naked capitalism

Anonymous says:

“A fundamental equilibrium would involve real long rates close to 3%”

How does he assess that? I know that might be a huge topic… but can anyone point me to where I can understand the logic behind that figure?

Anonymous says:

From today’s NYT

“Mr. Paulson said that ‘any regular access to the discount window’ should involve ‘the same type of regulation and supervision’ to which commercial banks are subject.

But Mr. Paulson said in effect that investment banks should not count on regular access to the window. ‘Despite the fundamental changes in our financial system, it would be premature to jump to the conclusion that all broker-dealers or other potentially important financial firms in our system today should have permanent access to the Fed’s liquidity facility,’ he said.”

Since I am confident that Paulson is well-aware that commercial banks do not have “regular access to the discount window,” this comment seems like fluff for the financially illiterate. If IBs have access to the discount window in crises — and it’s clear they do — then they have the same access as commercial banks.

If Paulson really wants IBs to get special treatment, he should ask Congress to pass a law forbidding the IBs to access the Fed’s discount window.

a says:

a very far fetched connection, and bad analysis

Anonymous says:

“Domestic demand would crash, unemployment would soar, deflation would set in, there would be very widespread capital default and the financial system would be in very serious danger of collapse “

That pretty much sums up the situation we are currently faced with. Maybe we should try to put a solid foundation under this economy. We continue doing what caused the mess in the first place. I fail to see the value of the last 2 pct rate cuts. It actually seems to have destabilized the mess.

S says:

“No asset left behind”

2yr auction went fairly well. BOE jawboning about an ease and Trichet holding his ground. Poland, romania lift rates and hungry on the cusp. Have to love how cutting rates and injecting money into the system has gone from open market operations to creative “solutions.”

eh says:

The US is of course a big exporter of agricultural commodities, and in that sense the commodities bubble has been helpful in boosting the value of exports/reducing the trade deficit. The weak dollar hasn’t hurt either.

Connolly’s note in effect says that there is no pretty way out of our current conundrum.

To say the least.

Too much debt, too little saving. A nasty deflationary recession is in the cards.

Anonymous says:

This Paulson is the same genius that stated on the record in mid-2007 that the global economy was the strongest that he’d seen in his entire business career. He is also the same genius that stated on the record in mid-2007 that the housing market had hit bottom.

Nice call bonehead. How do guys like him make it to become the CEO of Goldman Sachs?

Richard Kline says:

Paulson as a career shill; doesn’t _that_ peg him in a well-oiled hole, yes.

On our troubles, here’s the box. It has four sides; three long, one short; the power elite controls two.

—# 1: The US banking system as a whole is insolvent, or very close to it.

The distribution of losses is asymmetric, though. Most of the big boys are flesh-eating zombies, or becoming such. Many of the middies are only hurting, however, tho’ they’ll be howling when commercial re tips over.

—# 2: The $ is sucking vacuum.

We need the best part of a terabuck per annum of capital inflows from foreign money to keep our economy level; a little less in an economic downturn but still plenty money. Now, though, we have private foreign capital _outflows_ to the tune of tens of billions per month; perfectly sensible and rightly so in present circumstances. Foreign central bank and sovereign capital is still coming, evidently, but _proportionately less_ than in the past and building down, and even then only into the best assets. They all want out, sovereign and private, and each are acting according to their nature.

—# 3: We are entering a severe recession in the US.

By next year, we may be pronouncing its name with an initial consonant that is an occlusive rather than a lateral. Consumers aren’t spending ’cause they’re busted and bummed, and business won’t spend if consumers don’t, in addition to which credit is hellish hard to get and even intermittently unavailable (see # 1). Shill and bloviate all they want to, those mediaots, reality is what it is, and it bites when stepped on.

—# 4: The US is engaged in an ongoing, multi-front, military adventure in SW Asia which is a political cancer abroad and at home, a fiscal tapeworm, and a moral crime not least in that we continue to kill by the thousands a people who never asked for our presence or sought us harm.

I may also add that, independent of moral and practical issues, the conduct of grand strategy in this adventure is so colossally inept—on a world historical scale of crepitation—that one must seriously doubt the mental stability of the political executives, current and future, who pursue it with our name, credit, lives, and ambitions.

Now, nothing can be done about # 3. It is a cyclical process which will run its course, with home values a principal driver, though job losses can and probably will overtake that impetus in time.

We can control # 1. Swift public receivership of actually or nearly insolvent banking institutions, plus public credit to other players gone wobbly can at this point keep the US banking system going. It will look a great deal less fat, arrogant, and rich a few years on than it does now, but we need it, we can keep it solvent, so we must. (Barring a derivatives blow-up: that’s the boojum we may hope never to meet.)

We can, in principle, resolve # 4. Our present political executives refuse find that unthinkable (though be it said it’s plain they don’t think to much). I think it’s even money that the boys stay there until their paychecks bounce. It’s hard to root for _that_ eventuality, but . . . . Still, it is, daily, within our power to end this particular march of folly.

# 2, however, is now out of our control. The $ has been, in effect, a Ponzi scheme through the last thirty years: we create more credit in $, one way or another than we produce, and have now saved so little it’s hard to see how we could ever cover our chits. More to the point, it’s hard to see how the game can keep going regardless of what we want. We could try to monetize that debt; that’s the nuclear option which will only drive off our remaining sovereign creditors. Asset deflation _will_ help, maybe, in that our debts will get discounted and our credit truncated, bringing things rather violently back into line. Everything priced in $s is _over_priced. Managing this asset deflation . . . well, good luck. This has happened (and will happen) to other countries: they’re still here, and some of them are doing alright by themselves, now. We are NOT to big to get a spanking and a bath. What I suspect will happen, this being true, is that our creditors will ‘hold a conference and then announce their terms.’ This won’t happen this year unless the banking system does a China Syndrome thing. But the power advantage has shifted, we are incapable of resolving our currency issues alone, and are perhaps incompetent to resolve our currency issues alone since we’ve grown accustomed to our overvaluation and don’t know how to play with other rules. Other players will ultimately ’solve the problem’ for themselves. Then, it’ll be dicker or drop the Big One, and I don’t think we’re crazy. Just spoiled rotten.

Welcome to the 21st century. : )

Anonymous says:

I’ve been thinking about the actions the Fed have been implementing and feel the debasement of the dollar is the correct policy. Does it mean that there will be a bunch of pain to many Americans? yes. Does it mean that we will fall into a depression? yes. Does it mean its the end of the world? no.
The fundamental problem in the U.S. is the lack of high quality jobs too support the economic growth of the past ten years.
Invest in a company and they ship the jobs to India and China. This is about to come to an ugly end. Whether they like it or not. India and China are third world countries and once our economic downturn blows into their impoverished people, a whole lot of heads will be rolling.
At some point the pain of manufacturing in these countries will be so severe they will have no alternative than come home to where people do work for a bigger car. They don’t do that in China or India. There a 2 billion people in those 2 countries, most have not reaped any benefits from the growth in there economies and when the inflation monster hits them governments will fall.
So don’t be pessimistic, the U.S. is heading into a growth period and the jobs will be coming home. Remember this is the only place in the world where wages are falling. To a business that means something.

Richard Kline says:

All those manufacturing jobs that went to China et. al. . . . they are gone, and are _never_ coming back. Moreover, they were going to go regardless of what we might have done; ’shipping them’ only moved them faster, and to the profit of our own shippers. Look, the decline of labor intensive manufacturing in high wage countries is a largely fixed process. There exists tons of historical experience and material in Europe on this, it’s just that Americans think that the experience of others somehow doesn’t apply, here. Not so. I don’t say this as an advocate for what was done; I’m more an anarcho-syndacalist than anything, and I loath most of those who have profited from deindustrialization. I also do history, use my eyes, and use my head.

There is no way high wage labor can compete with low wage labor for the same value added. The problem in the 70s and 80s was called ‘de-industrialization’ because this had specifically happened in Europe; consider the Dutch example. Smarter countries chose areas where they could remain competitive in manufacturing, and bolstered them as a specific act of policy. For workers in other areas, efforts were made at retraining, with admittedly mixed results. In our country, we elected Reagan. That didn’t strike me as a competitive strategy, nor did it prove to be so.

The time to make an optimal transition for lost manufacturing jobs has passed; the window closed on that, ten years ago at least, probably longer. Now, we get pinched hard by the lack of opportunities between restaurant servers and money masseurs in cubicles. We will have to come up with a national retraining and industrial development policy from a disadvantageous position, starting from scratch. Doesn’t look good, gonna take ten years and several administrations even to get current on this one.

I know! We’ll all become musicians and sell video clips of our performances to eachother, hey. Oh wait, you say nobody pays for digital products? . . . Scratch that.

Anonymous says:

richard: what effect does a very cheap US dollar have on whether US wasges are considered “high” or “low” in comparison to other nations?

Richard Kline says:

To a re: Deutsch labor: Germany focuses on highly specialized manufacturing in niches where their products remain superior so their market share stays. They can afford the higher costs because their products have a competive advantage which outweighs price _dis_advantages. In addtition to which, one of Germany’s major markets for such specialized manufactures has been the US . . . with our inflated dollars allowing us to purchase their comparatively expensive products. This is _exactly_ what the French and Germans are screaming about with the decline of the $, that their higher costs will now seriously impact their sales to a major customer.

—But China will save them. (Maybe.) European-Chinese trade exceeds American-Chinese trade. Some of this is certainly high-value equipment and product exports from Germany. If the yuan comes up some, China can buy more: the lightbulb on THIS deal will go on before long, and China will increasingly work a ‘virtuous’ leverage with Europe, while the US flounders with its (appropriately) depreciated currency.

It is totally in the econominc, political, and military interests of the rest of the world for the $ to decline, and for them to stop funding our guns and chocolate economy. —Except they are still wedded to the export strategies of the last 60 years. But . . . the lightbulb WILL go on. Nobody really talks about this, but we are going to get to live it out, and soon.