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mises
Joined: 05 Nov 2007
Location: retired
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 Posted: Tue Dec 23, 2008 9:16 pm Post subject: Switzerland will follow Iceland over the cliff |
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In this crisis, the strength of a bank�s balance sheet is of little consequence. What matters is the explicit or implicit guarantee provided by the state to the banks to back up their assets and provide liquidity. Therefore, the size of the state relative to the size of the banks becomes the crucial factor. If the banks become too big to save, their failure becomes a self-fulfilling prophecy.
That has some commentators worries, most notably, Felix Salmon at Portfolio.com:
This seems right to me. And also very scary, because of one country: Switzerland.
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| UBS has a $2 trillion balance sheet; Credit Suisse has another trillion on top of that. Call it $3 trillion between the two of them, which is about ten times Switzerland�s GDP of $300 billion or so. Now that�s what I call too big to save. Oh, and did I mention? At the end of 2007, Credit Suisse was levered by more than 40 times; UBS was levered by more than 64 times. A 16% fall in UBS�s assets would wipe out not only all of its equity but 100% of Swiss GDP on top. |
http://ftalphaville.ft.com/blog/2008/11/12/18122/spot-of-swiss/
...
Debt kills. |
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Hater Depot
Joined: 29 Mar 2005
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| Posted: Tue Dec 23, 2008 10:03 pm Post subject: |
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| At some point I think the mantra "too big to fail" has to imply "too big to exist". Either the government should block companies from over-leveraging or it can break them up when they get too big. A lot of the current crisis is being caused by financial institutions that went into debt far beyond historical norms. The bursting of the housing bubble may have been the last straw, but it could have been anything. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Tue Dec 23, 2008 10:27 pm Post subject: |
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| Either the government should block companies from over-leveraging or it can break them up when they get too big. |
Exactly. Bank of America is leveraged 134:1 and Citi 88:1. Fanny/Freddy were at 80:1 when they blew up. (stats from last Thursday's FT). Last June, BofA reported their leverage at 11:1.
http://www.ft.com/cms/s/0/411f8da0-cd6f-11dd-9905-000077b07658.html
http://i.l.cnn.net/money/2008/10/06/news/europe.leverage.fortune/barr_EUROBANKS_graphic.gif
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| The bursting of the housing bubble may have been the last straw, but it could have been anything. |
You mean "first straw", right?
Here is that FT article I sourced from above, in entirety. It is behind a subscription wall:
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The age of obligation
By Niall Ferguson
Published: December 19 2008 02:00 | Last updated: December 19 2008 02:00
In the Old Testament Book of Leviticus, God commands the children of Israel to observe a jubilee every 50 years. Nowadays we tend to associate the word with celebrations of royal anniversaries such as Queen Elizabeth's golden jubilee in 2002. But the biblical conception of a jubilee was more precise: that of a general cancellation of debts.
This point is spelt out in Deuteronomy: "Every creditor that lendeth ought unto his neighbour shall release it; he shall not exact it of his neighbour, or of his brother; because it is called the Lord's release."
Such injunctions may strike the modern reader as utopian. How could any sophisticated society function if all debts were cancelled twice a century - much less, as Deuteronomy seems to suggest, every seven years? Yet we know that such general cancellations of debt really did happen in the ancient world. In 1788 BC, for example, about 500 years before the time of Moses, King Rim-Sin of Ur issued a royal edict declaring all loans null and void, wiping out some of history's earliest known moneylenders.
The idea of a generalised debt cancellation is not wholly unknown in modern times. The late Gerald Feldman, the world's leading authority on the German hyperinflation of 1923, drew a parallel between the ancient Hebrew yovel and the wiping out of all paper mark-denominated debts as a result of the collapse of the German currency (though, as he was quick to point out, those whose savings were wiped out were far from jubilant).
In the hope of avoiding the mark's meltdown, the economist John Maynard Keynes had repeatedly called for a general cancellation of the war debts and reparations arising from the first world war. Though no such intergovernmental jubilee was ever proclaimed, debt cancellation was effectively what happened after 1931, beginning with President Herbert Hoover's one-year moratorium on both war debts and reparations.
As 2008 draws to a close, there are many people on both sides of the Atlantic who yearn for such a simple solution to the problem of excessive indebtedness. Parallels with the interwar period are not inappropriate. It is all but inevitable that we shall see serious political and geopolitical upheavals in 2009, as the recession takes its toll on weak governments (Thailand and Greece are already reeling) and raises the stakes in inter-state rivalries (India-Pakistan). In the words of Hank Paulson, the US Treasury secretary: "We are dealing with a historic situation that happens once or twice in 100 years." The stakes are high indeed. Has the time arrived for a once-in-50-years biblical jubilee?
Excessive debt is the key to this crisis; it is the reason we are confronting no ordinary recession, curable by a simple downward adjustment of interest rates. It is the reason we still have to fear, if not a second Great Depression, then very likely the biggest recession since the 1930s. We are living through the painful end of an age of leverage which saw total private and public debt in the US rise from about 155 per cent of gross domestic product in the early 1980s to something like 356 per cent by the middle of this year.
With average household debt rising from about 75 per cent of annual disposable income in 1990 to very nearly 130 per cent on the eve of the crisis, a large proportion of American families are submerging under the weight of their accumulated borrowings. British households are in even worse shape.
Looking back, we now see just how big a proportion of US growth since 2001 was financed by mortgage equity withdrawals. Without that as a means of financing consumption, the economy would barely have grown at 1 per cent a year under President George W. Bush. Looking forward, we see just how hard it will be to stabilise property prices and the prices of the securities based on them. Already, at the end of September, one in 10 American home owners with a mortgage was either at least a month in arrears or in foreclosure. One in five mortgages exceeds the value of the home it was used to purchase.
The financial sector's debts grew even faster as banks sought to bolster their returns on equity by "levering up". According to one recent estimate, the total leverage ratios (on- and off-book assets and exposure divided by tangible equity) for the two biggest US banks were 88:1 for Citibank and 134:1 for Bank of America. The bursting of the property bubble caused such ratios, which were already too high on the eve of the crisis, to explode as offbalance-sheet commitments and pre-arranged credit lines came home to roost. Only by borrowing from the Federal Reserve on an unprecedented scale have the banks been able to stay in business.
With estimates of total losses on risky assets now ranging from $2,800bn (�1,850bn, �1,960bn) to $6,000bn, a chain reaction is under way that will leave no sector of the world economy untouched. The American economy is contracting at an annualised rate of 5 per cent. Commercial property is following the residential market into freefall. The Standard & Poor's 500 index is down 43 per cent since its peak in October last year. The market for credit default swaps is pointing to a surge in defaults on corporate bonds. The automotive industry is already (against the will of Congress and the original intention of the Treasury) on life support. The US is at the centre of the crisis but Europe and Japan may suffer even larger aftershocks. As for the much feted emerging market "Brics" - Brazil, Russia, India and China - their stock markets have been dropping like, well, bricks.
What makes this crisis of burning interest to financial historians is the knowledge that we are witnessing a real-time experiment with not one but two theories about the Depression.
On one side, Ben Bernanke, Fed chairman, is applying the lesson of Milton Friedman's and Anna Schwartz's A Monetary History of the United States , which argued that the Depression was in large measure the fault of the central bank for failing to inject liquidity into an imploding financial system. Mr Bernanke has not merely slashed the federal funds rate to below 0.25 per cent. He has lent freely to the banks against undisclosed but probably toxic collateral. Now he is buying securities in the open market.
The result has been an explosion of the Fed's balance sheet and of the monetary base. With assets approaching $2,263bn and capital of less than $40bn, the Fed increasingly resembles a public hedge fund, leveraged at more than 50:1.
On the other side, Mr Paulson has emerged as an unwitting disciple of Keynes, running a huge government deficit in an effort not merely to bail out the financial sector but also to provide a public sector substitute for sharply falling private sector consumption. Even before President-elect Barack Obama launches his promised infrastructure investment programme, estimates of next year's deficit run as high as 12.5 per cent.
Once, monetarism and Keynesianism were considered mutually exclusive economic theories. So severe is this crisis that governments all over the world are trying both simultaneously.
Although commentators like to draw parallels with Franklin Roosevelt's New Deal, in truth the measures taken since the crisis began in August 2007 more closely resemble those taken during the world wars. After 1914, and again after 1939, there was massive government intervention in the financial system. Banks and bond markets were reduced to mere channels for the financing of huge public sector deficits. That is what is happening today, but without the stimulus to manufacturing that the world wars provided. We are having war finance without the war itself.
Yet the effect of these policies is essentially to add a new layer of public debt to the existing debt mountain. Added together, the loans, investments and guarantees made by the Fed and the Treasury in the past year total about $7,800bn, compared with a pre-crisis federal debt of about $10,000bn. The Treasury may have to issue as much as $2,200bn in new debt in the coming year.
For the time being, the distress-driven demand for dollars and risk-free assets is pushing down the cost of all this borrowing. Treasury yields are at historic lows. But it is not without significance that the cost of insuring against a US government default has risen 25-fold in little over a year. At some point, with most big economies adopting the same fiscal policy, global bond markets are going to start choking.
Is it really plausible that the cure for excessive leverage in the private sector is excessive leverage in the public sector? Might there not be a simpler way forward? When economists talk about "deleveraging" they usually have in mind a rather slow process whereby companies and households increase their savings in order to pay off debt. But the paradox of thrift means that a concerted effort along these lines will drive an economy such as that of the US deeper into recession, raising debt-to-income ratios.
The alternative must surely be a more radical reduction of debt. Historically, such reductions have been done in one of four ways: outright default, restructuring (for instance, bankruptcy), inflation or conversion. At the moment, more and more American households are choosing the first as a way of dealing with the problem of negative equity, while more and more companies are being driven towards bankruptcy. But mass foreclosures and bankruptcies are not a pretty prospect.
Inflation, by contrast, is hard to worry about in the short term, not least because the Fed's expansion of the monetary base is leading to no commensurate expansion of the broad money supply; the banks would rather shrink than expand their balance sheets.
That leaves conversion, whereby, for example, all existing mortgage debts could be wholly or partly converted into long-term, low and fixed-interest loans, as recently suggested by Harvard's Martin Feldstein. (In his scheme, the government would offer any homeowner with a mortgage the option to replace 20 per cent of the mortgage with a low-interest loan from the government, subject to a maximum of $80,000. The annual interest rate could be as low as 2 per cent and the loan would be amortised over 30 years.
At the very least, this would rescue many homeowners from the nightmare of negative equity. A similar operation might also be contemplated for the debts of those banks that have been partially or wholly recapitalised by the state. This would not add to the federal debt in net terms and would reduce the interest burden, if not the absolute debt burden, of households.
Such radical steps would naturally represent a haircut for creditors, notably the holders of mortgage-backed securities and bank bonds. Yet they would surely be preferable to the alternatives. And they would certainly be a less extreme solution than the general debt cancellation envisaged in the Old Testament.
Financially, 2008 has been an annus horribilis. The answer may be to make 2009 a true jubilee year. The writer is a professor at Harvard University and Harvard Business School, a fellow of Jesus College, Oxford, and a senior fellow of the Hoover Institution, Stanford
Self-imposed recessions lead to a golden jubilee
Every seven years, God told Moses, the children of Israel should neither sow their fields nor prune their vineyards - a kind of self-imposed recession. After seven such sabbatical years, the trumpet of jubilee should be sounded: "And ye shall hallow the fiftieth year, and proclaim liberty throughout all the land unto all the inhabitants thereof: it shall be a jubilee unto you; and ye shall return every man unto his possession."
Land that had been sold was to be redeemed or returned to the original seller and the poor were to be relieved: "If thy brother be waxen poor, and hath sold away some of his possession, and if any of his kin come to redeem it, then shall he redeem that which his brother sold . . . If thy brother be waxen poor . . . then shalt thou relieve him: yea, though he be a stranger . . . Take thou no usury of him . . . " In addition, Jews who were slaves were to be set free.
To modern eyes, however, the most striking of these divine injunctions was that debts were to be cancelled as part of "the Lord's release". |
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Big_Bird
Joined: 31 Jan 2003
Location: Sometimes here sometimes there...
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| Posted: Thu Dec 25, 2008 8:47 pm Post subject: |
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| Interesting article |
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mises
Joined: 05 Nov 2007
Location: retired
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Wed Feb 18, 2009 7:38 am Post subject: |
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In an interview with Swiss daily Tagesanzeiger, a well-known economist has warned that Switzerland risks bankruptcy, if the recent market turmoil centering on Eastern Europe is not contained quickly. At issue are loans made in Swiss francs to Eastern European debtors. With many countries in the region falling into depression, currencies and asset prices are plunging. Therefore, debtors domiciled in Eastern Europe are increasingly expected to have difficulty with mounting foreign debt loads � and that spells trouble for Switzerland.
Below is my translation of the Tagesanzeiger article.
Switzerland threatened with bankruptcy
Swiss banks have given billions of credit to Eastern Europe - now the customers cannot pay back the money. Switzerland is threatened with the fate of Iceland, says economist Arthur P. Schmidt.
In countries such as Poland, Hungary and Croatia, the Swiss franc has become an important currency. Thousands of households and small firms took out loans in Swiss francs, and not in the national currency zloty, forint, or kuna because of lower interest rates. In Hungary, 31 percent of all loans are in Swiss currency. Amongst household loans, they are almost 60 percent.
Borrowers in distress
Now, the financial crisis has ended the era of cheap credit. As a result, Eastern European currencies are falling. At the end of September, one had to pay 46 francs for 100 Polish zlotys. Today it is 30 francs. That means more and more borrowers are having problems with interest payments and repayment. So the question is what effect this has on the Swiss financial marketplace. One who sees a dark future for Switzerland is economic expert Artur P. Schmidt. He believes that the Swiss franc is in danger because of the loans in Eastern Europe.
In Poland, Hungary and Croatia, the Swiss franc has become an important foreign currency - the dollar, so to speak, of Eastern Europe. Thousands of households and businesses have franc loans. Why?
The rapid growth in many countries of Eastern Europe was stimulated through loans in Swiss francs. Swiss banks and offshore institutions loaned the local banks francs, which passed the francs onto their customers. The loans were attractive because borrowers pay interest rates much lower than required for loans in local currency.
Now, this system has been shaken?
Yes, the system has only worked as long as the exchange rate between the franc and the currencies were reasonably stable. But that is not currently the case. For example, the Hungarian forint and Polish zloty have lost over a third of their value against the Swiss franc in recent weeks. Because of the devaluations of the national currencies, the debt to Switzerland has increased by more than one-third. Many of the Eastern European countries have serious payment difficulties, and are virtually bankrupt.
What does this mean for Switzerland?
It is likely that a significant proportion of the total 200 billion U.S. dollars of Eastern European loans were issued in Swiss francs. According to a report by the Bank for International Settlements worldwide franc loans equivalent to around 675 billion U.S. dollars are in circulation - which was about 150 billion directly from Switzerland, 80 billion of Great Britain and about 430 billion U.S. dollars through offshore financial centres. How many of these loans have gone bad is not known. But even if the failure rate is 20 percent, the banks would lose a lot of money.
Is the federal government going to intervene now?
If the banks require a massive writedown of such loans, above a certain magnitude, the government must intervene. This is already happening via the Swiss National Bank. In Poland, it has made several billion francs available to the local central bank so that Polish banks can cover the loans. At the same time, the Swiss National Bank inquired by the European Central Bank whether it could borrow money in an emergency. This is a clear warning sign that the Swiss franc could be under huge devaluation pressures in the near future.
Swiss banks were too careless in their lending in Eastern Europe?
Yes, indeed. Many bankers wanted to earn a lot and neglected the risks. The National Bank is also at fault as it did not intervene. In addition, the regulator and the politicians completely failed.
What Switzerland must do now?
Now, the possible losses caused by these loans must be made transparent. Above all, all of the Eastern European risks must be fully disclosed. Together with the loan losses from UBS and Credit Suisse, the entire writedown for Switzerland could exceed the Swiss gross domestic product.
That is to say?
Switzerland, like Iceland, is threatened with a potential national bankruptcy. One consequence would be that the Swiss currency could fall massively in value � possibly even crash. Another would be that Switzerland�s credit rating would be massively downgraded. That would be a trauma for the country: Switzerland was always as a stronghold of stability. The franc could become an unstable soft currency. Then Switzerland would perhaps be forced to abandon the franc and take on the euro.
This article fills in a lot of gaps for me. Two weeks ago, I happened to catch another post in the Swiss press about the Swiss government issuing debt in U.S. Dollars. In my post �Why are the Swiss now issuing debt in U.S. Dollars? I asked an open question as to why the Swiss were issuing debt in dollars. No one knew and I had yet to hear a satisfactory answer to this question.
Welcome to the dark side of globalisation. |
http://www.creditwritedowns.com/2009/02/switzerland-threatened-with-bankruptcy.html |
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mithridates
Joined: 03 Mar 2003
Location: President's office, Korean Space Agency
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| Posted: Wed Feb 18, 2009 7:51 am Post subject: |
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| Switzerland, like Iceland, is threatened with a potential national bankruptcy. One consequence would be that the Swiss currency could fall massively in value � possibly even crash. |
*warning: I don't know what I'm talking about re: the economy*
Wouldn't that be great for Eastern Europe then? All of a sudden the expensive franc crashes and they can pay off their loans lickety split. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Wed Feb 18, 2009 7:55 am Post subject: |
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If it the Swiss currency devalued independent of a severe crises in Eastern Europe, then there potential is there, yes. However, it is a severe crises (looming very large this week) in Eastern Europe that will take down Switzerland (and Sweden). So it is a wash. Both will be totally f^cked.
It looks like the world economy is entering phase 3 of this crises (first was housing, then consumption in America and some other states). This time, Europe will take center stage with sovereign risk. After that, Asia. |
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ontheway
Joined: 24 Aug 2005
Location: Somewhere under the rainbow...
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| Posted: Wed Feb 18, 2009 9:15 pm Post subject: |
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The whole world economy is collapsing.
Ponzi economics, the economics of fascist-socialism is failing.
What we must learn from this is:
No government anywhere in the world at any level should be allowed to borrow money, print money or run a deficit.
We must prohibit, constitutionally, all taxes on income and property.
Governments must be limited to spending that is capped at 10% of their nation's income and government revenues must be limited to a 10% national sales tax. |
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TheUrbanMyth
Joined: 28 Jan 2003
Location: Retired
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| Posted: Thu Feb 19, 2009 3:40 am Post subject: |
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| ontheway wrote: |
The whole world economy is collapsing.
Ponzi economics, the economics of fascist-socialism is failing.
What we must learn from this is:
No government anywhere in the world at any level should be allowed to borrow money, print money or run a deficit.
We must prohibit, constitutionally, all taxes on income and property.
Governments must be limited to spending that is capped at 10% of their nation's income and government revenues must be limited to a 10% national sales tax. |
So we can say goodbye to old Age Security and all social programs. police, good roads...and the list goes on and on. Do you have any idea of how much of society we'd have to dismantle for this? It'd be like living in the last century.
Ron Paul was turned down and rightly so. Deal with it and accept reality. If you don't want to pay tax, go to some country that doesn't have it. |
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ontheway
Joined: 24 Aug 2005
Location: Somewhere under the rainbow...
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| Posted: Thu Feb 19, 2009 7:28 am Post subject: |
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| TheUrbanMyth wrote: |
| So we can say goodbye to old Age Security and all social programs. police, good roads...and the list goes on and on. Do you have any idea of how much of society we'd have to dismantle for this? |
Social Security, the US plan, has prevented the creation of hundreds of millions of jobs around the world. A conservative estimate is that 200 million jobs have been eliminated and a liberal one is at least 500 million good, permanent jobs have been aborted by social security. Yes, the world can live without it.
Police. We had plenty of police before FDR and we had a Federal Government under 3% of GDP at that time. No problem.
Roads. We have too many roads, cars and air pollution these days. Energy shortages and traffic congestion. The socialist transportation model has completely failed. Under a free market transportation system, walking, elevators, and mass transit would be utilized as they are cheaper, cleaner and more efficient. Communities would be built to minimize travel distances, as that is more efficient. Mixed use construction would prevail and make life more calm, interesting, friendly and efficient. We need to adopt free market transportation.
The list goes on and on ... in every area, the free market is better, cheaper and cleaner than government.
And thus, although we would have to dismantle a lot of the fascist-socialist Ponzi government, and it is going to collapse anyway, Society will be much better off without all that evil expensive government that makes us poor, destroys jobs and lives and leaves our economy in a shambles, the people in fear and future generations burdened from birth.
Yes, smash the state and set the people free. |
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bacasper
Joined: 26 Mar 2007
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| Posted: Thu Feb 19, 2009 8:42 am Post subject: |
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| TheUrbanMyth wrote: |
| So we can say goodbye to old Age Security and all social programs. police, good roads...and the list goes on and on. Do you have any idea of how much of society we'd have to dismantle for this? |
and
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| Ron Paul was turned down and rightly so. Deal with it and accept reality. |
| ontheway wrote: |
Social Security, the US plan, has prevented the creation of hundreds of millions of jobs around the world. A conservative estimate is that 200 million jobs have been eliminated and a liberal one is at least 500 million good, permanent jobs have been aborted by social security. Yes, the world can live without it.
Police. We had plenty of police before FDR and we had a Federal Government under 3% of GDP at that time. No problem.
Roads. We have too many roads, cars and air pollution these days. Energy shortages and traffic congestion. The socialist transportation model has completely failed. Under a free market transportation system, walking, elevators, and mass transit would be utilized as they are cheaper, cleaner and more efficient. Communities would be built to minimize travel distances, as that is more efficient. Mixed use construction would prevail and make life more calm, interesting, friendly and efficient. We need to adopt free market transportation.
The list goes on and on ... in every area, the free market is better, cheaper and cleaner than government.
And thus, although we would have to dismantle a lot of the fascist-socialist Ponzi government, and it is going to collapse anyway, Society will be much better off without all that evil expensive government that makes us poor, destroys jobs and lives and leaves our economy in a shambles, the people in fear and future generations burdened from birth.
Yes, smash the state and set the people free. |
So Ron Paul was right after all, wasn't he? |
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