Saturday, October 11, 2008

Not Out Of The Woods

The G7 are meeting in Washington, where they hope to cobble together a plan to save the global financial system. The hope is through a coordinated effort, the plan will "will help restore stability to our markets and confidence to our financial institutions." Right now, details of the plan remain sketchy, although it looks like Paulson has finally seen the light, and will use the $700 billion bailout to acquire equity positions in banks, rather than buy worthless mortgage-backed securities. (Whether even this action causes banks to lend remains to be seen.)

That the crisis has moved this rapidly into the geopolitical realm has given me pause; I think we all take for granted how tightly coupled the world has become. The financial glue that binds us also has a way of diminishing the importance of other conflicts. As that glue weakens, those other conflicts reassert themselves in unexpected ways.

I think this statement from Bush yesterday was the most telling, and the most scary:
As our nations carry out this plan, we must ensure the actions of one country do not contradict or undermine the actions of another. In our interconnected world, no nation will gain by driving down the fortunes of another. We're in this together. We will come through it together.

I'm confident that the world's major economies can overcome the challenges we face. There have been moments of crisis in the past when powerful nations turned their energies against each other, or sought to wall themselves off from the world. This time is different. The leaders gathered in Washington this weekend are all working toward the same goals. We will stand together in addressing this threat to our prosperity. We will do what it takes to resolve this crisis. And the world's economy will emerge stronger as a result.
There are already signs that some countries with relatively strong economies are starting to assert themselves in Europe. For example:
(Notice I haven't talked about Asia. I think they have been keeping a lid on things up until now, and we could start seeing their problems emerge in the very near future. The other shoe to drop, if you will.)

Events have rapidly outpaced domestic political efforts, so there is no reason to expect heroics from the G7 this weekend. I do think they'll come up with a plan. I'm not confident it will work. One thing is for sure: this crisis will test the limits of global diplomacy.

10 comments :

Wadin' In said...

Here are the most dangerous words President Bush said yesterday:

"This time is different."

How many times have we heard this from how many different talking heads over the last 3 years?

It never is different. It is always the same in the basic and important ways. There is no easy way out. Everyone will feel increasing pain and the meltdown will continue.

Ultimately, in a few years, we will all start to dig ourselves out. Bush will be long gone, having guided his third financial entity to bankruptcy during his storied life (oil company, Houston Astros): This time it will be the largest economy in the world!!

As my favorite Aunt always said, "If you want to see where someone is going, look where they have been."

Sold in '05 said...

Lucky for us, we'll still have the Dem's financial braintrust to show us the true light.

All hail Barney Frank, Chris Dod and Chuck Schumer!

They are the only ones who saw this coming and tried sooo hard to stop it. If only they had been able to talk Clinton out of repealing Glass-Stiegel... oh wait, never mind.

It's all George Bush's fault, that's right, that's the ticket.

Now commeth the Messiah! Maybe he'll bring back Robert Reich or Robert Ruben. They oversaw none of this web of financial doom. Maybe they will finally expose the plot Bush ran that blew up the World Trade Centers.

Support ANY of these jackals at your own peril, they were ALL part of the problem and are VERY unlikely to be part of the solution.

Darth Toll said...

Sold in '05,

Love your post. All of these asshats are equally worthless, and they are all playing for the same team (elite bankster oligarchy.) Look at the contributors list of either Shelby (R) or Dodd (D) and you will see it's the same pigmen that line their coffers.

The whole D vs. R thing is a sideshow for the rubes. It keeps folks distracted from what is really going on - wholesale theft of true wealth and loss of rights. The banksters propagate mythology surrounding supposed differences between the two parties and foster faux antagonism, but at the end of the day Clinton goes golfing with Bush. What we have now is a form of crony-capitalism/fascism.

The reality is that the people represent the true wealth of this country, their labor, inventions, etc. and the banking sector has taken on a much too prominent role as money-changer/middleman (read: vampire leech.) Banksters do nothing productive and add no value. Such is the nature of our debt-based fractional reserve system. It's theft, by design.

I long for a return to the days when a local bank would act as a store of deposits for the nearby citizenry, and from those deposits capital could be loaned out for productive purposes - loans to businesses or for a house, etc. The banks would get to know the clientele and could make decisions if capital was required by someone credit-worthy. Sure, this model was subject to the ups and downs of the local economic picture, and a bank could fail if it made bad loans, but who can say that the "modern" system is any different and/or better? Did we trade painful periods of illiquidity at the local level for one giant episode of global collapse?

Patient Renter said...

Did we trade painful periods of illiquidity at the local level for one giant episode of global collapse?

It sure seems like we did.

Max said...

Sure, this model was subject to the ups and downs of the local economic picture, and a bank could fail if it made bad loans, but who can say that the "modern" system is any different and/or better? Did we trade painful periods of illiquidity at the local level for one giant episode of global collapse?

What keeps me awake at night is the potential for unintended consequences from the recent bailout actions. The economy is a complex system, and these drastic measures will have effects that nobody can predict. Good or bad.

What I do know is the "panic pump" is primed, and anything out of left field could push us over.

I find it interesting that nowhere in the world are losses really being taken. All this debt will come home to roost sooner or later, and through national guarantees, whole countries are now at risk. My gut tells me that the next crisis trigger will occur in Europe. The politics are just too complicated for simple solutions to work, and the disparities in GDP and debt load within the EMU is too great.

Patient Renter said...

I find it interesting that nowhere in the world are losses really being taken.

That is something I wish more attention would be paid to. With these bailouts, we're being made to believe that none of the losses that would have occured otherwise are justified. None of them?

As Dean Baker put it - the fact that businesses are struggling isn't a sign of the "credit crunch" so much as it's a sign that they're attempting to sell a product at a price that nobody wants to pay. This applies to all kinds of businesses: banks, brokers, car dealerships, etc.

How do we separate businesses that deserve to take losses from those that don't? It's not a distinction that anyone can accurately make which is part of the problem with bailouts - throwing more money at businesses that should naturally die off creates more economic harm than good.

Max said...

How do we separate businesses that deserve to take losses from those that don't? It's not a distinction that anyone can accurately make which is part of the problem with bailouts - throwing more money at businesses that should naturally die off creates more economic harm than good.

It all goes back to cheap credit. There are tons of businesses that function fine when capital costs are low. I think of low interest rates as subsidies on consumption. Consumers pay less on the front end, but they purchase with debt and pay high interest rates on the back end. It's like a carry trade between consumers and businesses. The system breaks down when credit becomes expensive, or debt service becomes unbearable.

It's hard to look someone in the eye and tell them they don't deserve to be in business. But if the only thing keeping them alive is cheap credit, maybe they don't. Cheap credit diverts capital from good businesses to bad, and encourages otherwise undeserving borrowers to take risks they shouldn't.

Anonymous said...

"But if the only thing keeping them alive is cheap credit, maybe they don't. Cheap credit diverts capital from good businesses to bad, and encourages otherwise undeserving borrowers to take risks they shouldn't."

This is one of the most naive statements I have ever read. Just because credit is cheap does not mean a bad business model is going to get credit. Most lenders underwrite to UCA cash flow. It is very easy to see if the business has historically produced enough earnings to service proposed debt. If the only thing keeping them going is credit, then the numbers will not work. A bank will also do sensitivity tests to see if the borrower can sustain with a 4% or so jump in interest rates.
Go take a look at a commercial loan portfolio and see how low the losses are. With the exception of small unsecured micro loans ($100,000 and less), the monitoring (covenants) and underwriting are so tough, loses are very small.
I think others have gone over this recently as well. Credit is necessary for growth. If you want to live in a 3rd world country, shut off credit.

Max said...

This is one of the most naive statements I have ever read.

Notice I said "cheap credit."

Why do you think we're in this mess to begin with? Look at all the LBO deals that happened over the last few years (and are failing now). No way those deals get done without ultra cheap capital. The retail and CRE sectors are way too big because of cheap credit. If you don't think big losses are coming on commercial paper, you're the one who's being naive.

Why should the taxpayers subsidize your business forever? If you need ultra low rates to survive, then you're nothing more than a subprime borrower praying that his ARM won't reset this month.

Anonymous said...

Max, these same deal were getting done when rates were in the high teens. I am now selling CRE rates at 9% and am having no problems. Not many of these business NEED low rates. Mezzanine financing for LBO's was being priced at 12% plus warrants just two years ago when we had really cheap credit.
My portfolio has ZERO loses to date, but I am a conservative underwriter and work for a conservative bank. I just don't think commercial loan are going to see the meltdown of consumer lending. There is so much more scrutiny and not every business relies on CHEAP credit. We are all adjusting just fine to higher spreads and rates.