a very nasty hard landing). Currency went from unbelievably weak to just weak... due to constant intervention.
Otherwise pretty much the way I saw it at the time (competed against Japanese suppliers & after Plaza a lot threw in the towel & built transplants here).
We'll see the same thing with the Chinese & Europeans here - they'll quit fighting dollar weakness & co-locate (some operations in home country, some here). Probably do real well too - like Toyota & Honda here.
OK Dryfly. Duly noted, will do a little more research on that one. Regards.
I hope somebody listens to Hussman. It really burns me up to see all of us pay to secure the profits of a few of us.
It's funny how we here in the comments are called "crazy" for making things out to be so bad, and yet so-called economists are allowed to call for unprecedented bailouts and socialization of losses. Why? Because the alternative is calamity!
So on my re-re-read of the Kitco article, my response is that the electronic dollars are the latter - funds released to financial institutions that hoard it.
So how to "force" them to release the funds downwards? How to break the bottleneck and release them to the other levels of the "pyramid"?
The question is... has our private indebtedness become a bigger problem than their public indebtedness... and if so will our eventual 'nationalization' of private indebtedness work out better than their attempt?
dryfly | 03.23.08 - 10:23 pm
Private debt is a bigger problem because the lender (actually and foolishly) believes the debt will be retired - eventually.
Public US debt? Not so much. We've been bankrupt for years, and everyone is too scared to do anything but lend us more.
It is the modern day equivalent of paying tribute.
homedad43 | 03.24.08 - 1:02 am
If your goal is to get the shit through the goose (more dollars distributed in the economy), it would probably be smarter to distribute cash to the least financially savvy (read: the poor) of our citizenry. Within months, the banks would have the vast majority of it back as debt is payed off and new devices to scam the newly-liquid are devised.
Marcus:
Someone commented here some time ago that the most efficient way to get things done - and stick the financial sector - would be to simply issue very large checks to the populace to do with as they see fit.
If your goal is to get the shit through the goose (more dollars distributed in the economy)
Financial foie gras - yum!!!
Long time reader CR, but I've been doing some similar calculations myself for the Australian property market.
Unfortunately, I can only find data for dwellings (http://www.rba.gov.au/Statistics/Bulletin/index.html) but the total value of household property works out to be around 3.6 trillion USD for Australia for the December quarter.
So, this isn't counting business real estate, pastoral leases, mining tenements - real estate used by the productive part of the economy.
I've done a bit of research on the US market for comparison, and I found that the value of US dwellings was around 17 trillion USD. So the value of the non-housing sector of the US real estate market, using your figures, is about the same as the housing sector, maybe a little more.
If we assume this as equivalent for Australia, then Australia's RE market is estimated at around 7 trillion USD.
The size of GDP? 1 trillion USD. It seems likely that our real estate market is 6-7 times our GDP. That's larger than Japan's bubble.
In fact, at the height of Japan's bubble, Tokyo's gross product was around 1 trillion USD, and the value of their entire RE market (not just dwellings) was 3 trillion USD. Our housing market alone has more value than Tokyo's entire RE market, for the same dollar of gross product.
It seems Australia's property is also the most expensive when compared to income.
Australian housing world's most expensive - National - theage.com.au
That article is from 2005, and at best, nothing has changed, if anything it has gotten worse.
The strange thing is, there is no sign that Australia's housing market is set to implode. There has been under building, lack of supply, but we also have much higher interest rates than other OECD countries, and higher unaffordability. This situation would suggest to me higher household density, but if anything household density has been getting more and more sparse.
Other similarities with the US - highly reliant on debt. We've had the best terms of trade for 50 years with the mining boom, yet our CAD is about 7% of GDP.
Interested in your thoughts, because while the US housing market is collapsing, there seems to be other countries out there in more precarious situations.
Thanks,
Gravy
The strange thing is, there is no sign that Australia's housing market is set to implode.
Neither did ours until it did.
Have been monitoring grass roots musings on RE prospects in a variety of markets including Australia.
Complacency compared to US at this point.
House price news, information and discussion - HousePriceCrash.co.uk
Sydney house prices are still holding in the upmarket areas. Until the commodity/resource boom economy ends that will probably continue. But in the much more vast (by area) western suburbs they have their own sub-prime meltdown.
ROI on apartments are ridiculously low: even with rents rising, a $500k apartment will struggle to collect $450pw. that is a GROSS return of less than 4.5%! Since anyone can get bank interest rates of 7.5% to 8% it boggles my mind that young people stil l rush to buy instead of just renting to see how it pans out.
As for Japan, i lived there during a few years of the lost decade and while it must have sucked to be employed by a bank and be struggling with a large portfolio of bad debt lent to real estate businesses and loss making smal l companies, most Japanese were sanguine: they saved at the post office, so few felt their nett worth was diminished. Prices in general, including rents, went sideways or down. It really was all about whether or not you could escape unemployment which was only a threat really to the 50+ year olds who slept at their desks in companies that refused to restructure.
so while the japanese bubble collapse may have been impressive on paper the social impact I think is quite a bit smaller than the current US situation.
And although the "lost decade" may have involved near zero growth, tell me what is actually wrong with that? life kept improving by other measures, cellphones kept getting smaller and the internet kept getting faster. etc etc. So the GDP didn't roar ahead but perhaps having a livable society that doesn't need 3% more resources year on year might be something every country should aim for.
david_in_ct:
why do you think the swaps market is going to unwind?
I recommend reading this article:
What Created This Monster? - NY Times
And take note that some of the top banking CEOs in the country have been fired, the FED is doing emergency weekend rate cuts, Bush and the Fed bailed out one of the World's top IBs with State welfare, Hedge Funds collapsing, SWFs getting burnt and pulling out, housing bubble, financing several wars, shrinking World economic clout, more countries rebelling against the system, historic debt load, soaring oil prices etc. At some point you got to ask yourself what is backing up that "45.5" trillion worth of electrons and what is the World investment community going to do as the losses mount? Now read this statement again in the above context:
He said the worlds huge excess liquidity has started flowing out of the US. If that flow were to be extended, it could lead to unprecedented problems.
The World runs on business and the investment money follows. Check out the World GDP numbers and compare them to ours. Russia seems to be winning the Caspian Basin battle, South Americia is tossing out Western oil companies and banks, the ME democracy project has turned into a financial burden with no end in sight, Chinese and Arab money are overtaking Africa and EU GDP has surpassed America's. There is a worldwide rebellion going on. Ignore this at your own peril.
@gravy,
I live in Australia.
I sold my own house in mid-2004, and persuaded my elderly mother about the same time to sell an investment property here and a house she inherited in the UK from her late sister. The rent multiples are just insane.
While I may have just been early in anticipating a bust, at this stage it appears I have lost both of us a LOT of money (mid-6-figures-USD between us).
ROI on apartments are ridiculously low: even with rents rising, a $500k apartment will struggle to collect $450pw. that is a GROSS return of less than 4.5%! Since anyone can get bank interest rates of 7.5% to 8% it boggles my mind that young people stil l rush to buy instead of just renting to see how it pans out.
Aaah, but young people aren't buying. The ratio of owner occupiers to investors is falling, and first home buyers are leaving the market. I can't remember where I saw the figures, possibly on a report by the Productivity Commission.
So essentially, it's real estate investors buying up the market, and new buyers being shut out.
Now, the yields are low on investment - some figures say as low as 2%. Negative gearing helps, but I think what has been happening in Australia is people buying based on capital growth.
It's difficult to predict where the Australian market will head - there's been woeful investment in infrastructure for almost 20 years, and governments have tended restrict the release and zoning of land where possible. These have all strangled the supply of the market.
But it very much seems that we're at the top of a bubble.
Yeesh, some of you really believe that government guaranteed bank deposits are a BAD idea?
We've tried the free market system, though not in my lifetime on this side of the pond. Here's some clues: Time spent waiting in line to withdraw all your savings ("Honey, I'm going on a bank run!") is a dead economic loss. If the wicket closes before you get to the front of the line, you'll spend the rest of your life with no discretionary income, which doesn't help the economy much. The government will have to pay you welfare and medicare in your dotage, because you won't be able to pay for it yourself. Other people will see your example and hoard their savings in coffee cans rather than on deposit, which doesn't help the economy much. Banks will, instead of offering guaranteed long term financing, offer borrowers call loans, requiring more capital reserves and less leverage at businesses, which doesn't help the economy much.
Read some history. JP Morgan did not say "Well, letting a few of the weaker banks fail will be good for the system." I suppose we've learned a lot since then, though.
Does it mean that Japanese jump from 50th floor and American from 28th floor? Big difference!
WOW!!! A public uprising this way cometh??? From Hussman:
"The Fed overstepped and the Treasury overstepped. At the point where unelected bureaucrats pick and choose who to subsidize, who prospers and who perishes,in a free capital market, and use public funds to do it, more is at risk than just $30 billion. Instead, we cross a line, and stumble off a very clear edge down an interminably slippery slope. We speak up now, or forever hold our peace."
"Rick Santelli of CNBC is exactly right. If this is how the U.S. government is going to operate in a democratic, free-market society, "we might as well put a hammer and sickle on the flag.""
@Tyrone
In some of the aread where payu day loan companies are proliferating you cant find a bank for miles. They are the new banks with 800% interest rates, however they are unsecured. Another subprime mess. But these bastards who are lending out the money arent protected by the gvt, yet.
I love this. Bloomberg reporting that builders stock are rising on home re-sells rising - these are existing homes, not new construction. This seems like a good move to me. I think I will but in an order to buy (NOT!)
PS - the newest best seller in my local Goodwill store is the Century 21 gold blazer - very stylish. They have hundreds in stock - all sizes available.
Even in the worst of time, the default rate of residential mortgages in Japan stayed below 0.2%. People kept paying off their mortgages even after the values of their homes more than halved. That's a big difference.
Commercial mortgages and other debts defaulted in masses.
US T-Bills now yielding les than JGB is enough to cause brown trousers all round in Tokyo. It means they can not disguise their deflation and export it to the US any more. No wonder they are worried.
"And although the "lost decade" may have involved near zero growth, tell me what is actually wrong with that? life kept improving by other measures, cellphones kept getting smaller and the internet kept getting faster. etc etc. So the GDP didn't roar ahead but perhaps having a livable society that doesn't need 3% more resources year on year might be something every country should aim for."
Justin | 03.24.08 - 4:08 am |
What if he US GDP has now reached a permanently high plateau?
governments have tended restrict the release and zoning of land where possible.
If there were an actual shortage of land for housing, this would be reflected in high rents as well as prices.
Prices out of whack with rents are an asset bubble, period.
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