Links 1/10/08 and a Scary Tidbit

Forgive me, but we are going to be a bit lean on posts tonight. I had too much to drink with someone who is terribly plugged in (security clearances AND knows tons of people in academia and the officialdom personally, both here and overseas).

Unfortunately, I can’t use many of the specifics he conveyed, but he is a very upbeat sort by temperament but also has been studying the banking/credit mess. He sees us going down the Japan path. Banks will not be technically bankrupt, but will have so many bad assets on their balance sheets, and will have taken hits to their equity bases, that 18 months from now they will be unable to make new loans. They will be quasi nationalized. BTW he said this in a completely evenhanded fashion, as if he was giving a weather report.

This, mind you, comes from someone who has written frequently for the American Enterprise Institute and tells me the Treasury and the Fed are working on this scenario now. This is far more dire than any forecast either yours truly, a constitutional skeptic, or even uberbears like Nouriel Roubini, have been putting forward.

Other juicy news:

Housing Futures Suggest Recovery Won’t Be Seen Until 2011 Housing Wire. This shouldn’t be a surprise; housing recessions generally last 15 quarters.

Blair takes advisory position at JPMorgan Financial Times. I am sorry, I am an old fart, but this is reprehensible. Isn’t making speeches for hundreds of thousands of pounds and book deals (bad) enough? Formal private sector jobs, even advisory roles, by top government officials, should be prohibited for at least two years (four would be better). Any shorter timeframe creates conflicts of interests.

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  1. RK

    With Tony at J.P. Morgan, and Jeb Bush at Lehman,
    the question is, where will W go. To be “fair and balanced” it would probably have to be Goldman.

  2. David

    There are so many executive orders in the Federal Register for “economic emergencies” that it does not surprise me that they might be planning for this, if only in a scenario sense. I.e., if this happens, then we will do that…

    Still, the odds of them making the situation better are low. Perhaps the odds are better than Japan, though. We’re more willing to force liquidations, even if they have to come slowly.

  3. Greg

    Yves, you tease, you must follow-up
    on this banking bail-out scenario.

    Don’t you mean ARE technically
    bankrupt, but kept breathing by Big
    Brother via quasi-nationalization?

  4. PureGuesswork

    What bothers me about “It will be like Japan in 1989,” or “It will be like 1929-32,” is that it never is. And it seems to me that someone as perceptive as you, Yves, should be just the fellow to figure out exactly how it might be different. So get to work. And lay off the sauce.

  5. Anonymous

    I second your point on mr. blair; I guess I old school at heart.

    It would be a sight to see the US G as an equity partner together with say China’s gov or ADIA. I am not sure that it would be politically possible to write down “politically-connected” equity before a de facto nationalization.

    In any case, my sense is that the US is quietly encouraging a SWF recapitalization b/c the political costs of the alternatives — whether balance sheet constrained banks or US G led recapitalization — are perceived as too high. The problems come when other countries think that they are investing to do the US G a favor. that blurs a lot of lines that shouldn’t be blurred, in my (old-school) view.


  6. E Cartman

    According to the blog Mahalanobis, hose housing futures markets are _extremely_ illiquid.

    It’s simultaneously hilarious and sad when academics like Summers (or Mankiw) pull some barely existing market out of thin air as a crucial prop in whatever “brilliant” argument they happen to be making.

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