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One of the reasons I have been advocating for the bailout is that I believe the 700B is spent either way. If the bailout passes, then we spend it in 1 or 2 big chunks, versus no bailout where bernanke & paulson spend it all smaller, less effective chunks (like it has been all year).Then I see a stunner like this:http://www.msnbc.msn.com/id/27005897Not only is Wells going to pay more for Wachovia, it is doing it WITHOUT government backing! The free market is stepping up to the plate and providing a solution. As such, I have to admit we may be much farther along in this thing than I think. It may be that we are contributing a big chunk of money towrds a problem that really is very close to working itself out. Perhaps we are spending a bunch of money on a problem that can be fixed with a few more, much cheaper targeted bailouts like we have seen for the last 6 months.I still support the bailout mostly because I think the downside risk of catastrophe is unacceptably high. As I said before, 80% chance I am completely wrong in what I see, and we will have a moderate recession, no big deal - 20% chance we are unbelievably close to imploding in a wave of cross default cross collateralization requirements. 20% chance is to high to risk in my book. So in essence I regognize we may be contributing a lot of money towards something unnecessary. In a way, I see this baiout as an insurance policy. If you knew ahead of time you wouldnt need the insurance you wouldnt buy it. But since you dont know, and with the downside being so severe, and knowing that the mere purchase will relieve so much anxiety, its still worth it.
On Wells Fargo:I think you miss the big picture of what is about to happen. The government has been building some big fortress banks -- Citi, J.P. Morgan and Bank of America -- in anticipation of the waves of recapitalization to come. Once the purchases of the toxic assets are made under the $750 billion plan, then some banks are going to need cash fast to make up for their losses. Some are going to get it from the Treasury, and some are not because they are viewed as being not viable.I think what happened with Wells is the bank woke up to their future and realized it was probably going to be one of the not one of the chosen fortress banks when the day of reckoning comes. Since its execs don't want want to be in that position (and I don't blame them), it grabbed for Wacovia as a way of trying to get into the fortress bank club and avoiding its demise.I don't think it is going to work since the deal has already been made. Wells is sitting on a huge amount of bad debt since Calif. has been the epicenter of this mortgage collapse.If I am right, we will see this tick in later this month when the Treasury launches the plan. It is going to take 15 days to get the regulations out, and put it in place. There will then be a huge shakeup, and unfortunately a miserable Christmas for many.The two chunks part of the bill is just a fiction, since it is largely left to the Treasury discretion of when to use the the second after reporting to Congress. Paulson has said he believes it might only take $100 billion, others say $750 billion won't be enough. I am certainly no judge of how much it might take.
Should have read:I think what happened with Wells is the bank woke up to their future and realized it was probably not going to be one of the chosen fortress banks when the day of reckoning comes.
Great point Edward. I saw your earlier post on that and I agree, but I kinda forgot about that when I posted this AM. I actually find your explanation to be a little more plausible than mine.Incidentally, a guy down the hall just got 2 fully executed "standstill agreements" faxed to us. He negotiated a deal with lenders counsel, if the bill is passed, give us 60 more days of credit before you cut us off. Lenders counsel agreed and two small businesses have just been kept alive for the next 60 days - essentially a good will gesture from these banks "we are willing to wait and see what happens". Now there is still a good chance these two companies in question will fail, but at least now we can wind them up responsibly. We were prepared to file bankruptcy next week, hand out pink slips, and tell the majority of the workforce to pack up their things and leave. Thankfully, we now have 60 days to find a buyer, work out a deal, and, probably save the jobs of 70% of the existing workforce. I dont know about you all, but that just made my day. Lets just hope that we see more of this in the weeks ahead.
Take a look at this. "Over the last 20 years, the US has made a collection of serious mistakes that may yet prove fatal. With the collapse of the Soviet Union, the US government launched a policy of world hegemony for which it lacked the means. The US government permitted much of its manufacturing base to be located offshore to the point of even being dependent on imports for its military capability. The US government deregulated the financial sector and permitted the rise of new highly leveraged financial instruments whose failures currently threaten the US with economic collapse.University of Maryland economist Herman E. Daly points out that the current crisis is really one of the “overgrowth of financial assets relative to growth of real wealth.” Daly believes that “financial assets have grown by a large multiple of the real economy” and that “paper exchanging for paper is now 20 times greater than exchanges of paper for real commodities.” Exploding debt liens have simply outgrown the wealth.The problem, in other words, cannot be bailed out. Historically, debt that cannot be redeemed has been repealed by inflation. The same inflation that wipes out debt will wipe out savings."Please share your thoughts. If this inflation scenario comes to pass, all the efforts we put into making sensible financial decisions, including the right time to buy a home, may go to waste. It is going to be frustrating.
tedk: the inflation scenario is why there has been much interest in investing in gold and foreign, um, stuff.The original question was: if the dollar tanks, what will be a safe-haven? I think that the question has changed to: when the dollar tanks (i.e. inflation), what will tank *Iess*.
tedK:Most of the debt this blogger is writing about is already securitized with T-bills and long-term securities, so it is wrapped up in some closet or bank somewhere. It is perhaps a problem for people concerned with federal and state deficit spending, but it is not the issue we are dealing with here. In fact, there is a pressing demand for T-bills at this time, including from foreigners worried about what is about to happen in Europe, which has reneged on its debt in the past 50 years. The United States has never done that, which is why we have the gold-standard of debt.So Paul Craig Roberts and this debt-concerned blogger is mixing up apples and oranges.The immediate problem we have is not the national debt, but involves derivatives of bonds.Here's the problem:A bank takes on a $1 million bond for Ford Motor Co. to build a new motor plant. It is an AAA bond, but for the bank it is a big investment so it then takes out an insurance policy against the loan, saying that the insurance company will pay off the $1 million if Ford Motor Co. defaults. That coupon on the insurance policy is what is called a credit default swap, or a derivative, and is itself worth something so can be traded. As long as the economy is going along fine and people are buying cars, the derivative coupon is as good as gold because the insurance policy it backs up will never be triggered. But now we have the oil shock, people are no longer buying Fords, and the economy is slowing. Ford is still paying off the $1 million debt, so the insurance policy isn't triggered. But the derivative has become more risky, so is worth less. How much less? That is the issue, and that is the problem. You tell me how much that derivative is worth today? You really cannot. There are other derivatives written for mortgages, which are also causing similar problems. In fact, there are trillions of dollars of these derivatives out there that could be triggered, which is what brought AIG down. AIG was a company with $1 trillion in assets.What Treasury is about to do is set some prices for the derivatives to get the derivative trading market running. Once that happens, it should in turn get the credit markets we use going again. That, at least, is the theory.
tedk,Overall I agree with what you wrote.It is my conclusion that there are only two ways out of the massive problem we find ourselves in.1) Debt default2) InflateWhat we are currently seeing is a massive amount of deflation (money supply/credit, not necessarily prices).The in turn causes the current amount of credit to be worth more . . . i.e. that 500k mortgage is now worth MORE than it was two years ago (maybe now it is worth 600k).So as the overall debt burden becomes more and more crushing the incentives to either default of inflate become more and more prevalent.Currently, the stage has been set for the gov. to try and inflate their way out of this mess. The problem with inflation is that it is non-uniform and will have unintended consequences. If they lose the handle on inflation (and it's a real possibility) look out.There is so much debt, corporate, government, personal that it will be impossible to pay it off, unless the country goes on a massive belt tightening campaign over the next 10-20 years. Since no-one wants to admit we are too far in debt AND will do anything about it, this seems unlikely. Given that the US desperately wants to keep the AAA rating they won't default.Their only hope is to inflate, and pray they don't lose the handle.
Thanks for sharing your thoughts NovaWatcher.gte811i,I quoted from that article by Paul Craig Roberts and the words are not mine. In the short term, the Fed may reduce rates even more, only to make the later inflation even worse. Given this kind of unpredictability, any investor who comes out richer is simply lucky, not because he/she is a savvy investor. That is something society has to recognize.Edward,Your description of the immediate problem focuses on CDS in general, resulting from a weaker economy, higher oil prices, etc. However, the main problem was with mortgage backed securities (MBS) and the main trigger was the bursting of the housing bubble. The public is paying for the stupid assumption by lenders that housing prices don't fall much. Paul Craig Roberts focuses on the actions by the US in the last 20 years that planted the seeds for the current mess, and concludes that the bailout cannot help much. Sure it may help with moving the credit markets at the moment, but the underlying issue is too much leverage by too many companies and people. The deleveraging process and debt destruction can result in painful consequences for all.
tedk,Actually, the MBS (mortgage backed securities) problem was adjusting fine with workouts dealing with the downgrades, etc. because the mortgage decline has been going on now for several years, as this blog has been documenting. These MBS workouts should not be surprising since MBS are based on mathematical models and adjusting them is relatively easy with computers.The problem comes with the CDS because there is a human dimension needed to judge/decide the value of the derivatives. Mathematical models don't help with these, and it is a lot of old-fashioned work reconciling their current value.I happen to believe this Treasury plan can work because it gives these financial concerns a time-out mechanism for parking their CDS while they figure out their value and restore some trust in the credit markets. What ultimately is needed is a central market for trading derivatives so there is some place to serve the functions Wall Street and Chicago exchanges do for stocks and futures. I am sure we will hear more of this when Congress gets around to the regulation issue, and runs straight into the issue of regulating insurance instruments that currently only the states have jurisdiction to supervise.Finally, John Craig Roberts and the gold bugs conservatives have maintained for the last 20 years that we are all on the path to perdition because of spiraling government and personal debt due to reckless spending, etc. Time will tell if he is right, but it does precious little good to run around ship yelling about the lack of fire extinguishers when there is a hole in the hull and the ship is sinking. Instead it is time to find some canvas, tar and wooden shoring to fashion a temporary patch to stop the water from coming in until the captain can find some shallow mud flat.
edward: just because they are mathematical doesn't give them any sort of deterministic properties. Hell, for the most part these are simple stochastic mixture models, conditional probabilities, etc.GIGO: garbage in, garbage out. Could refer to the model (crap model) or data the assumptions are based on (crap data).You can adjust all of the parameters you want, but if your model sucks, or your data sucks (or both), you're SOL.The ironic thing is that the weakness of these models is that they don't take human behavior, humans ability to adjust to changing environments, and their biases into decision making into account (e.g. Behavioral Economics). The irony is that these sorts of stochastic models have been a part of cognitive psychology for decades (see Handbook of Mathematical Psychology; Duncan Luce; Townsend & Ashby).
Edward,I look at all points of view with an open mind. Everything I have read suggests that MBS, not just CDS is behind the current credit market problems. Also, see Sebastian Mallaby. The view that the Fed's action in keeping interest rates too low and the pressure on Fannie and Freddie to lend, were major reasons for the current mess is shared by conservatives and centrist liberals alike.
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