Seeking the Fix That Will Finally Work
Another day, another plan from the US government that failed to impress the markets.
Thursday morning, the Treasury said that they will be injecting capital directly into banks by taking an equity stake. In theory, this announcement should give banks the peace of mind to start lending as a direct capital injection from the US government should reduce the risk of counterparty failure. More specifically, Bank A would be less worried about Bank B running out of money to meet their daily obligations which would hopefully make Bank A more willing to lend to Bank B.
This was the smartest option announced by the US government to date and the one that leading economists have been calling for. Unfortunately, timing continues to be the Achilles heel of the Bush Administration. The Treasury would not start taking equity stakes until the end of the month while the $700B bailout plan has yet to be up and running. The market wants a fix now and not 3 weeks later. Between now and the end of the month, liquidity could evaporate. We saw that with AIG who quickly ate into nearly all of their $85B loan from the federal government and are now asking for more money. For the US dollar, this means more weakness against the Japanese Yen as the market waits for the fix that finally works.
The Fix that Finally Works
The question is – what will that fix be? Unfortunately there are few answers to this all important question. Some economists are calling for another round of coordinated rate cuts while others are calling for stimulus checks and direct loans to small businesses. CNBC is even talking about the Fed possibly buying equity futures, but ultimately none of these solutions solve the crisis of confidence in the banking sector. So far, the plans announced by the US government have been reactive, which means that they are in response to the hemorrhaging in the stock market and the widening of credit spreads. What really needs to happen is for banks to just buckle down and start lending. They are in the business of taking risk and it is time that they take on some risk in the interest of unfreezing the credit markets.
G7 Meeting – Most Significant Since 1985 Plaza Accord
The next hope is the G7 meeting. Interestingly enough, Treasury Secretary Paulson is calling for an emergency G20 meeting to discuss the financial crisis. The G20 is the 20 largest economies in the world which includes Australia, China, Russia and some countries in the Middle East. This acknowledges the shift in wealth over the past decade and the need to get those countries involved. The G7 meeting is happening on Friday while the G20 meeting is scheduled for the weekend. This will be the most significant G7 / G20 meeting since the 1985 Plaza Accord which marked a major turning point for the US dollar. At that time the 5 nations attending the event agreed to intervene in the currency markets and to sell US dollars to reduce the US current account deficit and to pull the US economy out of a serious recession. FX intervention is still on the table, but it remains to be seen whether even that step will enough to surprise the markets.
How Low Can Stocks Go?
The Dow Jones Industrial Average has fallen to the lowest level in 5 years. Since its peak in October 2007, the Dow has fallen close to 40 percent. The worst financial crisis prior to the current one was the Wall Street Crash of 1929, which led to the Great Depression. Stocks started selling off in October 1929 with the big crash happening on October 29th of that year. Equities did not bottom out until July 1932, after the Dow lost 89 percent of its value.
These are scary figures but it provides a perspective on how bad things have gotten in the past. We sincerely hope that this doesn’t happen, but the lower equities fall, the greater the decline in USD/JPY and carry trades.
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1.Hedged In662
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This article has 23 comments:
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JCC
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21 Comments
Oct 09 06:27 PM-
AlexS
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192 Comments
Oct 09 06:45 PM-
AlexS
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192 Comments
Oct 09 07:17 PM-
curbs-in
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427 Comments
Oct 09 08:09 PMPlease review your history. The U.S. Government pumped $$$$ after $$$$ to reduce the impact after the margins were called. We still had the Great Depression. It went on and on... No CCC, no WPA, none of the alphabet soup that FDR came up with worked. It may have eased the pain a bit, but the programs did nothing to stop or end the Great Depression. The damage was done before the interventions took place.
The Great Depression started to end with the advent of the Lend-Lease program in early1941, and of course, World War II. If you look at the Dow, it took until just about 1955 to regain the value it lost in the crash; over 25 years.
Unfortunately, a lot of the mechanisms crated to prevent another Great Depression have been circumvented or downright abused. Let me ask you this: How would FDIC prevent a bank collapse funded with only one (1) percent of deposits? That was NOT the intent of FDIC as created by the FDR Administration.
JCC, the ball is rolling and I doubt there is anything that can be done to prevent the end game. There is a worldwide "margin call" and the banks are coming up short.
Quote:
JCC
Oct 09 06:27 PM
In 1929 we did nothing to turn the situation around. Today we have a worldwide response. Hopefully the efforts will provide signs of a thaw soon. Similar to Lemmings, it looks like investors are playing follow the leader off of a cliff into the ocean. This suicidal tendency should end soon.
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curbs-in
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427 Comments
Oct 09 08:20 PMWhen you state: "Another day, another plan from the US government that failed to impress the markets."
This makes it worse. Now I hear Bush is going to speak tomorrow. All of this speaks to the market that there is a sense of "desperation"... on the part of government. This does not bode well for the markets as the basic fact that Bush feels the need to come out tomorrow to "calm" them will have the opposite effect unless he's going to rescue the American way of life in one speech.
If you look back, you can really trace this death fall for the markets back to Paulson's "sky is falling" bailout plan that need to be passed "yesterday" and eliminating judicial review. It was almost a call for an economic "coup" by the U.S. Treasury. After the bill passed... Same guy, Paulson. is telling everyone, this all takes "time." Before it was passed we didn't have time, now we have time.
The Bush Administration and Paulson have turned a dismal situation into a real emergency by totally undermining the confidence in the markets by their actions and statements.
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Jackson Cash
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293 Comments
Oct 09 08:31 PM-
Sr. EM
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12 Comments
Oct 09 10:05 PMHe needs to just do it. Period. Then the market wil respect him.
Him and Bernanke started the crisis of confidence the day they failed to protect Lehman creditors.
Something will work at some point or people will see no point in selling. All I know is that today we are closer than yesterday to that point
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SHARON T.
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15 Comments
Oct 09 10:07 PM-
moonbat1775
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707 Comments
My Website
Oct 09 10:20 PM-
curbs-in
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427 Comments
Oct 09 10:41 PManimal spirits...
dead skunks...
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who
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123 Comments
Oct 09 11:48 PM-
occdude
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12 Comments
Oct 10 12:37 AMI got news, and it aint good. Whats happening is exactly what should be happening and is a very rational event based on solid fundamentals. The irrational thing to do is a "global intervention" where the entire freaking world debases their currencies collectively and we end up tacking EVERYONE down. You want to see GLOBAL hyperinflation and depression? Keep messing around.
Everyone needs to put down the damn remote, and PAY ATTENTION! This isn't going away and squandering what precious capital that remains on propping up unproductive assets is economic suicide!
So please, I implore you, enough with the "liquidity bromides" and start thinking outside the damn box, because inside the box is where the problems start and end.
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Smarty_Pants
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1130 Comments
My Website
Oct 10 12:41 AMLet the banks fail, return to the gold standard, pick up the remaining pieces of the collapsed financial house of cards, and move on.
Oh yeah, eliminate fractional reserve banking entirely so we can all be relatively sure our money isn't evaporating behind our back and that moonbat will be happy.
Bonus points: All the elite financiers and politicians involved in this fiasco are convicted and sentenced to a lifetime of appearances on various reality tv series.
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sf94127
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61 Comments
Oct 10 12:46 AMSuggestion start shorting a couple of minutes before he hits the microphones.
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Getridofthemnow
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25 Comments
Oct 10 01:12 AMTotal Assets = $100 (but recorded at $130 using "GAAP" and "held to maturity" pricing)
Total Liabilities = $115
Net Worth = ($15)
Ben Bernanke, who should be and likely will be fired before long (if Congress and/or next President finally wakes up), along with Daddy Warbucks (ooops...I mean Hank Paulson), told Congress and the world that to correct this negative net worth situation, we merely need to increase the limit on the poor saps credit card.
Ben: Here Mr. Banker. I know you are insolvent, but please take this money and grant more loans.
Banker: But Ben, I need to reduce my liabilities and find some way to recapitalize.
Ben: No...no. Just use the cash. Make loans. The market won't know you are insolvent because you don't have to mark anything to market. We will worry about capital later. This is a liquidity crisis, not a solvency crisis.
Banker: Ben, with all due respect, I don't think you learned much up there at Princeton. The reason my depositors are leaving, wholesale and large uninsured CD, is they have kind of figured out my assets aren't worth $130. They are a bit freaked about that. If I solve the capital issue and recognize the losses - that is "repair" the REAL hole in my balance sheet - they won't leave.
Ben: Don't worry. We will insure ALL depositors.
Banker: Ben...that doesn't solve the hole in my balance sheet.
Ben: Don't worry. Be happy. Trust me...I've studied these things.
Banker: And was it a water bong or a pipe you were smoking during those studies?
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Etoile Brilliant
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17 Comments
Oct 10 01:23 AM-
Distressed Volatility
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53 Comments
My Website
Oct 10 01:25 AM-
Distressed Volatility
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53 Comments
My Website
Oct 10 01:31 AM-
Blackeyebart
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7 Comments
Oct 10 04:54 AMBank A creates an new account with Bank B. This is a special account called a "Federally Guaranteed Interbank Account". There are rules. The account can only be used to receive cash equivalent from Bank B, not Intra bank transfers or interest or charges. The Fed Guarantees the account. A certificate is issued with the loan stating the terms. The Fed gets a fee for this service.
The balance can only be paid back to Bank A.
This is cheaper for the Fed as they don't have to find the cash.
This is good for Bank B, it gets the cash to carry on.
It's good for Bank A too. Just by loaning the money they get a Federal Guarantee. But Bank A is still hanging out for the interest, so it needs to be careful who they lend to.
Surely someone can put up a better idea ...
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unfaire
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16 Comments
Oct 10 06:46 AM-
unfaire
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16 Comments
Oct 10 07:15 AM-
TinyTim
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170 Comments
Oct 10 02:28 PM-
a believer
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51 Comments
Oct 10 09:54 PMBoth articles are actually about the same thing: how far we have fallen, and how much farther down we have to go.