naked capitalism

Matthew Dubuque says:

Matt Dubuque

Gerald Corrigan, former NY Fed chief and current managing director of Goldman Sachs, today proposed, in my view, a way to address these concerns.

Corrigan outlined a 3-point plan to accelerate reform of the CDS market that should accompany passage of the TARP legislation.

He argues that one of the reasons the interbank (and by extension the commercial paper and other secondary transmission mechanisms) markets have frozen up is because of the tremendous uncertainty injected into valuation models by shortcomings in the current CDS framework.

In short, he is arguing that by simultaneously reforming the CDS market, we can reduce the risk premia that is intensifying the spike in interest rates and this will help restore trust (and therefore assumption of counterparty risk) within the system.

I can provide a link to these ideas he voiced today if others are interested.

I have found his work to be deeply insightful in the past.

Matt Dubuque
mdubuque@yahoo.com

Anonymous says:

“… and pray for a functional and coherent Administration!”

There’s an old saying, “pray to God, but row towards shore!”

We all now that this was a deal Bush made long ago – lend us your global money to let us pay for the War, and I’ll pay you back…

Hence, end of term, end of deal.

lewy14 says:

I second what Anonymous 7:43PM said.

In particular I don’t get how auctioning more Treasuries induces panic, especially since much of the discussion has been around potential for depressing prices at mid-duration (bonds, not bills).

And I don’t get how providing prices (phony or not) lessens transparency and confidence (which is near non-existent at present).

I’m not saying I agree or disagree, I just don’t have enough here to go on.

Anonymous says:

Au contraire, confidence is high, apart from a few hedge withdrawl notices. Mom and Pop aren’t queued up around the block at Wells Fargo and Chase, demanding cash. GM and Chrysler are still in business. Buffett is buying, Obama is smiling, oil is cheap, and Ireland just indemnified every Irishman in perpetuity. Yay!

Anonymous says:

TARP = Troubled Asset Relief Program, the official name for the “bailout bill’.

Some rare truth in advertising, since they are trying to cover up some steaming doo-doo.

Anonymous says:

watching cnbc now… guy from cato institute against the bill ….. this freaking idiot, larry cudlow, doesn’t even let the guy finish ….. you stupid stupid larry …. just shut up and listen to the guy … i have never seen a half bald baby in my entire life….

Anonymous says:

Help! I am confused. I don’t understand, can someone please explain:

“This represents a liquidity trap: TARP recipients of Ts will hoard cash to buy Ts: rinse and repeat.”

I want to understand so badly but I just don’t. Sorry to be slow on, this. If anyone could elaborate I would really appreciate it. Who are the TARP recipients? Do people who ’sell’ assets to the gov’t, are they going to be paid in T-Bills? If not, how/why are they getting T-Bills? Or, are the banks just getting USD which they will then invest in T-Bills and not lend out to real businesses like they normally would?

Don says:

I have been asked the following, from a commenter:

“I get the basic principle here, that the government might be eating up the little private capital that is available through the issuance of T-bills, but the explanation really needs some beefing up before any but the very financially astute will understand this.

“Panic serves to encourage T. buyers, especially for bills;

This represents a liquidity trap: TARP recipients of Ts will hoard cash to buy Ts: rinse and repeat.”

These two points have to be established rather than assumed, as well as elucidated with better language.”

I am basically working from a number of assumption, that I will attempt to make clear here:

One, while the intent of the bailout bill might be to re-capitalize big finance and re-start lending, the flip side of this is that lending requires a borrower. My question is this: who will be that borrower?

Here are my assumptions: Borrowing isn’t about to expand since a large segment of the population is in no position to take on more debt – too many of us are already burdened with debt – and I doubt the need for more debt exists among a large swath of corporations/business when we are slipping into an every deepening consumer driven recession. Businesses aren’t going to expand and grow when consumption is on the decline and will be for some time . . . since households are by necessity needing to reduce debt, not take on more, a situation made especially true while (another assumption), we continue to experience increasing job layoffs.

I am assuming, then, that demand for more debt (or credit, if you prefer), just doesn’t exist. Consequently, this stated need on the part of the bail out plan is largely bogus. It’s real design is to unclog the movement of capital among the big boys – and the notion that by doing so it will then drip down to Main Street by increasing borrowing among households and business just doesn’t stand up.

As for the panic rush into short term Ts: the panic has served Treasury well so far by keeping down yields (making it less costly for the Treasury in paying off that debt), at a time when the T. bill market is being flooded with ever new and expanding supplies, which need to be bought to keep the Fed balance sheet greased . . . thus the upside of panic, and thus the need to frame the “debate” as one of either you for us or your against us, no, I mean, either you are voting against a depression, or you are voting for one.

More importantly, however, is the underlying point of my first assumption (that debt is not about to expand – and in fact will by necessity continue to shrink). If the injections by the Fed continue, which I (and others before me), argue that the bailout plan is really designed to support, then what happens if those injections do not lead to more lending/borrowing? My point here is that hoarding will continue. Consequently, the recipients of the injections will use the money to buy Ts, which serves to keep the operation going – with the recycling of injections – keeping the Fed balance sheet intact and the big banks from imploding. Thus the Ponzi scheme.

So . . . in the end this has everything to do with keeping the big boys on life support, having little or nothing to do with “Main Street,” which of course explains why all the attention is being given to saving the little people. Doing so, we’re told, requires that we first save the big boys, if we want to save our own hide.

Sick of Politicians says:

hey Dougie,
CHILL OUT…
nobody’s holding a gun to your head to read this blog…
if you don’t like it don’t read/participate in it.
Pretty Simple!

Now for my real comment:
Senate just passed the TARP (Taxpayer A%# Rape Program).

On to the house where they will finish throwing the taxpayer under the bus….

Bounce and crash…

Anonymous says:

As I understand this ruse, the buyers of the treasuries used to finance this expenditure will most likely be foreign institutions and central banks. If in fact this is the case one could argue this proposal fills a short term need to the detriment of the longer term global economy. What a shock! This is off the subject but can anyone confirm that this bill gives Treasury more sweeping powers over the US economy. I have heard this is true but I have not read the bill.

Anonymous says:

“This Blog used to be very interesting until a few weeks ago.

Is has now transformed itself in a cove of maniac drepressive lunatics.

Please go out of your house, have a look at the sun, the sky, smiling children anf flirty people ….

The world is not finished, as usual we will manage to get out. Please do not try to look for the disaster angle of any action, you will always find one. Be propositive, let’s help each other out. A simplistic banker.”

Well, when things suck, it’s hard to be optimistic.

I’m personally resigned to this situation. If the majority of the population and Congress want to f*ck this country up, I’m just going to shrug my shoulders and let them. I’ll take care of myself, my family, and friends, and that’s about it.

Anonymous says:

Senate approves Financial Markets Bill 74-25. Here is who voted against the bill. If not listed, they voted yes.

Democrats (39 yea, 9 nay, 1 no vote): Cantwell of Washington, Dorgan of North Dakota, Feingold of Wisconsin, Johnson of South Dakota, Landrieu of Louisiana, Nelson of Florida, Stabenow of Michigan, Tester of Montana, Wyden of Oregon

Kennedy of Massachusetts did not vote due to sickness.

Republicans (34 yea, 15 nay): Allard of Colorado, Barrasso of Wyoming, Brownback of Kansas, Bunning of Kentucky, Cochran of Mississippi, Crapo of Idaho, DeMint of South Carolina, Dole of North Carolina, Enzi of Wyoming, Inhofe of Oklahoma, Roberts of Kansas, Sessions of Alabama, Shelby of Alabama, Vitter of Louisiana, Wicker of Mississippi

Independents (1 yea, 1 nay): Sanders of Vermont

EvilHenryPaulson says:

I thought I had posted something similar,
October 1, 2008 7:05 AM
…
Net capital inflow to the US = flat? With private investors and foreign SWFs replacing Central Bank and institutional withdrawals of foreign entities that need the cash for their own bailouts.

Will the US government bailouts crowd out reinvestment into the US financial and manufacturing sectors also dependent on credit?

I had the same notion coming from a foreign capital flows (see B Setser’s blog) perspective, and I agree – The Federal Reserve is becoming a Central Bank in the worst sense of the word.

I will make caveat; lending will return to corporations for longer terms under some conditions. The Treasury is issuing paper heavily at 4, 13, and increasingly 26 weeks (Auction schedule), even if the existing paper rolls over into the same terms they are distorting the yield curve for the whole market.

Banks will lend on longer terms, but credit markets face a net decrease in use of money market funds which could squeeze the heavy users (credit cards, auto loans) out into longer dated paper.

The resumption in lending will be of little consolation to many small and medium businesses. Banks will be extremely averse to using depreciating assets as collateral like real-estate and some types of heavy equipment — even if there is a big enough margin of equity to protect themselves. Cash flow is also untrusted going forward into a sharp, deep, and potentially long recession L-shaped. Perhaps introduction of mark-to-opinion will encourage lenders to use something other than solid & liquid collateral (inventory).

Other concerns include the scheduling of US debt has/will become unbalanced making the sovereign debt, and its credit rating, vulnerable to interest rate changes

Others commenting on the blog: This blog did not cause the credit crunch, this blog will not cause a measurable impact in the macro-economy. Yes, this is not CNBC, and yes you are more than welcome to take Cramer + Fast Money's advice that the bottom is in. If you are interested in the equity markets, my opinion is we will head sideways until December and then there will be a resumption in falling stock market-price levels.

Glory's List says:

Dear Ms. Smith,
I just listened to you on bloggingheads.tv, and I think you're correct: Paulson and the Admin are way WAY out to sea on this problem. The bailout, at best, will do nothing, and in 6 weeks, 2-3 months, things will start to really REALLY start to fall apart.

What's your best case and worse case senario, and what should an "average" person like me do how has some savings, I'm freelancer, so I don't really have a "job," and I have savings and some stocks.

Should I sell everything, buy meal-ready-to-eats and guns and oil and blankets and run away to the nearest cave?

What can the average person do to best secure themselves over what's likely to be a very VERY bumpy ride?

Thanks & Cheers,
The Charters Of Dreams
http://libertydesirebelief.thechartersofdreams.com

Glory's List says:

Dear Ms. Smith,
I just listened to you on bloggingheads.tv, and I think you're correct: Paulson and the Admin are way WAY out to sea on this problem. The bailout, at best, will do nothing, and in 6 weeks, 2-3 months, things will start to really REALLY start to fall apart.

What's your best case and worse case senario, and what should an "average" person like me do how has some savings, I'm freelancer, so I don't really have a "job," and I have savings and some stocks.

Should I sell everything, buy meal-ready-to-eats and guns and oil and blankets and run away to the nearest cave?

What can the average person do to best secure themselves over what's likely to be a very VERY bumpy ride?

Thanks & Cheers,
The Charters Of Dreams
http://libertydesirebelief.thechartersofdreams.com

Anonymous says:

“To the person who suggested a 32 hr workweek, do explain how forcing everyone to work less is going to be beneficial as we head into a recession. that is about as stupid a suggestion as any that have been made since the bailout discussion began.”

Actually it is not a stupid suggestion, simply one that has no currency. It actually was the central proposal of George McGovern’s book: Nonfinancial Economics, The Case for the Shorter Work Week.

As you may know, several states have begun to implement the idea of fewer work day as means of controlling the budget expenditures with rising energy costs. In fact, according to one estimate, reducing the work week by one day might save as much as 8 million barrels of imported oil.

What you may not know, is that it was actually the first response to the Great Depression, passing the Senate as the Connery-Black wages and hours bill. Which though passing, was never endorsed by Pres. Roosevelt. It was however, mentioned as a voluntary solution by Pres. Hoover.

You should also know, that this “stupid idea” was expressly identified by Keynes in 1930 as the ultimate solution to the problem of unemployment posed by the Great Depression. And, was endorsed by Beretand Rusell in 1932 in his writing, “In praise of Idleness.”

So, to aid in fiscal discipline, reduce imports and the current acount deficit, and address unemployment caused by an economic downturn – it may just bear looking into.

Of course, I am not an expert on this issue.

Anonymous says:

11:02. There have been plenty of suggestions on this blog, other blogs, and op-eds, if you had checked. Yves was talking about the Swedish model way before it was popular to do so, and has served up other ideas too.

In fact, that’s one of the very biggest lies about the pressure to get this bill passed, that it was the only alternative.

The financial system is too large to be saved in its current form. There is too much debt out there relative to the size of the underlying economies. The financial system needs to be rationalized, not just propped up. That’s the fundamental flaw of your logic.

No one ever said that nothing of value had been created in the last 12 years.

Pascal says:

A shorter work week changes absolutely NOTHING to unemployment, other than perhaps increasing it a little due to decreased purchasing power! The aggregate unemployment rate is determined by frictional unemployment which is relatively low in the US, cyclical unemployment which is going to increase in the coming year, and structural unemployment which is market flaws such as overly stringent labour regulations (France) or wage rigidities. In the end, unemployment is determined by how far off the aggregate wage is from the labour market equilibrium and net purchasing power comes from the stuff you produce per hour – hence productivity. Period. Hours per week have NO theoretical framework and have not been an efficient policy when applied…

Pascal says:

Yes. The Scandinavian approach is to outright nationalize… but a Republican White House will never do that! That is why we are here now…

Anonymous says:

Don,
I wonder if you overlooked something in your second assumption that even though there is a dire need to reduce debt as a whole, it’s going to be very hard for people to change their habits overnight. In other words, if the banks are willing to lend, there will be takers, however, the level of debt (vis-a-vis assets) may not be the same as before.

Anonymous says:

Video from CNBC while the Senate voted. Discussing the historical context. Has Haines (Haines says “bitching” on live TV), Leisman, and Kudlow.

battle for middle earth says:

I doubt the next administration will foreclose on families that cannot pay their mortgage. When it becomes clear that the government will not foreclose, how much will those troubled assets be worth? How quickly will everyone figure out that their are few if any consequences for not paying.

Anonymous says:

http://www.cnbc.com/id/15840232?video=874949880&play=1

Another CNBC link.

Don says:

“Don
I wonder if you overlooked something in your second assumption that even though there is a dire need to reduce debt as a whole, it’s going to be very hard for people to change their habits overnight. In other words, if the banks are willing to lend, there will be takers, however, the level of debt (vis-a-vis assets) may not be the same as before.”

Lending standards are tightening at a swift speed. New credit lines for corporations is restricted in part by non-availability of credit or too high price to pay. Unpaid debt on the books is too high to re-start new debt expansion without the economy, number of jobs and income all increasing.

The bottom line with the (admittedly purely speculative) notion that I presented as contained in Yves introductory commentary, is that the Fed is now in the same boat as the big banks, where the fate of each are joined at the hip. The key, and this is part of Paulson’s plan, is to administer which banks fail and which succeed.

With their fates tightly woven, the ability for capital to expand by way of economic expansion is restricted, since the lending AND borrowing system are no longer adequately functional.

Anonymous says:

11:02. Frankly, it isn’t worth arguing with you because you reduce everything to a soundbite and dismiss it.

The Swedish model is not a straight nationalization. First, and this is still a very high level summary, the government did extensive study as to who could be saved, a triage of sorts.The banking system was reduced in size by banks too far gone being liquidated or folded into sounder banks. Shareholders wiped out, new top management installed, bad assets spun out to a liquidation vehicle, banks later brought public.

The government did not have any reason to nationalize sound institutions, which is what I think you are implying was part of the program, and I would be astounded if they did.

And when banks fail and the FDIC cannot find a buyer, what do you think has happened? The government owns it. It strikes me you are hung up on language and ideology and have not at all though through alternatives.

They made money on it, BTW. It is UNIVERSALLY considered to be the most successful model of handling a financial crises. Fed, IMF, other papers agree on this point.

So if you’d rather reject the best approach (or an American twist to make it optically more palatable), and advocate something that doesn’t, so be it. That why we are in the mess we are in. People having not factually grounded views of what works and does not work and insisting they are well informed.

FairEconomist says:

I’ve been thinking mostly about the durations issue, mostly because it’s really obvious something is going badly wrong in the commercial paper market. If you look at the volume report http://www.federalreserve.gov/releases/CP/volumestats.htm overall paper is actually *up* but the longer durations (20+ days) are way down. For example: the overall market average for the week of Oct 3 is 183,610, up from 2008 average of 148,710. But 20-40 day paper is only 6,778, *way* down from the yearly average of 15,864.

So the market has lost about 2/3s of its ability to convert liquidity to 30-day loans. 90-day is probably similar although there are technical issues with analyzing the chart because 90-day would expire during the end of year crunch so there probably isn’t much demand. Next week we’ll be able to look at 90-days again.

One of the most critical functions of the banking system is converting short-term deposits into longer-term loans for businesses. Much of the working capital market, for decades has come via money market funds (MM). Joe public or Joe CFO deposits money into a MM. That MM loans it to a bank (usually by buying paper, and usually at a medium duration) and then that bank loans it out to business for inventory, payroll or whatever. The MM has converted Joe’s demand deposit into a fixed-duration loan.

The problem we’re having is that people are fleeing commercial MM for treasury MM. Those are buying treasuries and thus converting the money to the desirable medium duration BUT that money is loaned to the Fed, and the Fed doesn’t make working capital loans. So the deposited money that had been made into working capital has been diverted into the Fed and lost to working capital.

The Fed is kind of trying to address this by loaning out money via various auction/discount windows. BUT, those loans have been overwhelmingly overnight – a particularly nasty demand deposit because it goes back so fast. For a bank to convert that to a 90-day loan it’s got to win 90 auctions in a row – a very risky deal with a crunch on. So the Fed undoes the duration conversion, and then some, converting the liquidity into a form that the banks can’t make into useful-duration loans.

Right now we have both commercial and treasury MMs. Deposits have shifted from commercial MMs to treasury MMs, and consequently we have less working capital (a commercial MM product) and better credit for the Fed (a treasury MM product). But, treasury MM rates are now very low and the gap between treasury and commercial fairly high, which creates an incentive for depositors to put money into commercial funds, producing some working capital.

When Paulson dumps out his 700 billion in treasuries it’s going to be at the short end. That will drive up rates for short-term treasuries. This will obviously draw even *more* deposits into the treasury MMs. That means even less in the commercial MMs and thus less working credit, the eventual commercial MM product. Hence Paulson’s billions remove working capital by competing for the deposits that could get used to make working capital loans. That 700 billion is going to go to fairly long-term mortgage securities. So Paulson’s billions divert credit from working capital to long-term mortgages – from where it’s most needed to where it’s most wasted.

Even if the giveaway adequately props up the banks, which I doubt, they still can’t make working capital loans, because the raw material they used (commercial MM deposits) will be desperately short.

I think it’s very telling that in two days of hearings and two weeks of discussion we have yet to see *any* detailed mechanism for how Paulson’s plan will increase the supply of, say, inventory loans. It’s not that every economist in the world is an idiot, it’s just not going to help. I think people have fallen into the fallacy that if it costs a lot it must be valuable. Paulson’s plan falls into the category of very expensive way to hurt ourselves.

Anonymous says:

I’ll call you 11:02 since that’s easier to write…

If a bank here got to 2%, I think the regulators would have a heart attack. That’s way below the levels they look to have.

In a video at Barry Ritholtz’s blog, Chris Whalen, who is a banking industry expert (well regarded private research service, big bucks clientele, you have to be a lot better than a Wall Street analyst to have your own boutique), had nothing but good to say about the FDIC’s competence. Conversely, he wouldn’t trust anyone else in DC to handle banks. So the skills are there, but Paulson wants to build his own bureaucracy.

I’m not a regulatory expert, but my understanding is that bank regulators have very broad authority regarding their charges, If they declare you insolvent, there is no way to appeal. I assume some legal provision has been made in return for getting a bank charter.

So in the US, we wouldn’t need a law like Sweden’s. The regulators could take banks with a low level of capital out and shoot them (I’d suspect at least a big bank, since they have a lot of assets with squishy values. Believe me, if a bank’s books said its equity was 2%, I’d bet a team of inspectors could find a basis for questioning enough valuations to have it declared insolvent).

We just tend to bend over backwards not to put banks under. But look at Freddie and Fannie. They were asked to agree to the conservatorship, but told it could be done on an involuntary basis if they tried fighting. And both, well certainly Fannie, as far as their public financials were concerned were in compliance with statutory capital requirements (Freddie was out of compliance on one metric).

Hughson says:

I dont know much about the economics but i have taken a short cut a researched and read extensively on the history of money to conclude that if the US does not Move quick to sure up the system, we will all be lauched back into stone age. The chances that this will succeed are low given historic similar instances but it is worth a try. The whole world is dependent on the dollar and it will support the deficit of the US at greater cost.

Anonymous says:

So far, Bernake’s and Paulson’s “track record” has been to create a bigger bailout, to fix the previous, failed bailout. Obviously, we’re at the end of the road with that tactic. So if this mother-of-all bailouts doesn’t work, I sincerely hope the Thomas Friedman’s of the world stop looking to these “leaders” for solutions. If only a couple of Roubini-types had been advising them all along, we’d be in better shape.

Ben and Hank supporters are unable to explain why these two, who have consistently misread the severity of the problems, and who are the root cause of the problem (Ben’s predecessor, Greenspan, and Hank at GS), should have the solution. Their real-time track record is near zero.

Anonymous says:

River said: “Why don’t we call a spade a spade? Imo, the bailout bill is nothing more than an attempt to prop up a failed economic model”

This is the guy with the stupid idea again:

I really have concerns about this, and that something like the great depression would not be a survivable event today. Conditions are very different than they were in 1930. Only a fraction of one percent of the population live on farms today and could provide for their immediate needs.

Leveraging in the financial sector is matched by economies of scale in the manufacturing sector – which implies a horrendous and rapid downside if things begin to unravel.

For instance, agriculture rests on a very narrow base – .67 agricultural workers for every 100 non-agricultural workers. This would seem to leave that sector very sensitive to a sudden rise in unemployment.

85 percent of workers do not produce a single real good, so all material production rests on the output a very small segment of the population which is itself very vulnerable to a downturn. We could, for instance, lose all the US automakers in a matter of months if things continue as they have been reported in September sales.

All the economists I follow are focusing on the niggling details of a financial bailout, no one is looking at a potentially disastrous macro event.

A shorter work week, with aggressive tax reduction for working people, might allow for an orderly unwinding of the debt bloated domestic market, but no one is looking at it. In fact, the merest suggestion leads to cries that it is insane.

DailyVus says:

what to do to prepare for the worst? There’s protecting assets that has been well covered here. I like the medicine, food, cigarettes and bullets barter information. Thank you.

Start thiking about relocating to a place know for its kindness. You can pitch in with whatever your resources are and survive happily at the same time.