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mises
Joined: 05 Nov 2007
Location: retired
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 Posted: Sun Sep 21, 2008 7:33 pm Post subject: Default by the US government is no longer unthinkable |
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Has the American moment passed? I am inclined to think so but am aware that in the midst of a crises such as this the 'facts' can become very emotive as panic sets in.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/09/21/ccliam121.xml&page=2
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Financial crisis: Default by the US government is no longer unthinkable
So, here we are - the start of a new world order. After the tumultuous events of the last fortnight, the global economic landscape will never look the same again.
Power has tangibly shifted - away from the United States and the Western world generally, and towards the fast-growing giants of the East. That's been happening for some years now.
But September 2008 marks the moment when the scale of our excesses, the extent of our debts and the moral bankruptcy of our financial regulatory system finally began to be truly exposed.
I say began to be exposed. Back in March, Standard and Poor's, the US ratings agency, estimated some $285bn (�156bn) of mortgage-backed securities would eventually be written-off by the global banking sector. On Friday, almost unnoticed amid the panic, that forecast was upped to $378bn.
In reality, total credit losses will be much higher - at least $750bn in my view. But the extent of the 33 per cent one-off increase in S&P's estimate speaks volumes. It reflects just how little anyone truly knows about either the ultimate size of the sub-prime losses or who ultimately holds the related securities.
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But with one in ten US mortgages now "delinquent" or "in foreclosure", and house prices still falling, such "toxic waste" is burning holes in balance sheets wherever it sits. That's why this crisis is far from over.
It's difficult to overstate the enormity of what happened last week. By any standard, the collapse of Lehman Brothers was a dramatic - and alarming event. One of the biggest names on Wall Street, the 158-year old bank was consumed by the scale of its losses and crippled by executive feuds. Deemed by the US Federal Reserve to be "sufficiently unconnected" to the rest of the global financial system, Lehman was allowed to fold.
In contrast, American International Group, the world's largest insurer, was judged "too interconnected" to collapse. So the Fed effectively "nationalised" AIG - the biggest rescue of a private firm in human history. And it's only a few weeks, of course, since the even more expensive bail-out of quasi-government lenders Fannie Mae and Freddie Mac - which, between them, account for a mind-boggling $5,300bn of mortgages, around half of America's home loans.
On top of all that, US Treasury Secretary Hank Paulson sent an $800bn financial rescue plan to Congress. He wants to create a second "Resolution Trust Corporation" - or government-owned asset management company - to take on illiquid mortgage-related debts. The original RTC was established to rescue the US Savings and Loans Associations that went bust in the 1980s.
And by the way, the Fed has also just offered another $125bn of liquidity to banks outside the US that are desperate for dollars and can't access America's frozen credit markets - a move co-ordinated with central banks in Japan, the Eurozone, Switzerland, Canada and here in the UK.
The combination of these measures - each of them of enormous significance in its own right - sent stock markets shooting-up on Friday. America's S&P 500 rose 4.03 per cent and London's FTSE 100 soared 8.84 per cent, its largest one-day rise ever. But, despite the end-of-week euphoria and trader-talk that "the only way is up", despite America's undoubted resolve and Paulson's determination to do "whatever it takes", the situation remains very fragile.
Nothing better reflects the amount of fear among banks in America - banks everywhere - than the sky-high rates they're continuing to charge when lending to each other. Ordinarily, inter-bank (or Libor) interest rates are only slightly above base rates. But with so much uncertainty remaining about the scale and occurrence of "sub-prime" - and with desperate bank executives still so reluctant to "fess-up" their losses - the US Libor rate on money to be paid back in three months is now a staggering 1.5 per cent above base. In recent weeks, Libor rates have shot up in other countries too.
Paulson's latest liquidity injection has lowered over-night Libor rates for now. But, despite the torrent of cash the US has directed at the credit markets, longer-term inter-bank rates have stayed stubbornly high, and some have gone up further. In other words, even the banks themselves don't think the rescue plan will work. Expect more - and bigger - liquidity operations in weeks to come.
The trouble is, though, as the bill for these bail-outs keeps rising, so does the possibility that the political consensus will crack and there'll be an almighty, and debilitating, dust-up. Paulson's RTC plan, in theory, could restore confidence. By taking sub-prime loans off banks' books, it could de-ice the inter-bank market, restoring credit lines to households and firms and preventing the "credit crunch" from shifting wholesale, in that fabled phrase, "from Wall Street to Main Street".
But, in the run-up to the US election in November, Democrats in Congress - and even some Republicans - may decide they're simply not having it. How much more can the US taxpayer take? It sounds insane, but the liabilities being taken on by the Fed and the US Treasury are now so enormous that the government itself could default. No?
http://www.telegraph.co.uk/money/graphics/2008/09/21/ixliam121.jpg
Check out the chart showing the recent spikes in the US 10-year credit default swap. In other words, the market is now pricing-in the genuine possibility that the US will struggle to pay-back some of its long-term T-bills.
That possibility is still deemed to be quite low. But the ultimate financial question - until recently, unthinkable - is now being asked. Yes siree, the mighty US government could default. That's how much the world has changed.
Liam Halligan is chief economist at Prosperity Capital Management |
And the dollar?
http://www.bloomberg.com/apps/news?pid=20601087&sid=arSYa87HCb9U&refer=home
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| Dollar May Get `Crushed' as Traders Weigh Up Bailout (Update1) |
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Sept. 22 (Bloomberg) -- Treasury Secretary Henry Paulson's plan to end the rout in U.S. financial markets may derail the dollar's three-month rally as investors weigh the costs of the rescue.
The combination of spending $700 billion on soured mortgage-related assets and providing $400 billion to guarantee money-market mutual funds will boost U.S. borrowing as much as $1 trillion, according to Barclays Capital interest-rate strategist Michael Pond in New York. While the rescue may restore investor confidence to battered financial markets, traders will again focus on the twin budget and current-account deficits and negative real U.S. interest rates.
``As we get to the other side of this, the dollar will get crushed,'' said John Taylor, chairman of New York-based International Foreign Exchange Concepts Inc., the world's biggest currency hedge-fund firm, which manages about $15 billion. |
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Kuros
Joined: 27 Apr 2004
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| Posted: Sun Sep 21, 2008 7:47 pm Post subject: |
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| Power has tangibly shifted - away from the United States and the Western world generally, and towards the fast-growing giants of the East. That's been happening for some years now. |
If by East, he means China, I'd tell him to wait another full 12 months before he delivers that line.
Fundamentals ain't good anywhere. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Sun Sep 21, 2008 7:49 pm Post subject: |
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| Very true. But I'd rather have a fat savings account than 65 trillion in total debt if I want to shape the world in the future. |
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Jandar
Joined: 11 Jun 2008
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| Posted: Sun Sep 21, 2008 7:53 pm Post subject: |
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Debt is a state of mind. You can trust me on that one.
Hell the value of money is but an illusion. |
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Kuros
Joined: 27 Apr 2004
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| Posted: Sun Sep 21, 2008 7:56 pm Post subject: |
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| mises wrote: |
| Very true. But I'd rather have a fat savings account than 65 trillion in total debt if I want to shape the world in the future. |
Living in a democracy means dealing with public fiscal irresponsibility.
Those reserves China has? It'll be useful for keeping the population down. One advantage the US has on China is that the US generally controls most of the area within its borders, and doesn't register 10s of 1,000s of riots each year.
Yeah, its mainly the article's unreflective assumption that a bad year for the US means a relative rise for China that I'm challenging here. The US can raise taxes without having to worry about internal security.
Its apples and oranges, is all I'm saying. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Sun Sep 21, 2008 7:56 pm Post subject: |
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| I'll not trust you. Debt is when you owe something to somebody. You've (the royal 'you') made an agreement with another party and are morally and legally obligated to fulfill the contract. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Sun Sep 21, 2008 7:59 pm Post subject: |
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| Kuros wrote: |
| mises wrote: |
| Very true. But I'd rather have a fat savings account than 65 trillion in total debt if I want to shape the world in the future. |
Living in a democracy means dealing with public fiscal irresponsibility.
Those reserves China has? It'll be useful for keeping the population down. One advantage the US has on China is that the US generally controls most of the area within its borders, and doesn't register 10s of 1,000s of riots each year.
Yeah, its mainly the article's unreflective assumption that a bad year for the US means a relative rise for China that I'm challenging here. The US can raise taxes without having to worry about internal security.
Its apples and oranges, is all I'm saying. |
I don't disagree with you at all actually. I find that many financial analysts and talking heads are as naive about China today as they were with the American housing market 4 years ago. China has huge problems and those reserves are needed. I'm a big believer that a huge chunk will go to the looming water disaster.
However. I do believe the American moment has passed. That does not mean that one power will become the next America, but that America will not have as powerful a role as she once did in shaping the political, cultural and economic forces of our globe. |
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sojourner1
Joined: 17 Apr 2007
Location: Where meggi swim and 2 wheeled tractors go sput put chug alugg pug pug
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| Posted: Sun Sep 21, 2008 8:08 pm Post subject: |
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We're going down. Plutocracy doesn't work. Democracy works. We are taught we have democracy, but it's propaganda and truth is about to be forced out of where we went so wrong.
Plutocracy is when the rich rule or make decisions.
Democracy is when the majority rule or make decisions.
You decide which one America is and why we got it all wrong. It's not hard to answer, but it's more than hard to fix nor are we empowered to fix this problem leading to our demise. |
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khyber
Joined: 16 Jan 2003
Location: Compunction Junction
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| Posted: Sun Sep 21, 2008 9:55 pm Post subject: |
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| One advantage the US has on China is that the US generally controls most of the area within its borders, and doesn't register 10s of 1,000s of riots each year. |
To be the devil's advocate though:
Having an impassioned populace who, with their riots are attempting to have their voices heard is not a COMPLETELY terrible thing compared to have a completely apathetic populace who sit back and let the "powers that be" run roughshod. |
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aka Dave
Joined: 02 May 2008
Location: Down by the river
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| Posted: Mon Sep 22, 2008 2:10 am Post subject: |
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America could very well have a depression. If you think this is remotely a good thing for the rest of the world, you're insane.
What made America powerful was our research universities, tech. innovation, and an open society to outside talent, transparent legal system, etc. These strengths largely remain despite Bush.
There's an expression "Capitalism without failure is like religion without sin".
In the late 19th century depression/financial meltodowns happened every 20 years. After the New Deal they were replaced by recessions.
What may be over is unbridled free market capitalism. The Bush administration is effectively destroying its own ideology.
http://www.tnr.com/politics/story.html?id=aead6b03-ae5c-4451-922b-e4c087329ee2
However, the "end of America" is a theme from foreigners (and Americans themselves) that's been around for ever. The Soviet Union was the new model in the 50s (Sputnik), Vietnam meant the end of America, the oil crisis in the 1970s. In mid 80s there was a Canadian (French, of course) movie called "The Decline of the American Empire".
As an American I'm relatively optimistic. The Bush administration ends in 4 months. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Mon Sep 22, 2008 9:45 am Post subject: |
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| aka Dave wrote: |
As an American I'm relatively optimistic. |
You should be. The British and Dutch empires fell and they are hardly wearing burlap sacks today. America doesn't need all these external obligations and problems. I think the country will be much better off in many ways when it is more normal. |
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PBRstreetgang21
Joined: 19 Feb 2007
Location: Orlando, FL--- serving as man's paean to medocrity since 1971!
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| Posted: Mon Sep 22, 2008 11:49 am Post subject: |
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| I think the country will be much better off in many ways when it is more normal. |
I couldnt agree more with that statement. I think a lot of the problem with America today is that its too involved in trying to RUN the world, rather than simply trying to exist within the world. Hopefully taking us down a notch will help us look more inward at what kind of economy we want to have and what we need to do to be a more competitive country based on output rather than brand name.
Maybe a significant economic setback might actually get Americans to START GETTING INFORMED AND VOTING. This election is seeing some of the highest participation ever but I still think its pretty pathetic when in a country of 300 million the canidates respective conventions draw about 38 million people. The debates are expected to draw possible 100 million viewers. Awesome. But that still means 2/3 are tuned out.
Even if they manage to get 70% of the country to vote (doubt it very much will be close to that) thats still 30% of the country not participating.
We cant have a democracy with a just a few people involved. Perhaps an economic or some other crisis will one day wake Americans up to that fact. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Mon Sep 22, 2008 1:08 pm Post subject: |
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How Congress Intends To Waste $1.8 Trillion
The size of the bailout is growing by leaps and bounds. Inquiring minds are asking A $1.8 Trillion Bailout: Where the Money's Going?
�Up to $700 billion to buy assets from struggling institutions. The plan is aimed at sopping up residential and commercial mortgages from financial institutions but gives Treasury broad latitude.
�Up to $50 billion from the Great Depression-era Exchange Stabilization Fund to guarantee principal in money market mutual funds to provide the same confidence that consumers have in federally insured bank deposits.
�The Fed committed to make unspecified discount window loans to financial institutions to finance the purchase of assets from money market funds to aid redemptions.
�At least $10 billion in Treasury direct purchases of mortgage-backed securities in September. In doubling the program on Friday, the Treasury said it may purchase even more in the months ahead.
�Up to $144 billion in additional MBS purchases by Fannie Mae and Freddie Mac.The Treasury announced they would increase purchases up to the newly expanded investment portfolio limits of $850 billion each. On July 30, the Fannie portfolio stood at $758.1 billion with Freddie's at $798.2 billion.
�$85 billion loan for AIG, which would give the Federal government a 79.9 percent stake and avoid a bankruptcy filing for the embattled insurer. AIG management will be dismissed.
�At least $87 billion in repayments to JPMorgan Chase (JPM) for providing financing to underpin trades with units of bankrupt investment bank Lehman Brothers (LEH).
�$200 billion for Fannie Mae and Freddie Mac. The Treasury will inject up to $100 billion into each institution by purchasing preferred stock to shore up their capital as needed. The deal puts the two housing finance firms under government control.
�$300 billion for the Federal Housing Administration to refinance failing mortgage into new, reduced-principal loans with a federal guarantee, passed as part of a broad housing rescue bill.
�$4 billion in grants to local communities to help them buy and repair homes abandoned due to mortgage foreclosures.
�$29 billion in financing for JPMorgan Chase's government-brokered buyout of Bear Stearns in March. The Fed agreed to take $30 billion in questionable Bear assets as collateral, making JPMorgan liable for the first $1 billion in losses, while agreeing to shoulder any further losses.
�At least $200 billion of currently outstanding loans to banks issued through the Fed's Term Auction Facility, which was recently expanded to allow for longer loans of 84 days alongside the previous 28-day credits.
A quick check of the totals shows that is $1.809 trillion dollars that Congress is hell bent on wasting.
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http://globaleconomicanalysis.blogspot.com/2008/09/how-congress-intends-to-waste-18.html |
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Kuros
Joined: 27 Apr 2004
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| Posted: Mon Sep 22, 2008 1:16 pm Post subject: |
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| PBRstreetgang21 wrote: |
Maybe a significant economic setback might actually get Americans to START GETTING INFORMED AND VOTING. This election is seeing some of the highest participation ever but I still think its pretty pathetic when in a country of 300 million the canidates respective conventions draw about 38 million people. The debates are expected to draw possible 100 million viewers. Awesome. But that still means 2/3 are tuned out.
Even if they manage to get 70% of the country to vote (doubt it very much will be close to that) thats still 30% of the country not participating.
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Census Bureau
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The number of preschoolers (younger than 5) was estimated at 20.7 million.
The number of children 5 to 13 was 36 million, with children 14 to 17 numbering 17.2 million. |
74 million Americans are under age 18 and thus cannot vote. So if 150 million Americans vote, that's 2/3ds of America voting, not 1/2. |
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Ya-ta Boy
Joined: 16 Jan 2003
Location: Established in 1994
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| Posted: Mon Sep 22, 2008 6:29 pm Post subject: |
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| I do believe the American moment has passed. That does not mean that one power will become the next America, but that America will not have as powerful a role as she once did in shaping the political, cultural and economic forces of our globe. |
This wouldn't be wishful thinking, would it? 
I'm guessing that a retraction of our military from many of the 130 (?) countries where we have troops might happen. In my opinion, that would be a good thing, although I would prefer it be done by choice and policy, not by financial necessity.
I can see an end of cultural dominance happening. People get burned financially and turn that into a resentment of American movies, clothing styles, music etc. Aren't those people in India who stand around stark naked doing yoga poses called sadhus? That might appeal to a lot of teenage boys around the world. Bollywood movies aren't that bad. Maybe Mumbai will be the next cultural capital. That would be a better choice than Beijing. |
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