October 8, 2008
QuickLinks: Everybody Cuts (But Nobody Seems To Care)
∙ Fed, ECB, Central Banks Cut Rates in Coordinated Move [Bloomberg]
∙ U.S. Stocks Retreat as Recession Concerns Outweigh Rate Cuts [Bloomberg]
[Editor’s Note: Yes, it’s a spoof and it’s already been around the block. But we laughed. And right now, we all could use a bit of levity.]
First Published: October 8, 2008 8:45 AM
Comments from "Plugged In" Readers
Wow. what a surprise.
as I surmised yesterday, we got our multinational coordinated rate cut today. (I didn't surmise today, just that it would come. however I did think it would be 1%. thus we'll get more in the future. We'll go towards 0.5% I'd guess)
As I said: going forward it will be very difficult to predict anything because a lot of the fundamentals will be altered by governments. This is not to say they can save the market. only that they can change the short term course of things without notice. government goals are political, not financial.
I do disagree with Tipster however. It is in theory possible to avert a worldwide disaster for now if all of the major financial players drop rates to BELOW inflation rates and hold them there. It could quite possibly cause a bubble somewhere. (I'm not sure where, they can't control where the bubble occurs, just that one will occur).
Similar to after the tech boom, low rates led to the housing boom and stocks still fell. remember, despite what everyone in the US thought, the housing boom was primarily a Credit problem (too much credit) and not because "everybody wants to live here"
Posted by: ex SF-er at October 8, 2008 5:22 AM
With oil nearly half what it was, what *is* the rate of inflation?
Posted by: tipster at October 8, 2008 7:38 AM
good question. I have no idea.
But I would GUESS that the US at 0.5%, Japan at 0-0.5%, and UK/Eurozone at 1% would do it if held long enough.
Overall, credit deflation is clearly going to outpace monetary creation, at least in the short term. But don't forget the lessons of the past. A concerted worldwide effort can clearly cause rapid monetary inflation that even overcomes credit deflation. That was the lesson we learned with Weimar Germany.
I am not saying that we will do this. I am saying the governments are trying their hardest to inflate just fast enough to allow a "soft landing" of mild deflation. But if they miscalculate they can overdo it causing another bubble... as was done in 2001-2005.
it's the so called Ka-POOM theory. Deflation first then massive inflation.
but as I've said countless times... whoever thinks they can analyze what the governments will do is lying. the whims of government flow with politics, and not necessarily with economic fundamentals. you can be pretty good at it (I think I've been pretty good at it) but you can't nail it.
Satchel hypothesizes that we will stop short of the inflationary route, and will instead go to deflation. I tend to agree with him on this. However, hyperinflation has happened before and it can happen again. we'll see. I have no idea.
But there can be no question that the worldwide governments are leaning away from inflation concerns and are instead fighting deflation.
Posted by: ex SF-er at October 8, 2008 7:49 AM
Re-flating the economy with another bubble can only be done with more debt. And it appears nobody wants debt anymore. Which is why they can lower rates all they want. Heck, they could lower to 0% like Japan, it wouldn't change the fact that most asset classes are still overvalued, and grossly so in some locales.
Posted by: San FronziScheme at October 8, 2008 8:48 AM
Re-flating the economy with another bubble can only be done with more debt. And it appears nobody wants debt anymore
The various governments may take on that debt. what do you think the TARP and the various lending facilities are?
Do not underestimate the power of governments to alter the market. Again, they cannot "cure" anything. But they can drastically alter short term events. You need only look back a few years. We had a recession after 9/11 that was delayed by government intervention. this led to the housing bubble of course and now we are worse off than ever.
The same can be attempted again. Especially if the govt increases it's TARP like activities and its lending facilities, if it continues a near-zero interest rate policy, if it buys bad debt and makes the debtholders whole (which creates money by the way), and if they give out more stimulus checks and/or tax cuts, etc.
all of this leads to more governmental debt, but it may cause people to actively seek the next bubble. the only thing that keeps this in check is if other countries stop lending to the United States.
with coordinated central banks however, it is still possible they'll all play the game.
Don't let what you hope will happen or what you think should happen blind you to the fact that the governments might not play along. they've broken tons of rules so far, and continue to break more every day. why do you think they'll stop now?
the stakes are very high right now. it is possible that we nearly had the collapse of our entire financial system a few weeks back, regardless of what some people believe. This system is rotten through to the core, and should not survive... however that doesn't make its destruction any less painful for all of us.
and as I've said many times, I'm against all this bailout stuff, so don't try to paint me as a pro-bailout guy.
lastly, don't underestimate the American consumer's propensity to take on debt. I would betcha that if the right terms were offered they would more than happily take on more debt.
If the govt interferes enough, I might take on tons of debt.
Posted by: ex SF-er at October 8, 2008 10:32 AM
I hear you. The last few weeks have shown us that govs are scrambling fix after fix after fix with no clear view as to where they're going. They're throwing away 25 years of gradual deregulation and limited intervention for short-term fixes to a structural issue: the "deficits don't matter" mantra from the 80s that has now been applied to the economy as a whole.
Sure the US consumer would take on more debt. It's in their DNA now. But nobody in the private sector or on the international scene wants to give them more debt. Whether the governments will be the savior of the debt-based consumption model remains to be seen. They're working on it really hard though, with borrowed tax money which will have to be paid eventually.
Posted by: San FronziScheme at October 8, 2008 11:19 AM
But nobody in the private sector or on the international scene wants to give them more debt
Treasury rates would disagree with you. they are still rock bottom. this means that there is more than enough money (for now) that our government can borrow and spend.
At some point will the spigot be turned off? I would guess so (and I've stated so as much). If you recall, I argued strenously with Satchel a while back that going forward Treasury rates may all of a sudden skyrocket due to burgeoning debt loads of our govt. (he felt future Treasury rates would fall).
However, we have not gotten there yet. there is money aplenty for our govt to borrow and throw at the problem (right or wrong).
Posted by: ex SF-er at October 8, 2008 1:08 PM
If I had skills/time I would put it together, but I'm really surprised we haven't seen a photoshop a cover with Paulson's face and this caption yet:
How are you gentleman??
ALL YOUR BANK ARE BELONG TO US
Posted by: LJL at October 8, 2008 7:36 PM
Governments have not broken any rules, since there never were any rules that couldn't be changed in the first place. The last 20 years have been great for holders of capital and big corporations. The top 1% have done very well, the next 5% okay, the rest not so good. Corporate and capital share of profits has steadily decreased, while labor's share has decreased. This is mostly due to government changing the rules to favor the wealthy.
Now the rules are changing again. Government can't do anything about the gross misallocation of resources that caused the housing bubble. That money has already been spent and that labor has already been wasted and we are all the poorer for it. But what government can do is keep a minor financial problem from turning into a global depression. Governments can and have in the past cushioned the blow of economic downturns and kept labor from just sitting there idle, instead deploying it to another productive use.
A better regulatory environment going forward can keep this sort of thing from happening again. Deregulation of some sectors has been helpful for the general economy: deregulation of telecom freed up tremendous innovation for example. Deregulation of the airlines made air travel widely available. But deregulation of the financial sector resulted in a bubble, which is what has always happened in the past when this has been tried.
And I am sure it will happen again, when the lessons of this generation are lost.
Posted by: NoeValleyJim at October 8, 2008 8:41 PM
I don't know if we are going to see deflation or inflation in our future, but I am betting on inflation. It all depends on how Paulson, Bernanke and the new President and Congress decide how to deal with the situation. But I am pretty sure that home owners and debt holders have more political clout than savers. I am saddened to say this, but it is probably true and if you think about, you will probably end up agreeing with me. If The Fed and the rest pull off an amazing magic trick, they might be able to inflate the economy about the same as the amount deflated by the collapsing Credit Bubble and get the economy going in other ways. What other posters call "blowing bubbles" is what I call Capitalism as usual. The history of Capitalism is one of booms and busts. The real trick is to not have every sector busting at the same time.
One thing I am pretty sure of is that we will not see hyperinflation. No great military power has ever seen hyperinflation and we are still a great power, by far the greatest military power on earth. There is nothing that can stop us from, say, moving our armies out of Iraq and instead occupying the great Saudi oil fields and extracting the oil for our own use. While this would probably not be a wise move in the long run, I am pretty sure that we would do it before facing hyperinflation and soup lines domestically.
Posted by: NoeValleyJim at October 8, 2008 8:53 PM
"And I am sure it will happen again, when the lessons of this generation are lost."
Once every 80 years like clockwork. I can hear it now, the arguements for "The Financial Services Modernization Act of 2088".
"Friends, we need to sweep away all of these outmoded and restrictive regulations that are hindering our financial system. Many of these antiquated statutes have been in place since The Global Bank Panic of 2008 and are holding back the innovative power of our financial services industry. With our new transdimensional algorithmic quantum risk allocation paradigms we can create a new era of prosperity by providing mortgages that pay themselves!"
Posted by: diemos at October 8, 2008 9:13 PM
[LJL], that was actually funny as hell so I coundnt resist. Sorry for the rough 5 minute rendering, im on a train.
Posted by: TechDefender at October 8, 2008 10:19 PM
Since we are all in such a festive mood:
Posted by: dub dub at October 8, 2008 10:49 PM
Question about the AIG bailout: It's reported that AIG has burned through the initial $85B and is going to get another $37B. Also reported that AIG had written some $446B in CDS's. Does this suggest that Treasury has already had to cough up over $100B for these AIG obligations? 25% of their total CDS exposure has triggered already? (Did these guys make any good bets?)
What a great company that we taxpayers just bought 79.9% of. We're still paying the idiot who was in charge of this mess $1 million per month in consulting fees - and, despite being called out by the Waxman committee, Obama, McCain, and Bush, AIG is planning another junket to Half Moon Bay.
So the questions are:
1) If we have paid out over $100B so far, what is the final total going to be? $200B, $446B?
2) Will it be made public what counterparties are receiving these payouts? (Goldman Sachs was reportedly on the hook for over $20B from AIG - and Blankfein allegedly pointed this fact out to Paulson last month in the Fed meeting where "they" decided to save AIG and let Lehman die.) Somebody is collecting some huge checks.
3) Where is this money coming from? I've been in the deflation camp, but how is this not hyperinflation? This is just one company. We have TARP, the nationalization of banks, McCain's insane new $300B program, etc, etc.
4) What would happen if we didn't honor the AIG obligations?
Posted by: FSBO at October 9, 2008 1:02 AM
untrue. The govt is breaking rules (or at least seriously stretching them).
There are things the Fed has done that it has no authority to do. AIG. unsecuritized lending. The way Bear Stearns was bailed out to JPM. and so on. They're not even bothering to change the Fed's rules anymore. The fed and treasury just do things.
I've spoken about the problem with the CDS market the other day.
To try not beating a dead horse, I'll refer back to my other very lengthy posts:
nobody knows how big the CDS problem is, so nobody knows how much AIG will cost. I don't say that lightly. Nobody knows, including the players themselves and including me.
I doubt we'll ever get word on who receives the payouts. but that said, it's so interwoven that it's likely everybody gets a payout in some way or another. some more than most. If you think Goldman benefitted from the AIG bailout, just wait until the TARP starts buying. As example: bear stearns wasn't bailed out for bear... it was bailed out for JP Morgan who would have failed if Bear Failed. By supporting Bear JP morgan benefitted... but by supporting JP Morgan it's counterparties benefitted... see?
The money is coming from the taxing authority of the US Government. In otherwords: either increased taxes or increased debt. At this point our govt as always prefers to just run up the debt. We've added near $1 Trillion in debt in just the last few months (not counting "off balance" debts like the new CPPF that has no stated limit). so far Treasury rates are low, so there's nothing stopping us from raising more debt. This of course will change at some point, depending on how global cooperation goes.
There is a huge possibility our entire financial system would have failed (literally) had AIG gone down. It was truly too big to fail, and still is. Some of the uberbear Austrian economists are willing to risk AIG failing, but IMO they are ignorant. It would take months if not years to figure out which banks are bankrupt after AIG failed due to the complexity and interwovenness of the CDS market. So the American economy would INSTANTLY be left with no viable national bank, and probably little to no viable major regional bank until the banks could sort out the mess. (again, it would take months if not years due to the complexity of the contracts and how deep they run).
To use an example: Lehman was way way way way smaller than AIG. Lehman was allowed to fail. This is what caused some big money market funds to break the buck. (very very bad). There was a run on all the money market funds. This is what happened that really forced the $700B bailout.
and AIG is Lehman x 1000.
underestimate the CDS market at your own peril. It is the true Tyrannasorous Rex hidden in the corner of the room. Almost every worldwide bank is heavily involved in the CDS market, and NOBODY knows who has what positions... only that the positions are large. ($63T and counting, notional value). And you cannot easily "net" positions in the CDS market for reasons I elucidated on the above linked thread. It is NOT a "zero sum game" as some people would like you to believe.
is it all hopeless? No. People are furiously trying to work out a way to "net" the CDS positions so that we can unwind them in an orderly way. My guess is that is one reason why they will suspend Mark-to-market accounting. They can create some central clearing house for CDS market, then start trading them. Most players will be insolvent immediately with the first trades, but if we suspend accounting rules then they can continue working it out behind the scenes until we find out who is net positive and who is net negative. the government will then likely choose a few favored institutions and rule in their favor... and the rest will fail. the failed institutions will be gobbled up by the "stronger" institutions.
IT will be a catastrophe. but it will be better than just letting it collapse (if you believe our system should survive that is). uh... maybe. like I said, nobody knows. we do face a Great Depression however. I do not say that lightly either.
Posted by: ex SF-er at October 9, 2008 4:34 AM
before you all jump down my throat: I am against changing the Mark to market accounting. I'm just giving one reason for why the govt is likely contemplating it.
Posted by: ex SF-er at October 9, 2008 5:17 AM
ex SF-er, great info as always. Regarding the $85B + $37B, have those amounts actually been paid out to counterparties at this point? Might funds actually flow back to AIG as this plays out (and the underlying prices change) - or did they just write coverage?
Posted by: FSBO at October 9, 2008 6:53 AM
Taking over AIG is a stealth recapitalization of the financial system. The bad bonds are taken off the books of players in the system and replaced by cash. Cash provided by the taxpayers. It's just another version of TARP but not on the public's radar screen.
Re: Hyperinflation. The inflation occured when the bonds were issued and increased the price of assets. Replacing them with cash now should only short-circuit the deflation to some extent. None of this money is actually being placed into the gente's hands in order to spend so it's not going to create a commodity inflation. We're still on tap for a collapse of the dollar at some point though.
Posted by: diemos at October 9, 2008 7:24 AM
The politicians still have the memory of how bad inflation was in the late 70s and the pain of getting it under control (the "worst recession since the great depression").
So although inflation has some attributes that would appeal to politicians, they understand quite clearly that they would be setting the economy up for a very bad fate.
So the trick is to inflate no faster than the economy deflates. Credit is deflating so fast that the demand for things is way down. This deflates the value of commodities. When commodities deflate, the demand for machinery and infrastructure to obtain the commodities also is greatly reduced, putting pressure on jobs which puts pressure on housing prices.
So the government can print a fair amount of money without inflating the economy. They know they'll be blamed for the recession that is required re-tame inflation, so they are not interested in driving inflation higher right now.
Posted by: tipster at October 9, 2008 9:25 AM
not to be an ass or anything but all of you renters that said the stock market was so much safer..
how ya' feeling now?
40% loss in 12 months?
Posted by: james at October 10, 2008 8:34 AM
I never said that. I haven't owned a stock since 2000. I'm in FDIC insured bank deposits and physical gold in the safe deposit box. My decade worth of modest living and diligent savings is just fine thank you.
Posted by: diemos at October 10, 2008 8:52 AM
great to here diemos. are you one of those guys buying a safe and hoarding it all at home?
Posted by: james at October 10, 2008 9:39 AM
i, for one, am not feeling too good, james.
diemos, in one of his posts, satchel said that safe deposits are not safe. i don't know why though.
Posted by: chuckie at October 10, 2008 9:41 AM
I've noticed a pattern - the only people who seem to compare owning real estate to being long the DJIA are people who bought real estate at/near the peak. Most other folks seem to realize that there are many other places to store money or invest, or that there are other equities besides the 30 stocks that go into the Dow Industrial index.
Posted by: Dude at October 10, 2008 9:43 AM
Not many places to hide nowadays, apart from liquidity and FDIC-insured equivalents.
Still glad I rushed out of RE and stocks in 2005-2006. There will be tremendous opportunity out there in the future.
Posted by: San FronziScheme at October 10, 2008 9:51 AM
my only point was that we are all susceptible to the cyclical nature of macro economic factors. if you think you aren't, i've got a bridge to sell you.
Posted by: james at October 10, 2008 10:22 AM
I've got a bridge to sell you.
Sure. Is there a toll on it? How much cash flow?
Posted by: San FronziScheme at October 10, 2008 10:39 AM
"diemos, in one of his posts, satchel said that safe deposits are not safe. i don't know why though."
During the depression gold was confiscated and private ownership outlawed. People were not allowed to open their safety deposit boxes without an agent of the IRS present to inventory it and confiscate the gold.
"we are all susceptible to the cyclical nature of macro economic factors."
Yup. And one day it will be time to move out of gold and cash and into stocks and real estate ... but not today.
Posted by: diemos at October 10, 2008 11:21 AM
i don't know about that diemos. aapl at 89.00 sure seemed like a great buy to me.
Posted by: james at October 12, 2008 8:19 AM
Knock yourself out.
You pays your money, you takes your choice.
Posted by: diemos at October 12, 2008 10:25 AM