It has been conventional wisdom that China, Japan, and other countries that run trade surpluses with the US, which means they fund our overconsumption by buying assets like US Treauries, would never restrict the flow of credit to us because it would lower their exports and hurt their growth. We’ve long been leery of the idea that unsustainable trends will have a life eternal, and Brad Setser has a simple reason why this process is self-limiting. Our foreign funding sources aren’t just lending us money to buy their goods; they are also providing the funding for interest on the loans extended for past imports. At a certain point, the interest payments become so large relative to the value of the exports that the deal no longer makes sense.
The day of reckoning may be approaching well before Setser’s tipping point. And the trigger is much simpler. We look like a lousy risk. The Freddie/Fannie conservatorship, the Lehman bankrutpcy, and the rescue of fallen Asian powerhouse AIG has, not surprisingly, lead to a reassessment of the US’s creditworthiness.
Yu Yongding, who has advised China’s central bank, urges Japan, China, and Korea to forge an agreement not to dump US bonds. Yu says in no uncertain terms that the Chinese are worried about their US holdings and see a US default as a real possibility.
We’ve said before that the US is in the same position as Indonesia and Thailand circa 1996, except we have the reserve currency and nukes. The precariousness of our position is now evident to all, save perhaps the average American citizen.
From Bloomberg (hat tip reader a):
Japan, China and other holders of U.S. government debt must quickly reach an agreement to prevent panic sales leading to a global financial collapse, said Yu Yongding….
“We are in the same boat, we must cooperate,” Yu said in an interview in Beijing on Sept. 23. “If there’s no selling in a panicked way, then China willingly can continue to provide our financial support by continuing to hold U.S. assets.”
An agreement is needed so that no nation rushes to sell, “causing a collapse,” Yu said. Japan is the biggest owner of U.S. Treasury bills, holding $593 billion, and China is second with $519 billion. Asian countries together hold half of the $2.67 trillion total held by foreign nations….
“Whether some kind of agreement between them to continue to hold Treasury bills is viable, I’m not sure,” said James McCormack, head of sovereign ratings at Fitch Ratings Ltd in Hong Kong. “It would be unusual. If it became apparent that sovereigns in Asia were selling Treasuries the market would take that quite badly, it’s something to be avoided.”…
China’s huge holdings of U.S. debt means it must bear a large proportion of the “burden of sorting things out” in the U.S., Yu said. China is not in a hurry to dump its U.S. holdings and communication between the two nations every “couple of days” is keeping Chinese leaders informed and helping to avoid a potential panic, he added.
“China is very worried about the safety of its assets,” he said. “If you want China to keep calm, you must ensure China that its assets are safe.”
Yu said China is helping the U.S. “in a very big way” and added that it should get something in return. The U.S. should avoid labeling it an unfair trader and a currency manipulator and not politicize other issues, he said.
“It is not fair that we are doing this in good faith and are prepared to bear serious consequences and you are still labeling China this and that, accusing China of this and that,” he said. “China knows what to do. We don’t need your intervention.”
The U.S. financial crisis had taught China a lesson and that was: “Why are we piling up these IOUs if they may default?” China’s economic expansion strategy, which emphasizes export growth that has led to trade surpluses and the accumulation of $1.81 trillion in foreign-exchange reserves, is the main problem, said Yu.
“Our export-growth strategy has run its natural course,” he said. “We should change course.”
Very interesting post Ma’am.
I guess its time for game theory practitioners to come into the play.
It is very lucrative option for marginal holders of US assets (Asia ex Japan, China – AXJC) to cash in on this “window” of opportunity and diversify into other currencies. So in essence it will be China and Japan caught holding the bag.
One way to attempt this – they better get together at a global level and unwind this mess step-wise. That will be a much better bet.
Other way is to buyout all others in the world and concentrate the holdings between China and Japan and then use consensus based un-wind. Politically this seems a little wierd idea to me.
But only China and Japan doing it will be a problem. My guess is China will wait till the overall exposure touches 4 trillion dollars (1.5-1.8x current exposure). Before it comes to the global table. Actually earlier the better – so we can move on and start the recovery process.
Further – if we want to see the light of global recovery at the end of this tunnel, we will need Chinese consumer (and Indian too) to come to the party. American and European consumers cannot and should not take any more burden of consumption.
Yongding is barking up the wrong tree; forget about worring whether Asian nations will start dumping Treasuries, the inevitable chain of events leading to US default will start with a lack of buying newly issued bills (and let’s face it there is going to be a flood of these very soon).
Once yields start to tick up and it becomes obvious that appetite to hoover up new Treasuries is waning, you can bet someone will start reducing their existing exposure. Confidence is such a fragile thing…
Not only is China worried about default risk; but also, thanks to its steady revaluation of the yuan under US pressure, it has suffered moderate but steady losses on the principal value (measured in yuan) of its US debt holdings. These now accumulate to double-digit percentages since the ‘strong yuan’ campaign got underway. (Hank Paulson simultaneously swears fealty to a ‘strong dollar’ policy, but don’t let this paradox bother you.)
With debt service on USGOV obligations now running at $400 billion a year — even at a time of extraordinarily low nominal rates — the ‘interest on interest’ tapeworm has been munching away inside the federal budget for some time. But every pyramid has a tipping point.
With their ill-advised scaremongering, the Bush regime has lit the fuse on a ghastly triple play: (1) the dollar weakens sharply; (2) foreigners draw back from buying Treasurys as their principal value falls sharply in foreign currencies; (3) Treasury yields soar to attract capital, sending the fiscal deficit spiraling upward as ‘interest on interest’ climbs into the terminal, self-reinforcing exponential phase.
Once the dollar starts sliding over the cliff, it probably will need to shed half to two-thirds of its value before foreigners are willing to buy US assets as a ‘currency bottom’ play, rather than as a yield play. This has been the pattern of many devaluations, from the UK in 1992 to Argentina in 2002.
Welcome to the Third World — la la, how the life goes on!
— Juan Falcone
BEIJING, Sept 25 (Reuters) – Chinese regulators have told domestic banks to stop interbank lending to U.S. financial institutions to prevent possible losses during the financial crisis, the South China Morning Post reported on Thursday.
Apparently denied but worrying, no?
“we have the reserve currency and nukes”
Starting to see this more and more often. History is a precedent..
In 1908 Britain had the reserve currency and a navy comparable in size with the rest of the world combined.
100 years later the players have changed but physical and economic principles don’t. Can your children eat nukes?
“He who is drowned is not troubled by the rain.”
What's with the Chinese?
Are they being naive in believing that Bush & Co care about them, just plain stupid or are they thinking in a different way and simply do not realise that the first to dump gets to eat the bacon *and* crap on the competition; i.e Japan.
There is no brotherly love shared amongst Asian countries; they are a racist and nationalist bunch all of them*. So why all this apparent cooperation?
*) I.E. Totally Rational I.M.O., given their history.
Wintermute has it exactly right. The fact that the US was once rich doesn’t mean it still is. The rest of the world thought we were rich a few quarters ago, but it is quickly dawning on them that the country is just like most owners of McMansions – a big expensive house doesn’t mean you can actually afford it.
Treasuries at 10% within a year??? Things can’t happen until they do.
you need to check this out:
So Juan F., you describe concisely just the scenario I and some others here worry about most. The largest single reason why this may be the real endgame to our present crisis is the fact the public financial policy makers do not appear to be worried about it at all.
And wintermute, the cyclical comparisons between the UK in 1908 and the US in 2008 are far, far closer than you may realize. This is the kind of thing which I study, and I actually did a thumbnail comparison (well the equivalent, ’bout 100 pages) for some friends and acquaintances a few years ago. In fact, the two contexts are ‘most comparables.’ I would say that the US is in a better position in aggregate—we are richer in complex ways, better educated, and have fewer equivalent competitors per se—but our situation is less stable, in large part because we have gutted our superior structural advantage in the world-system for fast gaudy profits: As world rulers, we’re rubes on a spree. The discussion which would follow from that is far longer than I can pursue, and has speculative elements, but still.
Those concerns are misplaced. The Paulson plan will result in a $700bn capital injection into US banks (and by design, and by necessity, at the expense of US taxpayers who need to face a complete loss).
This capital will then be used by banks to create up to 14 trillion dollars credit (at a 5% capital ratio). This will be ample to buy the comparatively small quantity of extra treasuries that will hit the market.
Frankly people have been saying “she’s gonna blow” for some time, all this handwringing is but theatre (for future finger pointing) since there has been plenty of time to do something voluntarily and in one’s own and best interests.
People like to learn the hard way especially when they can pass the consequences to others, or the view is clouded by short term interest, which is why the hard way turns up….
You need to say something about the potential for conflict of interest and self-dealing by the manager of the securitization hybrid investment transaction (SHIT) bailout fund has HUGE opportunities to profit by manipulating prices and by front-running its purchases/sales, as described below.
The manager has a HUGE incentive to manipulate the market by driving up the price of assets they want to sell in their personal capacity and by driving down the price of assets they want to buy in their private capacity.
Say PIMCO manages the SHIT bailout fund, and say a PIMCO fund owns a HUGE amount of BBB subprime type assets. Using the SHIT bailout fund can drive up the price of those assets through purchases on the market. And afterward, PIMCO could unload those assets into the market place, and as long as the SHIT bailout fund could continue buying those assets to keep the price high.
On the other hand, say PIMCO wants to buy assets cheap. Using the SHIT bailout fund, Gross can drive down the price using actual sales, short sales, options, etc. And afterward, PIMCO could load up on those assets, as long as the SHIT bailout fund could continue keeping the price low.
There is also a HUGE incentive for the manager to front-run the SHIT bailout fund’s transactions, in order to profit from movements in market prices due to the SHIT bailout fund’s purchases or sales, even if the manager isn’t complicit in the front-running (say information is “leaked”). PIMCO traders would give their left nut (or ovary) to have inside information on what assets the SHIT bailout fund wants to buy, so they can buy first and then sell after the fund drives up the price. And likewise, short sell assets before the fund drives down the price.
PIMCO/Gross may be a totally honest and upright guy, but you need rules to prevent the SHIT bailout fund manager from doing things like this. And those rules need to be enforced and audited.
Thought you might find this interesting. Is China pulling a Bill Gross, going on a buyer’s strike until the US cleans up the mess in the banks? If China perceives US banks to be risky because of the toxic assets, would it plunge headlong into those same assets through any participation in the Bailout directly?
Some might say this is a sign they view the US as a whole as an increased risk. I am not sure this implies they will move away completely. I’m just not sure how they think the US consumer will be alright if they are to foot the entire bill… and the “government bubble” is predicated on exports to those same consumers.
Mainland lenders ordered to halt interbank deals with US firms
Jane Cai and Adam Chen in Beijing
25 September 2008
South China Morning Post
(c) 2008 South China Morning Post Publishers Limited, Hong Kong. All rights reserved.
Mainland regulators have told domestic banks to stop lending to United States financial institutions in the interbank market in a bid to prevent possible losses during the financial crisis, industry sources said yesterday.
The ban from the China Banking Regulatory Commission (CBRC) applied to interbank lending of all currencies to US banks but not to banks from other countries, a source said.
The CBRC was not available for comment yesterday.
The decree appears to be Beijing’s first attempt to erect defences against the deepening US financial meltdown after the mainland’s major lenders reported billions of US dollars in exposure to the credit crisis.
Lending transactions on the mainland interbank market totalled 10.65 trillion yuan (HK$12.17 trillion) last year, according to the People’s Bank of China.
In the first eight months of this year, transactions totalled 10.11 trillion yuan, up 104 per cent from a year earlier.
At the end of last year, the mainland interbank market had 717 members, including banks, securities companies and trust companies.
Another banking source said the CBRC issued the ban after obtaining data about the exposure of mainland banks to bonds issued by bankrupt Lehman Brothers Holdings.
Top officials said they were keeping a close watch on the crisis and warned mainland financial institutions to be cautious in their daily business and overseas expansion.
“The international transaction volume of Chinese banks is not big. Those concerning subprime loans are probably lower than US$10 billion,” deputy central bank governor Ma Delun wrote this week in the China Business Post, a PBOC-affiliated newspaper.
But the deteriorating situation in the US has shocked top officials.
Mr Ma said that among the unexpected developments was the effect the crisis was having on normal assets, not just problematic assets; its impact on the whole credit market, not just single products; and its effect on Europe and other nations, not only the US.
The exposure of seven listed mainland banks to bonds related to Lehman Brothers totalled US$721 million.
Mainland banks had US$9.8 billion in exposure to US subprime loans at the end of last year and US$25 billion to Fannie Mae and Freddie Mac by June 30.
‘We still have nukes and the reserve currency’…
1) Nukes are most usefull as a deterent against others using nukes.
2) Rumblings about the status quo of the US dollar are getting louder by the day.
Do not underestimate the SCO and do not believe their stated goals.
There’s a lot of handwringing going on here as someone said. We need to focus less on wringing hands and more on what the actual end game is.
How is China going to get out of its dollar reserves? When do we think they will do it? I think we all recognize China is the lynchpin. Once they go, everyone will be getting out, even the Japanese.
As I stated previously in this forum, China will begin to play hardball AFTER the Olympics ended.
They have now ended.
They will choose the timing for this financial takedown, not us.
China’s reserves are rising at the rate of 500 billion per year. They can afford to take 100 billion hits without issue, as they choose the most advantageous moment to declare unequivocally to the world the beginning of the Asian era.
The Olympics, in their view, showed their cultural triumph in a time of moral decay throughout the world.
Now the Chinese leadership are deciding the most appropriate way and the most appropriate time, to demonstrate the superiority of Confucian morality in the financial system.
(I am well aware of the ostensible contradictions between Confucianism and the Communist Party of China. How those two have been DECISIVELY reconciled in Chinese culture and academia in the last few years is the subject of another comment.)
Pehaps the Chinese are the very people who will be bailed out by the Paulson Plan; this is why they are still holding USD.
China, et. al., are not going to start dumping dollars unless Bernanke starts monetizing debt which is exactly why he is not going to do it.
You got to ask yourself, why is it that the dollar is going up vis a vis other currencies and commodities over the last few months despite the insolvency of Lehman, AIG, FNM, FRE, and now TARP?
This reality totally contradicts the hyperinflation meme or the notion that foreigners are going to start dumping Ts. The market is telling you something. You need to start paying attention.
We over paid everyone thanks to the unions and over priced everything thanks to the retailers. No one else did it to us. Right now we are worried about junk paper and banks that already have failed but still stand only because of government props. Italy is fast going out route as its famed cloth industry is moving to China. If we do not make it here then other have their hand on the light switch.
It has been conventional wisdom that China, Japan, … would never restrict the flow of credit to us because it would lower their exports …
Since when has this been “conventional wisdom”? It seems to me that the (utterly daft) “conventional wisdom” has been that they were buying our securities because America “is a great place to invest”.
I have been arguing for years that:
1. the leaders of Japan and China have been perpetrating a vendor financing fraud like that executed by the managements of Nortel and Lucent during the telecom bubble,
2. the foreign exchange losses were made when they accepted payment in dollars at manipulated exchange rates, and the only question is when they will be ofrced to recognize those losses in their accounting, and
3. since there is no higher power to force them to recognize those losses and stop the fraud, as long as those nations’ leaders and their cronies continue to benefit from the fraud, they will not stop it.
It has now been about five years since I posted a comment to this effect on Brad Setsers’s blog and opined that he was very naive in his belief that since those Asian policies were so obviously bad economics they would not long continue.
It doesn’t matter that China loses real wealth every time it pays the current pegged exchange rate for a US dollar. China’s leaders and their cronies are enriched. Think how much money the managements of the US automakers and other midwestern companies could make if they could make the midwest an independent economic zone with a “Midwest Dollar” pegged at seven to the US dollar. Would it matter to them that their workers would be severely disadvantaged in buying imports from outside the midwest, or in travel outside the midwest? No. The profits from selling midwestern workers’ labor cheap that the controlling elite would have plenty of money for imports and foreign travel, even at the rigged exchange rate. And this is the situation in Asia.
The only thing that will cause China’s leadership to halt the vendor financing fraud will be their overthrow and replacement with a new set of leaders. As the strain from the contradictions inherent to the vendor financing fraud build, China will probably come apart at the seams as the Soviet Union and its satellites did, and when that happens things may change. But until then, the current leadership is riding a tiger, and cannot dismount; any attempt to move away from the current policy will require that they start beginning to recognize the losses, and the moment they start to do that, they will end up in a vicious circle that will spin them out of power.
Above should have read, “The profits from selling midwestern workers’ labor cheap would be so huge that the controlling elite would have plenty of money …”
The fed already starting monetizing debt through POMO last week. Friday was $8B worth.
The credit crunch is causing the market to focus more on liquid assets. That is the reason why the dollar has gone up – assets are being sold off and money poured into bank accounts.
That has the effect of raising the value of the US Dollar.
The problem is that with everyone liquefying, there is little left in the US economy worth investing in. If all you’ve got is a treasury bond giving less interest than inflation, then investors start thinking they might invest in some other country.
In other words, the quick rise in the US dollar is an indication that it will drop soon.
“They will choose the timing for this financial takedown, not us.”
Don’t think China want to takedown US, at least at this juncture. As Richard Kline points out, US is still highly competitive in lots of ways, not at least on nuclear weapon stocks.
So what does China hope in return for its “cooperation”? To quote YU YongDing in his own words,
“It is not fair that we are doing this in good faith and are prepared to bear serious consequences and you are still labeling China this and that, accusing China of this and that,” he said. “China knows what to do. We don’t need your intervention.”
[quote]to move away from the current policy will require that they start beginning to recognize the losses, and the moment they start to do that, they will end up in a vicious circle that will spin them out of power.[/quote]
Since the Chinese government is in control of reality within China’s borders they could indeed make such a move while blaming the losses on the evil machinations of the American capitalists exploiting the good-natured Chinese people!
If push comes to shove the Chinese are not averse to crush any dissent under the threads of tanks.
I’m actually at a loss as to what to write my senators today.
We, as a nation, have continually underestimated foreign economies, ignoring their culture.
As I sat with the CEO of a major news broadcast network a while ago, I told him that I thought it was fascinating how we brought capitalism to China and then were suprised (and eventually blocked) when they wanted to buy one of the largest US oil companies.
Needless to say, he didn’t get it.
Now maybe he does.
ThomasJ — Certainly the markets are telling us something today. The only way to make real money is to correctly anticipate what the markets are going to be telling us tomorrow. What were US equity markets telling us in October 2007? A much different story than they are telling us today. Fear myopia above all else.
Please report on the following action as the Federal Reserve is now actively draining cash from the system intentionally!!.
Normally the Fed conducts Temporary Market Operations int he form of Repos. where it takes securities (and now Equities!!) at the Fed window and allows the primary dealers to mark the value (ridiculous!) and then gives back that amount , in cash,
Well in a reverse repo the opposite happens…they are borrowing money from the same primary dealer/brokers at a time where they supposedly need cash.
The spike in the TED spread all but confirms this.
This is a highly manipulated scheme that is being played to make this bill pass. The Fed has already done repo’s in excess of $3 trillion in the last year alone.
$700B is going to fix this??
Please report this….it is very important!!
What’s driving the dollar is massive debt destruction.
Were it not for the Fed swapping out $287 billion to allow foreign CBs to lend dollars to their respective banks who are absolutely begging for dollars, the dollar would be skyrocketing.
China and everybody else that got sucked into building factories in order to meet debt based phantom demand from the US are going to need every dollar of US reserves they can get their hands on in an attempt to stave off the massive revaluation of the dollar that is looming over the horizon.
Meanwhile the Fed did a reverse repo of $25 billion yesterday (i.e. they sold Ts) and continue to drain the liquidity from the swamp.
How anybody can possibly construe any of this as anything other than a prelude to a massive global deflationary collapse simply boggles the mind. But I guess people continue to buy into the meme that the Fed can stop the market from running its course.
Excelllent comments by JM and thomas. This is exactly whats going on. China is effectively making itself a dumping ground for bad debt
your links don’t work.
and just who should we report this to?
the cynic in me is just too tempted to answer my own question…
What does not kill the economy makes it… stranger.
Reading all of the comments it appears that nobody here has picked up the reported news that China has “bought” Taiwan from the US. So the nukes have provided some respite. Wonder what’s next to be sold down the river?
The China/Taiwan report is discussed here : http://www.moonofalabama.org/2008/09/selling-taiwan.html
‘China, et. al., are not going to start dumping dollars unless Bernanke starts monetizing debt which is exactly why he is not going to do it.’—Don’t bet on it!!! China sees value in all of the paper.
Manufacturing has changed with components that snap in. Many new factories were built with the old model in mind.
thomas, james – agreed about massive deflationary pressures. But the US can’t afford to let this process run its course. Reason is that highly valued dollars will make all surviving debt highly expensive to service. Anyone who has managed to continue paying their mortgage despite the housing market meltdown will be blown away by such debts when wages fnally collapse. By then the US govt will long have found it painful to service the $400bn interest due on Treasuries each year (due to tax receipts shrinkage).
excellent informed comments here – so, the consensus appears to be that at some point we are going to see that dollar revalued (a view to which I subscribe) however anyone caring to hazard a guess as to when – do we think that the japanese and chinese will fight this all the way or admit defeat at some point? tough one to call
vis a vis China…we still make something that China needs: food. Think the recurring problems in their food supply chain are just an accident? Why we keep giving them leverage to tip us into a food shortage here in the US is beyond me. I would have thought securing our food supply would be national security 101. But apparently it isn’t.
I’ve said it before – the Asians will never dump their USD holdings. First, it’s too late in the game, second, they have nowhere to run.
More so, they will increase the USD debt purchases – wherever this crisis will take us the Asians will follow us there to the end. The export-oriented economy of China simply does not have other avenues for growth besides selling everything to the US on borrowed money.
maybe it IS about saving foreign investors…it certainly isnt about subprime…that was the match but isnt the issue any more
how do i knwo?
the 700 billion bailout is enough money
TO PAY THE ENTIRE MORTGAGE OF EVERY SUBPRIME HOME OWNER WHO IS IN TROUBLE OF DEFAULT
we are being robbed by wall street and bush pure and simple
Herb Stein’s law, “If something cannot go on forever, it will stop”, pronounced in the 1980s. See http://www.slate.com/id/2561/
The bailout money is a drop in the bucket.
Try this link
If asia starts selling treasuries/the USD they will obviously hurt the US, but more importantly, they will shoot themselves in the foot (by the time they have sold 10% the prices will be ridiculously low, and they will still have 90% to sell). The risk is probably slower buying, which is happening already as reserve growth slows due to slower exports and higher oil imports.
I share the view that the US is like an EM country in crises, but as you’ve rightly pointed out, with one difference: the USD is still a reserve currency – that was not the case of the BRL, ARS or THB.
The only alternative for Asia/China to continuing to buy treasuries would be free-floating/appreciating their currencies, but as we know, they refuse to do that.
Since Stein’s law that, “If something cannot go on forever, it will stop”, is undoubtedly true, but it’s also true that the current Chinese leadership is riding the tiger and, as “fr” says, if they were to sell even 10% of their holdings the prices of the remaining 90% would collapse.
I deduce from this that at some point the current Chinese leadership is going to become the former Chinese leadership, and it’s all going to come unwound in a very, very rapid and nasty way.
But when that will happen is impossible to predict.
The reserves held are gigantic. There are no other buyers on the planet left to go to.
So, as others have said, some of the things the Asians can do are
1) Use reserves as political bargaining chip. Gives them tremendous leverage on global issues.
2) Punitive terms for future trade (higher rates, weaker dollar, etc)
3) Demand for assets China lacks, ie. intellectual property, trade secrets, advanced skills and expertise, etc.
The issue that the Chinese ruling body doesn’t care about (and can ignore)trade imbalance is a good point. Anyway to know for sure if this situation is sustainable?
jm you are a funny man. US is a dying empire on its last breath. Soon the dollar will not longer be convertible to oil, gold, nor any other commodity. Americans will be forced to flee from Iraq and Afghanistan. A new multi-polar order will emerge with US playing a much smaller part. It is funny you are predicting China’s impending doom while American is going to dust.
I would like to add:
AMNAE, it is unrealistic to think that the US will try to use the military bargaining chip against Asia. By all accounts, the military is strained thin from all the time in Iraq. But more importantly, what possible *effective* actions can be taken in this case. Actions that would have a favourable outcome for the US. And the political will to try any military actions – can’t see it.
I agree with you, but we are still at least five years away from that. The US economy will have to look like the USSR in 1988 before we get to that point. Could happen.
JM- agree totally with you about the Chinese. At some point the leadership will get strung up.
I guess Im the only person who still thinks the US has a lot of power and isnt as weak as most people think. i dont get the whole dying empire thing. the US cant die unless its creditors pull the plug which would probably hurt them even more.
China might as well be spain way back when. A lot of gold that has no real value and cant ever redeem for anything else
Re: “the 700 billion bailout is enough money TO PAY THE ENTIRE MORTGAGE OF EVERY SUBPRIME HOME OWNER WHO IS IN TROUBLE OF DEFAULT
we are being robbed by wall street and bush pure and simple”
Great comment. I did a quick thumbnail calculation. about 400,000 foreclosures last year, and assuming (on the wild side), 800,000 this year. If every single house were written off at 1/3 its value (an absurd case, since many are selling at %50 to %80), the total amount is only 150 billion. So, the government, with our tax dollars could purchase every single home foreclosed on during 2007 and 2008 for 150 billion dollars at 0.33 on the dollar. So why are we allowing congress to hand over a trillion to wall street for their mismanagement? So that they can provide “liquidity”? I think we can come up with a much cheaper way to provide “liquidity” to the markets than going the current route.
Marc Faber was talking about buying forclosed houses this morning.
Congress is just making the problem worse and letting the same people have a pass. it wont be long until soemthing terrible happens again.
In defending the bailout proposal one commentor wrote this:
“”This capital will then be used by banks to create up to 14 trillion dollars credit (at a 5% capital ratio). This will be ample to buy the comparatively small quantity of extra treasuries that will hit the market.””
Maybe I have a bias in this chat, but the issuance of $700 BILLION in new DEBT that capitalizes bank deposit levels will be used to leverage $14 TRILLION in additional DEBT, not credits.
And, THAT is the problem.
We cannot out-debt our way out of a crisis caused by too much DEBT.
At some point, this entire debate WILL refocus to the nature of the FED’s DEBT-MONEY creation powers, the exact actual cause of the entire debacle.