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Marc Faber: US Needs as Much as $5 Trillion Financial Rescue

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Swiss investor Marc Faber, known for a long track record of good calls (he was a commodities bull until late this spring, for instance, when he reversed his view) and a fine grasp of financial markets history, confirms the estimate earlier in the week by Ken Ohmae that the US needs a salvage operation much bigger than the one envisaged by the Treasury plan, and the damage may come to $5 trillion:

Marc Faber, managing director of Marc Faber Ltd. in Hong Kong, said the U.S. government’s rescue package for the financial system may require as much as $5 trillion, seven times the amount Treasury Secretary Henry Paulson has requested….

“The $700 billion is really nothing,” Faber said in a television interview. “The treasury is just giving out this figure when the end figure may be $5 trillion.”…

“The decline in home prices of 20 percent is a relatively minor decline so far and it has created so many problems,” Faber added. “The US is in much worse shape” than Japan was when its stock market crash ushered in a decade-long slump in 1990.

There is other juicy stuff in the Bloomberg video. Some of Faber’s other comments:

The problem is excessive leverage, not housing per se.

Stocks may rally once a bailout package is in place, since on a short-term basis stocks are oversold, but a durable bull market for financial is “out of the question.”

The one bubble that has not been pricked is US Treasuries. Higher interest rates are in the offing.

While the dollar may decline sharply in the next few days, Faber regards it as attractive because even though the US is in bad shape, the rest of the world is even worse off.

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54 comments

  1. Evan

    Isn’t the 800 pound gorilla in the room Credit Default Swaps, with trillions of dollars in contracts outstanding?

    Seems to me that they, instead of the MBS issues, are truly what could take down financial institution after financial institution (which is why they had to save AIG).

  2. Anonymous

    I have to give this blog a *huge* thank you. Concise, factual, and excellent objective analysis.

    Thank you for spending the time and energy filling the void left by most media (NPR included) with actual news.

    Thank you. Thank you! Thank you!!!

  3. SlimCarlos

    >> While the dollar may decline sharply in the next few days, Faber regards it as attractive because even though the US is in bad shape, the rest of the world is even worse off.

    Would Faber thus have recommended Lehman? 'Cause, you see, even though it was in bad shape, Bear Stearns was in worse shape.

    What we are witnessing here is a failure of imagination. *All* paper money is heading south, along with the banking system that printed it.

  4. Matthew Dubuque

    Matthew Dubuque

    Unfortunately credit default swaps at 55 trillion are a small fraction of the 500 billion in derivatives (notional value).

    Hyperleverage is indeed a key.

    The principal cause of this catastrophe, the best operational heuristic I know of to describe it, is that:

    (1) These 500 trillion in derivatives were incorrectly assumed to have price distributions that followed a bell curve, COUPLED with

    (2) the EXTREME amplification of that tragic mistake by HYPERLEVERAGE.

    Will next weekend (i.e. 8 days from now) be characterized by frenzied crisis negotiations for a recapitalization of the banks?

    I continue to believe the central bank of England is in trouble. It may take 30 months to play out (and it may not), but this is one thing I am watching closely.

    Matt Dubuque
    mdubuque@yahoo.com

  5. Anonymous

    Right on, hermano slimcarlos.

    ‘Senator’ Harry Reid, on teevee a few minutes ago, stipulated that “we aren’t responsible for this.”

    Oh, no? Make no mistake: the ultimate cause of this crisis is Goofball Greenspan’s beloved “fiat money system,” which has ruled since Nixon slammed the gold window shut on 15 August 1971. Monetizing debt to create more “money” is a check-kiting scheme. It’s illegitimate. It’s a flim-flam.

    And characteristically, like any pyramid schemer, Senator Reid and his colleagues want to keep the pyramid expanding with — you guessed it — MORE DEBT.

    I’ve been saying for years that democracy and paper money mix like teenagers and whisky. The perverse incentives to keep “manufacturing prosperity” with more and more debt GUARANTEE that debt service eventually will exceed the economic surplus available to service it. Then an economic avalanche occurs.

    This may be it. Or — given that USGOV is still paying 4% rather than 14% to borrow — they may be able to juice the system into another business cycle or two, with a $5 or 10 trillion injection of borrowed capital.

    That just means the eventual crash will blow up the whole solar system, instead of merely our benighted planet. Man … political folks sho is crazy.

    – Juan Falcone

  6. Anonymous

    Faber mentioned, like everybody, the Japanese experience. My question for the astute readers of this blog is whether or not Japan might be a somewhat “safer” haven since it has already gone through and adjusted to this sort of event? (I mean in the sense of moving some money there and/or even physically moving there to live for those who have the option and can accept the social aspects of the region.) Thanks in advance for considered replies!

  7. SlimCarlos

    Sen Falcone (11:29), on the topic of classic Harry Reid quotes, here is a topper:

    ——————–

    On Monday night, Senate Majority Leader Harry Reid was briefed on the gravity of the situation in a secret meeting with the Treasury Secretary and Federal Reserve Chairman. Reid’s remarks are the best summary yet of the events of the last 14 months. He said, “We are in new territory, this is a different game… No one knows what to do.

    http://counterpunch.org/whitney09192008.html
    ———————————–

    Oh, but by all means, go buy the dollar. Back up the truck!!

  8. joe

    Once again, we have folks like los dos hermanos who pony up to the fact that it is the NATURE of the fractional reserve system, in creating all new money as DEBT, that has caused the crisis that is unfolding.

    They and others touch on the fact that we cannot leverage our way out of a over-leveraged situation.

    At some point, people will come to grips with the fact that we have about $50 TRILLION in IOUs of the government and consumer, including debt service, and that EVERY DOLLAR created in this country comes into existence as debt.

    What’s wrong with this picture, Yves?

    Every dollar created to pay the interest on the $700 BILLION, or $5 TRILLION must also be created as debt.

    Read Social Credit.
    Read C.H. Douglas’ Economic Democracy.

    The ONLY real solution is non-inflationary, government(Treasury) issue, debt-free credits to BEGIN to repay the huge mountain of debt that has already been created.

    More “leverage” is equivalent to pouring the gasoline on the fire that is our national economy.

    Why are we not talking about these facts?

    Anyone?

  9. wintermute

    Off topic – but it has to be pointed out – the secured creditors of WaMU have just suffered massively from a fraudulent conveyance.

    Looks like the FDIC could not afford to reimburse the depositors in a proper bankruptcy process – so the whole branch network has been split off for less than $1m per branch – virtually given away in a good bank / bad bank split. The “Bad bank” is now worth so little that anyone other than depositors has been royally shafted.

  10. Anonymous

    Joe,

    I think everyone agrees that American’s reliance on debt is an issue.

    The general consensus about where it fits in the current puzzle puts it at a lower priority than more visible issues like CDS and less specifically hyper-leveraging. Hyper-leveraging is not really the same thing as the debt issues you mention.

  11. Anonymous

    Compadre Slimcarlos,

    I perceive that you — like my goodself — are a great admirer of the eminent Senator and statesman, Harry Reid.

    Why just this morning on teevee, Senator Reid admitted that a former Nevada banking commissioner had advised him that the bailout plan is “the goofiest thing he’s ever seen.” But Reid went on to say, “Just because something is unpopular doesn’t mean we shouldn’t pass it.”

    Or to paraphrase your favorite quote from Reid, “Just because we don’t know what to do, doesn’t mean we shouldn’t ‘do something.’”

    Righto. Just stand fearfully in a darkened room, unleashing shotgun blasts in random directions. Eventually you’ll hit something — maybe a family member or pet. But at least you took decisive action, Harry Reid style.

    KA-BOOM! Oh no, I just shot the dollar!

    – Juan Falcone

  12. SlimCarlos

    Sen Falcone,

    I agree w/ you. Harry Reid is a great and wise philosopher. And one of the few honest voices in Washington. (“We don’t know what to do.”, Etc.)

    I hate to say it, though, but the only solution is to shoot the dollar. Add it all up (companies, banks, gov’t, households, etc.) and the US stands as a net debtor. Shooting the dollar, then, is actually a win.

    And in fact it is the only way out. If only we could channel FDR….

  13. Lewis B. Sckolnick

    WaMu’s secured creditors should be paid now or we could have LEH II.

    I do not think that we should put much weight on foreign models or past models.

  14. S

    The problem with treasuries even in a rising rate environment is that printing supercedes yield. The problem developing is one of confidence not capability. why would you trust the governement with any duration when you know the magnitude of the problems ahead. Euro may be flawed but the ECB has shown itself to be far more responsible than the Fed. I’d rather bet on one mandate than two. The dollar may rally but it is over for US$ long term. Why bet in the short term unless you want to trade it.

  15. Anonymous

    Every one knows Harry Reid personally wrote the bail out bill as well as carved the mantra “free + markets true love forever” into the doors of the Treasury.

  16. Benoit

    premise one: In the long term, a well diversified global portfolio always has exponential positive growth.

    premise two: Maximizing returns is achieved by leveraging as much as possible those investments that are guaranteed to grow.

    conclusion: profit! . . . . . . . . . . . . . . ?

  17. Anonymous

    Senors y senoras;

    First off, there are fundamentals of the Euro economy that the U.S. simply does not share. Such as the thinking that sometimes you have to do things for the greater good and not just your own back yard.

    I’ll say it again, sometimes one has to do things for the greater good and not just your own back yard.

    Did you get that? Fundamental difference.

    The question is / will be: is *this* bailout for the greater good?

  18. Anonymous

    Yves, I apologize if this is not the place to post this. It’s a letter I just sent to my Congressman regarding the cash-for-trash bailout. Anybosy wants to re-use the letter is welcome. I am posting it here as an opinion though with all due respect to those with opposing views. Richie

    Sir,

    Below are a few points I wish to make regarding the Executive Branch’s bailout plan. (I am OPPOSED to this plan both in temperament and in principle)

    One of the first things a rational mind thinks regarding this complex issue is, “Instead of listening to the voice of the majority, the more prudent approach is to give more weight to the opinion of those who are the the most educated and experienced in the matter at hand… the experts in the field of economics.”

    ******The flaw in that kind of thinking is when a person’s moral qualifications come to the forefront in importance.

    This is not the time to lay blame on the causes of our current economic distress UNLESS the answer to that issue can help us decide what to do now. I believe understanding the cause of our current problems WILL help us now. Some people justifiably lay blame on a greedy financial industry and, in many ways, on government itself but I offer the idea that what this all boils down to is this: Our current problems were caused by the sum of numerous human decisions… human decisions whose shortcoming was not a lack of expertise but instead a lack of moral qualification to be in the positions which they held. It was expertise without moral qualification that got us into this mess; we should not trust that intellectual cocktail to get us out.

    I advise you, Sir, instead of seeking out those who are most expert in the field of economics, to instead seek out those with the highest moral qualifications whether it be your colleagues with little economic experience or the humble voters in your district. It may turn out that the little old lady living in that small house has greater moral qualifications than the US Treasury Secretary and all the other so-called “experts.”

    Famous investor, Jim Rogers, once said (paraphrased by me) that when betting on which will win – natural market forces vs regulatory intervention to halt natural market forces – Rogers said he would put his money on the natural market forces every time. I embrace that idea as being generally true. So in other words, the best thing the government can hope to do now is a “controlled burn” of the bad parts of our economic system. In the long run, saving those parts – propping them up – will turn out fruitless and be a waste of money.

    Nobody needs reminding that $700 billion is a lot of money. Secretary Paulson’s plan is no less than a $700 billion tax on Americans that they will NEVER get their money’s worth out of. I believe that Secretary Paulson’s ultimate goal is to SIGNIFICANTLY overpay for the distressed securities. Furthermore, I believe it is an act of deception to give Americans false hopes that the US government might not lose much money on this. Secretary Paulson is wanting to overpay for those securities. That is the only way those institutions can remain solvent. Once again, we see yet another big decision being made with a boatload of financial expertise but not a thimble full of moral qualification.

    Richie

  19. Anonymous

    “The problem is excessive leverage, not housing per se.”

    The nail on the head… its all been about pushing up GDP with excessive leverage with little or no capital. The gov’t has been able to fund two wars, provide tax breaks and giveaways to the wealthy, while experiencing above average GDP growth which we now understand was a result of unchecked credit growth via a complex web of financial engineering.

    Remove the leverage or just reduce it and suddenly GDP contracts and the twin towers of Federal deficits, Federal balance sheet and trade imbalance, become center stage.

  20. S

    Seiously listening to these fools on CNBC is beyond the plae. You will not get paid, the farmers cant get fertilizer etc. This is demogoguery at its worst.

  21. Anonymous

    This bailout will not save the financial system. It may slow down the crash for a couple of months, but what no leader is saying is that the system is beyond repair and only a good flushing, with all the pain it encompasses, is the only option left now.

  22. Anonymous

    … listening to these fools on CNBC is beyond the plae. You will not get paid, the farmers cant get fertilizer etc. This is demogoguery at its worst.>>>

    The media is a catalyst for many things, not always good…

    Remember, CNBC is enjoying incredible ratings (eyeballs) right now, they're fabulously excited. This is the most amazing news they've ever had to report on. AND it gives them a chance to really use those fancy realtime 3D graphics…

    They would be wise to be careful "it is so, because i say it is so" is a dangerous thing.

  23. SlimCarlos

    >> Seiously listening to these fools on CNBC is beyond the plae. You will not get paid, the farmers cant get fertilizer etc. This is demogoguery at its worst.

    I disagree. The system has seized up and will soon grind to a halt.

    The problem is the liquidity is drying up for everyone. You'd like to be able to choke off capital flows to the unproductive segments of the economy and keep it flowing to where it is needed. But that's not happening. America needs capital for a whole bunch of reasons — I believe there have been two posts here speaking of the fact that nat gas producers are cutting back and that you can't buy gasoline in certain parts. Surely some refinery upgrades (or a new refinery?) is in order and who wants to freeze in the dark this winter? But now you can't get money for *any* purpose. The capital markets *are* seizing up. How can this be good for anyone?

    Something for you hairshirt types to consider.

  24. Justin

    Stop intellectualizing, slimcarlos! We need gut-level decision-making. Goodness knows we haven’t had enough gut-level decision-making in the past 8 years….

    (Completely agree with your point, if it isn’t obvious.)

  25. Anonymous

    someone just called wanting to lend us money for capital equipment. cold call. go figure.

    the system seized? we’ll see.

  26. S

    slimcarlos…

    the us needs credit because our economy is a house of cards. i vote for the great choke. bonus will be less suberban and urban blight and stip malles with worhtless shops.

  27. SlimCarlos

    >>someone just called wanting to lend us money for capital equipment. cold call. go figure.

    Did you get terms? Does it require the hypothecation of your left testicle?

  28. Jesse

    He’s right about Treasuries being a bubble.

    A lot of that is non-profit seeking purchases by foreign central banks.

  29. Anonymous

    “Did you get terms? Does it require the hypothecation of your left testicle?”

    slimcarlos;
    well, that would assume that i still had one, or had one to begin with, and that it was, well, available for that sort of thing and hadn’t been pledged somewhere else.

  30. Anonymous

    “Once again, we have folks like los dos hermanos who pony up to the fact that it is the NATURE of the fractional reserve system, in creating all new money as DEBT, that has caused the crisis that is unfolding.”

    The danger of fractional reserve banking lies not in debt per se… the danger is that the banks will quit lending with the central bank taking no action. If that happens then no new commercial bank money is created, and the money supply subsequently contracts, starting a deflationary spiral. Of course the Federal Reserve WILL act, and they can counteract this problem easily enough by printing money and using said money to buy treasuries on the open market to increase the money supply. Then when conditions improve, the Fed sells the treasuries and gets rid of the paper money that it gets back in return. I think that’s what Bernanke meant when he said ‘we have this wonderful invention the printing press’…

  31. Lewis B. Sckolnick

    There are major problems with the Treasury plan. First, by buying banks’ worst assets at above-market prices, taxpayers take an immediate economic loss — while transferring wealth to shareholders and executives of the very institutions that brought on the financial crisis.

    Second, this plan puts too much discretionary power in the hands of Treasury officials. Who determines what financial assets are purchased and at what prices? Who determines which bank gets to benefit from these taxpayer subsidies? Will bank shareholders continue to receive dividends, and executives continue to get paid huge bonuses?

    When financial institutions borrow massive amounts of money to invest in assets that are now found to be illiquid and poorly performing, it is not the responsibility of taxpayers to bear the resulting losses. These losses should be borne by the shareholders.

    John Paulson WSJ

    Right now we have a ‘situation’, for $700B we can buy a real problem.

    This is not a plan but an act of desperation whose impact if passed will be beyond our current imaginations.

  32. ScottH

    Richie – your letter is too long. It won’t get read.

    If an email or fax is longer than the average post here (after correcting for the Dubuque effect) you are wasting a lot of time on composition.

    Short and sweet. You don’t need to make all the points, nor propose alternatives.

    IMHO

  33. Anonymous

    The problem is excessive leverage, not housing per se.

    The problem is always excessive leverage

    How else could a measly 20% decline in house prices (hardly an unprecedented event in the western world) bring down a whole financial system.

    CNBC and Bloomberg TV should be forced to run Faber’s comment on their tickers every day so that people can read it every time they have some idiot talking head on claiming this crisis was all caused by sub prime borrowers (euphemism for poor people) defaulting on their loans.

  34. Anonymous

    SlimCarlos,

    I’m not sure how you come to your conclusion that the end is somehow near for the financial system..

    Many insightful comments layout the issues pretty clearly. Just to summarize, one of the primary issues are the banks going to the Fed (because that’s the best deal) instead of lending to each other.

    Please re-examine the issue because the doomsayers got us where we are today.

  35. joe

    So many anonymii and so little time.

    “”The general consensus about where it fits in the current puzzle puts it(DEBT) at a lower priority than more visible issues like CDS and less specifically hyper-leveraging.

    Hyper-leveraging is not really the same thing as the debt issues you mention.”"

    ummmmmm, excuse me?

    Hyper-leveraging is the same thing as hyper monetary inflation.
    Too much new DEBT-MONEY chasing too few productive resources.

    We are leveraging DEBT against our meager equity, regardless of where that equity is located.

    I might agree that the priority of ending our DEBT-DEATH spiral is a lower priority than something, but I don’t agree that it should be.

    Did I make myself clear?

    ALL NEW MONEY IS CREATED AS DEBT !
    The death-spiral we are in is caused by humongously-excessive DEBT.
    We are choking to death on DEBT.

    What is the D in CDS’s?

    Whether we borrow another $700 BILLIOn or $5 TRILLION from the great grandchildren will do NOTHING to address the cause of the problem.

    We will have to make annual payments on that NEW DEBT with new money, ALL OF IT CREATED AS DEBT.

    The death spiral.
    Avoid it at your peril.

  36. Anonymous

    Richie,

    Thank you. You’re right. This situation has been created and perpetuated by people with no moral compass.

    This is treason!

    And don’t anyone in this country ever call Bush stupid again. He’s accomplished everything any ruthless leader contemptuous of his own people could wish for.

  37. The Social Pathologist

    Here’s something interesting from Forbes.

    How did they determine the 700 billion dollar price tag?

    “It’s not based on any particular data point,” a Treasury spokeswoman told Forbes.com Tuesday. “We just wanted to choose a really large number.”

    And these idiots are in charge.

  38. Carrick

    Hey, I've just been reading this blog the past few days. It and its comment discussions have been a great help.. thank you.

    Here's a link about the money that is being made in this crisis (liquidation & foreclosures), and the Bush crowd's links to it.

    http://www.huffingtonpost.com/leah-mcelrath-renna/is-bush-profiting-from-th_b_129205.html

    I live in D.C., have a politics and Conflict Studies (history/psych/socio/econ) background. I'm not sharp on the specifics of finance, but this blog has been my best source for seeing through through the bullshit this week. I directed my Congressmen to it. Thank you again.

    Can you recommend any great overviews of this thing for the lay man, or might I recommend you write it? Piecing the story together from the posts has been fruitful, but a week into it, maybe a large summary/explanation is in order.

  39. Anonymous

    Yes, they’re in charge of taking over the government -its called an authoritarian regime. The people have only those rights permitted by the authorities. There is no recourse to the courts. There is surveillance for you and secrecy for them.

  40. Lewis B. Sckolnick

    Turkishweekly has a story about foreign firms leaving US markets. They attempt to blame the US markets and regulations but are forced to admit that the companies are not very sound.

  41. Anonymous

    GO OUT AND BUY A HOME…GO INTO CRAZY DEBT…It will all work out. The government, the banks ( they really are one in the same) and the courts will not throw you out. Americans will give ANYTHING to stay in their homes. Even give up their inalienable rights.

  42. David

    “The problem is excessive leverage, not housing per se.”

    simply what it’s all about.

    Now, I recall that is what happened on Wall Street in the later ’20s. Don’t the idiot Republicans (and Wall Street Democrats) ever read History?

    and don’t you love it when someone like Joe Scarborough blames it all on some poor schmucks buying houses they really shouldn’t have tried to buy in the first place?

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