I had warned readers against assuming that because we had a bounce in the equity markets, that life would soon return to normalcy (“It Isn’t Over Until the Fat Lady Sings“). But I didn’t expect a rout like this, particularly with no looming news trigger.

The yen has gone to 91. The Nikkei was down over 9%, most other Asian markets down 7%, Continental markets down over 10%, but have reverted to down a mere 7% plus. A more aggressive than expected production cut by OPEC has done nothing to stem the fall of oil, down 5%. Gold has fallen below (and a reader who sometimes laments the fact that he runs a gold fund noted that he had been watching trading this week hawkishly, and it had withstood attempts to drive it below that level). US stock futures trading has been restricted because it has fallen below 6%, its daily limit.

From the Wall Street Journal:

European shares tumbled Friday as fears of a long and deep recession grew, with the auto sector slumping after profit warnings from Renault and Peugeot-Citroen as well as weak results from Swedish truck maker Volvo.

The pan-European Dow Jones Stoxx 600 index dropped below 200 for the first time since mid 2003, falling 9.0% to 189.87. Among regional markets, the U.K. FTSE 100 Index dove 8.73% to 3730.78 and the German DAX 30 Index dropped 10% to 4068.43. The French CAC 40 index was down 10.2% at 2974.95, with Peugeot-Citroen among the biggest decliners, falling 14.1%.

And the credit market news is taking a gloomy turn again. From Bloomberg:

The cost of borrowing in dollars may rise as increasing prospects of a global recession prompts banks to hoard cash even after policy makers injected record amounts of the U.S. currency into financial markets.

The London interbank offered rate, or Libor, that banks charge for overnight loans in dollars may climb 4 basis points to 1.25 percent today, according to Jan Misch, a money-market trader at Landesbank Baden-Wuerttemberg, Germany’s biggest state-owned bank. It increased for the first time in 10 days yesterday. The three-month lending rate for Hong Kong dollars, known as Hibor, rose for the second day, gaining 5 basis points to 3.29 percent.

“The level of activity in the money markets remains significantly below standard norms and subject to sporadic abnormalities that can only be a function of illiquidity,” said Charles Diebel, head of European rates strategy at Nomura International Plc in London.

Now I want to know how Nouriel Roubini saw this coming. He went into what reader Dwight called Defcon One yesterday.

Marshall Auerbach e-mailed, saying (as we have) that the Fed is making matters worse:

All that’s left is the Fed buying longer-term Treasury securities to attempt to flatten the curve, get mortgage rates down, and add reserves. This will flood the market with reserves that now pay interest. so they can do this without a zero interest rate policy.

Their theory is that with more reserves bank will lend more, which is not the case, both in theory and in practice, as Japan proved not long ago.

Instead of the Fed buying longer term securities, the Treasury should simply stop issuing them and issue more bills. The Treasury not issuing longer term securities is functionally the same as the Treasury issuing them and then the Fed buying them, but with a lot fewer transactional costs.

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  1. Anonymous

    good start of the day. I am starting to feel sorry for the next Pres. He will be remembered for Hoover towns. What are they going to call our favelas? Obama shacks?

  2. Stevie b.

    “Instead of the Fed buying longer term securities, the Treasury should simply stop issuing them and issue more bills.”

    How many and for what length of time?

    You can fool a lot of people for an unknown amount of time – until the time when a lttle bit more is too much. Just look at the stock market for the last 10 years. Then for stocks substitute bonds and the dollar to see where we’re going sooner or maybe just a little later (if we’re lucky)

  3. bena gyerek

    there was very bad news from the uk. 3q growth came in at -0.5%, vs expectations of -0.2%. and don’t forget, this is the quarter BEFORE the crisis really got going.

    i think there is also a dawning realisation in markets that asia (specifically china) is not going to ride to the rescue of the global economy as the new consumer of last resort. indeed, china has its own homegrown credit crisis brewing, as has been noted previously on this blog.

    i am also surprised that the us govt et al have been so sanguine about dollar strength thus far. how long before we see attempts to talk the dollar down (and blame asian central banks for the problem)? remember, the 30s depression was compounded by a tariff war. could we now see something similar between the west and east asia..?

  4. Richard Kline

    The Heavy Mommy Tsunami is rolling round the globe in the equity markets today, mmm-hmm.

    The trigger concept is never one to which I’ve subscribed. At most, the designation of such foci describe proximal causes, but they are only contributory; if they are indeed a trigger, it is because the gun is made and loaded. More typically, to me, what you have are threshold conditions in the background, where small shifts, even peripheral ones, pass threshold criticality, after which the context shifts as a whole. Precipitation events from dissolved solutions are like that, and a reasonable metaphor, to me. ‘Triggering’ events or acts may shape the slope of a precipitated change, but they do not deflect the slope initially or typically ‘drive change.’

    I suspect that the level of the yen is a big part of this; it rose past a critical level, not necessarily anyone’s specific number but perhaps more level to volume of exposure. Won’t really matter in the near term, though understanding the process will matter down the road for managing similar instability scenarios.

  5. Richard Kline

    Obama lanais. But he can’t be blamed for what happens before he takes the oath, so they’ll be called Dub[ya] hovels.

  6. ruetheday

    IMO, the Fed buying longer term Treasuries to flatten the yield curve and get mortgage rates down further would be a mistake. You want some steepness to the curve now to get the banks healthier and in a better position to lend.

    It may be a moot point though. Bernanke has hopped on the fiscal stimulus bandwagon. It’s a tacit admission that monetary policy is tapped out, save for a couple more smallish rate cuts on their way, and he sees fiscal policy as the only solution now. Yet budget deficits are already high, and likely to set new records next year even without any conscious fiscal stimulus.

    Deflation is coming, and coming fast.

  7. Anonymous

    Sooner or later, they will cut the work week to 20 hours or less, and suspend collection of income taxes.

    Until then, I will make money as I have for the past year: betting they will be forced to reduce the work week to 20 hours, and suspend collection of income taxes to slow the collapse.

  8. Richard Kline

    First they came for the Russians; I crunched the numbers, and did nothing.

    Then they came for the Brazilians; I crunched the numbers, and did nothing.

    Then they came for the Koreans; I crunched the numbers, and did nothing.

    Then they came for the Germans; I crunched the numbers, snickered, and did nothing.

    Then they crunched my numbers, and I did something: I took out my big fat wallet and said, “I’ll charge that to American Express.”

  9. Yves Smith


    I should have given a little more context.

    In an oft-recounted 2002 speech before the Economic Club of Washington DC (the famous helicopter speech) Bernanke talked about the measures that a determined central bank could use to force the long end of the yield curve down. One was along the lines Marshall described.

    They desperately want to do so (even though I agree with you 100%, Greenspan’s best move as a Fed chair was in the early 1990s, when he dropped short rates a ton to create a very steep yield curve so banks could rebuild their equity. The problem is he then became overly fond of his best trick). They want mortgage rates lower to save housing. Even 50 BP lower on mortgage rated makes a big difference in buying power.

  10. a

    “to talk the dollar down (and blame asian central banks for the problem)?”

    Well the dollar is down big-time against the yen, so I don’t think the blame game is going to work against one of the most important Asian central banks. Mind you, JPY/USD should be about 60 or so…

  11. bena gyerek

    a said

    that’s because jpy was on the short end of most carry trades now being unwound, plus japanese banks are seen as super-safe these days.

    i think most of the dollar strength is due to (i) extreme technical factors, (ii) general flight to quality. i don’t think east asian central banks are contributing much (maybe they are even taking the opportunity to reduce exposure).

    but blaming them for the overvalued dollar would be a useful populist tactic for certain american politicians right now..

  12. Anonymous

    >>>good start of the day. I am starting to feel sorry for the next Pres. He will be remembered for Hoover towns. What are they going to call our favelas? Obama shacks?<<<

    McCain must be thanking his stars for being behind in the pols. Given the situation, I would.

  13. Bendal

    Coming from a layman’s view of all this mess taking place, but isn’t the government’s efforts to deal with this crisis akin to a doctor treating the symptoms of a deadly disease and leaving the root causes untreated?

    Banks refusing to lend money is a symptom; the stock market plunging is a symptom. Isn’t the cause of all this the bad decisions that banks and financial institutions made in an effort to maximize their shareholder’s profits, and so far as I’ve seen, there’s been nothing done to rein or control this behavior?

    Now the Washington Post is reporting that transit authorities nationwide are having to pay out millions of dollars they don’t have to banks as a result of their own bad lending and borrowing practices:

    More of these “hey, we didn’t know THAT was going to happen” events are going to take place, I fear…

  14. DownSouth

    Bendal said…
    “Isn’t the cause of all this the bad decisions that banks and financial institutions made in an effort to maximize their shareholder’s profits…?”


    The cause was not that bad decisions were made to maximize shareholder profit. If that were the case, the banks would be sound. The cause was that bad decisions were made in order to maximize executive pay and bonuses, and shareholders, integrity, honesty, the nation, indeed all of humanity be damned.

    But you are right, absolutely nothing is being done to rein in the real problem, as this CNN video points out:

    Wall Street’s bonus binge
    CNN’s Brian Todd reports on Wall Street’s top banks paying $70-billion in bonuses despite getting a government bailout.

    These bankers live in kind of a parralles universe, completely divorced from this world. It’s all part of their training in neo-classical economics.

  15. Anonymous

    I’ve been expecting more drops in the market, but only after some kind of bounce. These bounces haven’t been bounces they’ve barely been pauses in the cliff diving


    Matt Dubuque

    For me there clearly was a “looming” news trigger. An extremely grave one.

    I’ve mentioned it here before.

    The catastrophe in sovereigns, which is just beginning.

    Additionally, as I have mentioned before, although credit default swaps have gotten all the attention from the ever-myopic blogosphere and NY Times, the interest rate swap market is much bigger and the currency swap market is huge.

    The crisis there is just beginning.

    Matt Dubuque

  17. Anonymous

    Why is the US market not selling off more this morning? Anyone care to speculate on PPT manipulation?

  18. Matt Dubuque

    Matt Dubuque

    In my view, the reason the market is not “selling off more” is that, as I have stated for months in this forum, what we are seeing is CONSISTENT WITH the complete, absolute and total liquidation of the financial system of the world.

    From my vantage point (where, thankfully, I don’t have a television) what we are seeing is progressing precisely as expected in demonstrably predictable ways.

    It takes time to adjust your positions. Shall you sell your HIGHEST valued assets (such as GE) to meet margin calls or should you sell your trash?

    The correlation models used by the hedge funds, ALL of them Gaussian, are out the window.

    I’m NOT saying that what we are seeing is the complete and total and absolute liquidation of the entire financial system of the world.

    I’m not saying that and never have.

    What I AM saying is that EVERYTHING we have seen this year is CONSISTENT with that.

    I know of ZERO evidence that clearly proves that working hypothesis to be demonstrably false.

    And remember, in January when the AUDITED corporate earnings reports come out there will be all sorts of nasty “surprises” that the New York Times, whose debt was declared “junk” yesterday, never anticipated.

    But there is a very strong possibility it will be extraordinarily nasty BEFORE then.

    Matt Dubuque

  19. FairEconomist

    Instead of the Fed buying longer term securities, the Treasury should simply stop issuing them and issue more bills. The Treasury not issuing longer term securities is functionally the same as the Treasury issuing them and then the Fed buying them, but with a lot fewer transactional costs.

    Um, no: the Fed buying new Treasuries off the market increases the money supply and is very different from just doing nothing.

    The catastrophe underway in Japan is moving me very much against amelioration of depressions (other than short-term measures to keep markets efficient during the fall, keep bankruptcies slow enough that the courts can handle them, etc.) The Japanese spent 15 years trying to prevent/ameliorate their depression and got 15 years of no growth for their trouble. Now it looks like they’ll get a full-blown depression anyway. Interventional efforts should be directed at a healthy long-term recovery, not at preventing inevitable losses.

    I also disagree with selling short-term and buying long-term. Short-term issues will crowd out short-term commercial lending. Long-term issues will drive up long-term rates; but that’s just reality. A lot of capital has been wasted over the past 15 years, especially the past five, and it now needs to be replaced. That requires high real interest rates.

  20. ruetheday

    faireconomist: “The Japanese spent 15 years trying to prevent/ameliorate their depression and got 15 years of no growth for their trouble.”

    Would 10 years of negative growth, including some years with double digit negative growth and 25% unemployment rates have been preferable?

    The reality is that there is NO easy solution for dealing with the bursting of an asset price bubble in an environment with high levels of debt, as Irving Fisher demonstrated with his Debt Deflation Theory paper 70 years ago. Greenspans comment years back that the Fed should just ignore bubbles and deal with their aftermath later is 100% dead wrong.

  21. FairEconomist

    ruetheday, if you’re referring the the Great Depression, it wasn’t 10 years of negative growth, it was up and down wildly for 11 years. At the end it was about where it was at the start, but things were clearly improving. Also, it probably shouldn’t have been 25% unemployment; they put off cleaning up the banks too long and IMO that made the crash much worse than it had to be.

    But in any case, my point is that after the 15 years of no growth, it looks like the Japanese are going to get a whopper of a depression anyway, along with the rest of us. The 15 lost years wasn’t instead of a depression, it was in addition to it.

    Plus a lot of the depression we’re all going to get now is because Japan expanded its money supply but held interest rates low for those 15 years in a attempt to duck recession. With low domestic rates, there was no place for the money domestically so it went abroad via the carry trade and blew bubbles all over the planet. They were hardly the only bubble-blower but, still, we’ll all pay for what they did.

  22. Mara

    My two cents is that this isn’t the last of the drops. The PPT will charge in from time to time in a price keeping operation, but the slide will continue.
    If I were president (and this would only happen if it were “jury duty” style to pick em) I’d first get Nouriel Roubini to take the Treas Sec post (I’d probably have to bribe him to take such an odious task) and give him carte blanche to do whatever he needed. Then I’d get Yves to be Sec of State. The confidence would go thru the roof then. Oh, I’d also stop spending nearly $1 trillion a year on the stinking Pentagon. That might help. Jokingly I had floated the idea of selling Alaska to our creditors–now it seems like a great idea. Maybe chuck in Hawaii if it’s not enough. Heck, the French sold us half the US at one point.

  23. Robertm73

    Funny thing about selling and buying, Why not offer to buy iceland, hell we can charge it like everything else. the sad things is we are one of the best economies still running. So everyone is taking cover here. What happens when the cover blows up

  24. David Pearson

    The Fed’s problem is not juicing the money supply. Unlike in the early 30’s, the monetary base and M1 are growing at healthy clips.

    The problem is velocity. Since M and V are a product, any increase in M can be swamped by a plunge in V.

    Paying interest on reserves was a big mistake. Banks are parking all their liquidity at the Fed, which virtually guarantees no new lending. The Fed can help cushion de-levering, but it has no loan officers, no ability to get funds out to places where they might be spent on real goods and services.

    So the Fed needs to focus on moving the “V” rather than the “M”. There’s two (comlementary) ways to do that: 1) a massive stimulus; 2) financed by quantitative easing sufficient to penalize cash hoarders.

    The second point is the most important. The Fed has to print enough dollars to create inflation. It must actually target inflation on the upside. That is the only way cash hoarding will stop; the only way to change deflationary expectations. Of course Bernanke knows this.

    Mind you, I’m not saying this is a good outcome by any stretch. I wouldn’t have put ourselves in this situation. But caught between the liquidationist and inflationist alternatives, which do you choose? I guess I’m saying, if you’re going to try to use monetary policy, at least use it in a way that has an impact — by targeting velocity instead of the money supply.

  25. fresno dan

    I am certainly not the most sophisticated here, but I can’t help but think that all this financial legerdemain is making things worse. A shadow financial system flooded the world with “money” that was backed by “nothing.” Until those losses are realized, I think we are just treading water. I think real investment, producing real things, is what we will have to do.

  26. Anonymous

    Fresno Dan,

    I am certainly not the most sophisticated here

    You’re way ahead of the game then. The sophisticates of NYC/Washington and the handful of other globalist watering holes have out-smarted themselves. As a group they remind me of nothing so much as Wile E. Coyote, Souper Genius. Or Orwell’s pigs in Animal Farm.

    A shadow financial system flooded the world with “money” that was backed by “nothing.”

    Future historians will marvel that it actually happened that a bunch of mediocre liberal arts majors sporting Ivy League degrees once came to direct entire “economies” while imagining that paper and phosphor dots constituted “capital”.

    I think real investment, producing real things, is what we will have to do.

    If this is true, and I think it is, then look not to “Wall Street”, the “City of London”, the Fed or the ECB. These people really think that churning paper and phospor dots between entities like Starbucks and Mrs Field’s Cookies constitutes economic investment.

    These people are quickly going away in any case. I saw an AP article calling for 250,000 layoffs in the “financial services industry” in the next year. This is their rotten infrastructure. It’s going and it won’t be coming back. Good riddance.

  27. aw70

    @fresno dan

    Your comment about the shadow financial system, and the flooding of the system with excess money that somehow has to be “burnt off” before things can get back to normal has something going for it (unfortunately).

    The treading water bit, hopefully not so much. There is one goal we can aim for: that the burning only affects book money in certain specific areas of the financial system.

    If *all* money were to lose value in the same way, well, that would be a catastrophe, since we do have to shed quite a lot of it before we’re done. If we can get by by just destroying some of the more outlandish financial constructs (and leaving things like ordinary savings accounts alone), things look much better. Not good in any sense of the word, but still manageable to some degree.

    The excrement has hit the fan, and now the only realistic goal can be to have those who started it all stand next to the ventilator. Everyone will be hit, but these guys should take the maximum damage.


  28. Anonymous

    @david pearson,

    Agreed, but getting consumers to borrow & spend may turn out to be even harder than getting banks to lend.

    They drank the Koolaid the first time, and the result was the sheriff is now putting their kids and their bigscreen out on the curb.

    Its going to take a slightly more explicit guarantee to induce them this time.

    Something like a federal wage insurance program, perhaps.

  29. wintermute

    Unfortunately – a depression is just what is needed to instill financial values into most citizens of Western, consumer countries.

    Through the 80s, 90s and 00s we have had relentless “buy-now, pay-later” “instant gratification”, “bling bling” media-fed/led consumer culture which has simply got out of control. Why save when it is more fun to spend? Who cares about retirement when social security comes to the rescue? Governments set a bad example with relentless borrowing from future revenues.

    They don’t teach personal finance in schools, thrift, spending discipline. They don’t explain that only products can buy products and that debt is a claim on future products and inherently unsustainable.

    Our civilization needs a depression to teach the public and our governments a lesson in economic fundamentals.

  30. Anonymous

    fresno dan,

    Something like a federal wage insurance program, perhaps.

    See? Believers in fiat money actually come to believe that arbitrary fiat values can subsequently be assigned to Starbuck’s coffee cup servers and Mrs Field’s cookie bakers.

    Talleyrand’s quip about the Bourbons certainly applies to the aggregate financial and economics blogosphere: “learned nothing and forgotten nothing.”

  31. doc holiday

    One problem in this financial chaos, is the fact that 100% of people that are involved in explaining this chaos, do not understand what they are talking about.

    This crisis event is a stream of magic dust-like vapor being released from the wallstreet genie bottle. Thus, all the financial transactions related to aggregate global investing are simply too complex for any man, women, machine or politician to even begin to attempt to comprehend — so in the meantime, people bullshit each other as to why things are, the way they may be. This communication process to explain chaotic sequences is like explaining how the end result of a lotto drawing can be re-traced and mapped to compute the steps of the winners and losers in hopes of replicating a repeating pattern, so that others may follow that same path and then go backwards in time and place themselves upon new courses. This entire mess is all about entropy and fragmentation and the fact that information about this mess is the source of the chaos, and thus as we all add to it, we simply fragment and compound the chaos to a point where nothing does make sense.

    As an example of stupidity, here is an expert that seemingly understands more than anyone else:

    "This brings me to a pet peeve that has been increasingly irritating me as the crisis wears on: people with little or no understanding of markets confidently opining on the causes of the crisis. Funnily enough, the cause of the crisis is always exactly what they happened to be against before the crisis happened, and the solution is for the people they disagree with to be banned from polite society and exiled from the political process.
    What is most infuriating is that the people who know the least are the most confident about their appraisals. Anyone with any sort of expertise in the field knows that no one understands this crisis very well. Economists all over the ideological spectrum are rethinking the lessons we thought we had learned from the Great Depression and the Japanese experience. As it unfolds, we will no doubt be seriously rethinking our model of the relationship between the financial markets and the real economy.
    The problem is, ignorant people who have somehow gotten hold of one or two precious facts, and brandish those facts like a mighty Sword of Truth, are superficially convincing. They are convincing because they misunderstand the situation in, well, the way that ignorant people misunderstand it. The stories they concoct are therefore very convincing to the ignorant, except those who have an ideological predisposition to doubt their story. Those ignorant people are busy listening to some other huckster peddling financial snake oil."

    >> I think that's a case of the kettle calling the pot The Large Hadron Collider! For some reason, this person has it right, and the bums that are behind the curve just don't see the light or feel the magnetic waves in the way which they should. Thank God for smart people!

    I guess this is also related to the latest political spin that blames this current systemic global crisis (related to %65 Trillion in derivative chaos) on Obama, because apparently, McCain didn't cause this crisis (of $65 Trillion in derivative bullshit) ….. so, …

    Oh please, God, please help people in this Large Hadron Collider episode! I know that stupidity and sloth will be more and more common place, so please grant me the ability to find a place where I can hide from these people! I feel like George Bailey on the bridge to nowhere … Clarence, where are you now???

  32. Anonymous

    I know that stupidity and sloth will be more and more common place, so please grant me the ability to find a place where I can hide from these people!

    Try a local machine shop or small farm. Anyplace will do where intelligence has to be combined with learned skills and physical effort to produce goods of genuine value.

    The rapidly deflating modern paper flipping “financiers” avoid such spots like Dracula fleeing from rooms festooned with garlands of garlic.

  33. Anonymous

    Doc, I had to scroll down the whole list to get to your post. I come to enjoy your comments, unfortunately, my eyes were burning before I got there and so now must take a break, go stare at some trees outside the window…or buildings (whichever comes first).

    Trying to plan for 2009 with a small company is pretty rough, as is reading the words BLOODBATH…

    At least I provide a service. Back later…

  34. Anonymous

    Booms and panics are the history of economics. Why should today be any different? The folly of the wise folks pontificating on the current situation is that they are extolling their intelligence by reference to the rear view mirror.
    Did not almost everyone expect the dollar to devalue because of the huge systemic current account deficits which should have made debt service ever easier as time ground forward?
    Did not almost everyone think incomes/wages and real estate prices which have nominal incomes as a component of the price to be sticky on the downside? Did anyone really reasonably forsee a worldwide real-asset value collapse? If so, they are either sitting on great fortunes, or have been invested in low beta stocks and this recent fun missed ye olde dot. com crash but they also missed the fun in Microsoft and other tech successes of the last 1/2 century.

  35. Anonymous

    “Talleyrand’s quip about the Bourbons…”

    I guess you’re going to need to have a billion starving, unemployed people at your door before your imagination moves beyond 1850.

  36. doc holiday

    FYI: Bloodbath is a Swedish death metal supergroup from Stockholm formed in 1999.

    In August 2006, the band announced the departure of Dan Swanö from their ranks due to musical differences and Swanö's restrictions to devote more time and effort to the project in the future. They simultaneously closed the vocal auditions, announcing that no suitable singer had been found.

    >> Wow, a death metal supergroup — from The land of The Large Hadron Collider — Wow! No shock on my part, but I had originally hoped to find some interesting stuff related to the etymology of Blutbad, but nothing…, thus ends another futile day at Nakedcapilism.

  37. cent21

    If everything is falling, including commodities, port entry rates to LA, relative value isn’t so bad unless you’re leveraged. The leveraged, tough luck for them, but I’ve been envious of their success for the past decade or so while I sat with no debt.

    I’m fairly amazed that there is a flight, technical as it may be, to the US dollar. I would have thought gold up and dollar down in this condition, but I guess this is deflation. Might continue as long as there is leverage to unwind, I suppose, and shock waves from defaults on leverage. Just hope the guys running the dollar printing presses know how much they are printing and what is likely to happen if they over-shoot. It does seem to be a necessary tonic.

  38. wintermute

    anon 3:35 – the Ben Tre reference was a brilliant rejoinder.
    But the irony is that the destruction was caused by our financial and political leaders – top down – we all got carried away with the excess to some degree.
    Fortunately a depression is nowhere like the destruction of war.

  39. luther

    agreed winter,

    however, what is argued over in today’s other thread is that depressions lead to wars.

    given the global nature of this possible one, the suffering could unearth multiple deep-rooted resentments across the globe that have been politely unexpressed when capital was flowing freely.

    plus, we all know our 20th century history well enough to know how the business of destruction can stimulate economic ‘growth’.

    a question that i have is when are we all going to say ‘enough is enough’ and completely disengage from the vicious cycle.

  40. Richard Kline

    So FairEconomist, I strongly agree with your last paragraph at 11:11. The Fed has absolutely deluged the credit market with short-term paper, and there is strong circumstantial evidence that this action is implicated in the collapse of velocity in the commercial paper market as all participants get locked up playing kissy-face at the repo window. The volume of short liquidity is so high it’s even sucking longer term liquidity out of the credit market. This isn’t ‘proven,’ but when we do the analysis on this period post facto I have no doubt that the short bloat will be directly implicated as _the_ major misjudgment of the public authorities. And there is no way out of an _initially_ deflationary scenario to stability that doesn’t have long term rates rising. Bernanke’s efforts to engineer a steep[er] yield curve aren’t completely wrong, but there has to be a focus on the high end where public tools are thin. The attempt to steepen the curve by collapsing the short end has been near disastrous.

    And as you say, Japan’s experience pointed the way here. I never saw their zero policy as anything but a long-term disaster; one can’t get any kind of velocity or domestic economy at long term zero or neg rates, it’s madness. The destabilizing impact of dollar debt expansion has mattered far more in this global bubble than the cheap yen, but the irrationality of the Japanese yen bloat backstoped their standard of living for fifteen years at the coast of their _next_ fifteen years, yes, and they have their share of irresponsibility in the global bust. Why didn’t Japan, really, take a knock and move on? Hard times would have socially knocked their crony capitalist one-party regime out of authority for something rather more leftish. This wasn’t so much about saving the banks but about saving the ‘Power System.’ Which is why US public authorities are trying the same bad approach: it’s all about saving the One Party Capitalist system, since is socialism is a threat at all it is a threat to _them_. This is what we don’t hear about ‘the Japanese Method,’ that the real goal was political, not economic. No surprise, then, that economically it’s come a cropper.

    So Dave Pearson, I certainly agree with you that velocity is _the_ problem, not liquidity. But your two solution matrix is too narrow because it’s built inside our present box. The Fed-Tres Gang don’t have loan officers, no—but the banks they should be nationalizing DO. The way to get lending going is to nationalize key outfits, and direct them to loan at fair rates for normal business and where they can get reasonably good collateral. And when the 111th Congress gets sworn in they can charter further public lending firms to loan into the bottom of the economy to the same end.

    That’s called ‘socialism,’ yes. Which is what saved Europe c. 1948, when all the banks there were flat, and most countries had more craters than credit. No one, NO ONE uses this example in talking about how to make it back from Depression; even the Europeans don’t talk about their own success because politically it has been out of fashion to praise the small r reds who put industry back onits feet time was. We hear how much ‘the US _saved_ Europe_ by [fill in the blank].’ And certainly, by giving generous terms in Bretton Woods I the US helped shape a favorable space, for their friends. Their un-friends had to print money. I’m not saying that Europe 1948 is an optimal templet for our present problems. The point is that another way to stimulate is for the government to operate enough of the economy to directly stimulate _without having to pay off the capitalists sitting in the way on their padded duffs_. It is much cheaper to save the banking system if you don’t have to give over fees to GS and JPM in the process. Government in the US has its financial arms pinioned behind its back by political choice, not material necessity. We now see Ben and Hank on their knees kissing the shoe of the plutocracy and begging them to lend, lend for the good of the country. Instead of heaving them out of the way and lending on the country’s account sans fees. Private capital is, of course, much bigger in aggregate than the public vault; we have to get private capital going again, and their fears are not wholly irrational; surely not. It is THE SELF-INTEREST of private capital which is dysfunctional in the present crisis, though, so solutions will have to move around them rather than through them. Lead, follow, or get out of the way—or we lighten the life boat less your body weight and pull on the oars for the further shore, without you but with your lunch.

  41. Anonymous

    Sometimes, it is good to reminesce, even if just for a moment.

    Imagine a world without blogs. Imagine if the MSM was our only source of infotainment, like in the 1970’s. What would people be thinking right now? How would the nation’s reaction to the financial crisis be different?

  42. Anonymous

    Actually, the net and electronic money are very much part of the problem here, without them we wouldn’t be in this mess, might be a different one, but not THIS one.

    Interesting how it took decades and plenty of turmoil to institute paper money, but electronic money just came in unchallenged literally over night, as far the turmoil, well welcome to it.

  43. Anonymous

    IMO, engineering a steep yield curve to enable the banks’ bottom lines is just another way of sucking money from the overall economy to feed to the banks. If high short rates are so bad (as every sell side analyst/economist would have us believe), why are steep yield curves preferable? Most real borrowing is on the long/medium rate anyway. What about the debilitating effects on economic activity?
    To me, an outright recapitalization is far more preferable, at the cost of existing shareholders. In any case, the Central Bank should not be in the business of ensuring bank solvency, but should rather focus on maintaining the value of their currency.

    I think there is a huge refinancing risk associated with issuing T-bills as opposed to bonds. Investors cant get enough of treasury debt right now, and so this risk looks distant. But as we have seen in the last few months, the landscape can change pretty quickly. Good or bad, we have to live with steep yield curves.

  44. Anonymous

    Re: "Roubini is all-knowing and all-seeing"

    > That's why I keep my precious in my pocket and not on me finger

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