“America is going broke and the rest of the world knows it.
Bernanke is just speeding the country along the ever-steepening downward trajectory. We, in fact the entire World is ripe for A Great Depression…and there are signs it is fast approaching. It will take a World War III to break the chain…and that is the way some very scary people see things!
“It may not get AS BAD as when my Grandfather was my age and the banks closed, but I am telling you, if you are the average middle class American and do not have at least a half million dollars in net worth you can liquefy and the ability to tough out a year of being unemployed, read the grapes of wrath or watch the movie cause were headed down that path.”
“Unless Hillary Clinton or Barack Obama wins in the kind of landslide that entails a veto proof congress, Many of YOU will be standing in a bread line this time next year.”
``The banks have zipped their pockets up and money markets are clean out of confidence, as we head towards the end of the quarter with billions worth of loans up for renewal,'' David Buik, market analyst at BGC Partners in London, the inter-dealer broker controlled by Cantor Fitzgerald LP, wrote in a note to clients today. ``Over to you Mister Bernanke, Doctor King and Monsieur Trichet.''
JITTERS FOR SOME AS GOLD SOARS
Metals - Gold soars to record over 1005 usd as dollar crashes ...
Forbes, NY - Mar 14, 2008
The dollar slumped across the board to track the sharp fall in the Bear Stearns (nyse: BSC - news - people ) share price after the announcement that the ...
Gold soars as panicking investors seek safety
LONDON: Gold raced to an historic peak above $1,000 on Friday as the dollar’s plunge to record lows on weak data and deepening financial market troubles in the United States boosted bullion’s safe-haven appeal.
Gold, seen as a safe-haven asset during financial and political troubles, surged as high as $1,007.10 an ounce. It was quoted at $1,005.40/1,006.00 at 1504 GMT, compared with $991.00/991.80 late in New York on Thursday.
The metal has gained more than 20 per cent this year on top of a 32 per cent gain in 2007. US gold futures set a record high of $1,009 an ounce, with the most active contract for April delivery last quoted at $1,006.40 up $12.60 an ounce.
Platinum rose to $2,102/2,112 from $2,098/2,108 an ounce, while palladium rose $1 to $509/514. Silver was up at $20.71/20.76 an ounce from $20.42/20.47 in New York. Dollar: The dollar fell below 100 yen for the second straight day and hit a record low against the euro after Bear Stearns said a worsening cash position had forced the Wall Street firm to secure emergency financing.
News that the New York Federal Reserve and J.P. Morgan Chase will provide funds for the fifth-largest US investment bank signalled more credit turmoil to come and added to investor fears that the economy is in for a long recession.
The dollar plunged to 99.58 yen, its lowest level in 12-1/2 years, before easing to 100.20 yen, down 0.3 per cent. It was down 10 per cent against the yen so far in 2008. The euro hit $1.5688, an all-time high, before easing to $1.5613. And the dollar fell below parity with the Swiss franc for the first time ever, trading at 0.9987 francs, according to EBS, before easing to 1.0060 francs.
AND THE MONEY IS HEADED FOR SWISS VAULTS, OUT OF CIRCULATION, OUT OF LIQUIDITY AND INTO SAFE KEEPING FOR THE MASTERS OF MONEY! HOORAY FOR ME; SCREW YOU!
Is This the Beginning of a Worldwide Depression?
Barry's Blogs Special Features: World Wide Depression Feared
A Vicious Circle Ending In A Systemic Financial Meltdown
The Fed's moves amounted to window-dressing. “All the signs of stress that were there before are still here.
Fed rescues Bear Stearns in bid to quell financial panic
Credit tactic used for 1st time since Depression
Profile: Fed chairman Ben Bernanke spent much of his career studying the Depression ... and now has the chance to practice what he used to preach
(Ed.)
The problem is that Bernanke has long written about the “what- ifs” off a solution to the Great Depression without ever suggesting he understands or has a solution to the problems that cause great financial collapses. That does not inspire a lot of hope in this writer, and one of these days real soon we will be asking the question of: “When does a Recession become a Depression”, a very dangerous word game.
Again like anything of real importance the American News Media is not digging its teeth into the current economic collapse except for piecemeal bites at the housing industry, serious financial institution woes that it cannot ignore, and pronouncements and assurances out of Washington. In this case I am not sure whether it is a matter of media management/ownership control or the fact that the industry simply lacks the expertise and competence to address the issue.
The issue of competence is central to what is happening and what is going to happen. Lest we forget, the financial “well-being” hinges on: (1) Faith/confidence in the market place (that’s one of those “I believe, therefore it is so things” that we mortals fashion, an intangible, unprovable, and as we have seen a real psychologically mood shifting phenomenon, even within the span of a day, (2) Profits, without regard for any other values (The only numbers that matter are those that add up like 1+1=2 and there is no problem unless serious negative values rear their ugly heads. (3) Market Theories, and they are just that, manmade, man concocted theories that have validity in “some” people’s minds as long as their portfolios are flush and profitable.
Those theories are no better than most weather forecasts, in fact weather forecast are more accurate these days as they have some basis in technologically verifiable science. There is no science of economics and there never will be. We, human beings determine the definitions for economics, rules for being a player in the game of finance and we in our thoughts and acts/decisions screw things up and then have figure out how to correct them, hence the popularity of the expression “market/financial correction” or fixing our screw ups. And then there are the damned word games we play….
In the 30s, is a well agreed after the fact, that the three main causational factors were that(1) “The Economy was a novelty”. That translated into the game of massive “speculator get-rich quick investment”, (2) There was no lack of money; there was a lack of money in circulation. It was tied up in speculative investments and inventory. There was no Liquidity; no one understood that and no one knew how to “Correct” the problem. There was/ is no rule book or cook book. And (3) When panic set in people emptied the banks turned whatever they could into hard hoarded cash stashes…and crash!
That has not changed. We are still making up the theoretical rules and explanations as we go in a vastly more complicated world of corporate world finance! We can only guess what domino has to fall before they all tumble without warning.
The warning sign are here again and we are responding with baby steps and band aids and we are “willing” to speak of slowdowns, corrections, “possible recession”, but there are those, and they are not irrational alarmists, who dare to warn of the Big “D” word…Depression.
Have things gotten beyond our grasp?
Are we in the denial of “Recessions come and go?
Are we unwilling to consider and take drastic preventive actions against the real possibility of another Big “D”? Read on. Consider an think!
Global c.bank liquidity injection no cure for dollar
Forget $1,000-an-hour call girls called Kristen. When it comes to making a lot of rich men very happy, nobody does it like Ben Bernanke managed this week.
The chairman of the US Federal Reserve is nicknamed "Helicopter Ben" and on Tuesday the rotor blades were whirring again as he dropped out of the grey Wall Street sky on another daring mission to free up the credit markets.
Even if he did do something similar in August and December, the Fed's decision to accept $200 billion (£100 billion) of housing debt to prevent an implosion of the mortgage finance industry and a full-blown economic crisis was described in this newspaper as the boldest action since the Great Depression.
This is rather fitting for a man who has devoted much of his career to studying the causes of that bleak period in American history.
As Mr Bernanke, 54, likes to say when asked about the importance of studying those years: "If you want to learn about seismic activity, you study earthquakes, not tremors."
In his textbooks and Ivy League lectures, the former economics professor has argued that it was the failure to respond to the collapse of financial institutions in the 1930s - and the panicking of banks - that turned a market crash into a general economic disaster.
America and the wider global economy now face their most serious crisis for years. Catapulted to the centre of the storm, Mr Bernanke now has a chance to practise what he used to preach as he dictates the monetary policy of the world's biggest economy.
An economics professor at Princeton until 2005, Mr Bernanke once expected to spend his whole working life in academia.
He is a different man from his predecessor, the outspoken and egotistical Alan Greenspan. Mr Bernanke remains a donnish figure - self-deprecating and shy at the same time as being serious and methodical.
In public, he chooses his words carefully and invariably delivers them in a monotone. All in all, the textbook economist.
And could anyone but an economist (or maybe a car thief) claim - as Mr Bernanke does - that he can learn a lot about people simply by watching when they take their car keys out of their pocket?
Bernanke gets them out as he leaves his office, long before he gets to his car. Has he shown himself quite so far-sighted in his stewardship of the US economy? The jury is still out on whether he is the right man for the job.
While critics will concede that he inherited many of his problems from his predecessor, they have leveled various accusations at the Bernanke regime at America's central bank.
Many like to cite how his intellectual support for Mr Greenspan's low interest rate policy in the 1990s fed the housing bubble that has now burst so spectacularly.
Some say he has been too quick to bail out Wall Street whenever it gets into trouble, while others contend that the cloistered ex-academic doesn't understand Wall Street enough.
His contentious record on fighting inflation earned him the "helicopter" nickname after a speech in 2002 in which he reminded some of his mentor Milton Friedman's plan to "helicopter drop" free money to prevent deflation, when prices and the money supply go into decline.
Mr Bernanke grew up in Dillon, South Carolina, in an observant Jewish family that was one of the few Jewish households of any kind in the town.
His father and uncle owned a pharmacy, which their father had bought after emigrating to the US from Austria after the First World War.
The young Bernanke played saxophone in his school's marching band. Mr Greenspan played the instrument, too, so they have that in common.
Mr Bernanke gained an economics degree at Harvard and remained in academia, eventually winning a professorship at Princeton's economics department when he was just 31.
He remains religious but doesn't talk about it publicly, along with much else about his private life. He is married to Anna, a Spanish language teacher, and they have two children.
At Princeton, he became head of the economics department and surprised colleagues by becoming ambitious. A series of policy-oriented papers got him noticed in Washington and in 2002 President George W Bush invited him to become a governor of the Fed.
He spent less than a year as chairman of Mr Bush's Council of Economic Advisers - widely regarded as a prelude to running the Fed - before he was confirmed in his current job in February 2006.
While at the White House, he apparently amused the president by always wearing pale socks with white suits.
One of Mr Bernanke's first promises on taking over the Fed was that he would make the organization more transparent.
He soon learned not to be so transparent himself when he got into trouble after privately telling a female business reporter at a White House dinner that the markets had underestimated how tough he was on inflation.
When his comments were reported, the markets plunged. Unlike Mr Greenspan, he has since been a low-profile chairman, choosing his comments - and who he makes them to - with care.
He rarely discusses his politics and has been reluctant to express a view on political issues. When asked once about tax policy, he said it was none of his business.
However, he has admitted to being a Republican, although clearly a rather less radical one than Mr Greenspan, who was a devotee of the arch-libertarian thinker Ayn Rand.
In some of the textbooks he wrote while still an academic, Mr Bernanke distanced himself from such a philosophy, instead emphasizing how Adam Smith was worried by relative income inequality.
He also differs from Mr Greenspan in his managerial approach. While his predecessor was aloof, Mr Bernanke is a team player and is credited with being a good listener and a quick thinker.
At the crucial eight scheduled meetings a year of the Federal Open Market Committee, US monetary policy is thrashed out by Fed governors and bank presidents.
Mr Greenspan used to insist on speaking first and woe betide anyone who disagreed with him. The atmosphere around the committee's 27ft mahogany table is very different now.
The bank bosses often arrive without a clue of what Mr Bernanke is thinking. And because he likes to speak last, everyone has the chance to speak their mind.
It is a democratic, collegiate approach that his supporters say is one of his biggest strengths. He will need to draw on every one of them in the months ahead.
Mike Whitney
Information Clearing House
March 14, 2008
"It’s another round of the credit crisis. Some markets are getting worse than January this time. There is fear that something dramatic will happen and that fear is feeding itself," Jesper Fischer-Nielsen, interest rate strategist at Danske Bank, Copenhagen; Reuters
Yesterday’s action by the Federal Reserve proves that the banking system is insolvent and the US economy is at the brink of collapse.
It also shows that the Fed is willing to intervene directly in the stock market if it keeps equities propped up. This is clearly a violation of its mandate and runs contrary to the basic tenets of a free market.
Investors who shorted the market yesterday, got clobbered by the not so invisible hand of the Fed chief.
In his prepared statement, Bernanke announced that the Fed would add $200 billion to the financial system to shore up banks that have been battered by mortgage-related losses.
The news was greeted with jubilation on Wall Street where traders sent stocks skyrocketing by 416 points, their biggest one-day gain in five years.
“It’s like they’re putting jumper cables onto a battery to kick-start the credit market,” said Nick Raich, a manager at National City Private Client Group in Cleveland. “They’re doing their best to try to restore confidence.”
“Confidence”? Is that what it’s called when the system is bailed out by Sugar-daddy Bernanke?
To understand the real meaning behind the Fed’s action; it’s worth considering some of the stories which popped up in the business news just days earlier. For example, last Friday, the International Herald Tribune reported:
“Tight money markets, tumbling stocks and the dollar are expected to heighten worries for investors this week as pressure mounts on central banks facing what looks like the “third wave” of a global credit crisis….Money markets tightened to levels not seen since December, when year-end funding problems pushed lending costs higher across the board.”
The Herald Tribune said that troubles in the credit markets had pushed the stock market down more than 3 percent in a week and that the same conditions which preceded the last two crises (in August and December) were back stronger than ever. In other words, liquidity was vanishing from the system and the market was headed for a crash.
A report in Reuters reiterated the same ominous prediction of a “third wave” saying:
“The two-year U.S. Treasury yields hit a 4-year low below 1.5 percent as investors flocked to safe-haven government bonds….The cost of corporate bond insurance hit record highs on Friday and parts of the debt market which had previously escaped the turmoil are also getting hit.”
Risk premiums were soaring and investors were fleeing stocks and bonds for the safety of government Treasuries; another sure sign that liquidity was disappearing.
Reuters: "The level of financial stress is … likely to continue to fuel speculation of more immediate central bank action either in the form of increased liquidity injections or an early rate cut," Goldman Sachs said in a note to clients.”
Indeed. When there’s a funding-freeze by lenders, investors hit the exits as fast as their feet will carry them. That’s why the lights started blinking red at the Federal Reserve and Bernanke concocted a plan to add $200 billion to the listing banking system.
New York Times columnist Paul Krugman also referred to a “third wave” in his article “The Face-Slap Theory”. According to Krugman, “The Fed has been cutting the interest rate it controls - the so-called Fed funds rate – (but) the rates that matter most directly to the economy, including rates on mortgages and corporate bonds, have been rising. And that’s sure to worsen the economic downturn.”…(Now) “the banks and other market players who took on too much risk are all trying to get out of unsafe investments at the same time, causing significant collateral damage to market functioning.”
What the Times’ columnist is describing is a run on the financial system and the onset of “a full-fledged financial panic.”
The point is, Bernanke’s latest scheme is not a remedy for the trillion dollar unwinding of bad bets. It is merely a quick-fix to avoid a bloody stock market crash brought on by prevailing conditions in the credit markets.
Bernanke coordinated the action with the other members of the global banking cartel—The Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank—and cobbled together the new Term Securities Lending Facility (TSLF), which “will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS.
The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally.” (Fed statement)
The plan, of course, is wildly inflationary and will put additional downward pressure on the anemic dollar. No matter. All of the Fed’s tools are implicitly inflationary anyway, but they’ll all be put to use before the current crisis is over.
The Fed’s statement continues: “The Federal Open Market Committee has authorized increases in its existing temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB). These arrangements will now provide dollars in amounts of up to $30 billion and $6 billion to the ECB and the SNB, respectively, representing increases of $10 billion and $2 billion. The FOMC extended the term of these swap lines through September 30, 2008.”
So, why is the Fed issuing loans to foreign banks?
Isn’t that a tacit admission of its guilt in the trillion dollar subprime swindle? Or is it simply a way of warding off litigation from angry foreign investors who know they were cheated with worthless toxic bonds?
In any event, the Fed’s largess proves that the G-10 operates as de facto cartel determining monetary policy for much of the world. (The G-10 represents roughly 85% of global GDP)
As for Bernanke’s Term Securities Lending Facility (TSLF) it is intentionally designed to circumvent the Fed’s mandate to only take top-grade collateral in exchange for loans.
No one believes that these triple A mortgage-backed securities are worth more than $.70 on the dollar.
In fact, according to a report in Bloomberg News yesterday: “AAA debt fell as low as 61 cents on the dollar after record home foreclosures and a decline to AA may push the value of the debt to 26 cents, according to Credit Suisse Group.
“The fact that they’ve kept those ratings where they are is laughable,” said Kyle Bass, chief executive officer of Hayman Capital Partners, a Dallas-based hedge fund that made $500 million last year betting lower-rated subprime-mortgage bonds would decline in value.
“Downgrades of AAA and AA bonds are imminent, and they’re going to be significant.”
Bass estimates most of AAA subprime bonds in the ABX indexes will be cut by an average of six or seven levels within six weeks.” (Bloomberg News)
The Fed is accepting these garbage bonds at nearly full-value. Another gift from Santa Bernanke.
Additionally, the Fed is offering 28 day repos which –if this auction works like the Fed’s other facility, the TAF—the loans can be rolled over free of charge for another 28 days.
Yippee. The Fed found a way to recapitalize the banks with permanent rotating loans and the public is none the wiser.
The capital-starved banksters at Citi and Merrill must feel like they just won the lottery.
Unfortunately, Bernanke’s move effectively nationalizes the banks and makes them entirely dependent on the Fed’s fickle generosity.
The New York Times Floyd Norris sums up Bernanke’s efforts like this:
“The Fed’s moves today and last Friday are a direct effort to counter a loss of liquidity in mortgage-backed securities, including those backed by Fannie Mae and Freddie Mac.
Given the implied government guarantee of Freddie and Fannie, rising yields in their paper served as a warning sign that the crunch was worsening and investor confidence was waning.
On Oct. 30, the day before the Fed cut the Fed funds rate from 4.75 percent to 4.5 percent, the yield on Fannie Mae securities was 5.75 percent. Today the Fed Funds rate is 3 percent, and the Fannie Mae rate is 5.71 percent, virtually the same as in October…..A sign of the Fed’s success, or lack of same, will be visible in that rate.
It needs to come down sharply, in line with Treasury bond rates. Today, the rate was up for most of the day, but it did fall back at the end of the day. Watch that rate for the rest of the week to see indications of whether the Fed’s move is really working to restore confidence.”
Norris is right; it all depends on whether rates go down and whether that will rev-up the moribund housing market again.
Of course, that is predicated on the false assumption that consumers are too stupid to know that housing is in its biggest decline since the Great Depression.
This is just another slight miscalculation by the blinkered Fed.
Housing will not be resuscitated anytime in the near future, no matter what the conditions; and you can bet on that.
The last time Bernanke cut interest rates by 75 basis points mortgage rates on the 30-year fixed actually went up a full percentage point. This had a negative affect on refinancing as well as new home purchases. The cuts were a total bust in terms of home sales.
Still, equities traders love Bernanke’s antics and, for the next 24 hours or so, he’ll be praised for acting decisively.
But as more people reflect on this latest maneuver, they’ll see it for what it really is; a sign of panic.
Even more worrisome is the fact that Bernanke is quickly using every arrow in his quiver.
Despite the mistaken belief that the Fed can print money whenever it chooses; there are balance sheets constraints; the Fed’s largess is finite. According to Market Watch:
"Counting the currency swaps with the foreign central banks, the Fed has now committed more than half of its combined securities and loan portfolio of $832 billion, Lou Crandall, chief economist for Wrightson ICAP noted.
‘The Fed won’t have run completely out of ammunition after these operations, but it is reaching deeper into its balance sheet than before."
Steve Waldman at inter fluidity draws the same conclusion in his latest post:
“After the FAF expansion, repo program, and TSLF, the Fed will have between $300B and $400B in remaining sterilization capacity, unless it issues bonds directly.” (Calculated Risk)
So, Bernanke is running short of ammo and the housing bust has just begun. That’s bad. As the wave of foreclosures, credit card defaults and commercial real estate bankruptcies continue to mount; Bernanke’s bag o’ tricks will be near empty having frittered most of his capital away on his Beluga-munching buddies at the investment banks.
But that’s only half the story. Bernanke and Co. are already working on a new list of hyper-inflationary remedies once the credit troubles pop up again. According to the Wall Street Journal, the Fed has other economy-busting scams up its sleeve:
“With worsening strains in credit market threatening to deepen and prolong an incipient recession, analysts are speculating that the Federal Reserve may be forced to consider more innovative responses -– perhaps buying mortgage-backed securities directly.
“As credit stresses intensify, the possibility of unconventional policy options by the Fed has gained considerable interest, said Michael Feroli of J.P. Morgan Chase. He said two options are garnering particular attention on Wall Street: Direct Fed lending to financial institutions other than banks and direct Fed purchases of debt of Fannie Mae and Freddie Mac or mortgage-backed securities guaranteed by the two shareholder-owned, government-sponsored mortgage companies. ( “Rate Cuts may not be Enough”, David Wessel, Wall Street Journal)
Wonderful. So now the Fed is planning to expand its mandate and bail out investment banks, hedge funds, brokerage houses and probably every other brandy-swilling Harvard grad who got caught-short in the subprime mousetrap. Ain’t the “free market” great?
But none of Bernanke’s bailout schemes will succeed. In fact, all he’s doing is destroying the currency by trying to reflate the equity bubble.
And how much damage is he inflicting on the dollar? According to Bloomberg, “the risk of losses on US Treasury notes exceeded German bunds for the first time ever amid investor concern the subprime mortgage crisis is sapping government reserves….Support for troubled financial institutions in the U.S. will be perceived as a weakening of U.S. sovereign credit.”
America is going broke and the rest of the world knows it. Bernanke is just speeding the country along the ever-steepening downward trajectory.
Timothy Geithner, President of the New York Fed put it like this:
“The self-reinforcing dynamic within financial markets has intensified the downside risks to growth for an economy that is already confronting a very substantial adjustment in housing and the possibility of a significant rise in household savings.
The intensity of the crisis is in part a function of the size of the preceding financial boom, but also of the speed of the deterioration in confidence about the prospects for growth and in some of the basic features of our financial markets.
The damage to confidence—confidence in ratings, in valuation tools, in the capacity of investors to evaluate risk—will prolong the process of adjustment in markets. This process carries with it risks to the broader economy.”
Without a hint of irony, Geithner talks about the importance of building confidence on a day when the Fed has deliberately distorted the market by injecting $200 billion in the banking system and sending the flagging stock market into a steroid-induced rapture. Astonishing.
The stock market was headed for a crash this week, but Bernanke managed to swerve off the road and avoid a head-on collision.
But nothing has changed.
Foreclosures are still soaring, the credit markets are still frozen, and capital is being destroyed at a faster pace than any time in history.
The economic situation continues to deteriorate and even unrelated parts of the markets have now been infected with subprime contagion.
The massive deleveraging of the banks and hedge funds is beginning to intensify and will continue to accelerate until a bottom is found. That’s a long way off and the road ahead is full of potholes.
"In the United States, a new tipping point will translate into a collapse of the real economy, final socio-economic stage of the serial bursting of the housing and financial bubbles and of the pursuance of the US dollar fall.
The collapse of US real economy means the virtual freeze of the American economic machinery: private and public bankruptcies in large numbers, companies and public services closing down massively.” (Statement from The Global Europe Anticipation Bulletin (GEAB)
Is that too gloomy? Then take a look at these eye-popping charts which show the extent of the Fed’s lending operations via the Temporary Auction Facility. The loans have helped to make the insolvent banks look healthy, but at great cost to the country’s economic welfare. http://benbittrolff.blogspot.com/2008/03/really-scary-fed-charts-march.html
The Fed established the TAF in the first place; to put a floor under mortgage-backed securities and other subprime junk so the banks wouldn’t have to try to sell them into an illiquid market at fire-sale prices.
But the plan has backfired and now the Fed feels compelled to contribute $200 billion to a losing cause. It’s a waste of time.
UBS puts the banks total losses from the subprime fiasco at $600 billion.
If that’s true, (and we expect it is) then the Fed is out of luck because, at some point, Bernanke will have to throw in the towel and let some of the bigger banks fail.
And when that happens, the stock market will start lurching downward in 400 and 500 point increments.
But what else can be done? Solvency can only be feigned for so long. Eventually, losses have to be accounted for and businesses have to fail. It’s that simple.
So far, the Fed’s actions have had only a marginal affect.
The system is grinding to a standstill.
The country’s two largest GSEs, Fannie Mae and Freddie Mac, which are presently carrying $4.5 trillion of loans on their books, are teetering towards bankruptcy.
Both are gravely under-capitalized and (as a recent article in Barron’s shows) Fannies equity is mostly smoke and mirrors. No wonder investors are shunning their bonds. Additionally, the cost of corporate bond insurance is now higher than any time in history, which makes funding for business expansion or new projects nearly impossible.
The wheels have come of the cart. The debt markets are upside-down, consumer confidence is drooping and, as the Financial Times states, “A palpable sense of crisis pervades global trading floors.” It’s all pretty grim.
The banks are facing a “systemic margin call” which is leaving them capital-depleted and unwilling to lend.
Thus, the credit markets are shutting down and there’s a stampede for the exits by the big players.
Bernanke’s chances of reversing the trend are nil.
The cash-strapped banks are calling in loans from the hedge funds which is causing massive deleveraging. That, in turn, is triggering a disorderly unwind of trillions of dollars of credit default swaps and other leveraged bets. Its a disaster. Economist Nouriel Roubini predicted the whole sequence of events six months before the credit markets seized and the Great Unwind began”. Here’s a sampling of his recent testimony before Congress:
Roubini’s Testimony before Congress:
“There is now a rising probability of a "catastrophic" financial and economic outcome; a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe. (THAT IS CALLED A DEPRESSION ED.)
The Fed is seriously worried about this vicious circle and about the risks of a systemic financial meltdown….Capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue leading to a cascading and mounting cycle of losses and further credit contraction.
In illiquid market actual market prices are now even lower than the lower fundamental value that they now have given the credit problems in the economy. Market prices include a large illiquidity discount on top of the discount due to the credit and fundamental problems of the underlying assets that are backing the distressed financial assets.
Capital losses will lead to margin calls and further reduction of risk taking by a variety of financial institutions that are now forced to mark to market their positions. Such a forced fire sale of assets in illiquid markets will lead to further losses that will further contract credit and trigger further margin calls and disintermediation of credit.
To understand the risks that the financial system is facing today I present the "nightmare" or "catastrophic" scenario that the Fed and financial officials around the world are now worried about.
Such a scenario – however extreme – has a rising and significant probability of occurring. Thus, it does not describe a very low probability event but rather an outcome that is quite possible.”
Roubini has been right from the very beginning, and he is right again now. Bernanke can place himself at the water’s edge and lift his hands in defiance, but the tide will come in and wash him out to sea anyway. The market is correcting and nothing is going to stop it.
Depression risk might force U.S. to buy assets
By John Parry
NEW YORK (Reuters) - Fear that a hobbled banking sector may set off another Great Depression could force the U.S. government and Federal Reserve to take the unprecedented step of buying a broad range of assets, including stocks, according to one of the most bearish market analysts.
That extreme scenario, which would aim to stave off deflation and stabilize the economy, is evolving as the base case for Bernard Connolly, global strategist at Banque AIG in London.
In the late 1980s and early 1990's Connolly worked for the European Commission analyzing the European monetary system in the run up to the introduction of the euro currency.
"Avoiding a depression is, unfortunately, going to have to involve either a large, quasi-permanent increase in the budget deficit -- preferably tax cuts -- or restoring over valuation of equity prices," Connolly said on Monday.
"If conventional monetary policy is not enough to produce that result, the government may have to buy equities, financed by the Fed," Connolly said.
Legal changes would be needed to give the Federal Reserve and the U.S. government the authority to buy stocks. Currently the Federal Reserve can buy only debt issued by the Treasury, as well as U.S. agency debentures and mortgage-backed securities.
While Connolly already sees some parallels with the 1930s, he expects that a more pro-active central bank and government will “probably” help avert a repeat of that scenario today.
The buildup of a credit bubble in recent years was similar to the late 1920s run-up to the Great Depression, he said.
Then, investors were very optimistic about new technologies, and stocks rose against a backdrop of low inflation, and a trend toward globalization. There was even an equivalent of the modern day subprime mortgage debt meltdown in the form of U.S. loans to Latin American countries which had to be written off.
"The big difference is the attitude of central banks and specifically the attitude of the Fed," Connolly said.
Some economists have blamed the U.S. economy's travails in the 1930s on the Federal Reserve's hesitation to inject reserves into the banking system.
However, today's Fed has tried to preempt the danger of a protracted economic slump and has responded swiftly to a credit crunch in the past year and gathering signs of deterioration in the economy, Connolly said.
The Fed has stepped up its temporary additions of reserves to the banking system, and swiftly slashed its benchmark fed funds target rate to 3.0 percent from 5.25 percent in September. Analysts expect at least another 0.5 percentage point cut in next month.
At the same time, "the fed funds rate can't stay significantly above the 2-year note yield," Connolly said.
On Tuesday, the 2-year Treasury note yield was at 2.00 percent, not far above the lowest level since 2004.
The Fed "almost certainly" has to cut the funds rate to 2.0 percent by the end of this monetary easing cycle, he said. If conditions in the banking sector worsen, the Fed could cut the funds rate to 1.0 percent, a low last seen in June 2004.
Global banks have already written down more than $100 billion of bad debts associated with the U.S. subprime mortgage debt meltdown and housing market decline.
However, Fed rate cuts alone are unlikely to avert a prolonged period of economic weakness because the danger still exists that a burdened banking sector will choke off credit to consumers and households.
"The Fed probably can't fix it all on its own now," Connolly said. "There is a chance the Fed gets forced into unconventional cooperation with government," which could involve buying a range of assets to reflate their value.
(This is an artificial/temporary feel good/look good approach that does not solve the under lying problem; only delays the inevitability of collapse or a painful real solution that the big monied interests don’t even want to contemplate…restraint on their financial anarchy. Ed.)
That would be reminiscent of some steps the U.S. government took in the 1930s when the economy was mired in deflation and high unemployment.
One turning point came when agricultural prices were restored to their pre-slump levels, Connolly said. Such measures were among the New Deal programs that President Franklin D. Roosevelt launched to bolster the economy.
Either way, investors face bleak prospects now without some kind of further government intervention, he said.
Those steps might offer clues to investors in stocks and commodities, which Connolly expects the government might be ultimately force to step in and buy to stabilize markets. He expects that a depression may be averted, but only by the state and the Fed reinflating the price of such assets.
Beleaguered housing, non-government fixed-income securities and even the now overvalued Treasury market have little hope of generating substantial returns for investors over the next few years, he said.
"If we don't avoid depression, the only thing worth holding is cash," he added.
Say Again ” Its Still The Economy Stupid” Depression Looms
Posted on March 14th, 2008
by psburton in 2008 Election Coverage, All News, Arizona News, Blogosphere News, Breaking News, Business News, Stock Market News, US Politics
They do not call them depressions anymore. I think because the last one we had, was so bad the folks in charge of naming them, were warned by the powers that be, of dire personal consequences if they didn’t call it something else.
George Bush spoke today before the New York economic club, Seems he’s done his part its “other” folks to blame for the possible economic slow down,
Gosh if we democrats and other disloyal Americans would simply stop emboldening the terrorists by failing to support his legislation.
George places his faith in the Fed and wishes to assure all he is confident of an economic rebound, not that we are in a recession mind you, rather “folks” are worried, And he wants to assure them he is optimistic despite the pessimistic gossip by the friends of Alkida in the congress.
As someone who made his money in the market, I can tell you this, its worse than you can possibly imagine and then some.
To be frank I have mine, and while I am not your Uncle or the childhood friend you grew up with, I can give you this advice, buy some silver friend, I mean actual silver dollars and other liquidity.
It may not get AS BAD as when my Grandfather was my age and the banks closed, but I am telling you, if you are the average middle class American and do not have at least a half million dollars in net worth you can liquefy and the ability to tough out a year of being unemployed, read the grapes of wrath or watch the movie cause were headed down that path.
Unless Hillary Clinton or Barack Obama wins in the kind of landslide that entails a veto proof congress, Many of YOU will be standing in a bread line this time next year. Like I said I have mine, more then I will ever spend even in the most dire of economic cycles.
But many of you lack a clue on just how bad things will get in the next year, Keep always in mind it will eventually turn around, quicker I think with Hillary, but I am stepping aside on politics today, Barack is also capable of fixing the mess that the con man and his crew from Crawford will leave when Marine one lifts off for the journey back to his ranch, and though it pains me to admit it.
George Bush is not the individual responsible for the depression that’s coming this way, YOU are, sorry the only way the Republic will overcome the problem is by owning up and tackling the hurdles ahead.
Many of you bought a home when you couldn’t afford it, and most of you bought more home than you could ever hope to pay off, Yes George Bush & company encouraged the foolishness, but we all have to accept our share in the mess to come.
Hell in the early 1980’s I lost my shirt when the Hunt brothers of Texas attempted to dominate the world silver market, My Grand Dad was alive at the time, he warned me and I wouldn’t listen.
I wasn’t even going to tell him I was so ashamed, but I come from an Irish Catholic family, he came to my office while I was looking at bills I couldn’t pay, I was hardly past twenty one and my dreams of retirement at 25 were in the dumpster.
I was literally broke and my condo was in foreclosure, and Mom was not going to write anymore checks, He didn’t embarrass me, I am at that age where I need a personal assistant he explained, I know its an imposition but he had come hat in hand to ask if I would I consider moving in with him and helping him with the activities of daily living.
There is no such thing as a free lunch he would explain to me over the next few years, when he was young they would put air in the beer to cover the cost of the free sandwiches offered at lunch he explained, He had grown up dirt poor, never forgot what it was like to go hungry, saw too it while his children wanted for nothing, they learned the value of a dollar.
My Mom and Dad had spoiled me as some parents tend to when they have money, and he spent the last few years of his life instilling his financial ethic in me, When he died I could have invested the money he left me in several speculative deals that later paid off for those who did, I could have today been a whole lot wealthier than I am, but I could also have lost it all.
I turned away from the quick and easy wealth men like George Bush promise and to be fair can deliver more often than not.
I made conservative and frugal investment choices, It took another twenty five years of blood sweat and tears but his advice was the right choice at least for me, The only sure thing he would tell me is the cash you have in your pocket and the property you own out right, every deal, contract and business opportunity is speculation at its heart and you must treat it as such and avoid risking more than 10% of your capitol at any one time.
It was difficult, remember yahoo and Google, GAWD I could have my own lear jet today or I could be facing the next few years wondering if I will have a job and a roof over my head and food on the table.
In Phoenix the house we bought cost a half a million dollars a couple years ago, In today’s market If your lucky you might get half that if you could find a buyer to begin with, Gas will be four buck a gallon by the end of summer, Milk will be three bucks and a loaf of bread a buck sixty.
George Bush and John McCain are betting that more Americana’s than not will be so desperate by election time they can convince them they will essentially “loan” the American people enough money in the form of rebates, tax cuts and stimulus packages to ride out the bad times, Sadly the deception may work or enough republicans will retain seats to frustrate a democratic Presidents effort to undo the damage done by folks who have and have more.
The Republics only hope for a quick turn around from the recession the GOP declines to concede we are in is to raise taxes on the wealthy, put an end to giving corporations a blank check and addressing the cost consequences of a society where too many people lack health-care and attend schools run by folks who think creation science is actually science.
That’s my view yours may be different
By Jessica Hall
PHILADELPHIA (Reuters) - U.S. private equity firm Carlyle Group should emerge relatively unscathed by the cratering of affiliate Carlyle Capital Corp (CARC.AS: Quote, Profile, Research) (CCC), which invested in mortgage-backed securities and defaulted on about $16.6 billion of debt, analysts said on Thursday.
CCC, a fund listed in Amsterdam, said late on Wednesday that it expected its lenders to seize its remaining residential mortgage-backed securities assets after failing to reach a deal to refinance its debt.
The problems faced by CCC -- the decline in the value of its mortgage investments -- marked another example of the broader global credit crunch instead of a warning sign of trouble ahead for The Carlyle Group [CYL.UL], analysts said.
"They don't lose much on a fund like this. It's like when you drop an egg in your kitchen. You just clean it up and throw it away. It's bad if you're the egg, but your kitchen is going to be fine," said Roy Smith, a professor at New York University's Stern School of Business.
The Carlyle Group's exposure to CCC is minimal from a financial standpoint, analysts said. The Carlyle Group said CCC is a separate legal and business entity, and CCC's defaults did not trigger cross-defaults for any Carlyle borrowings.
"The people who invest with private equity funds are savvy investors. They recognize that this was an experiment undertaken by Carlyle to get into the mortgage business and they have little other exposure," Smith said.
The Carlyle Group, one of the world's largest private equity funds with more than $75 billion under management, owns companies including TV ratings firm Nielsen, doughnut seller Dunkin' Brands and former General Motors unit Allison Transmission.
Managers at Washington, D.C.-based buyout firm The Carlyle Group own about 15 percent of CCC, which listed in July 2007 as the credit crisis began spreading through globally. Shares of CCC sank 87 percent to 35 cents, a fraction of their $20 debut price last July.
The Carlyle Group said it actively participated in the negotiations with CCC's lenders and last year extended a $150 million credit line to its affiliate.
The one area where The Carlyle Group could face a minimal public-relations blemish is in trying to attract new funds at a time of big headlines about its affiliate collapsing.
"The Carlyle Group's general reputation continues to be excellent; however, its fund-raising ability for private equity ventures was certainly not helped by the problems with Carlyle Capital," said Ray Soifer of Soifer Consulting LLC.
"In this, Carlyle is not alone; the entire private equity community is encountering similar issues, to one degree or another," Soifer said.
One lawyer, who specializes in private investment firms, said The Carlyle Group will likely be unaffected by the CCC meltdown, both in financial liability and in public perception terms.
"These firms consist of a whole bunch of different businesses and they are all structured as limited liabilities," said Jay Gould of Pillsbury Winthrop Shaw Pittman, who does not represent Carlyle.
Gould said Carlyle's long-cultivated image as astute investors would probably remain largely unaffected, since many banks, brokerages, hedge funds and others have been forced to take big write-downs over declining asset values amid credit travails in recent months.
"A lot of people are getting a pass on this and ultimately they will too," said Gould.
(Reporting by Jessica Hall in Philadelphia and Dane Hamilton in New York, editing by Leslie Gevirtz)
CARLYLE CAPITAL ON VERGE OF COLLAPSE AFTER TALKS FAIL
Fund expects lenders to seize assets; to default on remaining debt soon
By Simon Kennedy, MarketWatch
Last update: 11:47 a.m. EDT March 13, 2008
CARYF 0.76, +0.47, +163.0%) said that it expects lenders will soon take possession of "substantially all" its remaining assets after it was unable to meet surging margin calls on its portfolio of residential-mortgage-backed securities.
Carlyle's woes contributed to a slump in European and Asian stock markets Thursday as investors feared credit problems will continue to spread. See Europe Markets.
The news also helped drive the dollar lower in foreign-exchange trading, sending it under 100 Japanese yen for the first time since 1995. See Currencies.
Shares of Carlyle Capital were all but wiped out, tumbling 95% in Amsterdam to 15 cents. The stock has plunged from the $12 range since the fund first announced it had missed some margin payments earlier in March.
So far, Carlyle Capital said it's defaulted on $16.6 billion of its debt, and its remaining borrowing is expected to go into default soon.
At the end of December, the fund had total equity of about $670 million and had used short-term loans, or repurchase agreements, to fund an investment portfolio of close to $22 billion.
Carlyle Capital's highly leveraged business model has made it particularly susceptible to declines in the value of its residential-mortgage-backed securities. Margin calls, or demands for cash to cover losses, have soared since the end of February as credit markets have worsened.
Justin Urquhart Stewart, co-founder of Seven Investment Management, said he expects to see more funds blow up as credit lines disappear and lenders become more cautious.
"Lending that might have been available three months ago just isn't there any more," Urquhart Stewart said.
Edmund Shing, a strategist at BNP Paribas, said a "raft of hedge funds" with similar investments are also shutting up shop. The forced sale of Carlyle Capital's assets is a concern because there aren't many buyers around, he added.
Talks collapse
Negotiations with lenders effectively ended late Wednesday when the pricing service used by certain lenders reported another drop in the value of mortgage-backed securities. That was expected to trigger another $97.5 million of margin calls Thursday, on top of the roughly $400 million of demands that Carlyle Capital received in the previous week.
"Overall, it has become apparent to the company that the basis on which lenders are willing to provide financing against the company's collateral has changed so substantially that a successful refinancing is not possible," the fund said in a statement.
The fund said Carlyle Group assisted in its negotiations and had been willing to provide additional capital if a successful refinancing could have been achieved.
Carlyle Group, the investment adviser to the fund, has provided a $150 million line of credit. The private-equity firm said in a statement Wednesday that individuals at the group own around 15% of the fund's securities, but none of the group's other investment vehicles have invested in Carlyle Capital.
The fund's portfolio is comprised entirely of securities issued by Fannie Mae (FNM:
Fannie Mae
Last: 22.36-0.61-2.66%
4:02pm 03/14/2008
Delayed quote data
Financial markets' biggest test since 1930s
By Edmund Conway
Last Updated: 12:01am GMT 15/03/2008
| Of all the nightmares dreamt by finance boffins, this has to rank among their worst. One of the biggest investment banks in the world is now only a fingernail's grip away from going bust. The very firmament of global finance has just ruptured, and while one can only guess at the probable effects, they won't be pretty. Money: Bear Stearns crisis sparks UK recession fears In the coming few weeks, financial markets face their biggest test since the 1930s. This is not hyperbole. The experts and traders who populate Wall Street and the City of London are now realizing that this crisis, which only a few months ago they thought might be over by Christmas, is here to stay for quite some time. But so what? How much difference can the problems of an American investment bank really make to our lives here? True, a few thousand Bear Stearns employees in Britain may lose their jobs, but given their bumper bonuses in recent years, they are hardly likely to join the bread-line. Yes, the share prices of both Bear Stearns and its British counterparts have slumped, causing investors some losses, but we are not talking about penury. Yes, America may be in recession (that is more or less official now), but life doesn't seem so unpleasant over here. Step out on to the high street today and does it really feel as though we are facing economic disaster? Hardly. The great British habit of shopping is still as strong as ever. Families are still borrowing and spending, albeit at a slower rate than in previous years. The vast majority of us still have our jobs - indeed, unemployment is at its lowest level in some decades. If this is what an economic crisis is like, you might well say, bring it on. The scene could hardly have been more different six months ago, to the day, when Britain's high streets were lined with queues of worried savers waiting to withdraw their cash from Northern Rock. The bank has been nationalized; shareholders are likely to lose a lot of money, but has the world stopped spinning? Hardly. These are quite reasonable sentiments - indeed, from his maiden Budget speech this week, it seems they are shared by Alistair Darling. I am sorry to say he is wrong. The events on Wall Street yesterday, where the Federal Reserve has had to bail out Bear Stearns, will have severe implications for the economy. This tale will be played out thousands of miles away, but as sure as night follows day it will contribute to a serious economic slowdown on these shores. House prices will fall further, unemployment will rise sharply, profits will tumble and a recession is a real possibility. In truth, the story here is not about Bear Stearns itself. Its collapse - and, indeed, the collapse of Northern Rock - are really symptoms of much more deep-seated problems in the economies on both sides of the Atlantic. Quite simply, we have borrowed too much over the past decade or so. Individuals and businesses alike are guilty. When banks ran out of money to lend to their customers, rather than closing the floodgates they came up with an ingenious solution. They found they could continue to lend mortgages and loans if they sliced up the debt and sold it on to other canny investors. They did so, and it was this "securitisation" that helped drive house prices ever higher both here and in America over the past three or four years (low central bank interest rates were the main driver before this). The only problem was that those investors weren't as canny as they thought. They paid massive prices for these bundles of debt, despite the high probability that a certain proportion of the debtors would default. When house prices in America started to fall, as they inevitably would after so many years of break-neck inflation, all too many investors found themselves landed with these toxic packages, no longer worth much more than the paper they were written on. This is where Bear Stearns comes in - of all the US banks, it is the most heavily exposed to the mortgage market. So many of those loans have gone bad in recent months that it has for some time been tipped as the next big name to topple - the American Northern Rock. Unsurprisingly, as a result of all this chaos, banks have pretty much given up on securitisation and this is where our rather vulnerable economy comes in. As the Chancellor himself pointed out this week (you, like much of the House of Commons may have snoozed through this bit), until recently mortgage companies were relying on this funny money for almost a third of their lending. This source of cash has simply disappeared - and not just for mortgages but for almost every kind of debt you can think of. It doesn't take a financial genius to realize the consequences: with far less cash at their disposal, banks are terrified of doling out more money to customers. They are raising their mortgage rates, and this is why families' borrowing costs are rising even as the Bank of England cuts interest rates. The fact that none of the banks has any idea how badly their competitors have fared has only served to intensify the crisis. The interbank lending markets - the oil that lubricates the financial system - have been all but frozen for months. The collapse of a big name like Bear Sterns can only make things worse, sparking fears that there are more dead bodies out there waiting to be exhumed. The consequences are stark. It will become far more difficult to get hold of debt in the future. First-time buyers intending to buy a house without a big deposit will struggle. Anyone with even a slightly blemished credit rating will find it much harder to apply for credit cards or overdrafts. Every week, thousands of households having to renew their mortgages are getting an awful shock as they realise they cannot avoid being shoved on to a painfully expensive deal. All this probably sounds more than a little gloomy, but there are some thin rays of sunshine. British banks seem to have weathered the storm more than their American counterparts - having lost less money, they are more happy to lend. Both the Bank of England and the Fed will keep cutting interest rates until the financial sector starts to recover. And while it is going too far to claim that Britain is better placed to withstand this turbulence than any other country, it genuinely is in a better place than in previous decades. However, the longer this crisis goes on, the bigger the impact on the economy will be. Like it or not, our fate is tied to the Bear Stearns of this world. |
JPMORGAN AND FED MOVE TO BAIL OUT BEAR STEARNS
Published: March 14, 2008
Bear Stearns, facing a grave liquidity crisis, reached out to JPMorgan on Friday for a short-term financial lifeline and now faces the prospect of the end of its 85-year run as an independent investment bank.
Multimedia
CNBC Video: Bear Chief Said Firm on Solid Ground (March 12, 2008)
Back Story With Jeff Sommer and Floyd Norris (mp3)
With the support of the Federal Reserve Bank of New York, JPMorgan said in a statement that it had “agreed to provide secured funding to Bear Stearns, as necessary, for an initial period of up to 28 days.”
For the next month, JPMorgan will work with Bear Stearns to reach a solution for its financing crisis. Options could include organizing permanent financing or, according to people briefed on the discussions, buying the bank for a discounted price.
“JPMorgan Chase is working closely with Bear Stearns on securing permanent financing or other alternatives for the company,” JPMorgan said in its statement.
The rescue plan represents a devastating if not ultimately final blow for Bear Stearns, a scrappy and until now resilient investment bank that carved out a niche for itself by mastering the intricacies of the United States mortgage market.
But after two of its hedge funds that specialized in the subprime mortgage market collapsed last summer, Bear’s expertise became its Achilles’ heel as the plummeting market for complex securities tied to subprime mortgages severely damaged its core business.
In recent days, Bear’s stock has plummeted more than 20 percent as investors as well as clients and broker dealers have shied away from the firm, fearing that their continued exposure to plunging real estate assets threatened their solvency.
The announcement on Friday did little to prevent wholesale selling in the firm’s stock, which was down more than 40 percent, to $32.15 a share, shortly after 3 p.m., after falling as low as $26.85, its lowest level in nearly a decade.
On Wednesday, Bear’s chief executive, Alan Schwartz, said in an interview on CNBC that his firm had ample liquidity, but his words have not been enough to prevent what seem to be a classic run on the bank.
In a statement issued on Friday, he said: “Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity. We have tried to confront and dispel these rumors and parse fact from fiction. Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations.”
While Bear may have some degree of short-term cash on hand, it is by no means sufficient if all its creditors demand to be paid at once. It has some valuable businesses like its hedge fund servicing and back office unit, as well as aspects of its real estate operations, but in light of the current market conditions it is unlikely to command a high price, especially from JPMorgan, which has said repeatedly that it is not in the market for an investment bank.
In a conference call on Friday, Mr. Schwartz, who just succeeded James E. Cayne as chief executive late last year, struck a frustrated tone as he described the run on Bear’s bank over the last 24 hours, raising the possibility that the firm’s days as an independent bank are numbered. He reiterated that Bear Stearns had started the week with sufficient capital. But four days’ worth of speculation had so rattled customers and lenders that by late Thursday they sought to cash out.
“As we got through the day, we recognized that at the pace things were going, there could be continued liquidity demands that would outstrip our resources,” he said.
Standard & Poor’s confirmed that situation after it cut its long-term credit rating on the company to BBB from A and said more downgrades were likely.
“Bear has been experiencing significant stress in the past week because of concerns regarding its liquidity position,” S.& P. said in a statement. “Although the firm’s liquidity, at the beginning of the week, held steady with excess cash of $18 billion, ongoing pressure and anxiety in the markets resulted in significant cash outflows toward the week’s end, leaving Bear with a significantly deteriorated liquidity position at end of business on Thursday.”
Mr. Schwartz confirmed on the conference call that the firm is working with the investment bank Lazard to consider strategic alternatives, a stock financial phrase that often signifies a potential sale. Though Lazard, Bear Stearns approached JPMorgan about securing a credit facility.
“This is a bridge to a more permanent solution and it will allow us to look at strategic alternative that can run the gamut,” he said. “Investors will be able to see the facts instead of the fiction. We will look for any alternative that serves our customers as well as maximizes shareholder value.”
Rushing to the aid of troubled American financial institutions represents the same moral hazard for the US Federal Reserve as the Bank of England faced in its botched rescue of Northern Rock.
The prospect of a collapsed Bear Stearns or Citigroup is too horrible to contemplate and most people agree that, despite persistent rumors that a bank was going under, the Fed will do all it can to keep America's troubled financial institutions afloat.
If only one institution were allowed to go bust, it would lead to a fire sale of assets that would create a serious domino effect for the others. If one collapsed, a second would follow quickly, pushing down asset prices farther and creating a panic that would set off a vicious chain reaction. (And Just Who The Hell Is Going To Save Them All? Where is the one that starts the cascade to catastrophe? It’s out there somewhere! Ed.)
“The central banks would never let a Bear Stearns or a Citigroup go bust,” one banker said last night. “They would get together and say: 'We're going to help you.' The knock-on impact of not doing so would be too severe.”
Wall Street fears a big US bank is in trouble
Regulator to pursue rescue of bond insurers
Northern Rock's near-collapse saw an already tight interbank lending market freeze almost entirely, and the same would occur if the market got whiff of a near-failure once again. The Fed has a history of bank bailouts. Continental Illinois was once the seventh-largest deposit bank in America, but in May 1984 it became insolvent because of bad oilfield loans that it bought from another bank. In the month before the bank went bust, a run saw depositors strip $10 billion from the coffers of Continental Illinois. The Fed and the Federal Deposit Insurance Corporation, a body set up in 1933 to protect bank deposits, were worried that if Continental Illinois collapsed, there would be widespread instability in the financial sector, so they pumped $4.5 billion into the bank and removed the bank's executives.
Continental Illinois shareholders lost their stake but bondholders were protected. The bank ran for ten years with 80 per cent of its shares owned by the US Government, until it was bought in 1994 by the Bank of America.
Lionel Robbins's The Great Depression (Macmillan, 1934) is one of the great economic works of our time. Its greatness lies not so much in originality of economic thought, as in the application of the best economic thought to the explanation of the cataclysmic phenomena of the Great Depression. This is unquestionably the best work published on the Great Depression.
At the time that Robbins wrote this work, he was perhaps the second most eminent follower of Ludwig von Mises (Hayek being the first). To his work, Robbins brought a clarity and polish of style that I believe to be unequalled among any economists, past or present. Robbins is the premier economic stylist.
In this brief, clear, but extremely meaty book, Robbins sets forth first the Misesian theory of business cycles, and then applies it to the events of the 1920s and 1930s.
We see how bank credit expansion in the United States, Great Britain, and other countries (in Britain generated because of the rigid wage structure caused by unions and the unemployment insurance system, as well as a return to the gold standard at too high a par; and in the United States generated by a desire to inflate in order to help Britain as well as an absurd devotion to the ideal of a stable price level) drove the civilized world into a great depression.
Then Robbins shows how the various nations took measures to counteract and cushion the depression that could only make it worse: propping up unsound, shaky business positions; inflating credit; expanding public works; keeping up wage rates (e.g., Hoover and his White House conferences) – all things that prolonged the necessary depression adjustments, and profoundly aggravated the catastrophe. Robbins is particularly bitter about the wave of tariffs, exchange controls, quotas, etc. that prolonged crises, set nation against nation, and fragmented the international division of labor.
And this is not all. Robbins also sets the European scene in the context of the disruptions of the largely free market brought about by World War I; the statization, unionization, and cartelization of the economy that the war brought about; the dislocation of industrial investment and agricultural overproduction brought about by war demand, etc. And above all, the gold standard of pre–World War I, that truly international money, was disrupted and never really brought back again. Robbins shows the tragedy of this, and defends the gold standard vigorously against charges that it "broke down" in 1929.
He shows that the US inflation in 1927 and 1928 when it was losing gold, and Britain's cavalierly going off gold when its bank discount rate was a low 4.5%, was in flagrant violation of the "rules" of the gold standard (as was Britain's persistent inflationism in the 1920s).
Robbins also has excellent sections demonstrating the Misesian point that one intervention leads inexorably to another intervention or else repeal of the original policy. He also has a critique of the idea of central planning and a fine summation of the Misesian demonstration that socialist economies cannot calculate. Almost every important relevant point is touched upon and handled in unexceptionable fashion. Thus, Robbins, touching on the monopoly question, shows that the only really important monopolies are those created and fostered by governments. He has not the time for a rigorous demonstration of this, but his apercus are important, stimulating, and sound. Robbins sums up his book in this superb passage:
It has been the object … to show that if recovery is to be maintained and future progress assured, there must be a more or less complete reversal of contemporary tendencies of governmental regulation of enterprise. The aim of governmental policy in regard to industry must be to create a field in which the forces of enterprise and the disposal of resources are once more allowed to be governed by the market.
But what is this but the restoration of capitalism? And is not the restoration of capitalism the restoration of the causes of depression?
If the analysis of this essay is correct, the answer is unequivocal. The conditions of recovery which have been stated do indeed involve the restoration of what has been called capitalism. But the slump was not due to these conditions. On the contrary, it was due to their negation. It was due to monetary mismanagement and State intervention operating in a milieu in which the essential strength of capitalism had already been sapped by war and by policy.
Ever since the outbreak of war in 1914, the whole tendency of policy has been away from that system, which in spite of the persistence of feudal obstacles and the unprecedented multiplication of the people, produced that enormous increase of wealth per head…. Whether that increase will be resumed, or whether, after perhaps some recovery, we shall be plunged anew into depression and the chaos of planning and restrictionism – that is the issue which depends on our willingness to reverse this tendency.
The Great Depression was the worst economic slump ever in U.S. history, and one which spread to virtually all of the industrialized world. The depression began in late 1929 and lasted for about a decade. Many factors played a role in bringing about the depression; however, the main cause for the Great Depression was the combination of the greatly unequal distribution of wealth throughout the 1920's, and the extensive stock market speculation that took place during the latter part that same decade.
The maldistribution of wealth in the 1920's existed on many levels. Money was distributed disparately between the rich and the middle-class, between industry and agriculture within the United States, and between the U.S. and Europe. This imbalance of wealth created an unstable economy. The excessive speculation in the late 1920's kept the stock market artificially high, but eventually lead to large market crashes. These market crashes, combined with the maldistribution of wealth, caused the American economy to capsize.
The "roaring twenties" was an era when our country prospered tremendously. The nation's total realized income rose from $74.3 billion in 1923 to $89 billion in 19291. However, the rewards of the "Coolidge Prosperity" of the 1920's were not shared evenly among all Americans. According to a study done by the Brookings Institute, in 1929 the top 0.1% of Americans had a combined income equal to the bottom 42%2. That same top 0.1% of Americans in 1929 controlled 34% of all savings, while 80% of Americans had no savings at all3. Automotive industry mogul Henry Ford provides a striking example of the unequal distribution of wealth between the rich and the middle-class.
Henry Ford reported a personal income of $14 million4 in the same year that the average personal income was $7505. By present day standards, where the average yearly income in the U.S. is around $18,5006, Mr. Ford would be earning over $345 million a year! This maldistribution of income between the rich and the middle class grew throughout the 1920's. While the disposable income per capita rose 9% from 1920 to 1929, those with income within the top 1% enjoyed a stupendous 75% increase in per capita disposable income7.
A major reason for this large and growing gap between the rich and the working-class people was the increased manufacturing output throughout this period. From 1923-1929 the average output per worker increased 32% in manufacturing8. During that same period of time average wages for manufacturing jobs increased only 8%9. Thus wages increased at a rate one fourth as fast as productivity increased. As production costs fell quickly, wages rose slowly, and prices remained constant, the bulk benefit of the increased productivity went into corporate profits. In fact, from 1923-1929 corporate profits rose 62% and dividends rose 65%10.
The federal government also contributed to the growing gap between the rich and middle-class. Calvin Coolidge's administration (and the conservative-controlled government) favored business, and as a result the wealthy who invested in these businesses. An example of legislation to this purpose is the Revenue Act of 1926, signed by President Coolidge on February 26, 1926, which reduced federal income and inheritance taxes dramatically11. Andrew Mellon, Coolidge's Secretary of the Treasury, was the main force behind these and other tax cuts throughout the 1920's. In effect, he was able to lower federal taxes such that a man with a million-dollar annual income had his federal taxes reduced from $600,000 to $200,00012. Even the Supreme Court played a role in expanding the gap between the socioeconomic classes. In the 1923 case Adkins v. Children's Hospital, the Supreme Court ruled minimum-wage legislation unconstitutional13.
The large and growing disparity of wealth between the well-to-do and the middle-income citizens made the U.S. economy unstable.
For an economy to function properly, total demand must equal total supply. In an economy with such disparate distribution of income it is not assured that demand will always equal supply. Essentially what happened in the 1920's was that there was an oversupply of goods. It was not that the surplus products of industrialized society were not wanted, but rather that those whose needs were not satiated could not afford more, whereas the wealthy were satiated by spending only a small portion of their income. A 1932 article in Current History articulates the problems of this maldistribution of wealth:
We still pray to be given each day our daily bread. Yet there is too much bread, too much wheat and corn, meat and oil and almost every other commodity required by man for his subsistence and material happiness. We are not able to purchase the abundance that modern methods of agriculture, mining and manufacturing make available in such bountiful quantities14.
Three quarters of the U.S. population would spend essentially all of their yearly incomes to purchase consumer goods such as food, clothes, radios, and cars. These were the poor and middle class: families with incomes around, or usually less than, $2,500 a year. The bottom three quarters of the population had an aggregate income of less than 45% of the combined national income; the top 25% of the population took in more than 55% of the national income15. While the wealthy too purchased consumer goods, a family earning $100,000 could not be expected to eat 40 times more than a family that only earned $2,500 a year, or buy 40 cars, 40 radios, or 40 houses.
Through such a period of imbalance, the U.S. came to rely upon two things in order for the economy to remain on an even keel: credit sales, and luxury spending and investment from the rich.
One obvious solution to the problem of the vast majority of the population not having enough money to satisfy all their needs was to let those who wanted goods buy products on credit. The concept of buying now and paying later caught on quickly. By the end of the 1920's 60% of cars and 80% of radios were bought on installment credit16.
Between 1925 and 1929 the total amount of outstanding installment credit more than doubled from $1.38 billion to around $3 billion17. Installment credit allowed one to "telescope the future into the present", as the President's Committee on Social Trends noted18. This strategy created artificial demand for products which people could not ordinarily afford.
It put off the day of reckoning, but it made the downfall worse when it came. By telescoping the future into the present, when "the future" arrived, there was little to buy that hadn't already been bought. In addition, people could not longer use their regular wages to purchase whatever items they didn't have yet, because so much of the wages went to paying back past purchases.
The U.S. economy was also reliant upon luxury spending and investment from the rich to stay afloat during the 1920's. The significant problem with this reliance was that luxury spending and investment were based on the wealthy's confidence in the U.S. economy. If conditions were to take a downturn (as they did with the market crashed in fall and winter 1929), this spending and investment would slow to a halt.
While savings and investment are important for an economy to stay balanced, at excessive levels they are not good. Greater investment usually means greater productivity. However, since the rewards of the increased productivity were not being distributed equally, the problems of income distribution (and of overproduction) were only made worse. Lastly, the search for ever greater returns on investment lead to wide-spread market speculation.
Maldistribution of wealth within our nation was not limited to only socioeconomic classes, but to entire industries. In 1929 a mere 200 corporations controlled approximately half of all corporate wealth19. While the automotive industry was thriving in the 1920's, some industries, agriculture in particular, were declining steadily. In 1921, the same year that Ford Motor Company reported record assets of more than $345 million, farm prices plummeted, and the price of food fell nearly 72% due to a huge surplus20. While the average per capita income in 1929 was $750 a year for all Americans, the average annual income for someone working in agriculture was only $27321. The prosperity of the 1920's was simply not shared among industries evenly. In fact, most of the industries that were prospering in the 1920's were in some way linked to the automotive industry or to the radio industry.
The automotive industry was the driving force behind many other booming industries in the 1920's. By 1928, with over 21 million cars on the roads, there was roughly one car for every six Americans22.
The first industries to prosper were those that made materials for cars. The booming steel industry sold roughly 15% of its products to the automobile industry23. The nickel, lead, and other metal industries capitalized similarly. The new closed cars of the 1920's benefited the glass, leather, and textile industries greatly. And manufacturers of the rubber tires that these cars used grew even faster than the automobile industry itself, for each car would probably need more than one set of tires over the course of its life.
The fuel industry also profited and expanded. Companies such as Ethyl Corporation made millions with items such as new "knock-free" fuel additives for cars24. In addition, "tourist homes" (hotels and motels) opened up everywhere. With such a wealthy upper-class many luxury hotels were needed.
In 1924 alone, hotels such as the Mayflower (Washington D.C.), the Parker House (Boston), The Palmer House (Chicago), and the Peabody (Memphis) opened their doors25. Lastly, and possibly most importantly, the construction industry benefited tremendously from the automobile. With the growing number of cars, there was a big demand for paved roads.
During the 1920's Americans spent more than a $1 billion each year on the construction and maintenance of highways, and at least another $400 million annually for city streets26. But the automotive industry affected construction far more than that. The automobile had been central to the urbanization of the country in the 1920's because so many other industries relied upon it. With urbanization came the need to build many more apartment buildings, factories, offices, and stores. From 1919 to 1928 the construction industry grew by around $5 billion dollars, nearly 50%27.
Also prospering during the 1920's were businesses dependent upon the radio business. Radio stations, electronic stores, and electricity companies all needed the radio to survive, and relied upon the constant growth of the radio market to expand and grow themselves. By 1930, 40% of American families had radios28. In 1926 major broadcasting companies started appearing, such as the National Broadcasting Company. The advertising industry was also becoming heavily reliant upon the radio both as a product to be advertised, and as a method of advertising.
Several factors lead to the concentration of wealth and prosperity into the automotive and radio industries. First, during World War I both the automobile and the radio were significantly improved upon. Both had existed before, but radio had been mostly experimental. Due to the demands of the war, by 1920 automobiles, radios, and the parts necessary to build these things were being produced in large quantities; the work force in these industries had been formed and had become experienced. Manufacturing plants were already in place. The infrastructure existed for the automotive and radio industries to take off. Second, due to federal government's easing of credit, money was available to invest in these industries. Thanks to pressure from President Coolidge and the business world, the Federal Reserve Board kept the rediscount rate low.
The federal government favored the new industries as opposed to agriculture. During World War I the federal government had subsidized farms, and payed absurdly high prices for wheat and other grains. The federal government had encouraged farmers to buy more land, to modernize their methods with the latest in farm technology, and to produce more food. This made sense during that war when war-ravaged Europe had to be fed too.
However as soon as the war ended, the U.S. abruptly stopped its policies to help farmers. During the war the United States government had paid an unheard of $2 a bushel for wheat, but by 1920 wheat prices had fallen to as low as 67 cents a bushel29. Farmers fell into debt; farm prices and food prices tumbled. Although modest attempts to help farmers were made in 1923 with the Agricultural Credits Act, farmers were generally left out in the cold by the government.
The problem with such heavy concentrations of wealth and such massive dependence upon essentially two industries is similar to the problem with few people having too much wealth. The economy is reliant upon those industries to expand and grow and invest in order to prosper. If those two industries, the automotive and radio industries, were to slow down or stop, so would the entire economy. While the economy did prosper greatly in the 1920's, because this prosperity wasn't balanced between different industries, when those industries that had all the wealth concentrated in them slowed down, the whole economy did.
The fundamental problem with the automobile and radio industries was that they could not expand ad infinitum for the simple reason that people could and would buy only so many cars and radios. When the automotive and radio industries went down all their dependents, essentially all of American industry, fell. Because it had been ignored, agriculture, which was still a fairly large segment of the economy, was already in ruin when American industry fell.
A last major instability of the American economy had to do with large-scale international wealth distribution problems. While America was prospering in the 1920's, European nations were struggling to rebuild themselves after the damage of war. During World War I the U.S. government lent its European allies $7 billion, and then another $3.3 billion by 192030. By the Dawes Plan of 1924 the U.S. started lending to Axis Germany. American foreign lending continued in the 1920's climbing to $900 million in 1924, and $1.25 billion in 1927 and 192831.
Of these funds, more than 90% were used by the European allies to purchase U.S. goods32. The nations the U.S. had lent money to (Britain, Italy, France, Belgium, Russia, Yugoslavia, Estonia, Poland, and others) were in no position to pay off the debts. Their gold had flowed into the U.S. during and immediately after the war in great quantity; they couldn't send more gold without completely ruining their currencies. Historian John D. Hicks describes the Allied attitude towards U.S. loan repayment:
In their view the war was fought for a common objective, and the victory was as essential for the safety of the United States as for their own. The United States had entered the struggle late, and had poured forth no such contribution in lives and losses as the Allies had made. It had paid in dollars, not in death and destruction, and now it wanted its dollars back.33
There were several causes to this awkward distribution of wealth between U.S. and its European counterparts. Most obvious is that fact that World War I had devastated European business. Factories, homes, and farms had been destroyed in the war. It would take time and money to recuperate. Equally important to causing the disparate distribution of wealth was tariff policy of the United States.
The United States had traditionally placed tariffs on imports from foreign countries in order to protect American business. However these tariffs reached an all-time high in the 1920's and early 1930's. Starting with the Fordney-McCumber Act of 1922 and ending with the Hawley-Smoot Tariff of 1930, the United States increased many tariffs by 100% or more34. The effect of these tariffs was that Europeans were unable to sell their own goods in the United States in reasonable quantities.
In the 1920's the United States was trying "to be the world's banker, food producer, and manufacturer, but to buy as little as possible from the world in return."35 This attempt to have a constantly favorable trade balance could not succeed for long. The United States maintained high trade barriers so as to protect American business, but if the United States would not buy from our European counterparts, then there was no way for them to buy from the Americans, or even to pay interest on U.S. loans.
The weakness of the international economy certainly contributed to the Great Depression. Europe was reliant upon U.S. loans to buy U.S. goods, and the U.S. needed Europe to buy these goods to prosper. By 1929 10% of American gross national product went into exports36. When the foreign countries became no longer able to buy U.S. goods, U.S. exports fell 30% immediately. That $1.5 billion of foreign sales lost between 1929 to 1933 was fully one eighth of all lost American sales in the early years of the depression37.
Mass speculation went on throughout the late 1920's. In 1929 alone, a record volume of 1,124,800,410 shares were traded on the New York Stock Exchange38. From early 1928 to September 1929 the Dow Jones Industrial Average rose from 191 to 38139. This sort of profit was irresistible to investors. Company earnings became of little interest; as long as stock prices continued to rise huge profits could be made. One such example is RCA corporation, whose stock price leapt from 85 to 420 during 1928, even though it had not yet paid a single dividend40.
Even these returns of over 100% were no measure of the possibility for investors of the time. Through the miracle of buying stocks on margin, one could buy stocks without the money to purchase them. Buying stocks on margin functioned much the same way as buying a car on credit. Using the example of RCA, a Mr. John Doe could buy 1 share of the company by putting up $10 of his own, and borrowing $75 from his broker. If he sold the stock at $420 a year later he would have turned his original investment of just $10 into $341.25 ($420 minus the $75 and 5% interest owed to the broker).
That makes a return of over 3400%! Investors' craze over the proposition of profits like this drove the market to absurdly high levels. By mid 1929 the total of outstanding brokers' loans was over $7 billion41; in the next three months that number would reach $8.5 billion42. Interest rates for brokers loans were reaching the sky, going as high as 20% in March 192943. The speculative boom in the stock market was based upon confidence. In the same way, the huge market crashes of 1929 were based on fear.
Prices had been drifting downward since September 3, but generally people where optimistic. Speculators continued to flock to the market. Then, on Monday October 21 prices started to fall quickly.
The volume was so great that the ticker fell behind44.
Investors became fearful. Knowing that prices were falling, but not by how much, they started selling quickly.
This caused the collapse to happen faster. Prices stabilized a little on Tuesday and Wednesday, but then on Black Thursday, October 24, everything fell apart again.
By this time most major investors had lost confidence in the market.
Once enough investors had decided the boom was over, it was over.
Partial recovery was achieved on Friday and Saturday when a group of leading bankers stepped in to try to stop the crash.
But then on Monday the 28th prices started dropping again. By the end of the day the market had fallen 13%45. The next day, Black Tuesday an unprecedented 16.4 million shares changed hands46. Stocks fell so much, that at many times during the day no buyers were available at any price47.
This speculation and the resulting stock market crashes acted as a trigger to the already unstable U.S. economy.
Due to the maldistribution of wealth, the economy of the 1920's was one very much dependent upon confidence. The market crashes undermined this confidence.
The rich stopped spending on luxury items, and slowed investments. The middle-class and poor stopped buying things with installment credit for fear of loosing their jobs, and not being able to pay the interest.
As a result industrial production fell by more than 9% between the market crashes in October and December 192948. As a result jobs were lost, and soon people starting defaulting on their interest payment.
Radios and cars bought with installment credit had to be returned. All of the sudden warehouses were piling up with inventory. The thriving industries that had been connected with the automobile and radio industries started falling apart.
Without a car people did not need fuel or tires; without a radio people had less need for electricity. On the international scene, the rich had practically stopped lending money to foreign countries. With such tremendous profits to be made in the stock market nobody wanted to make low interest loans.
To protect the nation's businesses the U.S. imposed higher trade barriers (Hawley-Smoot Tariff of 1930). Foreigners stopped buying American products.
More jobs were lost, more stores were closed, more banks went under, and more factories closed.
Unemployment grew to five million in 1930, and up to thirteen million in 193249. The country spiraled quickly into catastrophe. The Great Depression had begun.
End This Post….
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