EconoMonitor

Nouriel Roubini's Global EconoMonitor

The Fed keeps on wasting time while the mother of all bank runs is underway

Last Friday I pointed out in my “Financial and Corporate System is in Cardiac Arrest: The Risk of the Mother of All Bank Runs” that we were at the point of a risk of a systemic financial meltdown with the beginning of the mother of all bank runs: stock markets gave a vote of no confidence to the Senate passage of the TARP legislation (equities down 4% on Thursday) and to the House passage of the legislation on Friday (equities down 3% after the passage of the bill in the House). At the same time last week money markets, interbank markets, credit markets were all imploding with all interbank spread at new all time highs, credit spreads going up through the roof and the roll-off of the financing – via commercial paper – of the corporate system. As I put it last week we were facing:

– a silent run on the huge mass of uninsured deposits of the banking system and even a run on some insured deposits are small depositors are scared;

– a run on most of the shadow banking system: over 300 non bank mortgage lenders are now bust; the SIVs and conduits are now all bust; the five major brokers dealers are now bust (Bear and Lehman) or still under severe stress even after they have been converted into banks (Merrill, Morgan, Goldman); a run on money market funds restrained only by a blanket government guarantee; a serious run on hedge funds; a looming refinancing crisis for private equity firms and LBOs);

– a run on the short term liabilities of the corporate sector as the commercial paper market has totally frozen (and experiencing a roll-off) while access to medium terms and long term financings for corporations is frozen at a time when hundreds of billions of dollars of maturing debts need to be rolled over;

– a total seizure of the interbank and money markets.

This is indeed a cardiac arrest for the shadow and non-shadow banking system and for the system of financing of the corporate sector. The shutdown of financing for the corporate system is particularly scary: solvent but illiquid corporations that cannot roll over their maturing debt may now face massive defaults due to this illiquidity. And if the financing of the corporate sectors shuts down and remains shut down the risk of an economic collapse similar to the Great Depression becomes highly likely.

Indeed by last week a mother of all bank and non-bank runs was underway and even a well designed and well implemented TARP (let alone the poorly designed one passed by Congress) could not address the problem of a short term liquidity panic and run.

And with the liquidity and credit and banking crisis hitting European financial institutions this severe crisis was becoming global last week. I then suggested that only radical and urgent action could stop this mother of all runs such as the following ones:

– blanket guarantees of all deposits followed by triage between solvent and insolvent banks; and if a guarantee requires delayed legislative action the Fed could announce that it will provide unlimited and unconditional liquidity support to any bank that experiences a run on its uninsured deposits;

– drect extension of the Fed’s PDCF liquidity support to other member of the shadow banking system as the small number of broker dealers accessing the PDCF are not relending the liquidity to the rest of the shadow banking system; finance companies, leasing companies and other non-bank financial institutions lending to the corporate sector and real economy should have access to the PDCF and TSLF;

– drect Fed lending to the corporate sector via Fed buying the commercial paper that corporates are not able to roll over; and possibly even lending to state and local governments that are a now also facing a roll-off of their maturing short-term liabilities.

– a coordinated 100bps reduction in policy rates by all major advanced economies central bank and, possibly, even some emerging market economies central banks;

Since the crisis of confidence and liquidity was becoming more virulent over the last few days and during the weekend in Europe one would have expected a radical response over the weekend along the lines suggested above by the Fed and other central banks. After all Bernanke stated on Friday that the Fed would do whatever was necessary to deal with the liquidity crisis.

Instead the Fed did nothing over the weekend (before the crucial opening of markets in Asia and Europe) and then announced steps this morning that don’t even start to address the liquidity problems of the financial system: paying interest on reserves of banks only allows the Fed to provide more liquidity to banks (and only banks) while automatically sterilizing the effects of that liquidity support on base money; while doubling the size of the TAF (that only banks have access to) does nothing to address the run on the liquid liabilities of non-bank and the corporate sector. Also the liquidity support of banks (short of a formal guarantee of deposits and/or a commitment to unconditionally support any bank subject to a run) is not enough to stop the concerns by uninsured depositors of banks.

So the Fed wasted an entire weekend announcing nothing and then announced this morning a set of modest steps that does nothing to address the ongoing silent run on banks and the non-silent run on the short term liabilities of non-banks and of the corporate sector. This at a time when the markets was expecting – given the Friday statement of Bernanke – such radical and urgent policy actions. So no wonder that Asian and European equity markets collapsed at their Monday opening and no wonder that US equity markets are down 5-6% today (as of mid-day). So the time to move is now or, better, it was yesterday or a week or a month ago. Any further delay may lead to an implosion of the financial system and serious damage to the corporate system tilting a severe economic recession in a much more grave economic depression.

And even an emergency 50bps or 100bps Fed Funds cut will not do: the Fed has already done 325bps in the last year and interbank spreads have kept on widening while short-term lending in the private sector (banks, non-banks and corporates) is now close to being shut down. Given the risk of insolvency of even the most safe counterparties in the financial and corporate system reducing policy rates will not affect interbank and credit spreads. The only way to stop this liquidity panic is a blanket guarantee of financial sector liabilities and direct public provision of liquidity to the parts of the financial system and the corporate system that are now at risk of a meltdown driven by a liquidity run on their short term liabilities. So it is time for the Fed to stop wasting time and start the actions that will make a difference.  We are now at risk of a systemic financial meltdown of the financial system and the corporate sector too.

348 Responses to “The Fed keeps on wasting time while the mother of all bank runs is underway”

subgeniusOctober 6th, 2008 at 12:16 pm

Surely at this point the problem is with the fundamental nature of fiat currencies – in that they have NO INTRINSIC VALUE and the world is finally finding this out…

Wolfgang LenkOctober 6th, 2008 at 5:50 pm

Every currency is fiat currency, man. Does gold have intrinsic value? Looks more like a barbarian relic to me…

PwrighterOctober 7th, 2008 at 6:53 am

Yes Wolfgang, gold does have an intrinsic value. First of all you have to dig it out of the ground with human labour and costly machinery then refine it at high cost. It’s rare and can be made into many products both beautiful and utilitarian. I can think of a few useful things you can do physically with paper money but this site is moderated so I won’t specify them.

PhysiocratOctober 7th, 2008 at 10:01 am

“First of all you have to dig it out of the ground with human labour and costly machinery then refine it at high cost. It’s rare and can be made into many products both beautiful and utilitarian.”So many falsehoods. First off, gold is dug out of the ground using machines with very little human labor nowadays…did ya ever hear about those series of events called the Industrial Revolution?Gold is not at all rare — NOT AT ALL. Tons of it are pulled out of the ground daily, and many billions of tons already exist all over the world. It’s about as common as standard quartz rocks. Even oil is worth more than gold because it can actually be used to produce or transport things.Gold is useful in some ways, but most people only care about it because it is ‘shiny’ and falsely valuable — a ‘barbarian relic’ indeed.The only thing that is actually has value in the world is good agricultural and/or ranchland because the things necessary for life can be drawn from it. Learn about the Physiocrats, the first economists: http://en.wikipedia.org/wiki/PhysiocratUntil gold becomes edible, it will remain worthless like all other ‘precious’ metals.

GuestOctober 7th, 2008 at 12:25 pm

There are approximately 6 billion above ground oz of gold, not billions of tons. It costs around $350/oz to refine gold from the masses of earth and rock around it. Equipment/surveying/mining: despite the industrial revolution, these activities did not become free. You, sir, are a dipsh*t.

Wolfgang LenkOctober 7th, 2008 at 12:37 pm

Well, PW… Such values (utility, scarcity) are also present in soybeans, orthodox bibles and bourbon whiskey. Yet, to define among them a specific value which makes one of them currency is an impossible task. Relative prices have no natural tendency. The only merchandise that can be said to have intrinsic value is labor – for its ability to create/transform/produce. Without it there is no other kind of economic good (since every machine needs to be operated at some point, or else scarcity would disappear). Since human labor cannot be made into currency, no currency can have intrinsic value.Currencies are socially legitimate titles of potencial property. Money is power in paper. That is why the US crisis has apreciated the dollar: the US are still the most powerful (therefore, trustworthy) of all entities that produce such titles.I hope to have made my point clear. So long!

DarrenOctober 7th, 2008 at 4:42 pm

“gold does have an intrinsic value”.This is fundamentally wrong. Nothing has “intrinsic value”… there is no value without a valuer. Period.As far as practical value…gold is shiny and is useful for dental fillings, that’s about it. Nothing there to justify 1k/oz, except for the temporary fashion tastes of gold bugs.

P1AQLOctober 6th, 2008 at 12:31 pm

Menage a trois in Europe in full bloom! May the USD be with you. HOPE you’ve the ARM (down a leg) just in case …Best,P1AQL.P.S. Ben, time to activate machine plan 2002

GuestOctober 6th, 2008 at 9:44 pm

Exactly. It’s as it were 1923 and we are pushing a wheel barrel of reichmarks to buy a loaf of bread.

AleccoOctober 6th, 2008 at 12:34 pm

Thank you Mr. Roubini!In the Argentinean crisis of 2001 we had one of those bank runs, the Corralito (Playpen.) For over a year you couldn’t take your deposits out of the banking system.But that wasn’t as bad as today US and UK banks are. Property prices actually soared. This time the banks have gigantic holes with assets in mortgages with property spiraling down.I’m afraid the people in charge are completely incompetent so this won’t be handled properly. On the personal side there is a need of 101 in survival of financial crisis. On the macroeconomic side, not to let the ones who profited with this scam to just buy everything at discount prices.After the crisis there will be a strong boom again boosted by cheap commodities, cheap labour, and an economy not based on disposable goods. But who is going to profit from it?

GuestOctober 7th, 2008 at 12:27 pm

“I’m afraid the people in charge are completely incompetent so this won’t be handled properly.”Unfortunately, you are probably incorrect. They are VERY competent, and this is exactly what they wanted.

GuestOctober 6th, 2008 at 12:37 pm

Nouriel,What is going on in the brokered CD market. Any idea? Can banks still raise funds this way? Some banks have next to zero core deposits and depend on brokered CDs and Repos. I am wondering if these banks can get funds or whether they are borrowing at the discount window.Dave

2centsOctober 6th, 2008 at 12:58 pm

Afa you sound like a Bill Clinton understudy! … Just kidding.By “it”, I was referring to the cliff, the abyss, the point of all loss of interventional control etc. A bank run would cement the situation with the real economy which would cement the situation with the shadow economy.

AfAOctober 6th, 2008 at 1:30 pm

heeh, my mistake,I thought you were referring to some kind of a first-time experienced metaphysical ecstatic state of mind in which senses are in total denial of the provoked feelings for some short moments, that feel like an eternity, before succumbing to the unimaginable strangeness of the situation.

PilateOctober 7th, 2008 at 1:27 am

In the days before the white man native people in what is now Alberta hunted buffalo by spooking the herd into a panic. Then with torches and drums they steered them to a cliff and over they went. These places are called Buffalo Jumps. Sound familiar?

Dan WOctober 6th, 2008 at 12:39 pm

…and “the day after”, it is time, as Mr. Sarkozy’s ‘New World’ to be humbly accepted by the United States as the only true way out of madness. Global accountability, Global oversight, the destruction of the Derivatives house-of-cards.

AnonymousOctober 6th, 2008 at 12:46 pm

Many folks nowhere near the FDIC insurance limits are going to want their tokens out of the banks. No matter how meager their balances are.Looks to me like the ‘liquidity problem’ will grow exponentially when the awareness of the ‘problem’ moves from Wall street, to Main street, to My street.I’m going to walk downtown and see what’s going on at the local banks.

AnonymousOctober 6th, 2008 at 3:39 pm

My bank has run out of $100 bills. The teller had to provide cash in $50’s. She had a strange look on her face. ???

iNnOsInZOctober 6th, 2008 at 12:55 pm

I believe the problem has already trickled down to “My Street” from Main/Wall Street. I hear and see Avg Joe’s taking cash out from banks and talking about how to handle their retirement funds (401ks etc). I see panic and fear which will excarbate this crises.Unless the Fed takes some corrective steps (i.e. per Nouriel’s suggestions: insuring all deposits, and “triage” b/w solvent & insolvent banks), i don’t see the light at the end of the tunnel.

CLSOctober 6th, 2008 at 2:45 pm

Stuffing money in a mattress creates its own problems. I’d like to think people don’t really believe that is the way to go; unfortunately, I already know of some that have taken their money out of the bank.

LellisOctober 6th, 2008 at 12:52 pm

And what those that said a decoupling would happen now say? Russia in deep trouble,Brazil stock market closed twicetoday during business hour – two circuit breakers as market was down over 15%- the Brazilian Real own more than 30% in a few days. Yes, it is decoupling from the irrational dream some had.

AfAOctober 6th, 2008 at 1:00 pm

Nah! Unless there is some kind of solid news, I do not believe the sell-off is off.The PPT destituted itself of one of its most powerful tools, i.e. short-covering rallies. Without the shorts, the PPT is powerless. Before it was able to trigger rallies by intervening at crucial levels, altering technical indicators and let the shorts do the rest. I do not believe there are enough willing bulls to replace that mechanism.

Alessandro - http://castellidicarte.blogspot.com/October 6th, 2008 at 1:46 pm

Shorts have greed and fear inverted with respect to longs, so shorts are the one who panics on good news during a low. It is the same psychological event of a crash.With no shorts none panics on good news/FED daytrade.I think the PPT shot itself in the foot. I also guess they knew it and did ti only because there were short of any other trick.

Dan W.October 6th, 2008 at 12:54 pm

The thing that’s so unique about this crisis is that (a) it’s built upon a $50+ Trillion ‘house of cards’ in the Derivatives Pyramid Scheme, (b) because it simply cannot be fixed in traditional ways—because this meltdown is manifest in ways that wouldn’t have existed 20 years ago—our leaders are walking around in this somnabulent state of denial. It’s like watching some 80 year old racist codger down in Mississippi somewhere, still trying to install “White Only” bathrooms at his gas station. He’s stuck in another time, and no amount of denial and Confederate flag-waving is going to change the current reality. And even our supposedly righteous leaders—take Pat Leahy from VT for example—votes yes for the bailout because the FDIC raises its insurance coverage and there are more eyes watching Mr. Paulson. WAKE UP!! We are dealing with an entirely different economic universe here…it’s not about confidence, it’s about a system of thought, a way of thinking…that somehow 4-5% growth is our god-given right, and we’re gonna grow no matter how much we lie, cheat, steal…because not to grow means—god forbid—we can’t drive our Lexus’ and stay at The Ritz and buy $300 tickets to the Red Sox game.

subgeniusOctober 6th, 2008 at 1:03 pm

Personally, I think its what happens when “perpetual growth” (“unstoppable force”) runs into constrained resources (immovable object, a.k.a. “reality”). Doesn’t matter what you do – there is LESS you can have than previously because there is less STUFF than there was.

Nassim GandOctober 6th, 2008 at 4:26 pm

Oops, sorry too late, the RITZ is no longer there. Bought out by some Indian hotel company, Taj (transl: crown?)

GuestOctober 6th, 2008 at 12:56 pm

The average people on the street are getting spooked. People with less than $100,000.00 are withdrawing cash thinking it may not be available for withdrawal later. If withdrawals of this type become more wide spread then the blanket protection for deposits will be mute. Large numbers of small deposits being withdrawn from banks will affect banks in much the same way large depositors pulling cash would.

AleccoOctober 6th, 2008 at 2:26 pm

But the 100k guarantee might take months to work. How do you pay your bills without cash and without credit?

hazletonOctober 6th, 2008 at 2:34 pm

My local bank – Fremont Bank – in Northern California was just about empty. I thought it was closed but business was just super slow. I think most people are still clueless.

GuestOctober 6th, 2008 at 12:56 pm

@ PeteCA ~ regarding curbing exec pay and banning golden parachutes: “Boy…The Wall St execs can’t deal with a regular salary, even though the country’s finances are going down in flames. And Congress can’t help but add hundreds of millions of dollars in pork barrel projects … even though the economy is in critical condition. Howe about if we just take all these leaders, send them to a remote third world country, and start again?”A September 28 SF Chronicle’s report, “CEOs who left before the crisis took golden parachutes worth millions,” expanded on three poster boys who fled the scene with millions of dollars in severance packages:Stanley O’Neal walked away from Merrill with a package now worth $66 million (final pay package for his final year as CEO was $46.4 million).Ken Thompson, ousted from Wachovia, jumped out with a golden parachute now worth more than $5 million (total pay package for last year nearly $16 million, not including now worthless stock options).Chuck Prince was “forced out” at Citigroup in 2007 with a parting gift now valued at $16 million – valued at $22 million at departure (total pay package for his last year nearly $25 million).

Truth08October 6th, 2008 at 1:06 pm

This is truly uncharted territory. There have certainly been bank runs and depressions before, but to see one today with the massive size of the world economy and financial system is very scary. Unfortunately I don’t see any easy way out. We’ve lived on debt for so long, and inflated our fiat currency and banking system so much, that a true reckoning will lead to disaterous times for many people throughout the world. My only hope is that as the fallout continues, people come to understand what caused all this: wanting something for nothing, living outside your means, listening to the political and monetary scientists who said we can create money, growth, and wealth out of nothing. Viva Ron Paul. Read The Creature from Jekyll Island if you want to see how this has happened before. It’s amazing how a lot of the things described in the book, written before this crisis, perfectly describes what’s going on in this crisis.The Truth Shall Set You Free – What Now?

GuestOctober 6th, 2008 at 3:32 pm

it’s just Cramer – the problem is when he leaves the padded room of CNBC, the general public, who have never heard of him, think that he is legit – I think there is a correlation between the mid- day lows and his call to abandon ship. I am surprised what he does is not illegal

AnonymousOctober 6th, 2008 at 1:10 pm

Hey all you folks who voted for Bush! Didn’t see it coming? Go have a beer with Bush! Hint: vote for McCain and Palin 😉 If McCain crokes, Palin 😉 will have an easy time filling the big shoes left by Bush. Gosh darn it, why not just put Rove in the White House! Now there’s a guy to have a beer with!Vote McCain Palin 😉

utahbengoshiOctober 6th, 2008 at 1:48 pm

Yes, Bush is a fool, Paulson is a fool, the republicans are fools! Do you really think that BO and the dems have clean hands in this or will save the day? If so, then you are a fool. Each administration and each congress have virtually all sold off our futures to the second and third generation for a mess of debt-laden pottage all the while blaming the other “party” as if that ameliorates things.

JamesOctober 6th, 2008 at 1:57 pm

This kind of false equality of “they both did it” may be true to a point, but the Republican party BY FAR has been more damaging to our economy. They have been the ones crying deregulate deregulate deregulate. Deregulation resulted in Enron and it resulted in this. They have busted our budget far more than the Dems. Bill Clinton balanced the budget four years in a row and was on track for a huge surplus. All the Republicans do is spend and cut taxes, which gets them elections, but has resulted in what we are witnessing today.

utahbengoshiOctober 6th, 2008 at 2:08 pm

let’s be sure to thank Barney Frank, Chris Dodd, Charles Schumer, BO and their like for supposedly being “less bad” (assuming arguendo) in destroying our economy in exchange for truckloads of Fannie/Freddie/financial industry cash. As long as they all can perpetuate the sychophantic to believe that “‘the other party’ are the bad guys” on either side, they wip all up to a frenzy or placate them into the false sense of security to look out for yourself and your own community but rather just “trust me” to take care of you. Look to the Founders and fear any and all concentrations of government power which are out of control on both sides. They all need to go!

MarkOctober 7th, 2008 at 2:51 am

The budget was balanced during the Clinton years ONLY because of the DotCom bubble (and horribly distorted statistical reporting).Further, it was during the Clinton administration that Glass-Steagal was repealed. Do some research. Robert Rubin was key to all of this (and he’s been advising Obama).These are the facts. I detest both parties, in which case I have no bias.

GuestOctober 6th, 2008 at 1:51 pm

Did you see when Palin finally said what papers she reads on Fox after drawing a blank with Katie Couric??? THE ECONOMIST!!!!WAHAHAHAHAHAHA!!! What a joke they are! She’s probably never even heard of The Economist, let alone having read it!

GuestOctober 6th, 2008 at 4:00 pm

Since some like playing partisan games, here’s a block from the other side, i.e. excerpts from “The Day The Earth Stood Still” by Howard Ruff — October 3, 2008:Wall Street, as we have known it all my life, no longer exists. Merrill Lynch has been bought out, as well as Washington Mutual. Fannie Mae and Freddie Mac, Bear Stearns and AIG are gone, and Lehman Brothers is bankrupt and has collapsed. But the major issue before us is that this Democrat-controlled government has taken over everything we used to call “Wall Street.” With the aid, assistance and encouragement of President Bush, Uncle Sam is trying to buy $700 billion worth of rotten assets so they can control Wall Street.What rotten assets would they buy? It seems that one of the issues behind the collapse of the mortgage industry has been the Democrats forcing mortgage lenders and brokers over the years to issue mortgages that can never be repaid as part of their social policies to create “affordable mortgages” to create “an ownership society.”So Congress rushed in to create unenforceable mortgages which are unlikely to be paid – mortgages where you could start with a low teaser rate and kick the ball three or four years down the road to where the stated interest rate would rise so they couldn’t be paid. Also, no documented income required, no down payment!…Today Wall Street and the securities industry have been socialized by Congress and the Democrats are firmly in control. $700 billion will buy up the bad mortgages that people can’t pay and alter the terms to stop foreclosures so everyone, no matter how unworthy, can own a house they can’t lose, whether they can make the payments or not…The irony is that they may have created a problem beyond the ingenuity of human leadership; so big and perverse that there is no real solution short of spending billions to buy up bad assets.So who is to blame for this mortgage disaster?1. Blame congress, including compliant Republicans, for the “ownership society.”2. Blame the Federal Reserve for keeping interest rates so low for years that anyone could get a mortgage under the relaxed terms – buy a home with a mortgage that could never be repaid – creating a real-estate bubble.3. Blame perverse laws passed by Congress divorced from any reason to buy votes.4. Blame individuals who signed up for mortgages that they could never repay.5. And blame those who want to bail them out by buying their mortgages and readjusting the terms so they don’t get thrown out of the home they can’t afford and should not have bought! This is supposed to fix the problem.It may kick Wall Street and the banker’s problem down the road, but it won’t fix America’s problem. Everything you have been reading in newspapers and seeing on TV is aimed at saving a few favored executives on Wall Street and the tattered reputations of the politicians who created this problem… The vast expansions of the money supply that we are seeing dwarfs anything we have seen in our lifetimes…Monetary inflation means we will wake up one day in the grip of a huge price inflation. As Will Rogers said, “Invest in inflation, it’s the only thing that’s going up.”…Today I received an email from Money News: “The earthquake will come via a collapse in the market for U.S. government bonds as domestic and foreign investors realize that the only way Uncle Sam can meet his future spending obligations is to print massive quantities of money,” warns Boston University economist Laurence J. Kotlikoff.”The result will be sky-high inflation and interest rates and, most surely, a prolonged reduction in output and employment.””This could happen today. It could happen tomorrow. But it will happen here just as it has happened in every other country that tried to spend far beyond its ability to pay,” he writes.[T]he Federal Reserve has issued billions of dollars to favored firms so that some chosen bankers can buy up other institutions, buying the rotten assets so the old world can continue….When you combine this with the fact that other socially acceptable entitlement programs, like Social Security, Medicare and Medicaid, are unsustainable and can only be maintained by creating money, we have a lead-pipe cinch guarantee of more inflation in the future…NOTE: Ruff is an investment advisor–some like him some don’t—I cut the investment advice but thought his commentary interesting.http://www.kitco.com/ind/Ruff/ruff_oct032008.html

GuestOctober 6th, 2008 at 8:43 pm

The FED does not buckle under pressure from Congress. This is a shameful attempt to blame this crisis on some leftist social well-fare program. The FED acted independently when it lowered rates and kept them low. Many observant individuals recognized the obvious consequences of the irresponsible mortgage practices long before they were felt; I’m sure the FED was also aware. Does anyone remember Greenspan suggesting that people get ARM’s when the rates were at a record low? ARM’s ended up being the product sought most by those who couldn’t afford mortgages in the first place. THere’s more going on here than what the media is spinning.

GuestOctober 6th, 2008 at 10:14 pm

Oh, but it was not shameful for the person who started this to blame it on Republicans, or Palin, or… Of course it’s the Fed. And that’s the point. And where were you Friday when Pelosi and Frank and Reid and Dodd delivered for their masters in the Treasury and the Fed? Whose money do you think they gave to Paulson? Whom do you think they represented on Friday? Me? And what is this plan for me to buy expensive mostly new houses for people who never saved for them, nor made a downpayment, who got subsidzied mortgage and property tax rates and now will have their principals reduced and a home guaranteed by me for life? Capitalism?All Socialism involves slavery. And I know who this Congress and the Fed intend that slave to be. ME!

AnonymousOctober 6th, 2008 at 1:18 pm

You folks getting all up-in-arms about excessive CEO salaries and golden parachutes are missing the big picture. We <> to pay this type of compensation to attract big talent superstars! That’s why our system is so successful!

AfAOctober 6th, 2008 at 1:34 pm

Why not? Don’t tell me you are not enjoying the show?If I have the choice between this and an NBA game, I won’t hesitate long

GuestOctober 6th, 2008 at 4:04 pm

Yeah, we were entirely unsuccessful before, say, 1985, when executive compensation really took off.

AfAOctober 6th, 2008 at 1:42 pm

I am “enjoying” my day off.Yahoo!’s Breaking News headlines looks like an auction board:DOW plunges 400 .. 500 .. 550 .. 600 .. 700 .. points to below 10,000

AnonymousOctober 6th, 2008 at 1:32 pm

Dear NourielAn academic will not take bold action. The “master of levearage” only knows to pay higher prices. A regualtor who blames the doctor “short sellers” on finding the disease. What are you expecting form them? This is your triage!!!!

GuestOctober 6th, 2008 at 1:36 pm

Another bounce coming…looks like without any intervention, Dow 9500 is today’s closing target…

GloomyOctober 6th, 2008 at 1:39 pm

Nouriel,Time to give up on holding up this house of cards. Let’s save our resources for rebuilding from the ashes.You gotta know when to hold em’Know when to fold em’

GuestOctober 6th, 2008 at 1:43 pm

Amen.Gloomy, thanks for calling this right all along. This will be as John saw the collapse of all nations.

GuestOctober 6th, 2008 at 1:41 pm

From Fox News:Breaking News >> Dow Takes 710-Point Nosedive on Global Credit FearsIt is all over the news now! Way to go Congress, way to go

GuestOctober 6th, 2008 at 1:48 pm

Dow touched 9500!! It has gained back 80 points in a flash!! MAN, WHAT DOES THE WITCHING HOUR HAVE IN SOTRE FOR US???????

GuestOctober 6th, 2008 at 1:52 pm

2:50 p.m.Crude futures close below $88 for first time in eight months2:49 p.m.Market Snapshot: Dow plunges 800 points as global crisis persists

GuestOctober 6th, 2008 at 1:52 pm

@ Nouriel Roubini: “The only way to stop this liquidity panic is a blanket guarantee of financial sector liabilities and direct public provision of liquidity to the parts of the financial system and the corporate system that are now at risk of a meltdown driven by a liquidity run on their short term liabilities. So it is time for the Fed to stop wasting time and start the actions that will make a difference…”So, the sky is falling and the taxpayers and “public” (whatever that is) are to be the collateral damage. It’s easy, Dr Roubini, to say that there must be “direct public provision of liquidity” to those parts of the financial and corporate system now at risk of meltdown. But where is that “public liquidity” coming from?Unless I’ve missed something in basic economics – you are putting me and the entire economy at risk of meltdown – turning my salary and savings into worthless paper and setting me up to pay more taxes to keep replenishing the public treasury as Paulson empties it. If not, would you please, please EXPLAIN to me what you mean by the provision of public liquidity?This constant bailout of a failed and corrupt investment banking system must stop. You know as well as I there is not enough value in this economy to cover $40 to $70 trillion in credit default swaps and deep voodoo derivative schemes. The entire U.S. economy last year only amounted to $13.8 trillion in economic output.How many times are these “financial experts” going to be back with hat in hand for help from working men such as myself, with their guarantee that this one will solve everything? After Bear Stearns? After Freddie and Fannie? After AIG? After FDIC? After Merrill and Goldman and Lehman and Wachovia? After Friday’s massive Paulson-Bernanke Bank Bailout end-all to solve everything?And now it’s Monday and there’s urgency for more?Well, I say NO! The cure is worse than the crisis.

Crow doughOctober 6th, 2008 at 6:42 pm

I absolutely agree. Where does the public bailout end if we prop up every failing market on the planet? And how is that done? Do we just print truckloads of dollars to grease the wheels? And what guarantee is there that the greedy creeps who are now withholding their free federal billions would begin loaning money again? This whole rats-nest of derivatives and phoney paper is about to collapse as a result of the same thing that created the Leviathon in the first place: pure greed on the part of a few shrewd operators who couldn’t care less about the cultures or economies they have undermined. Eff ’em all, I say! If Da System collapses all the better- it will free millions of people from debt peonage, which is the only future these lying scum on Wall Street ever gave us!

AnonymousOctober 6th, 2008 at 1:57 pm

It was an era when giants walked the earth–Alan Greenspan (originator and progenitor of the present financial crisis; he always has something to say, but most of what he says and does is way off the mark), Hank Paulson (it’s not easy to be your own God!), Ben Bernanke (an expert on the 1930’s great depression–now he has his own real-life great depression with which to play), and last, but certainly not least, George Bush (the bad-karma kid–if there’s a way to make a terrible situation even worse, George will find it); Marble idols all, but with feet of clay. The END is nearer than you think. I feel very sorry for all of us, and especially for me!

paulysonOctober 6th, 2008 at 1:57 pm

If you guys did not complain about the bailoutlast week, it would have passed earlier andthis would have never happend.

MAOctober 6th, 2008 at 2:03 pm

Miss America here.My apologies for the length of this in advance… Likewise it’s disjointed structure.This is a 2 part “essay” which I started last week but couldn’t finish until now, due to time restrictions.The first part is a rant/synopsisThe second part is a planThe Bailout plan…It’s a win/win! I love that statement when it comes to finance! Like a used car salesman, Hank Paulson, Ben Bernake, and GW Bush have peddled that sound byte out to the public during their spin sessions for the new bailout. …but everyone smelled a rat. …and now the markets are reacting.Why??? Because win/wins don’t exist in finance… unless you want to break the economic see-saw.Work your way through the equation.Wall Street wins short term, Gov/taxpayer win long term.So then who loses?Gov/taxpayer lose short term, Wall Street loses long term?(Bailout proponents may argue that there are “wins” in other areas, but every win, has a loss somewhere else.)The questions you have to ask are: Is this plan just made to put off the loss? Until when? How is delaying a problem advantageous? Can the Gov/taxpayer absorb that short term loss? Can Wall Street absorb that long term loss? If the “wins” shift… Where do the “losses” shift?Based on how overspent, the Gov/taxpayer is at the moment, it would appear that the gov/taxpayer are not capable of any short term losses. Likewise, based on the current volatility/stress on Wall St, who would be willing to bet on any companies in the financial industry long term right now? We’ve already seen the negative wealth affect at throwing money at this problem. Likewise, we’ve seen parallel affects from attempts to mask our shortfalls, by using rate reductions and credit facilities. The net effect is dollar devaluation, which results in an inflationary death spiral of commodities.So clearly, our current model for an economic fix… is flawed.To solve our current problems, we need to see what flowed where, and where our actions will flow. This will give us a better understanding of just how far the balance of our excess was thrown off, and what our counterbalance will need to be. (Not all bubbles are bad. Bubbles that we create can deflate orderly if there is a counterbalance to the bubble.)The economic see-saw was broken a few years back when we saw Real Estate and Stock Markets rally in synch, above and beyond “actual” growth. In the case of 2002-2007, we saw the expansion of 2 bubbles that are one another’s counterbalances expand at an alarming rate. The attempt to deflate these 2 bubbles simultaneously is virtually impossible based on their size, and a lack of a new counterbalance that can absorb the outflow of these bubbles. As we saw the Federal Reserve attempt to use the US Dollar as a counterbalance, we quickly discovered that it could not be done without massive inflation of dollar denominated commodities.With nowhere to deflate to, and debt destruction of wealth running rampant, cash becomes the ultimate commodity. Hording of cash/credit also becomes self perpetuating as the freeze causes more freeze pressure, which in turn puts additional pressure on the deflating bubbles.My balanced approach to working with this economic see-saw has led me to the following conclusion:A lose/lose scenario must be accepted to counterbalance the win/win of our recent exuberance. (since there is no counterbalance that can absorb the deflation of the 2 existing bubbles) Both Real Estate and Wall Street will have no choice but to take on losses. So, in the scenario where everyone losses, from an equality standpoint, no one loses.Rich Hartmann’s / Miss America’s PlanThe world is now looking for someone to blame for the crisis that now exists. We must investigate the causes so we do not repeat our past actions, and so we can hold irresponsible fraudsters accountable for their actions. But in the meantime we must also act immediately on what we do know to address our urgent needs. To prevent a catastrophic financial collapse, we must provide liquidity to banks to keep markets from freezing. Likewise, homeowners must come to a realization that they are holding overpriced illiquid assets too. (Their homes) New regulations as well as regulatory bodies need to be created.To flesh out what I believe would be a fix for the current problem can be detailed in a multi-level approach. The key points are as follows:1. Up to $1 trillion credit LEASE.2. Home Principal Reduction – I have argued this for quite some time and have worked through economic models (that I created) which show recapitalization taking a few short years.3. Create Central Regulatory/Depository for MBS market, CDS market, and Hedge Fund / Private Equity groups.4. Pair off of CDS market. – To reduce counterparty exposure, and lessen the need for the allowance of failure.5. Backstop FDIC on new deposits up to $200,000.006. New Regulations on shorts and DerivativesI have worked through quite a bit of these scenarios and can provide a more detailed approach (if I was employed to do so)1. – $1,000,000,000,000.00 lease:To keep credit markets moving, the US Government lease liquidity to ailing institutions versus illiquid securities at par value, with pledged collateral from the institution to cover over 102% of the amortized difference. (Mutual Funds, Pension Funds, etc… can exchange at more favorable rates to meet net redemption outflow) An initial cap of up to $1 trillion can be placed upon this. (I have calculated the need for a net of $1.2 – $2.1 trillion in liquidity that will be needed on a short term basis. $1.2 is likely. $2.1 is doomsday.)2. – Home Principal Reduction: (10%, but we can do up to 20%!!!)In a capitalist market, you CAN NOT show blind allegiance to any particular group. If you bailout every bankrupt person, then responsible people will choose not to pay. You can NOT create fail/reward system. A balanced approach with an option of anyone to receive a 10% principal reduction of home loans is needed. (many of the underlying secondary market securities have already been written down this much or more already) For participating banks that are willing to perform a principal reduction, they will receive a parallel lease line to liquidity to cover the immediate loss. At the same time, an “open receivable” will be created for the amount written down. (You can chose not to have a reduction which will be discussed below, as well as how the “open receivable works)A) – At 10%, it will take banks approximately 19 months to recapitalize the losses from the write down through P&I alone.B) – By reducing the monthly bills of every person, you are putting IMMEDIATE capital in the US citizens hands. While at the same time you are putting equity in the home owner hands, which gives them incentive to stay in their home.C) – The extra cash that is “saved” by the homeowners will flow (most likely) to 1 of 3 places.1. Pay off debt2. Savings3. Under the mattress.In the first 2 scenarios, you have cash flowing back into the system. Debt repayment will help aid putting a floor under default or the confidence/fear of default by investors. “Savings” will immediately recapitalize the banks, thus helping start an upward cycle (that may speed up a recovery that would be faster then the aforementioned 19 months) Under the mattress… will have to be addressed. (this can be done through increased bank rates and raising of FDIC caps.)2a) – Home Principal Reduction (caveats):* For those whom have paid off their MTG debt, or choose not to write down their principal, a tax break will be created to reward them annually (similar to a STAR reduction)* For all those that choose to reduce principal, an open receivable is kept on the books for the length of ownership of the home. If the housing market were to recover and you were to see a windfall, the open receivable would have to be paid prior to seeing a profit.For example, You have a $200,000 mortgage. The bank writes down 10%.* The bank creates an open receivable for $20,000.* The Gov’t leases the bank $20,000 liquidity in exchange for that receivable. (Based on lease rules and pricing of risk on that receivable the Bank also offers collateral to cover the amortized difference)* The homeowner now has a $1,140 monthly payment as opposed to a $1,266 payment, saving them $126 per month which gets infused back into the financial system (It’s a “rolling stimulus plan”. – For a $417,000 conforming loan, the savings would be $264 per month.)* 5 years from now, the housing market recovers. You sell your $200,000 home (which you were only paying on $180,000) for $230,000. Instead of walking away with a $50,000 profit (230k – 180k = 50k) you would be force to pay off your open receivable first. So you’d walk away with $30k (or maybe less if interest is added???)3. Create Central Regulatory/Depository for MBS market, CDS market, and Hedge Fund / Private Equity groups.A Debt Servicing Corp – which I have posted here before is a start point for the MBS market. Parallel market coordinators will also need immediate creation for the CDS market, as well as a central regulatory for the HF/PE business. Without TRANSPARANCY CREATION, there will be no CONFIDENCE restored! It goes in that order.4 – Pair off of the CDS market.Through a central regulatory, more sophisticated universal systems can pair up unnecessary derivates, and write them against one another. This will reduce counterparty risk/exposure, as well as reduce, net overall debt. For those familiar with TBA’s, it would work in parallel form, by “round robin” payments and straight pairoff wires.5 – FDIC insurance raise.For confidence, and inflation adjustments, the $100,000 will need to be increased. (I won’t bother explaining any more as I believe this has finally been addressed in the current package.)6 – New regulatory rulesThis list can go on and on… but for starters, some simple provisions should be made.“shorts” should not be banned! Uptick rules should apply. In addition, shorting must find direct lenders to short from. (No more borrowing from Mutual/Pension Fd’s etc…)A direct “conflict of interests” exist here! In the current environment, MF/Pen funds lend securities for 2 typical purposes. Collateral & Shorting. These funds are paid well for the loaning of their securities. …but so are the custodians and so are their advisors. If a “short” is successful, the broker makes money, as well as the custodian, as well as the advisor. …but the underlying investor is now holding a depreciated asset. If MF/Pen fund holders knew their assets were being used against them to bring down the value of their own assets, the never would participate in them (regardless of the fee generation) Most prospectuses of MF/Pen Funds do not state that their assets are being loaned for this purpose. (so investors should be protected from this self destructive process that they aren’t even aware of.)In addition to these “rules”, accountability for destructive actions must be more aggressively prosecuted. Bear gets taken out by Goldman: By GS cutting off relations, the risk on Bear bonds rise 600bps, and investors immediately pull their cash and $28billion leaves the door in 3 days. The move was well coordinated and done with destructive aim. JPMChase (with GS backing) cuts off liquidity to Lehman through the Tri-party window (by cutting/devaluing their collateral to pennies on the dollar) Lehman is left without cash to cover standard obligations as they cannot raise enough collateral. $200billion leaves in a day. In these cases, cannibalism can be euphemized as self preservation. …but in fact, they are aggressive acts of financial war.Without liquidity added to the credit crisis, consumer stimulus/bailout, new rules, new regulatory’s, we are without a sound direction to go. Confidence will return after transparency has been returned to the investor. Credibility will be returned after fraudsters are held accountable.Without approaches that mirror these actions… I am left just preying for us all.Miss Americap.s. I will be visiting Mickey Mouse for the next week or so. I will be 1,000 miles from ground zero… but 1,000,000 miles from the financial world / economy. I will try to put together something when I get back on the directions that we will go based on the actions that have been taken.Will Dollar/debt destruction increase the value of the dollar at a faster pace then print/inflation? (supply vs demand) Will it perpetuate hording?Will our only choice be a worldwide “stock split of worldwide currencies” be our only option. (I suggested this some time ago. Something like this may become an “only choice”?)

iNnOsInZOctober 6th, 2008 at 2:53 pm

MA, great post. Was hoping you could clarify some of the points you mentioned:1) Up to $1 trillion credit lease <– Define “ailing institutions”? Does it include Corporates, Industrial’s etc? If financials only, i don’t see how they can put up a collateral when their assets are plunging down and nobody knows what they are worth? If they had the collateral, wouldn’t it be possible for them to get some sort of lease thru private investors? I mean we do see Buffet et al going for preferred shares; so thats maybe one good way of recapitalizing?2a) Home Principal Reduction: “…or choose not to write down their principal, a tax break will be created” <— Why should they get a tax break when they are refusing to write down their principal? Maybe they believe their assets are performing and want to hold on to their books? I really think they should cut the principal across the board if they want to see any benefits from the Gov’t.P.S Have fun @ Disney 🙂

MAOctober 6th, 2008 at 3:14 pm

Good questions iNnOslnZ.There’s a lot more detail I could write if I had more time. (likewise, my models are working well with simulated “fallout” scenarios)1. Gov’t backstop would aid all. Not just Finance. Any company with excess cash, it seems, has gotten mixed up with financial arms, and debt creation. “A lease” meansloan, with an option to buy. Companies will be inclined to “mark” assets well based on potential collateral siezure. (fixed assets can be calculated) True price discovery will evolve with my point #3 (regulatory)There are provisions like that in my grand workthrough. I did not flesh out every detail… but, to truly stimulate the economy, cash needs to keep moving in a circle of life fashion. (plus, tax break people who did not write down principal would not have to pay any receivable on the sale proceeds of their house.)Hope this helped.I have to wrap things up and packMiss America

GuestOctober 6th, 2008 at 3:33 pm

Go back and read it again and I’m sure it will make more sense. It is the homeowner, not the lender, who is the subject of that section.

iNnOsInZOctober 6th, 2008 at 3:59 pm

@Guest:Thanks for pointing that out. I was looking at it from lenders perspective.So we’re assuming that all lenders agree to reduce the principal for homeowners.@MACorrect me if i’m wrong: “lease”= loan with a call option? That’s what Buffet did with Goldman deal i believe.I feel if Corps start putting up collateral and Gov’t has full right on it before any other bond holders, the confidence in bond market could be lost? I don’t know, maybe i’m just taking your lease idea the wrong way.

YankeeOctober 6th, 2008 at 5:37 pm

For those of us who just paid off our mortgage, if we waited we would have been able to pay it off through the reduction. I would be ok with a tax credit. Really good suggestions, Rich!

Miss ItalyOctober 6th, 2008 at 2:04 pm

With the last good trades today, I’m officially out of the market for this year. I’ve made about 50% playing with stocks and ETFs (no options) through some big bets that I wouldn’t normally do (would be 100% without banning on short sales…). I was sure this was once in a lifetime chance, not just because of the big events unravelling, but mainly thanks to the edge that all the contributors on this blog (and the Professor naturally) gave me . Only positive by my side, was the ability to recognize almost two years ago that the level of informations and discussions on this blog was well above anything else. Thanks to everybody. I’m sorry that I don’t have good contributions to make and help you back somehow. Like Alessandro, I’m just a physicist, but unlike him, I haven’t had the patience to the get litterate on economics and finance. Just used the information digested by the Professor and the bloggers. Back in the market when it will become something similar to a market again….What do I do with the cash now?

London BankerOctober 7th, 2008 at 3:21 am

Quite seriously, a senior banker in the City last night recommended to his peers that each have £20,000 cash at home in their safes as the banking system illiquidity could lead to emergency measures including closing banks to cash withdrawals for a period.

David HallOctober 6th, 2008 at 2:09 pm

I think it’s time to stop rewarding the risk-based abstract market economy, and infuse the middle and lower middle class labor economy. How about cutting off further bailout dollars directed at the corporate finance-based markets? The complexity of investment instruments and repackaging methodologies appears to make restoring them to rational functioning highly speculative; let them fail; they can be reconstituted with a fresh set of rules and transparency. The extraordinary level of disassociation between tangible asset and exchange value is corrupted.How about we simply ensure the continued functioning of the FDIC and other asset insurance vehicles (capital property assets only), distribute dollars directly to the consumer/saver base — social security recipients, homeowners that are not in arrears, those with less than 36 percent of their gross household income assumed by monthly debt payments, savings account based investors (low risk), those who have avoided the speculative marketplace…It seems to me that the base economy (so called Main Street) can be directly and immediately stimulated to function with some isolation from the greater complex corporate/financial economy, and at a far cheaper/less complex/more likely to succeed return on investment.

crowdoughOctober 6th, 2008 at 6:49 pm

They’ll print all the dough they need to keep the crapshoot going. But that’s still all it is- a total phoney crapshoot. “Free markets” indeed!

GuestOctober 6th, 2008 at 2:20 pm

DOW LOSSES CUT IN HALF!!!! HELL< AT THIS PACE WE WILL BE GREEN IN THE NEXT 40 MINUTES!!! UNBELIEVABLE!!!!!

GuestOctober 6th, 2008 at 2:33 pm

Well, if teh market was looking for an ease, they may screw themselves if this rally’s much further, especially if it regains 10,000.

Michael LittlebigOctober 6th, 2008 at 2:36 pm

How dare people question the FED and Congress who used their best psychic ability to resolve this financial holocaust without verifying the facts. These two entities are committed afterall to protect the treasures of the wealthy and the powerful.Dearly beloved, we are gathered here today to pray that the luck of the Fed and the Congress improves over the next few hours.

GuestOctober 6th, 2008 at 2:36 pm

Sun County Airlines filed for Chapter 11 bankruptcy protection Monday amid a federal fraud investigation targeting its parent company’s former Chairman and CEO, Tom Petters.

dhomeOctober 8th, 2008 at 3:59 am

Mostly from the jolly green printing press and, if the are still some foreigners out there who have not got sick and tired of being fleeced; them.I read that Hanky Panky and Helicopter Ben are having lots of trouble getting any foreigners to stump up the 700bil for the TARP, so I guess the printers will be working overtime (again). Hello hyper-inflation!

GuestOctober 6th, 2008 at 2:52 pm

Of course – didn’t you know that if the DOW collapses, there is a buying opportunity at 3pm, guaranteed..

GuestOctober 6th, 2008 at 2:48 pm

Like any other day, world markets finish down 7%-20%, the good ole USSSRA is now down 3%. The PPT looks insistant on reclaiming 10,000 cuase you can’t have that in the headlines tonight!!

GuestOctober 6th, 2008 at 3:25 pm

“The Fed also said it will begin paying interest on commercial banks’ reserves, another way to expand the central bank’s resources to battle the credit crisis.”what happened to fractional reserve banking and the whole idea that the fed was in total control because they always get the interest from member banks (money that doesn’t exist, so the banks are beholden to the fed)? does this mean the fed is dissolving and jp morgan, citi and b of A are in control?

GuestOctober 6th, 2008 at 4:08 pm

With “reserves” of 25 cents for every $100s in issued loans, i.e. reserves of .000267%, the Fed is on an addictive high of pure fiat money (computations made by Mogambo using figures from Prudent Bear).

GuestOctober 6th, 2008 at 2:54 pm

Black MondayToday the Dow was down at least 700-800 points at one stage. There seems almost no doubt that without direct PPT intervention, we would have seen a triple-digit loss on the Dow.First, anyone who thinks the 9700 point or 9800 point level on the Dow is a support … is probably dreaming. But for intervention, the index would have plunged right through those levels. To me, this indicates that there is plenty of downside room in this current market.Second, the market response today is a direct answer to Congress’ approval of the Paulson plan last week. Message to Congress: Next time you are confronted with emergency action on the economy, take time to properly consider your actions – and make sure the plan involves accountability for the people who caused this mess!PeteCA

GuestOctober 6th, 2008 at 3:35 pm

100% correct – the PPT pressed the button at the point where things were going to free fall (mid afternoon – so overnite we’ll get the rate cut and a few other announcments and be up 200 tomorrow — delaying the inevitable

GuestOctober 6th, 2008 at 3:49 pm

I want to bet with you the Fed will lower the rates. It big time now with the EURO/USD going through the roof. The US has enough problems with liquidity and trade deficit. Sure they don’t want to face a strong dollar problem now!

GuestOctober 6th, 2008 at 7:46 pm

This is the same strychnine Greenspan injected into the economy in 2001 that almost killed the economy. Now that the economy is faltering on its last legs, Dr. Benanke is going to administer the killing dose. And all the heads of the world sit by nodding collectively, except for those assisting in the heinous act. We had a proven cure under Volcker but now no one wants to pay the price. Even Roubini is in on the last rites. It’s one thing to be famous for detecting the signs of the collapse: it’s quite another to know the poison and recommend another dose. Dr. Roubini is one of the few who understand this economic malaise. I ask him to reconsider his prescription.

GuestOctober 6th, 2008 at 2:55 pm

ooo – it – can’t – quite – make – it – to 10,000….9993 – just – need – one – more – big – buy….

GuestOctober 6th, 2008 at 2:59 pm

THIS IS CRIMINAL! NO ACCOUNTABILITY, JUST MAKE IT SO! Down only dow 290 points now!!!! I HATE THIS ADMINISTRATION!

GuestOctober 6th, 2008 at 2:59 pm

Wow, look at that market strength. A 460 point rebound in the last hour. There must be some excellent news I missed……….

AnonymousOctober 6th, 2008 at 3:07 pm

You just witnessed a nice game in the world’s biggest casino! I think the fact that some economists once called these markets efficient is even more unbelievable!

crowdoughOctober 6th, 2008 at 6:55 pm

What you witnessed was the “free market” being manipulated by the Big Dogs who own the casino. They always must win, doncha know? Criminals, actually, lying effing criminals.

GuestOctober 6th, 2008 at 3:05 pm

For those who wonder what direct-and-combined market intervention looks like … please take a look at the Dow during the last hour before closing today.There are only two possible explanations for this:1. Those are your hard-earned tax dollars being ploughed directly into the futures markets for the Dow and the S&P 500AND/OR2. Somebody just got some BIG inside information that the Gov’t is going to announce special emergency measures tomorrow morning to stabilize the markets.In the old days, **** like this used to actually work. Banks made big money with this type of inside trading. Now – we Americans just take it as a strong sign that the WRONG people are in charge of our economy!PeteCA

GuestOctober 6th, 2008 at 3:13 pm

Mr. Roubini,If there is a run on the banks from foreign banks, then why does the USD rockets to the sky?Hedge funds liquidation is not enough to support the USD if foreign banks are drawing away their deposits in US banks.

GuestOctober 6th, 2008 at 3:45 pm

Many thanks, I agree that what this guy is saying makes sens.Interestingly he seems to contradicts Mr. Roubini’s view that Foreign banks are going to precipitate the run on the US banks. If Redeker’s view is correct the oppposite effect will provide a strong support for the USD.US investors seem to have more foreign investments to liquidate than foreign banks have deposits to draw from the US.

GuestOctober 6th, 2008 at 3:15 pm

4:14 p.m. [BAC] Bank of America late-traded shares fall 4.3% to $30.874:13 p.m. [BAC] Bank of America cuts quarterly dividend 50% to 32c4:12 p.m. [BAC] Bank Of America to sell $10 bln in common stock

GuestOctober 6th, 2008 at 3:18 pm

4:16 p.m.U.S. stocks end off lows on talk of global interventionYeah, right, just like talks of the “rescue package” fixing everything…

GuestOctober 6th, 2008 at 3:18 pm

Rescue is banker and media double speak. For the giant taxpayer-to-banker money transfer just signed into law, a sailing party afloat and floundering can be said to be “rescued” by responsible sailors if brought back to shore and mended and made whole again. The question. Has America’s financial system, on the wrong course and trillions under water, been made whole again by the taxpayer “rescue?” No.Bailout, of course, is the operative word. Taxpayers go out to the floundering party, bail water from the leaking boat. But does the leaking boat head back to harbor for repairs? No, it continues on course. Out to sea, the same leaky boat with the same captain and crew making plans for their next great adventure.Dr. Roubini. You know this was no rescue of a floundering banking system. It was just another bailout, and they’re going down again – with another call for “Bailout”!

GloomyOctober 6th, 2008 at 3:19 pm

Be happy, don’t be greedy”We’d actually like to see a little more panic,” said Matt Cheslock, a senior specialist at Cohen Specialists. “Then you get stocks that go down and bounce,” enticing buyers, he said. “Eighteen percent might seem like a discount but when you don’t get a bounce it’s not. The stock could go down another 2 percent,” he explained.”I’m a little frustrated and disappointed. I thought we had a great setup here for a selling climax,” Art Cashin, director of floor operations at UBS, told CNBC. “We could still see a selling climax tomorrow … then turn like a cattle stampede and roar back. That would be the kind of bottom that could last for months,” Cashin said.

GuestOctober 6th, 2008 at 3:23 pm

Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way.The OTC derivative market is the largest market for derivatives, and is unregulated. According to the Bank for International Settlements, the total outstanding notional amount is $596 trillion (as of December 2007)[1]. Of this total notional amount, 66% are interest rate contracts, 10% arecredit default swaps (CDS), 9% are foreign exchange contracts, 2% are commodity contracts, 1% are equity contracts, and 12% are other. OTC derivatives are largely subject to counterparty risk, as the validity of a contract depends on the counterparty’s solvency and ability to honor its obligations.EVERYTHING IS FINE. DONT WORRY. UNDERDOG IS HERE !

IncognitoOctober 6th, 2008 at 3:27 pm

They make the rules, then make the money, and finally bankrupt the system. What is left after all is manipulation for them, and shock & awe for the rest of us.Enough with the arrogance of these shameless people! Enough with their uncanny attitude! Enough with their insecure personalities!How is it possible to make such a big world so small to share for all of us? We may not be able to share everything equally; however there should be a way to share things decently.What happened in the markets today (or for the last one year) is beyond corruption! The markets are built to exchange ownership of assets. That’s why it should not be left to the hands of some mentally retarded people!

GuestOctober 6th, 2008 at 3:37 pm

You are an elegant and eloquent thinker and writer, so I respectfully point out to you that you might want to re-think the severe insult that you have imposed on those who are afflicted with mental retardation.imho the mentally retarded citizens that I am connected with, are infinitely more responsible and honest than the rabble that have created this mess.

IncognitoOctober 6th, 2008 at 3:44 pm

I think you misunderstood what I said. I meant that those people who created this mess out of their own greed are mentally retarded. I completely agree with that fact that the part that you are with “are infinitely more responsible and honest than the rabble that have created this mess”. I apologise if I wasn’t clear with my message. I am not a native English speaker.

GuestOctober 6th, 2008 at 3:53 pm

I believe I understood what you meant and have only suggested that you re-think your choice of words.For a non-native English speaker, your command of the language is far better than many of us who are native speakers.

IncognitoOctober 6th, 2008 at 4:12 pm

I am sorry and apologise for my choice of words. It mad me feel really bad after I understood what you meant.

GuestOctober 6th, 2008 at 4:42 pm

You are an orator, Incognito. I am putting your words, which speak so poignantly and so passionately to our plight, in my “dictionary of quotations,” from whence came this:Oh, that my tongue were in the thunder’s mouth!Then, with a passion would I shake the world.SHAKESPEARE: “King John,III” 1596

GuestOctober 6th, 2008 at 3:40 pm

A little harsh today, professor. Perhaps the Fed is having troubles coordinating action with our European counterparts, which don’t see the difficulties you see.

GuessOctober 6th, 2008 at 3:42 pm

Tomorrow (Tuesday) Dow Jones – Up? or Down? – my guess is up due to a combination of news and ppt intervention — too bad cause if things had been left to their own devices tomorrow could have been one of the great buying opportunities circa 1987

MauilibrarianOctober 7th, 2008 at 6:21 am

I think you may be right about tomorrow, but this artificial action by the PPT indicates likely more market overriding downturn in the intermediate to longer term. Bottom line, the single biggest short-term problem is the short-term corporate credit markets, as Dr. Roubini indicates. If those aren’t operating efficiently soon, then artificial manipulation of the equity markets will quickly be meaningless and overwhelmed by the reality of the situation.

Octavio RichettaOctober 6th, 2008 at 3:49 pm

It took a little over three years, but history has finally repeated itself!http://www.federalreserve.gov/Boarddocs/Speeches/2005/20050826/default.htmRemarks by Chairman Alan GreenspanReflections on central bankingAt a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, WyomingAugust 26, 2005 Whether the currently elevated level of the wealth-to-income ratio will be sustained in the longer run remains to be seen. But arguably, the growing stability of the world economy over the past decade may have encouraged investors to accept increasingly lower levels of compensation for risk. They are exhibiting a seeming willingness to project stability and commit over an ever more extended time horizon.The lowered risk premiums–the apparent consequence of a long period of economic stability–coupled with greater productivity growth have propelled asset prices higher.5 The rising prices of stocks, bonds and, more recently, of homes, have engendered a large increase in the market value of claims which, when converted to cash, are a source of purchasing power. Financial intermediaries, of course, routinely convert capital gains in stocks, bonds, and homes into cash for businesses and households to facilitate purchase transactions.6 The conversions have been markedly facilitated by the financial innovation that has greatly reduced the cost of such transactions.Thus, this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums

ignatiusOctober 6th, 2008 at 4:24 pm

I cannot understand why almost anybody seems to take for granted that you require the banking system to supply the real economy with credit. What could be easier than pumping liquidity directly to Main Street? The chances to actually get your money back would be infinitely higher than trying to bail out the banks, which may or may not convince some of them to relend part of the handout. Cut out the middle man and let the financal sector die a well deserved death, leaving the few well managed institutes to takeover.In the meantime, let the government act as a lender of last resort, so that the companies can continue their operation and meet their payroll requirements. A simple way to do it, as I already suggested a few threads before, would be to extend the period allowed for payment of outstanding corporate taxes to 18 months while charging a high but reasonable late interest rate of e.g. 4% above the FFR. It would be cheaper than the Paulson bailout and put the money where it is needed. What’s not to like?

GuestOctober 6th, 2008 at 5:20 pm

Ideology is preventing rational thought and we’re left to watch the insanity unfold before our own eyes.I’ve never before felt so angry and helpless.Hopefully something positive arises from the rubble.

crowdoughOctober 6th, 2008 at 7:09 pm

What, you think Da System operates in the interest of the People?! The idea is to keep everyone in debt peonage, not free them!

ignatiusOctober 7th, 2008 at 4:22 am

Sure, but this only explains that it does not happen. However, I was wondering why virtually nobody – even here in this blog and other non-mainstream forums and blogs – is even suggesting measures in that direction. It seems that bank monopoly on distributing money (or more exactly credit, however under a fiat regime this is more or less the same) is so deeply ingrained into the collective worldview, that even dissenters are unable to think outside the box.Almost anybody seems to think that the collapse of the banking system necessarily implies the collapse of the real economy and the halt of production.

AnonymousOctober 6th, 2008 at 4:37 pm

So the stock market went up 300+ points when there was no logical reason for it–or was there? Yes, believe it or not, the US government is activly manipulating the US stock market. And it wasn’t a cheap thing to do, and they did it with your money! And I don’t think it will work, but it provides and excellent opportunity (maybe your last if you haven’t all ready done so) to get the hell out while the getting is good. If it goes on like this, maybe it will be true socialism with the US government being the majority share-holder in all US public coperations.

PeterJBOctober 6th, 2008 at 4:59 pm

You had better prepare for the worst as the guilty, the incompetent and the stupid prepare to spend more of your money to sanitize themselves and to – in a organized ‘fashion’, so as to impose themselves on you for another round; IOW, they want the rest of the cash that you stuffed into your mattresses. What is yours, is their’s, and they want it all:”French President Nicolas Sarkozy, who convened the Oct. 4 meeting, called for a global summit “as soon as possible” to implement “a real and complete reform of the international financial system.” He said “all actors” must be supervised, including credit-rating firms and hedge funds. Executive-pay systems must also be reviewed, he said. “We want a new world to come out of this,” Sarkozy said. “We want to set up the basis for a capitalism of entrepreneurs, not speculators.”Well we can guess who the “entrepreneurs” and “actors” will be. This is just the “we are innocent and are really not incompetent phase of the hopeful re-election campaign; ‘trust us – we have the answer to go forward, er, again’.The Global Summit of Morons and Parasites (global “leadership”) is to be also attended by the obedient Priests of Economics and Bureaucracy from the global Temples of our “faith-based” catholic center of the Federal Reserve of the New World Order.Bah… if you believe this crap then you deserve to wither on their vines.”The liquidity must flow”.The only action required has been posted.Promise every Banker a life prison sentence and a whipping if they do not comply and then enforce it Mr Paulson and Mr Benanke.I still like the Bordello option for the FedRes. Ben could be Maitre de la Maison and Hank the butler. (Oh, it already is:)Ho hum

GuestOctober 6th, 2008 at 8:59 pm

They hate Nicolas Sarkozy in France. His ratings are looooow. He’s trying to improve his ratings by attacking other interests in the world that are not his business. He’s a scandal-ridden moral pygmy. His wife left home because of his multiple infidelities, he traveled around with a woman before he married her, married her four months after his second divorce, and even the French are shocked. Bah! is right. I don’t want Sarkozy’s “new world.” (Later I will send a really strong message.)I like you, PeterJB.

Miss ItalyOctober 6th, 2008 at 11:43 pm

Don’t worry Sarkozy is in good company, the always smiling Italian prime minister Berlusconi. His latest comment shows either full ignorance or criminal intent… reassuring the Italian people with savings in the Italian banks that purchased products from Lehman Brothers: “don’t worry, the 700 billions just voted is such a big parachute, no one will be hurt”. How criminal is that? How can I tell my Italian friends that the 700 billion has nothing to do with protection of their investments?…. Liar!!We are in good hands.

Octavio RichettaOctober 6th, 2008 at 5:06 pm

This is a reply to Miss Italy on 2008-10-06 14:04 above.I’ve come to the conclusion that i totally hate the “reply to this comment” format. Due to the limited capabilities of most blogs, just posting along the timeline is less work for those who, like me, like to read all comments.Wow! You are quite a wizard! Is that 50% return YTD in your portfolio? Or are you just focusing on your positive “casual” trades as of late? If you are a reputable physicist you should try to be a bit more scientific in reporting your investment results.Today, After closing my last short, TWM, at the morning market low, and selling a 10% position on a 30 year stripped treasury that got ahead of itself, I am a bit over 8% YTD, even leaving today’s gain for PTTRX (for which no closing price is available yet, and accounts for about 30% of the my portfolio).Volatility in my portfolio is now limited to the PTTRX position so unless the bond wizard does something totally crazy, it looks like I will be able to claim an 8%+ return for 2008. My 2007 return was 9.3% vs. 5.49% for the S&P 500.Take a look at a great chart which shows the risks involved in the stock market despite a positive expected long term return.http://www.icmarc.org/xp/rc/marketview/chart/2008/20080502SP500HistoricalReturns.html

Miss ItalyOctober 6th, 2008 at 11:27 pm

Octavio,sorry for non being precise: mine is 50% return YTD on the capital I put to play in the stock market and accepting to loose, entirely. That was a fraction of my total capital, the rest of which was left in a “safe” place. Total YTD return on my full capital is just 20%. But getting 50% in the stock market was really something. And 20% overall is pretty good, too. As I said, not something I suggest to anybody, too much swing, but I had confidence the suggestions here were pretty much spot on.Thank to you and everybody else in the blog.

John RyskampOctober 6th, 2008 at 5:13 pm

The problem is that Nouriel’s analysis has reached the limit of its usefulness. He is the one who is saying that nothing can be valued, but he is proposing bank triage on the assumption that something can be valued.This is a contradiction. He’s moved into the zombiconomy, where transactions take place on the assumption that something COULD BE valued.This is desperation. And I don’t think it’s going to happen. I don’t think they’re going to recapitalize banks because, if they do, the stock market will go to 3000.At this stage bank recapitalization will NOT restore confidence. It will SINK confidence (whatever zombiconomic confidence reamins) because people will assume that, if the Government is recapitalizing banks, then the problem must be much worse than the problem the Government says will be solved by recapitalization.So, Nouriel is just as out of touch with the facts as Paulson. The main concern of the Administration is prevent a stock collapse. It’s declining, of course, but their only concern is that it not collapse. Recapitalization of banks does nothing for them. It runs counter to what they’re trying to achieve.

artichokeOctober 6th, 2008 at 6:15 pm

John, why do you say the administration cares only about the stock market? I’ll grant that they are acting that way, but if they still think the stocks are important, it suggests even more stupidity or more altruism than I can give them credit for.Or, maybe Bush has had a conversion-of-sorts and is looking out for the little guy with a 401K now, moreso than they are trying to protect the fatcats?

GuestOctober 6th, 2008 at 6:28 pm

Lost 401ks means a lot of social unrest and political backlash. The babyboomers dominate the population, and have lots of money and political influence they are the last group of people the gov wants to turn thier back on. They forced all these people into the stock market with IRA’s and 401k’s and thier would be hell to pay.

crowdoughOctober 6th, 2008 at 7:18 pm

Yes, John, it really appears we’ve reached the abyss where anything done won’t do any good. Prop the stock market up to keep up morale even as the whole system collapses. And what then?

John RyskampOctober 6th, 2008 at 5:17 pm

“Since the crisis of confidence and liquidity was becoming more virulent over the last few days and during the weekend in Europe one would have expected a radical response over the weekend along the lines suggested above by the Fed and other central banks. After all Bernanke stated on Friday that the Fed would do whatever was necessary to deal with the liquidity crisis.”See? He’s starting to make predictions that don’t come true. And he doesn’t understand why his recapitalization proposal is anathema to the Fed. It would mean wiping out shareholders. This would make the market collapse.He would be much better advised to stick with the facts. Don’t do anything as panic-stricken as guarantee all deposits and lower interest rates (since when has THAT accomplished anything? he’s losing it, even to suggest such a thing). Just advocate a ban on housing evictions.When will these high-flying commentators ever come down to earth and start paying attention to FACTS?

GuestOctober 6th, 2008 at 5:44 pm

I’d be interesting in hearing any rational arguments against the logic of Ryskamp’s proposal.Setting aside the usual ideological arguments and the fact that it won’t likely happen, why isn’t this a sound foundation on which to turn around this financial crisis?

GuestOctober 6th, 2008 at 5:24 pm

Dr. Rubini,You have been writing about and predicting the financial meltdown, including the steps that are/have been taking us there. However, it would be interesting to know what could be the consequences of such a financial meltdown:- will treasuries still be safe?- will the dollar still be safe?- are there risks of hyperinflation, due to gov overspending trumping the deflationary pressures of a recession/depression?Thanks for the great blog!

GuestOctober 6th, 2008 at 6:17 pm

It’s funny but the professor never seems to answer what exactly he really thinks will happen and what the end result will be, he says deflation but at the same time talks abouth the Bretton Woods 2 agreement being broken but doesn’t explain precisely how that will happen just kind of refers to the pressure being put upon it but doesn’t elaborate as to the steps China and the west will take to break it or how it will unravel. For example will we wake up one day and read in the paper China decides to break the Bretton Woods agreement? How much pressure will it take? Are we close to being there etc. Also would this be deflationary or inflationary for the U.S.? I think if the professor came out with more concrete conclusions he would be taken less seriously or given less credibility, I suspect the professor holds some things back.

GuestOctober 6th, 2008 at 9:58 pm

Stick your neck out too far and it will be chopped off or your feet will turn to clay.My opinion is that the next significant issue is the new gold-backed currency or currency basket the ROTW has already agreed upon and how quickly they will move from dollars into the new currency(ies).When this happens, the Treasury will have to print to cover that lost investment. That’s when hyperinflation will kick in.

GuestOctober 7th, 2008 at 6:35 am

Great question but I think its sort of like asking an MD if a patient will be able to walk again while they are in the middle of having a stroke.

ewulfOctober 6th, 2008 at 5:34 pm

Markets psichology, go faster than policy makers proposed solutions, get their way through.It might be important better coordination ,but the main world leaders have already sent the message, that everyone is ready to go on with further support to get the uncertainty under control.So,it is imnportant to keep in mind ,that short run urgencies,might confuse about what medium term needs are.Nobody is willing to protect risky behaviour,at expenses of other´s people money.So ,there is a critical balance about solving a crisis, and spreading out the seed for this situation to happen again.-

YankeeOctober 6th, 2008 at 5:49 pm

We will see some deflationary behavior, but I think we will start going hyperinflationary. This kind of $ coming out of thin air could do nothing else….

GuestOctober 6th, 2008 at 6:04 pm

The problem is that the nation has no more capacity for credit regardless of the terms and interest rate, the lending institutions know this very well now and will not be lending freely so I expect a lot of deflation, but we could start seeing the dollar crash because of our government debt is so out of wack with its earning potential but still no inflation in the real economy untill the government starts getting desperate and floods the depressionary market with printed bills. It’s funny how we view inflation and deflation as so different from one another when they’re just opposite means to being poor.

GuessOctober 7th, 2008 at 7:03 am

That really is the question and much of what I have read speaks to both issues either as sequential, as you suggest, or as mutually exclusive. Gold is slightly higher but continues well off of its highs, which would suggest inflation is not imminent. Base metals are well off of their highs as are oil and most agricultural commodities. — here is a link to Marc Faber intervied this morning (Tuesday Oct 7) — he stated – markets most oversold since 87 – emerging markets will be the place to be notwithstanding global recession – and finally inflation will take hold – therefore gold is the place to be along with plat and silver.http://www.cnbc.com/id/15840232?video=880660896&play=1

GuestOctober 6th, 2008 at 6:29 pm

A person with a tin hat can see a third outcome for the election – A coupIn her new book Naomi Wolf outlines how use of the ongoing economic crisis in combination with:1. Ongoing practice of mass arrests of illegals and at the RNC including journalists.2. Confiscation of recording devices.3. Legal mechanisms in place for GWB to declare an emergency martial law condition.4. First Brigade of 3rd infantry division is now in training for population control.5. FEMA Concentration Camps – http://www.youtube.com/watch?v=0P-hvPJPTi46. Bailout bill gives GWB ~$1 billion in discretionary spending.7. Threats of Martial Law to Rep. Brad Sherman http://nz.youtube.com/watch?v=HaG9d_4zij88. GWB has the legal authority to wage a war against terrorism across the “whole world” which includes the United States.9. DHS is now flashing yellow and the FBI warns of potential terror attacks on public buildings. http://deepbackground.msnbc.msn.com/archive/2008/10/06/1501940.aspx10. Republicans are accusing democrats of being terrorists: Obama called a terrorist in front of erratic McCain http://www.youtube.com/watch?v=RvXf9AUHTqM11. Government using faith as a mobilizing toolInterview – Naomi Wolf – Give Me Libertyhttp://www.youtube.com/watch?v=_XgkeTanCGIhttp://www.endofamericamovie.com

crowdoughOctober 6th, 2008 at 7:23 pm

Wassamatta, you don’ wanna be a Murkan?! They won’t stop NASCAR or shut down the bars, so where’s the sweat?

LellisOctober 6th, 2008 at 6:50 pm

In Brazilthere is acards game in which the rule is to cheat. When you haveno way out you scream “TRUCO”. That immediatlely triples the bets and it is a take it or leave it situation. Actually the opponent can yell “6” and bouble it again, and so on.At the end, and the game ends at 12 points, if you have nothing else to do but lose, you scream “TRUCO” Well, I thing someone with a higher handis going to do it soon, and the rest will be left with nothing.Have you imagined a US default to finance the rescue of its society? Well, Great Britain has done it, France has done it and all major so called developed countries have done it but the US. Will the USsay TRUCO and just wait to see hat happens? I would say it is a strategy to get out of the mess and look good internally.So, TRUCO!

artichokeOctober 6th, 2008 at 6:52 pm

It’s pretty clear that even if not sufficient, it is necessary to lower the Fed Funds Rate and keep it down. There has to be an incentive to “put money to work” and for every percentage point the FFR is above zero, there is more reason just to hoard rather than lend.

AfAOctober 6th, 2008 at 10:28 pm

It doesn’t really matter where the FFR is at, does it? It is not the lack of flow of liquidity INTO the PD’s and banks that is causing the problems but lack of flow OUTO other parts of the shadow financial system and the real economy. Something was broken in there (the lever?) that prevents the liquid from flowing.

lellisOctober 6th, 2008 at 6:53 pm

some of the typing errors above and lack of spaces are due to my new Dell laptop, that eat letters like some of my investiments are going tobe eaten out.

captaintraveeOctober 6th, 2008 at 7:03 pm

Last year, I was at my hometown business expo asking all the “bankers” their about the financial crisis and saying it would get much worse. They mostly looked at me like I had three heads and told me everything was fine. This year’s expo is next week. I can’t wait to go:-)(I emptied my 401k and payed the penalty at dow 13,000)

ABCOctober 6th, 2008 at 9:03 pm

Very fine and thorough article on possibility of US debt default. Thanks OC, and great to see you back here.Quote from article:The Economist magazine wrote that: “…public credit depends on public confidence…The financial crisis in America is really a moral crisis, caused by the series of proofs …that the leading financiers who control banks, trust companies and industrial corporations are often imprudent, and not seldom dishonest. They have mismanaged…funds and used them freely for speculative purposes. Hence the alarm of depositors and a general collapse of credit…”The words appeared over 100 years ago on 2 November 1907 during the 1907 crash.

ArmchairOctober 6th, 2008 at 9:13 pm

Genuine question: does the use of the expression “shadow banking system” imply that there is a daylight banking system?Indulgent questions: can the shadow banking system be rescued at a reduced price, of say 60% for the entire pool of assets that shadow banking system holds? Can the future ownership pie of this reduced value shadow banking system, be divvied up in a diplomatic way, a preservationHyper-maniac question: now that we are at the twelfth step, does that mean we are are at the seventh-inning stretch?

GuestOctober 6th, 2008 at 9:22 pm

BTW, professor, did you pick a 12-step scenario because you knew we are dealing with a debt addiction?Time to admit we are helpless to stop and defer to Higher Power? As Miss America said with a probably unintentioal spelling slip: Let us prey

GuestOctober 6th, 2008 at 9:46 pm

We have property rights.And I would like to say to Frank, Pelosi, Reid and Dodd, and Bush, Paulson, Bernanke, and Greenberg: Get off my property! GET OFF MY PROPERTY!I owe the investment bankers nothing. Nothing!“I laid my bones to, and drudged for the good I possess; it was not got by fraud, nor by luck, but by work, and you must show me a warrant like these stubborn facts in your own fidelity and labor before I suffer you, on the faith of a few fine words, to ride into my estate, and claim to scatter it as your own.” R. W. Emerson: The Conservative, 1841.AGAIN, GET OFF MY PROPERTY!

GuestOctober 6th, 2008 at 9:49 pm

Pakistan facing bankruptcyOfficially, the central bank holds $8.14 billion (£4.65 billion) of foreign currency, but if forward liabilities are included, the real reserves may be only $3 billion – enough to buy about 30 days of imports like oil and food.Nine months ago, Pakistan had $16 bn in the coffers.The government is engulfed by crises left behind by Pervez Musharraf, the military ruler who resigned the presidency in August. High oil prices have combined with endemic corruption and mismanagement to inflict huge damage on the economy.Given the country’s standing as a frontline state in the US-led “war on terrorism”, the economic crisis has profound consequences. Pakistan already faces worsening security as the army clashes with militants in the lawless Tribal Areas on the north-west frontier with Afghanistan.The economic crisis has already placed the future of the new government in doubt after the transition to a civilian rule. President Asif Ali Zardari has faced numerous but unproven allegations of corruption dating from the two governments led by his wife, Benazir Bhutto, who was assassinated last December.The Wall Street Journal said that Pakistan’s economic travails were “at least in part, a crisis of confidence in him”.While Mr Musharraf’s prime minister, Shaukat Aziz, frequently likened Pakistan to a “Tiger economy”, the former government left an economy on the brink of ruin without any durable base.The Pakistan rupee has lost more than 21 per cent of its value so far this year and inflation now runs at 25 per cent. The rise in world prices has driven up Pakistan’s food and oil bill by a third since 2007.Efforts to defer payment for 100,000 barrels of oil supplied every day by Saudi Arabia have not yet yielded results, while the government has also failed to raise loans on favourable terms from “friendly countries”.Mr Zardari told the Wall Street Journal that Pakistan needed a bail out worth $100 billion from the international community.”If I can’t pay my own oil bill, how am I going to increase my police?” he asked. “The oil companies are asking me to pay $135 [per barrel] of oil and at the same time they want me to keep the world peaceful and Pakistan peaceful.”The ratings agency Standard and Poor’s has given Pakistan’s sovereign debt a grade of CCC +, which stands only a few notches above the default level.The agency gave warning that Pakistan may be unable to cover about $3 billion in upcoming debt payments.Mr Zardari is expected to ask the international community for a rescue package at a meeting in Abu Dhabi next month.This gathering will determine whether the West is willing to bail out Pakistan.

CaponeOctober 6th, 2008 at 10:01 pm

All, this site is so rich with content it would take full time to truly keep up. Octavio, I agree with the reply to comment issue. I have not been here in a long while and I do not like it at all – maybe I am just old school…Miss America (thanks for excellent commute home write up) mentioned all currencies splitting in two as a possibility and Yankee referred to a deflationary period followed by hyperinflationary period. When I was OCD following this stuff before, I struggled with this transition that could take place and HINT HINT HINT asked all of the people here who are much brighter than I to attempt to draw comparisons to or investigate other equity markets which declined and then experienced hyperinflation – for example Bovespa ? Perhaps comparing the equity index versus the currency charts during the period.While technically I see a day by day argument for a 29 87 like crash from here in the next few days, in the back of my mind as Yankee points out, I see a myriad of issues that will have TBTB simply printing money to fix each and every one. Ultimately, I believe we will have hyperinflation. How do you possibly come to grips with how or when that could happen?It is funny how no matter what the asset class in favor is whther it be tech stocks kaboom, then everyone ran into real estate, stocks, commodities, kaboom. Now, look everyone runs to cash and well, you can’t necessarily have that either and people are losing money in what is traditionally cash. Sounds a heck of a lot like sports gambling. If everyone is on the same team, that team usually does not win… Another parallel to sports gambling for you, if everyone bets millions and millions on a team Vegas takes the game off the board as they know something must be up. All bets placed on Bears for example way above average dollars, Vegas pulls the game and the Bears cover. Same thing with the SEC banning short selling. Everyone betting stocks go down, Vegas, I mean the SEC / Wall Street takes the game “shorting 800 stocks” off the board. Where WERE/are those stocks going? They going down. Game over… The retirement funds of every American are in a giant speculative pool called the stock market. Sleep well on that note…Silver has corrected 50% and oil 40%. These keep popping up on my radar screen especially if down the road, on the other side of the deflationary rainbow is hyperinflation…

AfAOctober 6th, 2008 at 11:12 pm

Capone,Deciding on the inflation/deflation is a very difficult game. Not only because they are both in play, but because each scenario depends on EXOGENOUS variables that many (inflationistas and deflationistas) exclude from / cannot include in their models.The exogenous variables are by definition almost unpredictable either about their occurrence, their timing, or their magnitude (because of the absence of clear cause to effect relationships).Such exogenous variables are mainly related to institutional or government decisions and actions, and include, among many things, decisions by central banks (especially the Fed: monetize, unsterilized interventions, “give up”, 0% FFR …), decisions by governments (more bailouts, reduce exposure to $, flee $ …) and metagovernments (institution of a new currency/financial system …)These exogenous variables are trigger-based (or if you wish they are categorical/nominal variables, they only accept values Yes/No – or 0/1) rather than process-based (or interval variables, they are gradual and can take any value). The problem is that, unlike with interval variables, you don’t really know where you are or when will there be a shift from 0 to 1, from Yes to No (no more US treasuries for me), it is usually difficult to predict.

GuestOctober 6th, 2008 at 10:05 pm

Panic as Russian stock market falls by almost 20%Published on 06-10-2008Source: RIA NovostiThe Russian stock market gave in to panic on Monday with the MICEX dropping 18.6% to 752 points and the RTS falling by 19.1% to 866.39 points – the worst losses since the 1998 crash.Russia’s financial system has been affected by a global credit crunch which started in the U.S. and quickly spread to Asia and Europe leading to record losses on Russia’s financial markets, rising interest rates and a liquidity shortage.Sergei Sheikov, managing director for corporate clients at the Olma Company said: “Monday became one of the blackest days for most market participants – for the first time since 2005 the RTS index closed below the psychologically important benchmarks of 900 and 1,000 points.”Losses for many blue chip stocks exceeded 20% with Norilsk Nickel shares worst hit as they plunged 30.2%. The losses forced the closure of the MICEX, Russia largest index, and RTS three times on Monday.Fears regarding the spread of financial crisis caused all world markets to plunge, which contributed to Russia’s market losses. Britain’s FTSE 100 experienced its worst day since 1987 as stocks plunged 7.85% and France’s Cac 40 index fell 9.04%, and in the U.S. shares fell below the 10,000 point level for the first time in four years as they shed 4.65%.

duderOctober 6th, 2008 at 10:10 pm

I hate to cross post but I had the wrong thread so…you check out Bloombergs quickly you may get a good laugh.EQUITY INDEXESSingapore Straits Times 2,159.96 -8.36 -0.39FUTURESSingapore Straits Times 216.00 -1,955.00 -90.05OMFG, this is what the future holds? HAHAHAHA. Think someone will lose their job over THAT one?

GuestOctober 6th, 2008 at 10:15 pm

Nikkei down by over 320 points in early trading now.Doesn’t bode well for the Dow tomorrow.Why do I suspect that Mr Paulson and Mr Bernanke are preparing to sprinkle some magic whiffle dust on the US markets???? The key development will be if they make a proclamation – and the market still tanks. It’s getting more risky taking a long position these days.PeteCA

duderOctober 6th, 2008 at 10:18 pm

Pete. Did you look at the numbers above? Bloomberg Still has the Singapore Straits Times futures trading down 90%. Can a typo cause a heart attack?

GuestOctober 6th, 2008 at 10:42 pm

Saw that comment and I thought it was really funny. LOL!!! This is a REALLY bad time in the global markets to make a screw-up like that. Bet the guy who posts the numbers doesn’t keep his job. Too funny!PeteCA

AfAOctober 6th, 2008 at 10:20 pm

Talking about card games.There is a Moroccan game that is called Liar (or Cheater). Cards are equally distributed among players. The objective of the game is to get rid of all cards. There are no real winners, but only one loser; the last one left with cards in his/her hands. The first player starts by putting up to 3 cards face down in the middle of the table and saying which cards they are/want to make others believe they are (e.g. 2 fives). It is then up to the next player to the right to either continue (i.e. putting more of the – allegedly – same card face down on top of them, and so on to the next player) or call him/her a Liar, in which case, they uncover the cards; if the last player actually lied (1 five and 1 queen for example is still considered a lie), the liar “eats” all cards on the table, but if s/he is not (if a party turned more than once and that player has lied before, he is not considered a liar), then the caller eats all the cards on the table.The “untaught” rules of the game are to (1)lie AS LONG AS you are positive the next player would not call on you, (2)not lie WHENEVER you are positive s/he would, (3)call the previous player liar when you cannot execute (1) or (2)BUT you are positive he is (well you can still call for other reasons such as for vengeance), and (4)not call someone when you are positive s/he did not lie UNLESS you cannot execute either (1) or (2).The strategies to execute one or all of these rules are virtually unlimited, including deceit, game of chicken (especially when only two players are left)Technicalities:1-The uppercase conjunctives are not formal rules, but they ensure the game’s flow and entertainment.2-One card is taken out of the deck/pack and hidden.3-Whenever any single player amasses 4 cards of the same number, s/he takes them out of the game.4-In fact, one player could play more than 3 cards at a time, although that invariably means s/he is lying, the next player, for reasons that are his/her own (e.g. make the last liar “eat” big) would not call liar.I find much similarities with what goes on in Wall Street, especially with Credit derivatives. It seems that many have been called liars and lost, and many will so be too. I am waiting for the face to face between taxpreyers and taxprayers.

Rex VisigothisOctober 6th, 2008 at 10:57 pm

Doctor R, the dry cleaner called–can’t have tux done before you leave for airport. He will send it out by taxi, cabdriver will walk it to the security check point, TSA guy will take it from him and meet you at the gate. He’s also packing silk long-johns; Oslo already pretty cold.ps-dry cleaner says he read your article in February, cashed out, says thanx.

GuestOctober 7th, 2008 at 12:08 am

big deal, a utility not accepting credit cards.why would a monopoly care about making anythinghelpful for customers.

GuestOctober 6th, 2008 at 11:20 pm

Roubini’s wish come true?Fed Sets Floor Below Rate Target, Engineering `Stealth’ CutOct. 7 ( Bloomberg) — The Federal Reserve may have trimmed borrowing costs yesterday without actually saying so.The central bank used power granted under last week’s financial-rescue legislation to effectively set a floor under its main interest rate that’s lower than the 2 percent target set by policy makers last month. The Fed may now pay interest on bank reserves while it floods financial markets with liquidity, pushing down the overnight lending rate by about 0.75 percentage point to 1.25 percent.“Absolutely, it’s a stealth easing,” said John Ryding, founder and chief economist of RDQ Economics LLC in New York and a former Fed researcher.http://www.bloomberg.com/apps/news?pid=20601087&sid=a2KRwOfPJk58&refer=home

AnonymousOctober 6th, 2008 at 11:23 pm

Anyone want to take bets that the election will be suspended due to the $ crisis and Bush/Cheney stay in power?

GuestOctober 7th, 2008 at 12:40 am

Yeah, you can’t fight the power if you are the power….What is needed is a wholly-new mobilization of political might. Unfortunately, this is Amerika…

GuestOctober 6th, 2008 at 11:53 pm

美國CNBC 電視台的長期大好友克藍瑪(JIM CRAMER)在開市前大聲疾呼叫投資者拋售股票,結果S&P500 指數在紐約時間上午10時半已下跌7%。這是典型的解脫性拋售高潮,長期大好友叫人清貨,不是底是甚麼? 同日美股的波動幅度指數(VIX,Volatility Index)一度升至60,也反映了投資者極度恐慌的情緒。

PeterJBOctober 7th, 2008 at 12:25 am

Talking of Treason, Lies and Theft:” THREE of Australia’s biggest banks tapped long-term loans from the Future Fund as cash dried up from other sources in the wake of the collapse of US investment giant Bear Stearns.Documents obtained by The Australian under Freedom of Information laws show the ANZ, Westpac and the National Australia Bank obtained funding for as long as 10 years.”So, there goes the Future Fund of Australia or probably what was left of it… Now, the Bankers and politicians are saying here that the Bankers cannot pass interest saving on to the homeowners because of the cost of money (implied foreign borrowings) but here they are getting home grown funds (the cannot get more foreign funds as nobody trusts them) so why then is the cost of money so high???????Or is it;-} ? I think not!!! – they are all lying er, still.http://www.news.com.au/business/story/0,27753,24456999-462,00.htmland the RBA has slashed rates by 1%…and this is just the beginning…Arrest all Bankers Now before it is too late! Seize all the Banks Assets (the reality is you don’t arrest those that you do lunch with) But all the Banks in Bankruptcy Protection:The Liquidity MUST FlowHo hum

jugglingcdo'sOctober 7th, 2008 at 12:40 am

Thursday is D-DayThursday’s auction for Lehman’s credit default swaps (CDS):D, 800 points yesterday???how bout 1000 points on thursday…do you guys have extra popcorns at home??Forget the stock market gyrations. Forget Bernanke and Paulson’s ineffective, unconstitutional schemes.Thursday’s auction for Lehman’s credit default swaps (CDS) is much more important.Why?Well, if banks are reassured by the CDS auction, it could do more to free up frozen capital than all of the Fed and Treasury’s ill-conceived plans put together.As Bill Gross, head of $721 billion dollar fund Pimco, says:’Credit markets are based on trust and when there is no trust, markets can freeze up . . . . Imagine yourself at the drive-thru ordering a Big Mac. At one window you order and pay, at the other – 20 feet ahead – you pick up your lunch. What if you thought that after paying at the first window, your 1000 calorie sandwich might not be waiting for you a few seconds later. You might not pay; business as usual might not take place. That is what is happening in the credit markets. They are frozen in “McFear.” After the failure of Lehman Brothers – an investment bank which took orders at one window, and promised to pay at another for trillions of dollars of those CDS, swaps, and other derivative “sandwiches” – institutional investors said that they’d prefer to stay at home and have peanut butter instead of risking their money ordering a Big Mac. And so their money goes into that figurative mattress instead of the register at McDonald’s, people are laid off, profits go down, bank loans become less available, our economic center cannot hold.”An auction occurred today to determine the value of Freddie and Fannie’s CDS. While there were approximately $500 billion in CDS written against Freddie and Fannie, those who issued CDS will be repaid between 91.5 percent and 99.9 percent of protection they sold. In other words, the issuers of such CDS will only have to pay out between .1 and 8.5 cents on the dollar.For a rough, back-of-the-envelope calculation, let’s split it down the middle and call it 95% of $500 billion, which means that the issuers of Freddie and Fannie CDS will only have to pay out about 5 cents on the dollars, or about $25 billion total. That’s a lot of money, but not catastrophic.On the other hand, “investors who wrote protection on a Lehman default will have to pay out between 81 and 85 cents on the dollar.”No one has disclosed how many billions of dollars in Lehman CDSs are out there. And no one knows the exact payout amount which will be determined at Thursday’s auction.But it is known that “Lehman was one of the 10 largest parties participating in credit default swaps, the New York Times reports. The company’s most recent quarterly filing said it bought and sold $729 billion in derivatives with a fair net value of $16.6 billion.” And a lot of people bought CDS betting on Lehman’s failure in September.D-DaySo Thursday is D-Day, where “D” is for “derivatives”.If there are a lot of Lehman CDS out there, and if the auction price comes in high, it could greatly exacerbate the global economic crisis no matter what Bernanke and Paulson do. On the other hand, if there aren’t that many CDS out there, or if the price comes in lower than people expect, it would be a huge sign of stability in the CDS market that could reassure financial institutions and investors worldwide, which could “free up liquidity” and help avert a depression (no matter what Bernanke and Paulson do).Washington Mutual’s CDS auction is October 23rd, and we might not have a final answer on how big the CDS crisis is until then

GuestOctober 7th, 2008 at 10:28 am

But wasn’t Lehman heavy in Freddie and Fannie. If those were covered, wouldn’t this temporarily defuse the explosion?

jugglingcdo'sOctober 7th, 2008 at 12:45 am

Lehman CEO Punched at GymLOL LOL again LOLhttp://www.businessandmedia.org/articles/2008/20081006150152.aspxKnock Out: CNBC Confirms Lehman CEO Punched at GymNetwork verifies reports Richard Fuld was attacked for financial institution’s bankruptcy.It seems anxiety from the financial crisis is reaching new highs, but the tipping point for one individual came at the Lehman Brothers gym in the midst of the company’s collapse.While former Lehman CEO Richard Fuld was testifying before the House Oversight Committee Oct. 6, CNBC reported he had been punched in the face at the Lehman Brothers gym after it was announced the firm was going bankrupt. CNBC and Vanity Fair contributor Vicki Ward said Fuld was attacked at the gym on a Sunday following the bankruptcy.“Frankly, I sat there and listened and I’m with the guy who apparently, the day before Barclays announced they were coming in and Lehman had already filed for bankruptcy, went over to him in the gym and punched him because that’s how I feel when I, you know, when I watched that,” Ward said on the Oct. 6 “Power Lunch.” “I didn’t think he was contrite at all, I thought he was arrogant.”Ward confirmed previous reports about the incident that reportedly occurred Sept. 21 and said the information came from “two very senior sources.”“From two very senior sources – one incredibly senior source – that he went to the gym after … Lehman was announced as going under. He was on a treadmill with a heart monitor on. Someone was in the corner, pumping iron and he walked over and he knocked him out cold. And frankly after having watched this, I’d have done the same too.”

GuestOctober 7th, 2008 at 8:11 am

why are these fat cats working day and night trying to shore things up instead of playing at the gym?

PeterJBOctober 7th, 2008 at 12:50 am

Talking about Australia and other things interesting:Reserve Bank (RBA) sheer panic and desperation cuts rates by 1% when they admit inflation indicators still high – Yes great stuff… Mr Stevens…ASX jumps in recovery – everybody can go back to sleep now.Politicians and Bankers and the barking mad pundits of all incompetent and stupid are saying every hour that Bank borrowings from overseas are too expensive to pass anything onto Australian Homeborrowers,er… “scr&% you”!The Australian (newspaper) reporting that Australian Banks can’t get loans overseas and have borrowed from the Future Fund of all Australians – obviously with the collusion of the Australian government, bureaucracy, banks, RBA, etc., etc., ad nauseum.Obviously and as stated the Australian “leadership” are in coordinated contact with the High Priests of the FedRes:Full analysis: A state of Panic and Desperation now exists in World “leadership”.It is time to also panic;-)>Ho hum

xia019October 7th, 2008 at 12:51 am

The sad thing is, why Fed/Treasury not listen to you, Prof. Roubini. They really do not understand (Ben did not know what he was talking about when he testified before in Congress that subprime was not a major concen, housing towards soft landing…. He still not understands what he is doing today).There is a report that Fed/Treasury will purchase Commerical Paper. They are going to run out of money very soon. Instead, provide “insurance gurantanee” for short term commerical paper is a much cheaper way to get all investors back to action again.

jugglingcdo'sOctober 7th, 2008 at 1:12 am

A taste of what to come,http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4894904.eceTerror as Iceland faces economic collapseThe Icelandic Government seized control of the country’s biggest banks last night in an attempt to fend off wholesale economic collapse.Turmoil at the banks, whose shares were suspended by the Government yesterday afternoon, had sparked panic in the tiny state, which has a population of 300,000, about the size of Coventry.Queues formed at petrol stations as Icelanders rushed to fill up before reported fuel shortages, while savers who tried to withdraw money from banks or sell bank shares on the internet found websites were not working.Meanwhile, fears mounted in Britain that the deterioration of Iceland’s two biggest banks – Kaupthing and Landsbanki – could have disastrous consequences for savers, City staff and the high street.

GuestOctober 7th, 2008 at 1:23 am

my friends keep telling me its a small nationits isolatedthen i gave them the KO punch, remember sarajevo? franz ferdinand,what happened then..and their response was, WHO??:(

Sponge Bob Square KnickersOctober 7th, 2008 at 6:04 am

What does Sarajevo have to do with this current crisis? The Franz Ferdinand shooting was the spark for WW1, however this is totally different and Iceland has no enemies? They just borrowed far too much on the International Money markets and are now paying the price due to the money markets shutting down.

GuestOctober 7th, 2008 at 6:50 am

My thoughts are with the people of Iceland, but I have to ask. How did a country of only 300,000 people borrow $120 billion when their GDP is only $20B? I don’t mean who allowed them, I mean what did they spend it on?

MarkOctober 7th, 2008 at 8:30 pm

Hmm… I remember getting into a discussion with someone here about Iceland over their “advantage” in that they have geothermal. I argued that that was fine and dandy for their own use, but they had no real other resources for export and therefore didn’t have a bright future.Looks like I’ve called another one correctly.

IvanOctober 7th, 2008 at 1:18 am

Some interesting observationsWhat I can’t really explain is the surge on commodity prices in the begging on the year. People started talking about crisis about a year ago but this seemed to have no effect on commodity prices. Moreover, the prices have surged to unprecedented levels in the first half of the year. I can probably explain the surge in oil prices as its production is really declining due to peak of oil, but the raise of prices on other commodities was quite strange given the large stocks all around the world.At the same time the US dollar was weakening to most currencies, which may be explained by the economic slow down and anticipation of the crisis. The strange thing happened again. As it became obvious that the crisis is eminent the US dollar changed its direction and started to strengthen again all other currencies. This is really strange to me.Can anyone explain the following observations?

MarkOctober 7th, 2008 at 4:01 am

I’ll take a stab at it (true test of whether I, being an economic neophyte, have learned anything from all the great minds here).The shift to commodities was typical return-seeking. Not typical, however, was the scale. The scale of it, which pumped things up further, was due to the fact that the markets were anticipating this financial mess.Why the re-shift? You can’t force people to consume. There was NO growth in commodities (when the consumer is flat). Additionally, because all these “leaders” are completely ignorant of real systems, they believed that the top gurus (Paulson et al) had a fix (how many times have people’s personal discussions have we heard “someone will do something?”). But to be fair, some (as in perhaps Buffett), feel that there’s no alternative to dumping money down the rat hole- it’s all funny money anyway, so really, what’s the real loss? Guns blazing at least gives the sensation that something’s happening, despite the fact that we’re firing into the night as we sink in quicksand…OK, the “real” loss is the loss of institutional control. It’s about much more than just the economic structure, it’s about the entire social structure.The idea of being too big to fail is the exact reason why we’re going to fail. Complexity, as Derrick Jensen points out, is the road to failure. BIG guarantees failure. Mother Nature doesn’t like competition, and Mother Nature bats last…

PeterJBOctober 7th, 2008 at 4:49 am

@ Mark”OK, the “real” loss is the loss of institutional control. It’s about much more than just the economic structure, it’s about the entire social structure.”Yes, it’s about the socio-economic structure.”Mother Nature doesn’t like competition, and Mother Nature bats last…”I don’t believe so Mark, with respect, I believe that we were / are not in accord with Mother Nature (The Laws / Principles of Physics) or, IOW, we were / are out of sync. Nature is non interventionist and it is the biggest player and her structures cannot be gamed by ‘fatal conceitedness’.Ho hum

MarkOctober 7th, 2008 at 8:40 pm

Perhaps you misinterpreted me… I was suggesting that we thought that we could defy Mother Nature (which is, in essence, the same thing as controlling her).If you’ve been paying attention to my posts they have been pretty consistent in regard to my belief that our systems could not continue because they ARE out of sync with Mother Nature/the real physical world.I don’t suggest that nature somehow has a collective conscience such that it can map a strategy in dealing with the imbalances/mankind’s abuses. But what WILL happen is that the forces of equilibria WILL force mankind’s abuses toward a more natural equilibrium.I think that we’re really saying the same thing.

Wolf in the WildsOctober 7th, 2008 at 1:47 am

I think PANIC is the right word to describe the reactions of the various central bankers gloablly but in their panic, they are still NOT DOING THE RIGHT THING. Although it has been highlighted upteenth time to all the people that matter, they still don’t get it. We have a breakdown in the money creation process, but it is not due to confidence. It had been about capital and will always be about capital. Its about the inability of the current amount of banking capital globally to support the amount of assets out there. Its about banking capital insolvency as the underlying assets go delinquent. Its about the M3 getting destroyed as the money multiplier crashes towards 1. At the end of the day, its about not enough money to support the asset base priced at par.Cutting rates will not help when no bank CAN LEND. What it might lead to is a Zimbabwe like situation when printing money is viewed as an all cure. It is not. The central bankers of this world must realise that there cannot be any situation where there is no pain. But the idea must be to ensure the recovery from that pain is short rather than extended. Difficult decisions must be made, and made quickly. Sometimes the low road is the right road.I have suggested the following before and I will repeat it, with the hope that someone in power is listening:1. Distressed asset vs equity swap. Fix prices at 20c to the dollar.2. Debt for equity swap for senior debt holders (25%) and subdebt holders (50% for tier 2 capital, 100% for tier 1)3. Massive dilution for existing equity holders.4. Temporary guarantee of all depositors for a fixed period (1yr + 1yr)5. Fire existing management6. Setup regulations to prevent the same from happening again (reinstate Glass-Stegall)7. Set up clearing house for credit derivatives8. Break up mega banks into smaller entities that cannot be “too-big-to-fail”

MarkOctober 7th, 2008 at 4:12 am

Wolf,Money is supposed to represent work. I’d argue that money creation isn’t happening because we don’t have any real growth in work output. (Most work being done by fossil fuels, which have, or soon will, be in production decline.)Virtual economic policies won’t be able to overcome the fundamental fact that all is based on REAL work and that real work is in decline.People have lost faith in the money system fairly valuing real work. And given that 2/3rds of the world’s population lives on $3/day or less and likely does more real work than those playing with virtual money, it’s clear that things have a LONG way to drop…

GuestOctober 7th, 2008 at 6:17 am

People have lost faith in the money system fairly valuing real work. And given that 2/3rds of the world’s population lives on $3/day or less and likely does more real work than those playing with virtual money, it’s clear that things have a LONG way to drop…

Yes but firing up the printing presses would be synonomous to giving these people a raise wouldn’t it? Albiet, the value would likely be less they will have more tissue?

Free TibetOctober 7th, 2008 at 5:00 am

I really don’t disagree with you. But it looks to me like we’ve moved beyond that. The generalized run on bank capital died with the shorts. It has morphed into a run on uninsured deposits. We’ll have to come back to the capital problem. The issue for the moment is that the only players left are CB’s. Ben’s helicopters are only fanning the flames. I think Roubini and Sarkozy get it. But the EC can’t act in concert with a unified money and disjointed money policy. Germany won’t bail out Iceland, nevermind Ireland who blew their own bubble & rejected the EC constitution. But Germany may not be big enough to save even some of their own banks. And TARP. It was never designed to do the right things. It’s not going to help at all now.What breaks the ice? A time out? A bank holiday? A rate cut?

GuestOctober 7th, 2008 at 10:40 am

You say “nevermind Ireland who blew their own bubble & rejected the EC constitution.” Maybe Ireland valued her freedom more than handing her fate over to international bankers and Sarkoy’s “new world.” Personally, I’d rather starve than live under these corrupt despots. Appears that in America we get both — the despots and starvation.

MojitoOctober 7th, 2008 at 2:35 am

Prof Roubini sez: “Since the crisis of confidence and liquidity was becoming more virulent over the last few days and during the weekend in Europe one would have expected a radical response over the weekend along the lines suggested above by the Fed and other central banks.”..but if your goal is to transfer a large amount of wealth out of the middle class, redeem trash for dollars and buy hard assets for pennies, then when that no longer works, dump the dollar altogether, why then you’re doing everything right…

Little SaverOctober 7th, 2008 at 2:57 am

To begin with, the Paulson plan doesn’t seem to be designed to openly handle the banking problems at the capital level. It seems that they will tackle it in a covert way, by offering more for troubled assets than they are worth. That way, shareholder’s equity can be increased selectively for choosen banks without openly admitting it, and while at it sparing shareholders of chosen banks from being diluted out. Watch their operations carefully. There was a reason why the original plan asked for elimination of control and responsibility, as stated in section 8:Sec. 8. Review.Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Wolf in the WildsOctober 7th, 2008 at 3:25 am

Anyone looked at Countrywide and Bank of America recently? It appears that Bank of America is assuming Countrywide holding company debt but not the bank level debt? Why would that be the case?? I am wondering if something is up their sleeves……

GuestOctober 7th, 2008 at 3:57 am

現時冰島中央銀行約擁有40億歐元外匯資產,但冰島四大銀行已有逾1000億歐元的債務。因此,國際標級機構上周已調低冰島的主權評級。Iceland was downgraded last week.Why the USA is still at AAA????

AnonymousOctober 7th, 2008 at 5:34 am

I think it is becoming monumentally clear that it is not possible to resolve the market’s liquidity problems without directly addressing the solvency of its financial institutions; and it will not be possible to create any confidence regarding solvency until the industry’s losses can be quantified, and the survivors recapitalized. Our best hope now is sweeping writedowns followed by a massive injection of capital, and the longer we wait to do that the worse this is going to get.

MarkOctober 7th, 2008 at 5:55 am

You left out THE key element- consumers, aka people!What good is it if these institutions can only exchange money between themselves and there’s no consumption on the output/demand side?The “consumer/people first” argument has more validity, but, unfortunately, the consumer is tapped out and is unwilling to go further into debt (placing their children up as collateral).What we’re seeing is the liquidation of the system. Consolidation, which will temporarily make it look like things are salvageable, is the first step in this terminal decline.

MarkOctober 7th, 2008 at 5:59 am

I should add that the consumer is the real bottleneck. We’ve hit (and passed) “peak consumption” (which likely coincided with “peak oil”). Growth has stopped and capital is unable to find an outlet. There’s a shortage of chairs (consumer purchasing ability) and the music is stopping (energy decline).

Free TibetOctober 7th, 2008 at 6:32 am

In the end, yes. But, where does the capital come from? Nationalize the industry? A govt. TARP to buy preferred shares? What management is going to go out on a limb to obtain that capital and risk that he might be declared insolvent? And the shadow system? The CDS market?And the problem is now cross-border. It requires a cross-border response.

MarkOctober 7th, 2008 at 7:31 am

But this is like asking “yes, but what about the operation?” when the patient has died.The motions are meaningless if they cannot sustain life.Fundamentally people are starting to revolt from their enslavement to the system. They can no longer find the justification for going further in debt; and quite frankly, the system’s rules no longer can justify allowing any more debt.If one views this in the sense of energy equations then it’s pretty clear. Applying more energy into the equation than one gets out will eventually produce a deficit.People no longer want to supply the energy to purchase excess “wants” (which are “wants” fabricated by the system, more of a push demand than a pull demand [consumer driven decision]).Only a game reset, a clearing of debt has any hope of staving off the collapse of the system. And even then, such a maneuver would likely wipe out pensions.

PeterJBOctober 7th, 2008 at 6:16 am

A Message to the Australia Leadership regarding the Global Socio-economic Collpase leading to the Mother of All Depressions in infantionary terms; A new experience:A. Your jacking up of Interest rates recently which you thought stopped inflationary trends in their tracks: You were wrong; deflation at that time was easily predicable; you made a fatal mistake, as the looks on your faces showed. The free-market cow was objecting to long term abuse and not short term abuse.B. Your dropping the interest rates today by 100 basic points is even more serious and shows that your incompetence and stupidity may be unequaled in what was the free world. Now you will see inflationary trends resume their trends which are set to destroy all the efforts to contain the free market system to the direct benefit of the Banks and the Body Politic (includes the faithfully and thoughtless bureaucracy). As I know that you cannnot contain this inflation beast, due to the two pre-mentioned moves, you have blessed all Australians with an unnecessary future of pain and suffering and have probably also have sealed your own fate.C. Your secret funding of the Banks from the Australian Future Fund and most probably elsewhere, indicates an acknowledgment of your culpability in things horrid and dread that will, through your cowardice, your dishonesty, your willingness to deceive, your arrogance and betrayal of the Australian public, seal the immediate fate for your constituents and the Australia socio-economic well being. Disaster comes as your promise wept.You speak of economic responsibility and I stand to answer that what you have brought to bear is crasse stupidity – a legacy that arises from your total ignorance and your eagerness to serve the Banks on a priority over the people of Australia; your wards.Today, Iceland took over all their Banks and seized their assets and management. This is an action that you should have taken, not for those Banks to be placed into some sort of Socialistic state but to free them from the socialistic and fascist state for the elite that they have been allowed to become but to return them to free-market fundamentals and operations. Usury has become the preferred mechanism of these Banks and continues on your watch.The liquidity of the World MUST flow freely and the Banks of this World are empowered and entrusted to this very function. Whereas, the Banks World-wide have enacted a treasonous wrought and have frozen lending while at the same time, have demanded and have been granted, by the likes of you, liquidity from the public purse. These acts Sirs, amount to TREASON, besides being stupid.As a result of the Banks actions Worldwide, the whole socio-economic system of the World will go into a major depression of some years.D. If interest rates are not concertedly raised in the last part of this year, Banks do not continue lending allowing liquidity to flow, if the peoples are not protected from the secondary economic fallout, then Sirs, be prepared to stand trial for Treason. Consider that you have been so advised and that you were pre-advised in the Year 2005 in formal terms, which you ignored.Mr Kevin Rudd, You talk about about “Tough decisions and tough Actions”; take such measures and arrest all Bankers, their Executives, and Board Members tomorrow and seize their assets while at the same time replace supervisory management into these Banks to allow the Liquidity to resume its Flow.Such bold actions will allow transparency to be brought to the state of our Nation’s finances and be a step towards bringing confidence back into Australian matters of socio-economics. There is no no other choice and it may be already too late due to the secrecy behind your funding deals with the Banks.This could be, Sir, your most enduring moment and your legacy while it could make your memoirs worth reading.Peter J. Bolton

GuessOctober 7th, 2008 at 7:14 am

Pimco’s El-Erian on CNBC 8:00 am NYT – says plumbing still clogged with no improvement and that the signs of very slight improvement in the short term credit markets today are not significant and that Fed backing commercial paper is not sufficient. Calls for fed to cut rates by 1% and ECB by 2%. He states housing has infected everything else so fixing housing alone is no longer sufficient but that Government needs to back all mortgages. El-Erian likes emerging markets as they overshoot on the way down — if the situation is stablized they will rebound.Link will be available on the CNBC site about about 9am.

ErasmusOctober 7th, 2008 at 9:09 am

bloggers,what are your thoughts on FX markets long term? I’ve read some interesting articles on $/€ parity and EU nations switching out of the Euro. What do you think?

GuestOctober 7th, 2008 at 6:23 pm

It is too bad that for $700B they came up with something as useless as the TARP (or whatever the new bane is ). Paulson ,Bush et al just ignored advice the smart economists like Dr. Roubini . I wonder if the plane is being readied for the Bush estate in Paraguay .

MauiOctober 8th, 2008 at 12:40 am

Commentary on the Present Turbulence in MarketsAbout the American and global financial crisis. There are many ways it can be characterized, but in the end the current crisis comes down to a crisis in ‘trust’ — of both honesty and ethics.Specifically, a lot of people from Mainstreet America are not aware how Lehman Brothers’ handling of itself in the days leading up to it’s bankruptcy created the example in all of this that has added to the present problems, especially in the money markets.Two examples, just before it’s failure, Lehman’s New York office transferred a few billion dollars in cash from their London office to their New York office to try to avert insolvency. Those funds would have been used to pay prior expenses such as salaries in London. This created an uproar in Europe, but not so much so in America. Also, Lehman left significant incomplete transactions in the markets just before their failure. This is the example of why banks and participants in the money markets do not ‘trust’ each other right now, and why there is very little activity in the commercial credit markets.Lastly, the nature of the Bush/Paulson bailout as presented to analysts/participants on Wall Street will involved preference and ‘survivor bias’ as to which companies will be helped and which will not. Already that preference can be seen by the nature of interventions in the markets. Those who are not insiders with the Bush Administration, who are the vast majority of Wall Street participants, clearly feel they will not be a part of the Paulson favoritism. This ‘lack of trust in policy’ is part of what is creating the negative reactions in the markets since the plan was passed by Congress. Again, it comes down to a lack of ‘trust.’What is at stake here is that this is no longer just a mortgage or speculative derivatives problem. This is now a fundamental problem that calls into question the ‘trust’ and ethics that has to underly these transactions. This crisis of ‘trust’ is a social crisis that has been developing in America for many years, and fundamentally it is a crisis of human behavior. Until that is overcome, things will not get better nationally nor globally.

AnonymousOctober 8th, 2008 at 6:36 am

The U.S. public does not have the income to continue supporting our economy, let alone that of the world. Huge numbers of people here (and abroad) no longer have any economic function. That can’t be fixed without war and depression. What – for example – will happen when GM or Ford or Boeing or Citi or Bank of America, or all of them, go belly up?

GuestOctober 9th, 2008 at 3:15 pm

Heidegger – another mor=on but:To the thoughts thenselveshow much torture did it take him to figure that little caveat out

MauiOctober 9th, 2008 at 8:59 pm

Bank of England Short-term rates and LIBORIt seems that there is unanimous agreement that the short-term credit markets being locked-up and non-functioning is the first priority problem in the economy that needs to be solved, and soon.In the U.S. those rates are determined by short-term Fed rates (1.5%) and the London-based LIBOR rate. LIBOR in London is influenced partly by Bank of England’s current short-term rate (4.5%). With Bank of England’s higher short-term rate, this is creating a substantial spread between short-term rates in the U.S. and LIBOR determined commercial credit and municipal rates in the U.S. This disparity, measured by TED Spread, is causing short-term credit to be too expensive in the U.S. and locking up credit markets. Furthermore, the extremely low Fed fund rate in the U.S. appears to be having counterintuitive unintended consequences for depositors and lenders.There should be closer coordination between U.S. and English short-term rates, probably meaning that BOE rates need to come down more. This would need to be done within a few days. If this does not happen, the Fed needs to coordinate a new standard of commercial short-term interest rate to replace LIBOR in the U.S. with a rate that brings down artificially high commercial lending rates in the markets so as to unlock those markets.

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