Does The US Still Face An Emerging Market-Type Crisis?

The US has developed some features more typically seen in an emerging market, including disproportionate power and system-threatening activities in the finance sector.  In fall 2007, the US (and the world) experienced the kind of precipitous fall in credit, output, and employment that was, in modern times, seen only in “emerging market crises”.  Our first Baseline Scenario was controversial and largely dismissed when it first appeared on September 29, 2008, but many of its arguments and policy recommendations have now been absorbed into official thinking (at least in the US).

Is the US out of the emerging market-type woods?  Can we now rule out the possibility of a great depression?  Such a severe economic outcome is not currently our baseline view (e.g., as discussed in this NBR interview), but it is still a downside scenario that needs to be taken seriously – and, at least in our interpretation – this is also the view of Bernanke’s Fed (see our piece on Sunday and the profile in yesterday’s Washington Post.)

Why is a depression scenario still on the table?

The problem is not the potential degree of insolvency of banking per se.  And it’s not only about the way financial markets operate.  Nor is it just about how the market for credit default swaps (created by and for big finance) is proving – once again – to be a powerful, potentially self-fulfilling mechanism for betting on financial institution failure.

Rather, the danger in this situation arises primarily from the attitude and approach of the US Treasury.  We are supportive of this Administration on many issues, and I applauded the ideas and actions of Treasury around the G20 last week.  But I don’t think Treasury understands the potential speed with which the crisis can again become more severe – moving back into another phase of chaotic jumps in financial distress around the world.

The most compelling evidence for lack of readiness comes from those who are now most articulate in Treasury’s defense.  “Congress will not provide any more money” and “you must recognize the political constraints” are sensible points.  But think about what they also imply.  Treasury is not making the case, full-time and flat-out, for more funding – on a contingency basis – from Congress.  At least from my conversations on Capitol Hill, I see no signs that this is Treasury’s top priority.  In fact, I would go further and be blunter: no one is ready.

I recognize that this would be a hard sell.  And I understand that the mood is shifting away from bailouts and towards attempting to manage some sort of debt-for-equity swap; which seems to be what the WSJ is heavily hinting at this morning.  But if you’ve taken nationalization off the table and you have very little cash remaining for anything bailout/rescue-related, you are vulnerable to runs. 

The only way to stop speculators is with massive financial firepower (you must be able to scare them; no one way bets on bank defaults) and a credible set of policies that show things are going to turn around (act at the system level; don’t try to handle the banks piecemeal).  Don’t let bankers’ past misdeeds (or current power) and market panics ruin the economy and so many people’s lives.  Go get the money from Congress – Capitol Hill is full of responsible and responsive people, but the Administration has to make the case, at the highest levels and in the most persuasive manner that saving the financial system from collapse is our top priority. 

Don’t make the mistake of Hank Paulson who, until September 17th, always assumed he had more time to prepare (or just prevaricate).  When the crisis is upon you, there is no time.

61 responses to “Does The US Still Face An Emerging Market-Type Crisis?

  1. adios amigos

    But then, you turn to the next page of the WSJ, and Wells Fargo Bank is declaring record profits. Am I missing something here? On one page of the WSJ all the banks are insolvent, but on the next page…..record profits. Sounds like one page doesn’t know what the other page is doing. Can you say….. “theft”?
    AA

  2. Can I translate “emerging economy” to the less technocratic “banana republic”? At least in terms of our political system?

  3. bobgreenfest

    Great update. I just posted an update on http://www.bobgreenfest.wordpress.com which also asks for a call to action from the public. No time like the present!

  4. Very confusing.

    Too many (Krugman, Johnson) look like hecklers shouting their disappointment after the parade has passed them by and the participants are gathering under the Big Top for the post-event celebration. I hate to say it but the game looks like it is over that the so called bad-guys won. Fact: you are shouting in the face of the largest, most sustained and broad based financial market rally in 50 years. Turn down the retorical naysaying and spend an hour watching Jim Cramer on CNBC with a cold beer in your hands. It will do you (and us) some good.

  5. I think that the crisis could well evolve (morph) into something that goes beyond easy rescue attempts from further fiscal stimulate measures or more debasement of the monetary system via QE.
    The US government is snookered and it will become more apparent as time goes on – the tipping point has been reached in terms of the credibility of repayment possibilities for the US accumulating deficits.

    Recent projections from CBO show that the projected US budget deficit over the next 10 years is entering what might dramatically be called a death spiral.
    A graphic is worth a thousand words and it can be seen here

    http://morph366.blogspot.com/2009/04/screen-saver-image-for-head-of-chinese.html

    If I was the head of the Bank of China I’d probably install that graphic as my screen-saver or desktop image file

  6. Adios amigo knows little of what it speaks…it is far too early to say the game is over. We do not yet know what the endgame looks like. We do not know what the long-run ramifications of the extraordinary policy interventions of the last 18 months will be. We do not know the shape and timing of the recovery, how much inflation there will be, what will happen to oil prices as recovery occurs and so on. We do not know if the long-run potential growth of the US has been permanently damaged.

  7. The implication I’m getting from many fronts lately is “it’s over” – we’re out of the woods.

    I just haven’t figured out what has really changed, other than the stock market, to believe this is really true? And, as Simon alludes to, what prevents it from happening again?

  8. E. Barandiaran

    Simon,
    Although Adios Amigo may have a point, I’m still interested in knowing what you mean by the US facing an emerging-market type crisis. As an old Argentinian economist that have lived and worked on fiscal and financial crises in several countries, I know that all countries are vulnerable to runs because of speculation–people like to speculate about the incompetence and corruption of politicians (remember UK in the 1960s and early 1990s). But apparently you mean something else. May I suggest that to illustrate what you mean you answer a few questions of your choice about a particular experience of an emergent-market economy or a banana republic. Let me say that my main concern about your country right now is government corruption but not the speculation about it.

  9. Erich Riesenberg

    Isn’t it quite normal for a company which has made a big acquisition and write off to announce good earnings the following quarter?

    Was it Thursday the story broke on Treasury wanting to prop up insurers? I don’t know whether to make my long term care premium payment because I don’t know if the company is solvent.

  10. Adios says:
    Fact: you are shouting in the face of the largest, most sustained and broad based financial market rally in 50 years.

    Actually this ralley hasn’t been seen in over 70 years, during the onset of GD1

    http://www.dshort.com/charts/mega-bear-comparisons.html?mega-bear-quartet

  11. Carson Gross

    Of course it’s over. That’s the magic of changing some accounting rules and printing massive amounts of money: it fixes all the malinvestment of the last 30 years.

    Thank goodness.

    In totally unrelated news:

    http://www.calculatedriskblog.com/2009/04/fed-orders-banks-not-to-release-stress.html

    Cheers,
    Carson

  12. FT’s Lex had an interesting bit on Congress’ culpability in pressuring FASB [4/9 p.12]. I don’t see enough reportage on this for the laity to understand but their conclusion is fairly straightforward:

    The result? Accounting jiggery pokery will increase a bank’s supposed strength, as measured by its regulatory capital.
    Of course, this is nonsense. It is little wonder that investors have increasingly focused on capital ratios based on tangible common equity, which is less prone to such tinkering. The FASB is trying to be responsive in a crisis. Further loss of faith in public accounts is too high a cost.

  13. Carson Gross

    Erich,

    That’s exactly the point David Goldman has been making over at atimes:

    http://blog.atimes.net/?p=880

    But no worries. Despite the fact that residential RE has another 20% to go, commercial is just getting started and credit cards are starting to taco, everything is good. All priced in.

    Cheers,
    Carson

  14. I am not sure whehter Simon meant “fall 2007″ or fall 2008. I think this is an important distinction. The credit market seized up in fall of 2008 and has yet to right itself. While the Fed has all but come out and said “Buy Spread Product”, the street ain’t listening. Spreads have improved but are still very wide with dislocations in all but the highest quality paper.

    Why is the fall 07 vs 08 distinction important? I think it is important because the credit market is telling us more aftershocks are coming and the earthquake just happened. Unfortunately I tend to believe the credit market rather than the equity market. I hope this time it is different.

  15. Stock market rally is all fine and good – obviously someone has cash left to burn. And I hope it keeps going for a long time, however…

    I’m still trying to figure out what has systemically changed… CDS’s are still legal/unregulated, huge non-bank financial and commercial institutions have been added to the ‘to big to fail’ tent, mysterious assets remain on balance sheets and creditors’ motivations for ‘fixing’ things are suspect. In the meantime – our reward for bailing out large financial institutions is credit card interest rate hikes at the very time they have reduced lending opportunities – preying of customers they have just trapped and driving more to the brink.

    Your call for caution and question is well warranted. Hope some are still listening.

  16. Adios, your logic only proves that those who don’t learn from history are doomed to repeat it. Yes, the market has had a great run recently, but from peak to trough the market lost 89% of its value from late 1929 to March 1933 – oh, and it had 6 or more great raillies that all ended in badly. Right now, percentage and time wise we are very close to being exactly where the world markets were in March of 1931 – and the market still had a lot more to give up before it really hit bottom.

  17. You know you’re getting through when the Cramerite brokers show up to prove you wrong with market movements.

  18. >Fact: you are shouting in the face of the largest, most sustained and broad based financial market rally in 50 years.

    Well, nothing wrong with that the market is extremely idiotic at times and is certainly not to be trusted in this case.

    David

  19. Concerning measuring GDP. market indexes as a gauge for the state of our nation. RFK said it better than I ever could a few weeks before he was murdered. Forgive the long post:

    “We will find neither national purpose nor personal satisfaction in a mere continuation of economic progress, in an endless amassing of worldly goods. We cannot measure national spirit by the Dow Jones Average, nor national achievement by the Gross National Product. For the Gross National Product includes air pollution, and ambulances to clear our highways from carnage. It counts special locks for our doors and jails for the people who break them. The Gross National Product includes the destruction of the redwoods and the death of Lake Superior. It grows with the production of napalm and missles and nuclear warheads…. It includes… the broadcasting of television programs which glorify violence to sell goods to our children. “And if the Gross National Product includes all this, there is much that it does not comprehend. It does not allow for the health of our families, the quality of their education, or the joy of their play. It is indifferent to the decency of our factories and the safety of our streets alike. It does not include the beauty of our poetry, or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials… the Gross National Product measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile, and it can tell us everything about America — except whether we are proud to be Americans.”

  20. It’s over because the market is up? And according to one prediction consumer spending will increase even as unemployment continues to rise.

    I get the impression that a lot of people who know far more theory than I ever shall have nevertheless lost sight of the fact that the economy involves everybody. This mess started with mortgages. As millions lose their jobs, it will go on with mortgages, and other personal crises that affect the economy not only directly but through demands on services for which there are already inadequate funds. I am thankful for Johnson, Krugman, and a few others who look at the connections, as they teach me ways of examining the reality.

    Is one characteristic of an emerging market a weak industrial sector? After the changes of the past three or four decades, I should think we could qualify, and that is something very different from the situation sixty or seventy years ago. Where does it lead–to a different kind of recovery?

  21. Paris Biltong

    I don’t know what’s “emerging” about the US economy, which I see more as post-capitalist than anything else. The privatizing of profits and socializing of losses has never been more in evidence. We can talk about economic solutions until we’re blue in the face, the only thing that counts now is power. The latest idea of securitizing the bailout (http://www.nytimes.com/2009/04/09/business/09fund.html?scp=2&sq=%22toxic%20assets%22&st=cse), as absurd as it may seem, merely reflects the unchecked influence of the Lawrence Summers of this world (and their masters up in the dungeons).
    Also, speaking of the purported unprecedented rally in the financial markets, how come equities are still trading at two-thirds of their high for the past year? The rally has brought prices way up to where they were a couple of month ago. Not the kind of rally we can believe in.

  22. Here is a hopeful interpretation of recent events. It is not my interpretation… it’s a hopeful interpretation.

    Trigger Point: The Fed _finally_ declares it’s going to start printing money. Almost at the same time, Geithner _finally_ shows us a plan. Not a great plan, but at least it’s a plan. FINALLY. After months of destructive vascillation. Presumably, we owe the Bank of England for helping our own Fed grow a spine. [Note – back in January/February, the lack of QE by the Fed was my chief gripe.]

    Cascade of events: Cash-based reserve holders realize they better do something other than stay in cash, because the Fed has decided its going to use the weapons that it promised to use back in September (before chickening out). They start moving into equities/non-cash assets. Market goes up. Commodities go up. There’s a growing realization that things aren’t going to stay low forever (and may not, in fact, get even cheaper), so investors start to worry about missing the bottom (rather than getting suckered by a dead cat bounce). At the very least, people stop selling.

    Indeed, the “stop selling” philosophy has spread, and banks (swollen with federal money) now stopped selling all those foreclosed properties. Sure, their backlog may be building, but the number of properties available vs. buying rate (e.g. the X-month supply) starts to shrink – and that looks great. And scary for everyone sitting on the sidelines, waiting to buy a house.

    As the market goes up, consumer confidence slowly rebuilds (wealth effect, signalling effect), and people begin to respond to unsatiated demand. [There is some evidence – weekly US consumer sentiment data ticked up in late March. http://www.xe.com/news/2009-03-27%2010:09:00.0/329893.htm?categoryId=2&currentPage=1 ]

    Simultaneously, the administration decides it has enough artillery and stops projecting gloom and doom in order to win approval from Congress for its bills. The mass media declares that the recession could really be coming to an end and if you don’t act fast, you could miss all the deals! ( http://finance.yahoo.com/family-home/article/106865/Ten-Things-to-Buy-Before-the-Economy-Improves )

    Meanwhile, companies have stripped employees to the bone and won all of the concessions they’ve been trying to get for years, and undone the pay hikes. Corporations have finished using Q4 2008 and Q1 2009 as an excuse to take all of the losses to goodwill and other non-productive “assets” that they’ve suppressed for so many years. So, things look so bad that anything semi-normal is good.

    Presto – we have a recovery. For at least a little while.

    Now – hold onto your hats – here is the _really_ hopeful part.

    Team Obama decides to develop a long-term memory (or maybe they were born with one). Larry Summers decides to learn something for a change, and recants his bluster of the prior 20 years. Tim Geithner graduates from his apprenticeship. Obama remembers his roots.

    The US public realizes that this is a different group of leaders, because the money being pumped into finance was all part of a anti-cyclical master plan. (Remember, to be counter-cyclical, one should relax regulations when things are bad and then slap them back on as things improve.) So, as things start to improve, we start to see Congress develop detailed new policies, and the G20 build a more robust infrastructure, and the Basle Accords are revised and strengthened, and the incentive structure at the ratings agencies is repaired, and the banks start to think in the long term…

    OK, let’s not get too hopeful. But the point is, if this really is a recovery, and our leaders were _really_ smart and _really_ ethical, then it makes a good bit of sense to focus on the positive for a while, and start fixing the system when the system is healthy enough to survive the fixing.

    The (hopeful) question is, when the crisis is over (if in fact this is the turning point), will we all have the motivation to say “Never Again” and mean it?

  23. What if this is the way things are: Obama is a pragmatist. He understands and maybe even agrees with the Johnson/Krugman take, but he has to do what he can. So he settled for second best but politically possible—limp long, vulnerable to speculative attacks, appeasing the banksters, compromise PPIP, all the partial, solutions we’ve seen so far. In exchange for this deal with the devil (read big banks if you want to, that’s how i see it) he is working toward getting the tools in place for rapid nationalization of any systemically important company.

    If this second best solution works out and the economy recovers (unlikely, but predicting the economic future is difficult so who knows) then it is more or less a win/win. If the second best plan blows up, the pitchforks will really be out for the bankers and Obama will have the political will and also the tools to take the sort of dramatic action Johnson and Krugman recommend.

    Yes, it is true that we will have wasted time and lots of money if things blow up, but was the sort of action Simon Johnson advocates really possible politically? The time has cost the economy and lots of people their jobs, but it maybe it couldn’t be helped. As for the money, we’ll print more. There will be consequences for that, but one of the consequences will be that a weakened currency will help manufacturing and hurt the financial industry so it won’t be a completely bad thing.

  24. Thanks, Mark G. Do you have the source?

  25. Mark Stevens

    The stock market may have risen 20% but what does that mean to the person who has been laid-off and downsized? People who frequent this website seem to forget that the economy is 70% consumer spending. America is tapped out and there is no pent-up demand out there ready to jump back to previous levels. Until households are solvent, and people have jobs, or are not worrying about losing them, what the stock market does is irrelevant to most Americans.

  26. > I’m still trying to figure out what has systemically
    > changed…

    The US Gov has stated that they will effectively prop up the financial institutions indefinitely. If they actually do keep this up, it’ll lead into zombie banks and eventually crush the dollar.

  27. Here’s one: http://economistsview.typepad.com/economistsview/2008/09/rfk-on-the-inad.html

    Also 19,700 google hits on rfk speech gdp markets

  28. 70% consumerism (debt) and 20% FIRE. 90% of total GDP is facing huge headwinds for years to come.

  29. What I see, as a lay-person, is a pure “confidence game.” It is widely agreed that the US consumer will fund the recovery. All the recent news points to a coordinated conning of the American public. This is made much easier by “lifestyle inertia” – Americans want nothing more than to go back to things just like they were, and it just so happens that Wall Street and DC would like that too. With interests aligned, the sell is much easier.
    So, we have stress tests that not only must be kept secret, but that which the NYT has already reported “nobody will fail.” We have the FASB magically declaring the previous definition of “loss” shall now mean “profit” and, voila, Wells Fargo reports $3B of profit made on accounting flim-flam and taxpayers loans. The market soars, the MSM plays along, and now we have our “recovery.”
    People (the general, consuming, US public) act based on their expectations. The last8 months have shown that when they expect bad things, they bunker. However, when they expect good things, even if those things haven’t happened yet, they act accordingly. How many personal-finance gurus end up counseling people who are in debt because they spent money they “expected” to get but never did? That is human nature, US consumer style.
    If you build it, they will come. With no ammunition left – no money, no room to lower rates, no political will to close banks, the confidence gambit is all Washington has left, really. It’s not such a bad bet, since all America really, really wants is bubble-sweet-bubble.

  30. Happy days are here again
    The skies above are clear again
    So let’s sing a song of cheer again
    Happy days are here again

    Chorus to one of the most popular tunes of 1930.

  31. What if this is the way things are: Obama is a pragmatist. He understands and maybe even agrees with the Johnson/Krugman take, but he has to do what he can. So he settled for second best but politically possible

    At this point, Obama has in his hand incontrovertable proof that the financial world is profoundly corrupt (Madoff/Stanford) and hopelessly insolvent (the stress tests). We know, from last fall, what it can be like when the financial markets lock up. He can go to Congress and demand authority to do basically whatever he wants. If he said he needed receivership authority for the big financial institutions, and needed it now, he’d have it by the end of next week at the latest and Monday if he was in a hurry.

    Obama is choosing a half-assed plan which does little besides enrich the bankers because he wants to, or has blind faith in those who do.

  32. richard campos

    CRITICAL ANGLE OF POTENTIAL DIFFERENCE THAT DRIVES CONSUMPTION TO PUSH PRODUCTION
    Ricardian equivalence is an ideal state that assumes proportional distribution of income and savings and proportional growth of income and savings which is the case for a natural system of energy distribution without free will , like plants or animals. In an ideal state you wouldn’t need a stimulus because you wouldn’t have a depression. But in our real state of disproportional distribution a lower percentage has savings capacity and the majority doesn’t have savings capacity therefore government demand sided spending stimulates the economy because the majority spends the money instead of saving. In a free will system in order to keep equilibrium and avoid chaos you have to regulate distribution of income by keeping a relationship between the lower bracket and the upper bracket avoiding dispertion that would collapse the critical angle of consumption-production, like the critical angle of a light beam,fermats principle of least time or the critical angle that supports the wing of aircraft, bernoullis principle . The critical angle allows for the proportional difference of potential that,transmits light, that supports an aircraft wing in flight and the adequate difference of potential that allows for consumption to breed production. .A supply sided tax cut widens the critical angle in favor of an inverted pyramid during a recession would not be an incentive for investment because of the falling rate of profit and would concentrate income even further on the top income bracket who have greater savings ability on the contrary stimulating aggregate demand by government spending transfers liquidity to the consumers who spend all their income because they have no savings potential. Therefore driving the difference of potential for production of goods. Market power or purchasing power of the majority of consumers pushes production. A Potential Difference in favor of consumer purchasing power is what keeps the equilibrium of growth and avoids the collapse of the system because consumer purchasing power is the base of the pyramid and a greater amount of money at the base generates the difference of potential necessary to push the motor of the system, just like the difference of pressure that lifts an aircraft in the air.

  33. Thanks for the post, Simon, espeically about the mindset at Treasury. What you say accords very strongly with Phillip Sawagel’s Brookings paper* on the Treasury under Paulson (strongly recommended).

    What comes through again and again in that paper, is not regulatory capture or even cognitive capture. Rather, the overwhelming constraint preventing clear decision marking seems to be the perception of the limits on what it is politically possible to do to fix the financial sector, given Congressional, and particularly House Republicans, opposition.

    See these quotes:

    – In the post-Bear calm: “These options would move the focus of financial markets policy back from the Fed to the Treasury, which would be appropriate in what was a problem reflecting inadequate capital rather than insufficient liquidity. But these actions all required Congressional action and there was no prospect of getting approval for any of this.”

    – On the immediate post-Lehman situation: ” Having long known that Treasury could not obtain the authorities to act until the Secretary and Chairman could honestly state that the (economic and financial) world seemed to be ending, they went up
    and said just that, first in a private meeting with Congressional leaders and then several
    days later in testifying to the Congress on September 23 and 24.

    – On TARP: “The problem with the criticism on capital injections vs. asset purchases is that Secretary Paulson never would have gotten legislative authority if he had proposed from the start to inject capital into banks. The Secretary truly intended to buy assets—this was absolutely
    the plan; the TARP focused on asset purchases was not a bait and switch to inject capital.
    But Secretary Paulson would have gotten zero votes from Republican members of the House of Representatives for a proposal that would have been portrayed as having the government nationalize the banking system. And Democratic House members would not have voted for the proposal without the bipartisan cover of votes from Republicans. This
    is simply a political reality—it was a binding constraint on the Treasury.

    Without being a political naif, I find it truly remarkable how decisive these considerations are – Treasury never does / says what it thinks is right for the economy because of these constraints. Further, in the paper at least, the description of these constraints are never strongly backed up with evidence (potentially to avoid embarassing those Republican congressmen who were truly and terribly wrong in their assessment of what could happen.

    From what Simon is saying in his post, it seems we could be in a similar situation again. Why is Treasury still thinking in such limited terms when we have already stared into the abyss once?

    * http://www.brookings.edu/economics/bpea/~/media/Files/Programs/ES/BPEA/2009_spring_bpea_papers/2009_spring_bpea_swagel.pdf

  34. “But the point is, if this really is a recovery,…”

    LOL

    “…and our leaders were _really_ smart and _really_ ethical…”

    LOL

    What are you smokin’?

  35. Keep your grubby hands away from my rose-colored glasses!

  36. This is an incredibly difficult set of questions:

    Is Obama choosing a second best because he knows things we don’t, and feels he doesn’t have a choice?

    Is Obama being snookered by Lawrence Summers and Tim Geithner, who are desperately trying to preserve the system that feeds and enriches all of their friends? (And to understand this, you really need to understand that much of Summer’s and Geithner’s circle of friends – their entire social network – would be crushed if the banks were really allowed to fail.)

    Is Obama playing along, letting the system heal until it’s healthy enough to undergo surgery?

    Has Obama struck a deal – he gets his stimulus and several policy initiatives (environment, some energy, some health, education, infrastructure), and the banks get to keep their privileged status?

    Are they all just confused, and honestly trying to do the best thing, but overwhelmed by the sheer pace and complexity of events?

    We do not yet know the answer to these questions.

  37. Investment, on sufficient scale, can push production as well as restore spending power to consumers.

    The challenge is coordinating it (which requires government and forced taxation), and allocating it (govt. needs to actually prove it can make decent choices).

    Unfortunately, precious little of govt. spending is actually directed to investment. Most is dedicated to preserving consumption (entitlements, etc.). And in some sectors, like energy, the deep pockets are actively cutting socially productive investments because these jeopardize their profit streams. Nor is govt. spending (a mere $15 billion per year, compared to the size of the federal government) even close to sufficient.

  38. I always check to see if you’ve commented. Thanks for your cogent observations.

  39. there is a fundamental difference between the u.s. and an emerging market crisis — the feedback loop impact of the u.s. on the rest of the world. yes, the u.s. capital markets behaved no different than brazil or poland or anyplace else when the world decides the country and currency are hot places to invest. with the u.s., however, the world booms as well. and of course there is the reserve currency thing. okay, key point — fed working paper (noted in my blog) said that when industrial country currencies collapse it is more often a good than a bad. go figure. but this fed is set to let the dollar go. that plus underpinning the real collateral underlying all this paper (homes) is the way to mitigate the impact of a deleveraging economy. government cannot replace all the leverage foreign capital that is leaving. so yes, another crisis is brewing.

  40. Largest, most sustained broad based financial market rally in 50 years.

    That would sound better if it didn’t come after the largest, most sustained broad based financial market dump in 50 years.

  41. Malls across the nation are loosing thousand of tenents every month. Those tenents are sending your fellow Americans to the unemployment lines.

    What is the downside (some broad assessment of risk exposure) of the commercial real estate derivitives market? Ignore the vioces crying in the wilderness. Listen to the swindlers and thieves who conjured, cloaked, and profited wantonly from the worst economic crisis since the great depression. What is driving this rally? Ghouls swooping into stressed properties at firesale prices, using astounding government largess, historically cheap loan terms and conditions, and usual collusion, insider information, and nepotism, and fraud that shaped the previous boom, bubble bust economies, – because nothing has changed!!!! Two banking CEO’s brag about profits after culling the mark to market standards, and absorbing billions of tax payer dollars – and the markets go wild, “the largest, most sustained and broad based financial market rally in 50 years” ensues! This is speculators and short sellers manipulating markets, (not unlike the proceedures Crammer executed and espoused.)

    The banks are unimaginably wealthy and rolling in cash! What a surprize when every single Obama economic advisor is a Wall Street insider or a former Goldman employee – and every single Obama economic advisor is an apologist for and defending FAILED institutions and FAILED managements bruting FAILED models – and every single Obama economic advisor demanded that the American tax payer burden the enomorous costs of pouring trillions of dollars tax payer debt, (borrowed money) into the offshore accounts of the swindlers and thieves (now touting record profits) who caused the greatest economic crisis since the depression.

    Insiders can and will game the system and invest in the devil, establish offshore entities to cloak and swindler billions of dollars, and being well advised by said devil recieve insider backdoor exclusive information, influence, and access the other 99.5% of humanity completely lacks, and can never dream of obtaining.

    The RFK quote above speaks to the heart of the grotesque crimes; the pillaging and rank betrayal of the American people by corporate titans and oligarchs who own and control the government.

    In a world where there are no laws, – there are no laws for anyone!

  42. Well, we can’t know what Obama does or doesn’t know. My question: How plausible is it that Obama went for the best workable solution, or at least attempted solution, because it allowed him time to make arrangements for a more dramatic intervention?

    Maybe I’m an naive or underestimating how insulated the president is, but, unlike his predecessor, Obama reads. He must know the broadly articulated point of view that Geithner and Summers were assistants during the bank orgy and that their solutions are largely protecting the banks at the expense of the rest of the country. So why is he choosing this course? He doesn’t care? He’s already corrupted? He doesn’t ‘get it’? Seems unlikely. Simon’s explanation is that the financial industry has too much political power.

    In other words, Obama couldn’t nationalize the banks. (Leave aside for a minute the bit about banks vs. bank holding companies.) So instead of taking assets from the incompetent and turning them over to competent management, obviously something that ought to happen in any system that purports to be a ‘free’ market, he opted for the best solution that he could actually implement.

    I’m just looking for a consistent explanation that fits both the circumstances and the character of the man we got to know fairly well during the campaign.

  43. Got it, saw it. Thanks again.

  44. Hooray, the markets are having a few good days. Wake me up when we’ve put everybody back to work and real productivity is on the upswing again. Until then it’s just financial game playing among the folks who either caused the problem in the first place or were too inept to see the problem coming.

    Might the market’s behavior presage an economic resurgence that would put people back to work? Sure, but of course, but until it does I’m not convinced.

  45. Just wanted to say to robby that I think you make very insightful points.

  46. Simon:

    I think you are correct to be concerned about the effects of the next unexpected crisis and the ability of the Treasury to effectively respond to it in a timely way.
    One observation that I have made is that our government in general prefers to prepare for a repeat of the last crisis rather than prepare for a theoretical crisis in the future, no matter how convincing the argument.
    I am also beginning to believe that our large financial institutions harbor a similar mindset. It’s a mindset that seems to be difficult to overcome.
    Hopefully, this has been recognized and studied by some experts who can give advice.

  47. As Simon pointed out on cspan this week, emerging economies have often exported their way out of crisis but the entire world cannot (unless we export to mars).

    And you’re certainly right about the us industrial sector.

  48. Is one characteristic of an emarging market a weak industrial sector? That is a really good question. In spite of everything we have experienced in the long term build up to this crisis, it is so easy to be lulled by our past national successes.

    Perhaps some basics on comparing our economy to emerging markets would be useful now. How are we like an emerging economy, Simon? I am almost afraid to know.

  49. Simon, your point is well taken. I trust baselinescenario.com is required reading at Treasury.

  50. Simon,

    Your reference to 9/17/08 and Hank Paulson brought a flashback. I dumped every security I held for cash on 9/16/08. I decided in the early AM to spend the day researching AIG. As you may recall, it was widely known that AIG was in for windfall of $80 billion plus within a day or two.

    There was not single piece of data that could be found that supported a number that large. In fact one research report from one of Wall Street’s best and brightest, concluded, after examining all transparent filings that the best they could come with $30 billion plus need.

    I decided then that what we assumed was a transparent reporting and evaluation system was fraud and not only was it a fraud, the regulators were complicit.

    Nothing has changed, and the last I read AIG’s windfall is $180billion . It is horrifying to imagine the consequences if the transparency of our current regulatory system has an error factor of 6:1 ($180b/30b).

    We may make it out of this, but I am not looking for bottom yet, only the top of this bear rally.
    — Ed Fennell

  51. You have to be kidding AA!

  52. I think we are suppose to believe it is over, and with all the monitary policy being used every moment, it SHOOO DOES look that way…but, it is more fluff, smoke and mirrors.

    The problems that have brought us to this point in our history, reflected in the sharp market decline of the fall, is only the first act, in a two or more act play–but it aint over til it’s over.

  53. TO: Ed Fennell

    I wrote at least half of the legeslators several times, and every pundit i could find for months starting the day after the TARP 1 turned into a secret meeting at the treasury to pass out money.

    The AIG scandal was secondary to the fact that Lehman was denied a 6billion dollar bridge loan which gave Goldman, Morgan and other surviving IB’s Lehman’s market share, and a win on the fact that so many hedge funds and probably the proprietary trading desks of Goldman and Morgan (and all their affiliates) were betting on Lehman going down, so this was a big win to let them go down.

    Hank and Ben played tag team on the issues on Lehman and AIG…very clever…bottom line, it is now public info that Goldman was saved by the decision to rush in on AIG…but no one seems to care…and these are the people who run our country…puppets to the federal reserve banks…and all affiliates….I don’t see much hope in this changing, but there have been times when good wins over evil–but who can know if now will be one of those times.

    I just fear that the whole knows the corruption that appears to have occurred, and now will judge our country and our currency as corrupt.

  54. StatsGuy

    On this one, I have to call you Dorothy in the land of OZ.

  55. I think you Simon and James, must be up on the numbers to make a judgement about whether or not the U.S. has the “capability” at this point to do what you, Simon, suggest in your last three paragraphs.

    Or, is it time, for a different lender of last resort. Although the IMF is largly controlled by the US, there are still other member nations that could come together to make strong suggestions. My fear is that the firepower has been unsuccessfully used, and we are close to the end of our rope.

    ( or was our rope cut a long time ago, in the effort to push on a string…it is late, just a silly aside )

  56. I grieve over the choice Obama made, in concert with Geithner to support the Paulson/Bernake agenda.

    The world was waiting and watching, but as soon as it became clear that that was his course, the Chinese announced that they were concerned about our currency—2+2=4…..the world was waiting and hoping the he really would be a change–maybe he is, but only one that gives the most powerful lobby in our country, more power, and possibly turn a blind eye to self dealing. I do remember him saying in one press conference when asked about previous policies (involving bailouts and possible corruption) he announced that we had to let go of the past and move forward. This comment was the beginning of my worry that he had fallen prey to the seduction the bank lobby’s agenda.

    And with all of the talk about decreasing the power of the lobbiest in WDC, this was clearly out the window the day, the music died ( i mean the day that geithner and obama very clearly backed the paulson bernake plan –so, as far as keeping hope in Obama, he has shown himself to be a puppet, and it is terrifying.

  57. TonyForesta you know the truth…–could you please detail your ideas for solutions to the tragic problems you detail?

  58. Too much bad news already for the last 18 months.

    We need some respite.

    Who knows, this current bear rally can turn into a bull run and those who have been addicted to bad news and those waiting for more good news are going to be left far far behind.

    It is never too late nor too early to be able to invest in this “crisis of the century”.

    The last time there was a “crisis of the century” was during the 1929 to 1932 stock market meltdown. Dow Jones went down from $470 to $42 in 3 years or 91% haircut. It was only natural since the stock markets at that time were still young and immature.

    Look at China and the other developing countries with young and immature stock markets; China went down 72% and the other countries went down more than 80%.

    Look at Nasdaq, a young and immature index of the late 1900’s. It went down more than 80% during the tech meltdown of 2000 to 2002.

    SnP is more diversified but less immature than Nasdaq; so when it got hit by the mortgage and financial meltdowns, it was able to go down 57% so far to 666 level – while the BKX or the banking sector went down from 121 to 17.75 from 2006 to March 2009 or a massive 85% haircut.

    US and European stock markets are already more diversified and many sectors have matured through their decades of experience of both booms and busts. They are less likely to suffer the same fate as most markets of the early 1930’s.

    Do you think we will be able to buy stocks again at these dirt cheap prices in our lifetime?

    Dow Jones went up from $42 to $12,000 from 1932 to the year 2000. A massive 28,470% price appreciation over 68 years – or an average of 417% price appreciation per year.

    Excessive? Yes, and Dow Jones is now paying for those 68 year of excess since year 2000.

    What’s lost in this panic environment is that those who did not invest during the Great Depression and beyond did not profit from such a historic rally.

    Those who tried to chase the rally during the 80’s, 90’s and early 2000’s are now suffering the payback period. Chasing the markets is a fool’s errand.

    Now that the payback period is in earnest similar to the market meltdown of 1929 to 1932; it is more likely those who don’t invest now and in the future due to excessive fear of the markets are the ones not going to reap the profits of stock market rallies in the future.

    History repeats itself or at least rhymes with the past.

    We may never see this “Investing Opportunity of the Century” ever again in our lifetime.

  59. Top 10 signs you are living in a banana republic
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