Wall Street, where Chicken Little resides, cries that the sky is falling, or words to that effect, because financial institutions are so suspicious of each other nowadays they will not lend money to each other, much less to anyone else. The vast right-wing financial conspiracy, I mean system, is frozen, their banks are stuffed full of mortgage-backed securities with pretend credit ratings of Triple A, but which scarcely anyone believes are truly AAA, and, though they have confessed to about $190 billion in losses, this is just the tip of that well-known iceberg. The question is, who will be the next to admit to more wide-spread disaster: three additional abashed hedge funds just did so, and the highly respected Carlysle Group (Papa George Bush's private equity fund) allowed as how one of its hedge funds is in default and cannot meet margin calls... who is next?
But wait, the Federal Reserve is coming over the horizon on a white horse! Just in time to help the financial sector dress up their quarterly reports for the auditors,
the Feds created the "Term Securities Lending Facility (TSLF) which will offer up to $200,000,000,000 ($200 billion) in US Treasury Securities in exchange for those AAA-rated mortgages, a type of collateral the Fed has never before accepted. True, since 1980 the Federal Reserve has been allowed to accept mortgage-backed securities as collateral, but has previously never actually bought them (doing so puts the American taxpayer on the hook for these risky securities, by the way). This time the Feds are "lending" the $200 billion for 28 days, which gets the banks and hedge funds, etc., past the dreaded auditors on 31 March, who might otherwise require them to write-down the questionable AAA securities, leaving them with inadequate reserves to cover their highly leveraged loan portfolios, which would mean a lot of very bad things for the entire financial system, and would possibly create a massive world-wide financial mess... a bigger mess, that is.
Obviously, a 28-day swap (risky mortgage securities for US Treasuries) only postpones the problem, and does not solve it. We are entitled to ask: just how bad were the 2008 first quarter reports going to be, before Feds on the white horse showed up? What happens when the final day of reckoning can be postponed no longer?
Pumping all this manufactured-out-of-thin-air liquidity into an already pumped up market can only fuel inflation, or something worse. Some financial experts are already calling our situation Stagflation (http://www.thestockadvisors.com/content/view/1962/9/), which means high unemployment combined with rising prices. Beginning last year, the anti-inflation benefits of globalization started to fade as the cost of Chinese and Indian goods and services began to rise. The Bureau of Labor Statistics, which in the past has been accused of manipulating economic data to suit the politicians, finally had to admit that the Consumer Price Index was up 4.3%, and the Producer Price Index (a better indicator of future prices) was up 7.4% in the year to January. Companies are already reporting lower profits and have begun to cut their work forces--- payrolls fell 63,000 in February after a revised decline of 22,000 on January--- we await the inevitable revision for February. If past history is any indication, politicians will be in denial all the way down.
Mortimer Zuckerman, co-founder of Boston Properties, Inc. (the largest office real estate investment trust) has been quoted in an investment newsletter as saying on Bloomberg Television, "We are looking at the worst set of macroeconomic conditions since the Great Depression... I don't know where the bottom is." The Federal contribution of $200 billion is apparently considered a small drop in a very big bucket. The trend is down, and in a battle between the Federal Reserve and The Trend, chances are the trend will win.
Welcome to the WonderWorld of Republicanism: untrammeled implementation of the core doctrines of the right wing conservatives who control the Bush Administration were in full-blown operation on Wall Street. Notice the refusal to regulate, the devotion to destructive short-term profit over long term construction, the contempt by Wall Street and K Street for Main Street, the intense concern over the comfort and feeding of the shadowy super elite, the political papering over of how Washington is quick to protect and succor megabanks as compared with the rather begrudging sops tossed to the peasant middle-class in what amounts to a staged media-gesture... and absolutely no policy changes that will tackle the fundamental dysfunctionalism of the system. If the Democrats can't make this case and whip their sorry butts in November, something is wrong with that Party, too.
http://www.dailykos.com/story/...
From the London Times Online:
Global stock markets may have cheered the US Federal Reserve yesterday, but on Wall Street the Fed's unprecedented move to pump $280 billion (£140 billion) into global markets was seen as a sure sign that at least one financial institution was struggling to survive.The name on most people's lips was Bear Stearns. Although the Fed billed the co-ordinated rescue as a way of improving liquidity across financial markets, economists and analysts said that the decision appeared to be driven by an urgent need to stave off the collapse of an American bank.
"The only reason the Fed would do this is if they knew one or more of their primary dealers actually wasn't flush with cash and needed funds in a hurry," Simon Maughan, an analyst with MF Global in London, said.
But that said, rumors like this are a dime a dozen. sometimes they have basis in fact, but just as often they are market manipulation on the short side. There was some sketchy trading in this puppy the last couple of days, IMHO.
The markets are just wild these days. Everyone needs to take some Xanax and Vicodin and sleep this off.
Just remember that every time they create another dollar out of thin air (for the sake of "liquidity"), the purchasing power of the dollar in your wallet goes down, and pretty soon you will notice an almost direct correlation between the increased number of dollars floating around and the rate of inflation in prices. The true rate of inflation is not 2 or 3 percent but closer to 11 or 12 percent (so far). Too bad about retired folks on a fixed income; too bad about your retirement account which is rapidly becoming worthless. You're on your own there, you should have been a more alert and involved investor, you chump.
When Republicans natter on about Democrats' raising your taxes, the response is: Republicans create inflation, and that is the biggest tax of all, the sneaky, silent tax.
But the move the other day was specifically an effort to avoid increasing inflation and further depressing the dollar.
That said, there is no doubt there are a whole bunch of people getting screwed right now because of the mess created by, mostly, Alan Greenspan, and then George W. Bush.
On top of the Fed, you have state regulators for state chartered banks. You have the Office of the Comptroller of the Currency for federally chartered banks. And you have the primary regulator of all banks: the FDIC. And since the repeal of Glass-Steagall, you have the SEC and the Commodity Futures Trading Commission. You want to put this all the Fed, that's fine. But there were a whole lot of other fully governmental (non-quasi) entities regulating these markets and which one of them tried to put the breaks on this?
I know it is easy to carp and criticize with 20-20 hindsight, but there were plenty of people years ago who warned about just such an outcome. Do you suppose one reason Bush and Petraeus are making noises about stretching out the surge is because Iraq's oil is not yet firmly in the grasp of Bush's international oil companies? I notice that the Iraq puppet government is refusing to honor the Kurds' newly negotiated oil deals.
Don't you just purely admire the administrative competence of a businessman running the (sloppy) federal government? Isn't the policy vision of the God-inspired pro-Armageddon forever war inspiring? Don't we hunger for more of the same? Remember that as we go to the polls in November (and look out for the man behind the curtain, manipulating the machine to the greater glory of Conservatism Triumphant).
These big upswings in the market allow people to hide a lot of junk. But no one ever asks questions when we are riding high and no one ever wants to put the breaks on a good time.
So, what would you like now? What I find most amazing or amusing about this is that all these Milton Friedman devotees seem to lose their faith when economic crisis stares them in the face. What happened to let the market work itself out? What happened to it's market distortions caused by government intervention that creates these messes to begin with?
Bankers IMHO are not particularly good businessmen, and Wall Street whiz kids with their pointy-toed shoes and blow-dried hair were such financial geniuses and earned themselves such remarkable bonuses (just before it all hit the fan, what a good sense of timing) that the prevailing philosophy was: Don't get in their way, markets will mysteriously regulate themselves and if it wasn't good it wouldn't be happening. Let the good times roll (for Wall Street, anyway).
In any case, the fox was guarding the henhouse when it came to all the gutted regulartory agencies and the politicized supposed watchdogs. Milton Friedman? What about the Austrian economists who were warning us--- true, nothing sexy, just a plodding oldtime examination of thrift, that is savings rate, fiat currency, capital formation, and mis-allocation of resources? I'll grant you, capitalism has produced a marvelous life style for more people than other recent ideologies, but there is something corrupt and problematic about the mature form we see today--- although the hot-house forced growth of regulated enterprise under the Chinese Communists certainly is raising their living standards (so far).
I do not believe "government regulation" per se is the answer, but given the effect of slash and burn production, humanity's heedless plundering of the earth's resources is creating horrible problems for our children and grandchildren, and we need to reconsider if we can (or should) continue as we are. You ask "what should we do?" and I think beginning a dialog about just this subject is overdue.
Anyway, here is the optimistic view. The apparently declining value of mortgage backed securities (MBS i market parlance, or sometime CDOs, for collaterized debt obligations, depending on the structure of the debt) have been marked down way to far by the bean counters. Th problem is that because after these instruments were created, there was no liquid market for them -- they were complicated things that people didn't really understand.
So to compensate, and mainly to generate trading commissions, investment banks created an index (the ABX) based on these instruments, a/k/a a derivative. Now, investors that owned these things would short this index as a hedge (if the value of their underlying MBS went down, they would make money on the short of the index). The problem was that since the underlying securities didn't actually trade, the price of the derivative was not based on the actual value of the underlying security, but merely on supply and demand. since the index was used as a hedge (and typically shorted), the price was driven down (there were always more sellers than buyers).
What happened then? Well, accountants had to figure out a way to value the underlying securities. In the absence of a market, they looked at the ABX, and since it was declining, they marked down the value of the underlying securities. This, obviously, created a downward spiral.
But the fundamental value of these securities (the actual stream of income they produce) is not as bad as the market value would lead one to believe. At some point, there will be an actual market for these securities, at which points banks will be able to rebuild their capital without issuing additional capital.
Hope that explanation is clear.
As for Ben, I think the jury is still out. Right now, he seems a bit to eager to please Wall Street, and they know it. Just look at the bond market. They know they are leading him around by the nose, and he is fearful of not fulfilling its expectations because it might lead to a market crash.
The ABX has already collapsed. I have heard that the next danger area is another derivative -- the default swap market, which I won't even bother to explain, mainly because I don't understand it.
The problem with the securities is that the ratings system was a sham. People bought things that were supposedly investment grade, but in reality were not. You had underwriters that weren't even verifying income (the most basic of controls). The underwriters basically were aligned with the brokers in pushing these mortgages. They were passed on as good debt. On top of that, these loans were then bundled and converted into a security that was then sold in many parts to many different investors. So, the loan originators pushed all of the risk onto investors and failed to do any kind of rigorous check to back up their assertion that these securitized debt instruments were investment grade. Now with tide going out, all of these supposedly good risk homeowners start to default. That uncovers the failure of the original ratings and now everything is tainted. Because if a group of these instruments was incorrectly rated as investment grade, then how do you know where that actually stops? And since my asset-backed security is a bundle of loans, there is no way for me to discretely identify whether I am holding a junk bond. And all of the rates have not reset yet, so investors still have to be antsy not knowing what it is that they are holding. That's why you get a four for Greenspan, because he knew all this was going on and he recognized the run-up in housing prices and all of these fancy and exotic mortgages were a problem. But what was his solution: report his concerns to Congress and fail to execute his own regulatory oversight function.
Banks have just taken this to an extreme. Their thinking now appears to be: "I was lied to here, how do I know that every borrower isn't lying to me? So, now I refuse to even buy Commercial Paper from triple-A rated corporations. Oh! and my investment banking arms are increasing margin for everyone across the board and making margin calls." This feeds a bearish cycle since the borrowers have to sell assets to post additional margin. Declining asset values make the lenders up margin further. Business borrowers cut back on investments because they can't obtain credit; they also lay off people. And the cycle continues until we hit a floor of sanity or until we collapse in economic ruin.
You are correct with respect to other things that happened with respect to the mortgage market. There is no question that people were given loans they could not afford, people knowingly took loans they had no business taking on, and there was a lack of control at virtually every step of the process, if not outright fraud. Certainly, conflicts of interest abounded.
All I'm saying is that the credit mess is related, but not solely the result, of the sub-prime mortgage mess -- that much of it results from the creation of an ass-backwards derivatives market that has artificially constrained capital. I just think it is incorrect that banks are not buying AAA commercial paper from corporations out of fear that they don't know what they are getting (although that is the case with asset backed paper, particularly mortgage paper).
In any event, I readily admit that my knowledge of the inner-workings of this stuff is limited, so I'm not looking for an argument. I appreciate the four rating, and will try to deride Greenspan in more posts going forward. :)
On a more purely political note, is the very experienced Senator Clinton going to claim credit for this in addition to her personally bringing peace to Northern Ireland?
On November 12, 1999, President Bill Clinton signed into law the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act of 1933. One of the effects of the repeal is it allowed commercial & investment banks to consolidate. Economist Robert Kuttner has criticized the repeal of the Glass-Steagall Act as contributing to the 2007 subprime mortgage financial crisis.
Wikipedia
Since we're talking about the banks and Wall Street, let's not overlook the savings and loan debacle and the Resolution Trust Corporation which tried to correct the S&L's horrible experiment in simulating banks, and actually managed to effect a stunning transfer of wealth in this country... I've always thought the depths of that little mess deserved to be investigated. Maybe we need another RTC for the 7+ million possible foreclosures coming up?
What strikes me is how all these greedy and elaborate experiments repeatedly end up punishing the Main Street schmucks, while the big guys generally get bailed out and cosseted by the politicians. We, The People, indeed.
Put your money in your mattress, and sleep easy that your wealth is only be eroded by inflation, and not something worse.
Speaking of possible rallies, it appears that mortgage rates will be revisiting their historic lows of a few years ago. If there are 30 year fixed at 5% available, don't be surprised to see a lot of home buying this summer.
Anecdotally, I know one very shrewd real estate wheeler dealer who has already started buying heavily.