Posted on 01/23/2008 7:20:33 PM PST by AndyJackson
Bears beware. The New Deal of 2008 is in the works. The US Treasury is about to shower households with rebate cheques to head off a full-blown slump, and save the Bush presidency. On Friday, Mr Bush convened the so-called Plunge Protection Team for its first known meeting in the Oval Office. The black arts unit - officially the President's Working Group on Financial Markets - was created after the 1987 crash.
It appears to have powers to support the markets in a crisis with a host of instruments, mostly by through buying futures contracts on the stock indexes (DOW, S&P 500, NASDAQ and Russell) and key credit levers. And it has the means to fry "short" traders in the hottest of oils.
The team is led by Treasury chief Hank Paulson, ex-Goldman Sachs, a man with a nose for market psychology, and includes Fed chairman Ben Bernanke and the key exchange regulators.
Judging by a well-briefed report in the Washington Post, a mood of deep alarm has taken hold in the upper echelons of the administration. "What everyone's looking at is what is the fastest way to get money out there," said a Bush aide.
Emergency measures are now clearly on the agenda, apparently consisting of a mix of tax cuts for businesses and bungs for consumers. Fiscal action all too appropriate, regrettably.
We face a version of Keynes's "extreme liquidity preference" in the 1930s - banks are hoarding money, and the main credit arteries of the financial system remain blocked after five months
"In terms of any stimulus package, we're considering all options," said Mr Bush. This should be interesting to watch. The president is not one for half measures. He has already shown in Iraq and on biofuels that he will pursue policies a l'outrance once he gets the bit between his teeth.
The only question is what the president can manage to push through a Democrat Congress. The Plunge Protection Team - long kept secret - was last mobilised to calm the markets after 9/11. It then went into hibernation during the long boom.
It seems he failed to spot the immediate threat from mortgage securities and the implosion of the commercial paper market. But never mind.
The White House certainly has grounds for alarm. The global picture is darkening by the day. The Baltic Dry Index has been falling hard for seven weeks, signalling a downturn in bulk shipments. Singapore's economy contracted 3.2pc in the final quarter of last year, led by a slump in electronics and semiconductors.
The Tokyo bourse kicked off with the worst New Year slide in more than half a century as the Seven Samurai exporters buckled. The Topix is down 24pc from its peak. If Japan and Singapore are stalling, it is a fair bet that China's efforts to tighten credit are starting to bite. Asia is not going to rescue us. On the contrary.
Keep an eye on Japan, still the world's top creditor by far, with $3 trillion in net foreign assets. The Bank of Japan has been the biggest single source of liquidity for the global asset boom over the last five years. An army of investors - Japanese insurers and pension funds, housewives and hedge funds borrowing at near zero rates in Tokyo - have sprayed money across the Antipodes, South Africa, Brazil, Turkey, Iceland, Latvia, the US commercial paper market and the City of London.
The Japanese are now bringing the money home, as they always do when the cycle turns. The yen has risen 13pc against the dollar and 12pc against sterling since the summer. We are witnessing the long-feared unwind of the "carry trade", valued by BNP Paribas in all its forms at $1.4 trillion.
The US data is now relentlessly grim. Unemployment jumped from 4.7pc to 5pc - or 7.7m - in December, the biggest one-month rise since the dotcom bust and clear evidence that the housing crunch has spread to the real economy.
"At this point the debate is not about a soft land or hard landing; it is about how hard the hard landing will be," said Nouriel Roubini, professor of economics at New York University.
"Financial losses and defaults are spreading from sub-prime to near-prime and prime mortgages, to commercial real estate loans, to auto loans, credit cards and student loans, and sharply rising default rates on corporate bonds. A severe systemic financial crisis cannot be ruled out. This will be a much worse recession than the mild ones in 1990-91 and 2001," he said.
Sovereign wealth funds stand ready to rescue banks, as they have already rescued Citigroup and UBS. But as Moody's pointed out this week, the estimated $2,500bn in lost wealth from the US house price crash is more than the entire net worth of all the sovereign wealth funds in the world.
Add fresh losses as the property bubbles pop in Britain, Ireland, Australia, Spain, Greece, The Netherlands, Scandinavia and Eastern Europe, as they surely must unless central banks opt for inflation (which would annihilate bonds instead, with equal damage), and you can discount $1,500bn in further attrition.
Not even a Bush New Deal can hold back the post-bubble tide that is drawing in across the globe. What it can do is buy time. Fortunately for America - and the world - the US budget deficit is a healthy 1.2pc of GDP ($163bn). Washington has the wherewithal to fund a fiscal blitz.
Britain has no such luxury. Our deficit is 3pc of GDP at the top of the cycle. Gordon Brown has shut the Keynesian door.
I thought the Fed was not supposed to purchase S&P futures. Is Evans-Pritchard a liar?
We’re doooooomed!!!!!!!
More of the same ol’ stuff. Don’t know how “they” think they are helping those of us who work for a living, but it’s the thought that counts I s’pose.
I think Ambrose Evans-Pritchard is nutjob.
Not all households. The people who paid the most in taxes won't get any rebate checks. The people who paid no taxes will get checks - but that's not a rebate! That's a handout!
When is George going to announce that he is switching to the Democratic party. His departure is past due.
If we actually have some crash and a recession and it's what ushers in the bitch into the WH, we really are.
We should have suspected something when he introduced "compassionate conservatism" into our lexicon.
>>Plunge Protection Team <<
The Clinton Whitehouse had one of those, and it had nothing to do with finance.
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"True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late and to bring about a depression."
~~Ludwig von Mises
It appears to have powers to support the markets in a crisis with a host of instruments, mostly by through buying futures contracts on the stock indexes (DOW, S&P 500, NASDAQ and Russell) and key credit levers. And it has the means to fry “short” traders in the hottest of oils.
The team is led by Treasury chief Hank Paulson, ex-Goldman Sachs, a man with a nose for market psychology, and includes Fed chairman Ben Bernanke and the key exchange regulators.
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So now in addition to the usual suspects the federal gov’t is going to manipulate the markets and try to teach those bad bad short sellers a lesson ... IDIOTS! those short sellers ARE your liquidity generators...
Can helicopter Ben be sued under RICO?
Explain to me how we are going to get a short-term stimulus plan with Nancy and Harry in charge of both Houses?
I agree this is too Keynesian for my blood, and Bush has always been more of monetarist. One has to remember, that even the Reagan administration was gun shy when it came to the Laffer Curve and was not willing to abandon Monetarist policies all together.
First we got into this mess because of runaway lose monetary policy. THis loosey-tighty policy we have now cannot fix that. It is going to take enormous fiscal efforts to inflate us out of this mess.
It’s throwing money from a helicopter...without the helicopter.
It's already happening. Fixed rate mortgages are down to almost 5%.
p.s. Nancy and Harry would not be in charge and it would be a Republican House and Senate if George had been a better leader.
If they do have a loss they want you to pay for it.
As near as I can tell, the Bushes, pere et fils, are completely innocent of any knowledge of how money works. They are just good and loyal friends of lots of folks who know how to work the system.
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