naked capitalism

FairEconomist says:

You have to admire the efficiency of the Russians. Bush spends 700 billion in Iraq for nothing. Russia spends 5 billion and gets control of the North Atlantic shipping lanes. Putin sure can play the game.

Matt Dubuque says:

Matt Dubuque

The big push is on for strategic access to Arctic oil.

Plus Russia has actually salted away a little cash. By contrast, the USA has not.

Matt Dubuque
nospammdubuque@yahoo.com

doc holiday says:

If you missed this story, it has some interesting thoughts:

$5 Trillion Cash Pool Needed to Stop Rout, Ohmae Says
By Bei Hu

Ohmae, nicknamed “Mr. Strategy'' during his 23 years as a McKinsey & Co. partner, called for a $5 trillion “international facility'' to be made available to financial institutions. The system could be modeled on one used by Sweden during its banking crisis in the early 1990s, he said.

“This is a liquidity crisis,'' Ohmae said at an investor forum hosted by CLSA Asia-Pacific Markets, the regional broking arm of Credit Agricole SA, in Hong Kong yesterday. “The liquidity has to be so big that people won't get panicky.''

http://jessescrossroadscafe.blogspot.com/2008_09_01_archive.html

Erich Riesenberg says:

The Wall Street Journal is reporting the Treasury may finance investors who buy the assets the Treasury eventually sells off.

http://online.wsj.com/article/SB122342388130313375.html

So, is the Plan for the Treasury to overpay in purchasing assets, then underprice (possibly through cheap credit or retaining some of the risk) when it sells? This is so roundabout and time consuming, how can it possibly be about global solvency instead of enrichment at taxpayer expense?

london7 says:

We must put things in perspective. Iceland borrowed $16k per capita. It is unknowable what is their GDP per capita as of recently because of the demise of the currency but my Economist’s “Pocket World in Figures 2007″ shows $41k per year. So, now, very speculatively with kruna halved it should be $20k.

US for that year was $39k per capita but also has $9tril. federal debt, which ends up being $30k per capita.

Iceland is probably better; and being smaller probably more organized and will accept sacrifices.

–petar

S says:

The CHinese also stiking out in editorial in the People’s Daily today re the US inflating its way out at expense of debt holders. THe next decade will be more fascinating than the ’80s. The USSA is the USSR circa 1980. What does the US look like without dollar hegemony…

Anonymous says:

Yves,

I love this blog. I have been heavily involved in subprime over the last six months.

I have been having a debate with a co-worker:

He believes that the bank failures are a result of a liquidy problem.

I believe that these banks have on their books tier-three assets such as CDO’s which are falling in value.

I am wondering if you could clarify what is at the heart of the failure of banks in the U.S. and EU.

Thanks

Yves Smith says:

Anon of 10:15 PM,

You asked a big question, and I am afraid I can give only a short answer,

It is true that illiquidity can lead banks and companies to fail, But there is strong evidence to suggest this is a solvency problem, bigger than the CDO problem you mention, although that is an important piece.

As you know, banks carry only a small amount of equity. 8% is a good rule of thumb. European banks carry even less (some are geared as much as 50 times).

Banks (and we can include investment banks) engaged in riskier and riskier lending. Just look at how the profile of credit card borrowers has changed. Banks have been out to create heavily indebted, chronic borrowers, though the use of teaser introductory offers. Before, they used to price their products so they made money off everyone (in fact, in the old days, the best customer was someone who paid the annual fee but used the card little or not at all); now their profits depend on the heavy borrowers.

Since the early 1990s, but at a greatly accelerated pace, consumers have taken on more debt relative to income. The ratio of consumer debt to income rose by 50% from 2000 to 2007. That is simply stunning.

Banks were also discouraged from building up loss reserves in good years. It was seen as a way to smooth earnings and frowned up on by regulators (talk about perverse).

So we have a lot of deadbeat borrowers, due to over leverage. Some were destined not to make it, some might have but will be taken down by bad luck or a deteriorating economy.

European banks didn’t have as much latitude to take risk, but were brought down by buying US product and also by exposure to the markets where consumers went wild (England, Ireland, Spain, the Baltics).

Does that help?

HoosierDaddy says:

Seems almost like a setup for President Jindahl to Invade, er, liberate Iceland to show that we’re back after the malaise of the Obama years, er to free the medical students/depose the illegitimate regime/end the the suffering. Knocking off small regimes was almost elevated to an art form in the Reagan/Bush I years. Bush II, sadly enough, was no artist. It’s not hard to imagine a reprise (gives the proles something to think about besides the economy).

Greg Byshenk says:

Re liquidity vs. solvency, isn’t the biggest problem that no one really knows for sure which is the case (’no one’ here including quite possibly the banks themselves)?

Certainly there will be some outright losses, but it seems (at least to my non-expert eye) that the greatest concern is that, with all the complex derivatives and various counterparties, no one really knows what the result of unwinding would be. And even a bank may not be able to determine its own result, as such is dependent upon other parties, whose results are dependent upon still other parties, and so on.

But one possible result of unwinding everthing could be losses that are manageable by at least the majority of financial institutions. Of course, it is also possible that such is not the case, and there are gigantic losses waiting to wipe out large numbers of financial institution. But it seems that there is insufficient information for a compelling argument either way.