Uh Oh ...

by hilzoy

The IMF agrees with Nouriel Roubini:

"The IMF warned on Saturday that the global financial system was on the brink of meltdown, while France and Germany pushed ahead with a pan-European crisis response to try to prevent the worst global downturn in decades.

At a joint news conference, French President Nicolas Sarkozy and German Chancellor Angela Merkel said they had "prepared a certain number of decisions" to present at a Sunday meeting of European leaders as they work feverishly to restore blocked credit markets to working order.

The United States appealed for patience, but the International Monetary Fund stressed that time was running short after leading industrialized nations failed to agree on concrete measures to end the crisis at a meeting on Friday.

"Intensifying solvency concerns about a number of the largest U.S.-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown," IMF chief Dominique Strauss-Kahn said."

Under the circumstances, I really wish the G7 had agreed on something a bit more substantial. In their communiqué Friday, the G7 nations pledged to "take decisive action", "take all necessary steps", etc., but did not explain what those actions and steps might be. Yesterday, the Group of 20 came up with "no concrete offers of new moves", though they "staged repeated displays of unity."

We need more than displays of unity right now. Willem Buiter has a good post outlining the areas that require the kind of international cooperation we seem to have failed to achieve. He characterizes the G7 agreement as "the absolute minimum required not to have their Washington DC meeting on Friday, October 10 characterized as an abject failure."

We need more than this. And we are running out of time.

Comments

[frank]

I'm not claiming that there is no reason for a sense of urgency about the market meltdown, but I wish people would apply the Daniel Davies' test to these plans. Nothing good is going to come of handing big bucks over to the Bush administration.

It just makes more sense to wait until January, with, if necessary, a bank holiday until then.

[ral]

frank, maybe you can afford to wait but from what I hear manufacturing companies are unable to finance purchasing parts to fill actual orders due to the inability to use commercial paper. This is a serious problem.

I tend to agree that the Bush administration can't be trusted but what is the alternative?

[John Thullen]

"a bank holiday until then"?

The Christmas shopping season may be canceled on account of cannibalism.

You don't want a bank holiday until then, unless you're thinking maybe martial law might be fun.

[byrningman]

Everybody seems to love the British plan, although it ain't cheap.

[Nate]

On the one hand, this whole thing is incredibly surreal. We're having an economic crisis over nothing. It's all because of pretend money Wall Street wrote itself during the 90s, and linked to real things like mortgages. No real physical wealth's been destroyed, the factories, farms, and houses are still there. But the financial systems that are supposed to grease the machines that get everything where it needs to be are acting more like superglue.

If only the simple answer of fire all the bank heads and make the banks start working again was that simple, and would work.

[bobbyp]

byrn.....what? buying up worthless paper at face value (Bush, Paulson, McCain plan) is "not cheap"? Surely you jest. Injecting tax dollars into bank equity sheets is more effective, and probably way less costly.

Me? I await the first offer from a bank willing to pay me to take out a loan...then I will Know the End Times are indeed near.

[byrningman]

byrn.....what? buying up worthless paper at face value (Bush, Paulson, McCain plan) is "not cheap"? Surely you jest. Injecting tax dollars into bank equity sheets is more effective, and probably way less costly.

I was talking about the British plan. The hint was that I called it 'the British plan'.

[AndyK]

Speaking of martial law....

I don't think I've seen anyone here mention Congressman Brad Sherman claiming that predictions -- I had typed "threats" until I realized that Sherman doesn't use that word -- of martial law were made during the rush to pass the bailout?

Naomi Wolf (who does use the word "threat") writes about it here:

alternet.org/rights/101958/thousands_of_troops_are_deployed_on_u.s._streets_ready_to_carry_out_%22crowd_control%22/

Video can be seen here:

youtube.com/watch?v=HaG9d_4zij8

Sherman, a Democrat from the San Fernando Valley (I think he represents Sherman Oaks, interestingly enough), was deeply opposed to the bailout, for reasons he mentions even in the shortest version of the video. (Searching at youtube will turn up different length excerpts.) He may be making a justified claim, but I can read it with different nuances:

Maybe they said "Vote for this or the President will declare martial law!" or maybe "If this doesn't pass, everything will fall apart and there will be riots and we'll have no choice but to call out the troops!"

I'm not sure whether there's a huge difference there, but there may be other interpretations as well. In essence, I'm trying to be very cautious with such a dire-sounding claim.

[AndyK]

Damn. The url got cut off. It's

alternet.org/rights/101958/thousands_of_troops_are_deployed
_on_u.s._streets_ready_to_carry_out_%22crowd_control%22/

[Don the libertarian Democrat]

Check Buiter out this morning:

http://blogs.ft.com/maverecon/2008/10/action-plan-my-foot/#more-333

"If by the time the markets open on Monday morning, this vague list of pious intentions has not been complemented with a rather longer list, by each of the G-7 and preferably by each of the G-20 nations, of specific actions and measures to suppport their key financial markets and institutions, including essential cooperative measures to stabilise border-crossing markets and institutions, then stocks will continue to plummet as they did last week. Some suggestions on what to do can be found in my previous posting on this blog. Even sitting alone in front of my laptop in my dressing gown, I came up with eight rather specific actions."

Read his list. Even in my dressing gown in front of my PC, I agree with him.

[Don the libertarian Democrat]

http://www.washingtonpost.com/wp-dyn/content/article/2008/10/10/AR2008101002441_2.html?hpid=opinionsbox1

Every Nation For Itself?
Great post by Peter Boone and Simon Johnson in the Washington Post entitled "The Next Word War? It Could Be Financial":

"The global financial outlook grows more dire by the day: The United States has been forced to shore up Wall Street, and European governments are bailing out numerous commercial banks. Even more alarmingly, the government of Iceland is presiding over a massive default by all the country's major banks. This troubling development points not only to an even more painful recession than anticipated, but also to the urgent need for international coordination to avoid something worse: all-out financial warfare."

They list "six steps toward avoiding a situation of "each nation for itself". Please read them.

1) Recapitalize Banks.
2)Guarantee on banks deposits and debts.
3)Lower interest rates jointly.
4)Continue and guarantee pumping in liquidity.
5)A stimulus plan of at least 1% of GDP.
6)Some kind of relief to homeowners.
Plus:
7)Let prices fall to market levels.
8)Times are going to bad, whatever we do.

They all make sense to me, at this point.

[ken]

Under the circumstances, I really wish the G7 had agreed on something a bit more substantial.
-----------
Sure you do. And if they had proposed something substantial you would be right there with all the other ankle biters pointing out how flawed the proposal is and how you, or someone you know, has a far better idea.

There is so much ill will amongst the nattering nabobs for authority that it is virtually impossible to get a fair hearing no matter the urgency of the matter. So better for them to present the ideas instead to those whose decisions actually matter instead of to the Roubinis of the world, who I gaurantee you will not like it anyway, no matter what.

Roubini, it is said, is a stopped clock whose time has come.

Fiscal and monetary policies have been aggressive and innovative. The last few months of the Bush administration will be as seen by historians to be as full of new ideas as was the first hundred days of the FDR administration.

But there is still a great deal of unfinished business in other areas that needs urgent attention.

First the SEC needs to be rid of Cox. The new head should immediately suspend FASB 157, reinstate the uptick rule, force hedge funds to disclose, put all trading of credit default swaps under the perview of a new exchange and limit the creation on new trading vehicles (including ETFs) to those that serve a legitimate public purpose. Oh, and we need the immediate exposure of those naked short sellers that are being investigated by the SEC or by NY AttGen Coumo.

And where is the Labor Department? Can they not do something about the Boeing strike? This is no time for the Labor Sec to be sitting on her hands. She should take whatever steps are necessary to settle this strike ASAP including forcing the two sides into binding arbitration.

And whatever happened to public infrastructure spending? If there was ever a time to spend public funds on rebuilding bridges or funding public transit now is the time.

So far it has been the Treasury and the Fed carrying the ball. The rest of government has been sitting on the bench. We need everyone in the game and we need them now! We cannot afford to wait for a new administration to get all set up. This administration needs to lessen the damage to the economy in every way imaginable and that means with every power of every agency we have.

[Oyster Tea]

Amazing. I think I agree with Ken.

[stickler]

Well, Ken, that sounds great. But you might notice that the President right now is George W. Bush. He is lazy, incurious, and stubborn. He has appointed flacks and cronies all through the government (who picked Cox, the man you want fired?).

The "leadership" we can expect from Bush is the "leadership" we've already seen: a few more petulant speeches from the Rose Garden and repeated calls for Americans to tough it out. That's all he's got.

[Eric Martin]

Oyster Tea,

I'm kind of with you on that, except for this bit:

The last few months of the Bush administration will be as seen by historians to be as full of new ideas as was the first hundred days of the FDR administration.

But then, ken is strangely preoccupied with trying to rehabilitate the legacy of Bush.

[Don the libertarian Democrat]

http://www.forbes.com/opinions/2008/10/08/recession-depression-keynes-oped-cx_nr_1009roubini.html

Here's Roubini:

"Since the private sector is not spending, and since the first fiscal stimulus plan (tax rebates for households and tax incentives to firms) failed miserably as households and firms are saving rather than spending and investing, it is necessary now to boost public consumption of goods and services via a massive spending program (a $300 billion fiscal stimulus).

The federal government should have a plan to immediately spend on infrastructure and new green technologies; also unemployment benefits should be sharply increased, together with targeted tax rebates only for lower income households at risk; and federal block grants should be given to state and local government to boost their infrastructure spending (roads, sewer systems, etc.).

If the private sector does not spend and/or cannot spend, old-fashioned traditional Keynesian spending by the government is necessary. It is true that we already have large and growing budget deficits; but $300 billion of public works is more effective and productive than spending $700 billion to buy toxic assets."

[ThatLeftTurnInABQ]

I agree with comments above that the British plan (which is based in turn upon what the Swedes did during their banking crisis) is the way to go.

With regard to the urgency of the matter, and whether it can wait or not, in an earlier thread I posted a story from Yves Smith's blog which struck me as particularly significant in showing how the credit freeze is now impacting the real economy, which I'll repost below. Here's the gist:

Some transoceanic cargo shipments are now being held up because commercial Letters of Credit are not being recognized as valid or the exporter can't obtain them to begin with. Without valid LOC's international bulk import-export trade will come to a halt.

This affects things like grain shipments - i.e. for people in parts of the world dependent on imported food this could become a very acute problem very quickly.

This story is based on anecdotes, albeit ones that are being supplied to Yves (who seems to be very well connected) by industry insiders. The plural of anecdote is not data, so we don't yet know how extensive or serious this problem is. Nonetheless, this story scares the heck out of me. I think we may have a very serious situation on our hands and if this is the case rapid action is urgently needed within days, not weeks or months.

Letters of Credit being refused, international trade seizing up as a result

The credit crisis is spilling over into the grain industry as international buyers find themselves unable to come up with payment, forcing sellers to shoulder often substantial losses.

Before cargoes can be loaded at port, buyers typically must produce proof they are good for the money. But more deals are falling through as sellers decide they don't trust the financial institution named in the buyer's letter of credit, analysts said.

"There's all kinds of stuff stacked up on docks right now that can't be shipped because people can't get letters of credit," said Bill Gary, president of Commodity Information Systems in Oklahoma City. "The problem is not demand, and it's not supply because we have plenty of supply. It's finding anyone who can come up with the credit to buy."

So far the problem is mostly being felt in U. S. and South American ports, but observers say it is only a matter of time before it hits Canada.

"We've got a nightmare in front of us and a lot of people are concerned it's going to get a lot worse," said Anthony Temple, a grain marketing expert based in Vancouver....

Access to credit is key to the survival of maritime trade and insiders now say the supply is being severely restricted. More than 90% of the world's trade by volume goes by ship...

[ken]

Eric, can you name another administration that has used the power of government as aggressively as has the Bush administration?

See what I mean?

You may not like Bush, I never liked him myself, but it has to admitted that so far he has far oustripped any expectations anyone had for him in dealing forcefully with an economic crisis. So stay with your pout if you choose. I prefer to deal with reality as it presents itself, no matter what.

Still I wish he would light a fire under other government agencies and get them on the field during the last months of his presidency. There remains a lot that can be done.

[byrningman]

LeftTurn, thanks, that was interesting an interesting example of how the modern credit market must facilitate all sorts of seemingly mundane daily business.

[Anarch]

TLTIA, I remember when you mentioned that a few days back and yes, it's still fnording scary.

but it has to admitted that so far he has far oustripped any expectations anyone had for him in dealing forcefully with an economic crisis

No, he really hasn't. When Paulson actually does something, then I might be impressed.

[liberal japonicus]

You may not like Bush, I never liked him myself,

ken's been a concern troll so long, he's not sure who he ever liked.

[Eric Martin]

Eric, can you name another administration that has used the power of government as aggressively as has the Bush administration?

I agree, but then I view torture, the suspension of habeas corpus, illegal surveillance of American citizens, rampant corruption and obstruction of justice to be bad things.

You may not like Bush, I never liked him myself, but it has to admitted that so far he has far oustripped any expectations anyone had for him in dealing forcefully with an economic crisis.

No, I don't think so at all. And, interestingly, I agreed with Oyster Tea that I liked your earlier comment because you seemed to be saying the opposite: that Bush needs to get serious and start really addressing the situation!

So stay with your pout if you choose. I prefer to deal with reality as it presents itself, no matter what.

And the reality is that historians are going to compare this period of Bush's presidency with FDR's first 100 days?

O-kay ken. Nice reality you got there.

[ken]

When Paulson actually does something, then I might be impressed.
--------------------
Sheesh, it seems that the world is changing so fast that many people forget what just happened yesterday.

Paulson put Fannie and Freddie into government conservatorship with a 200 billion dollar loan.

Paulson started buying MBS directly the at the rate of 10 billion a month.

Paulson took an 80 ownership stake in AIG, the worlds largest insurance company, for an 80 billion dollar loan.

Paulson gauranteed the trillions of dollars in money market funds as of Sept 19. against any loss.

What does it take for you to see that Paulson has already done something?

Any one of these things is unprecedented and radical. Each one, if taken alone, would have been worthy of a generation of phd dissertations and a couple of dozen books.

Anarch, it's time for you to catch up.

[ken]

And the reality is that historians are going to compare this period of Bush's presidency with FDR's first 100 days?
---------------
Yep, the way government is used will never be the same as before Bush took office.

Like FDR, Bush has changed the relationship between government and the public in ways never thought possible. Just look at the long list of unprecedented actions he, or his Treasury Sect more accurately, has taken to save the economy. And they are still not done.

Eric, set aside your personal animus and just look at the facts.

It is very possible that these last months of his presidency will redeam his legacy in the eyes of historians. Would another president have been as willing to take such radical action? I don't see either Clinton (either one) Obama, McCain, Biden or anyone else willing to act so quickly and decisively. I suspect they would all have gone to Congress with some weak and watered down proposal (like the stupid health care proposals they all have) and nothing would get done. I really think any other president would have dillied and dallied so long the crisis would have grown completely out of hand.

[hilzoy]

Bye again, ken.

[Jesurgislac]

Why is he still here? I dinna ken.

[Gary Farber]

Eric, can you name another administration that has used the power of government as aggressively as has the Bush administration?

I agree,

I don't. I can think of plenty of other administrations that have been at least as aggressive in various acts: Jefferson's, in making the Louisiana Purchase.

Andrew Jackson, for his removal of U.S. funds from the Bank of the United States, and many other steps to oppose the Second Bank; for his handling of the Nullification Crisis, and for the Removal Act.

The little-known Abraham Lincoln, for an endless series of steps, from the suspending of habeas to the defense of the Union, to the Emancipation Proclamation.

Andrew Johnson, for the purchase of Alaska.

Harry Truman, for the attempted nationalization of the steel industry.

Richard Nixon, for imposing wage and price controls.

That's just off the top of my head.

[Gary Farber]

"I suspect they would all have gone to Congress with some weak and watered down proposal (like the stupid health care proposals they all have)"

Remember, this is ken, Democrat! (Who really doesn't like G. W. Bush, doncha know.)

[hilzoy]

Jes: I banned him, but he came back. Another IP address.

[Warren Terra]

Och, good one, Jes.

[Jesurgislac]

Hilzoy: Jes: I banned him, but he came back. Another IP address.

For some reason, I didn't see your comment saying he was banned until after I'd posted mine.

Which was just a semi-irresistible pun, not a request for information, really.

[Brandon Moore]

For a lot of background about subprime mortgages and securitization, read http://www.marginalrevolution.com/marginalrevolution/2008/10/why-exactly- href="are.html">The Panic of 2007. (referenced on Marginal Revolutions)

In short, a bank making a normal fixed rate mortgage gets about the same expected return whatever happens to house prices. A hybrid ARM is basically a long position on house prices, so the bank makes money if prices are going up and loses lots if prices go down.

Then the loans are securitized, and rescrambled through CDOs, and then the risk is shuffled around with credit default swaps. This makes it almost impossible to estimate how house prices will affect any given investment.

Gordon says that's why this is so toxic - the value of the bad mortgages isn't enough to wipe out enough companies to be a problem, but it's enough to wipe out any given company, so nobody wants to trade.

By the way, the loan originators have to buy back any mortgages that default in the first few payments, so the lending to totally unqualified people all falls on the loan originator - only the risk of betting that house prices will rise spreads in that toxic way.

[The Crafty Trilobite]

the loan originators have to buy back any mortgages that default in the first few payments

Brandon, you're assuming that the loan originator actually performs. When the stakes are this high, that is not always true. Also, many of them or their guarantors or insurers are going under or already gone.

I still don't really get how the economy came in such a short time to depend so heavily on these particular financial instruments (ARM-backed credit-swaps) that all the financial institutions are now scared to lend to each other. Have they no other assets?

I suspect I'm not making sense. I'll read the article you referenced and see if I can get my head around it.