This is where the bailout money will come from
Posted on 09/23/2008 10:03:28 PM PDT by Kaslin
Estimates of how much money a government program will cost are notoriously unreliable. Estimates of the cost of the current bailout in the financial markets run into the hundreds of billions of dollars, and some say it may reach or exceed a trillion.
Many people have trouble even forming some notion of what such numbers as billion and trillion mean. One way to get some idea of the magnitude of a trillion is to ask: How long ago was a trillion seconds?
A trillion seconds ago, no one on this planet could read and write. Neither the Roman Empire nor the ancient Chinese dynasties had yet come into existence. None of the founders of the world's great religions today had yet been born.
That's what a trillion means. Put a dollar sign in front of it and that's what the current bailout may cost.
Will that money be spent wisely? It is theoretically possible. But don't bet the rent money on it or you could end up among the homeless.
Whenever there is a lot of the taxpayers' money around, politicians are going to find ways to spend it that will increase their chances of getting re-elected by giving goodies to voters.
The longer it takes Congress to pass the bailout bill, the more of those goodies are going to find their way into the legislation. Speed is important, not just to protect the financial markets but to protect the taxpayers from having more of their hard-earned money squandered by politicians.
Regardless of what Barack Obama or John McCain may say they are going to do as president, after a trillion dollars has been taken off the top there is going to be a lot less left in the federal treasury for them to do anything with.
Already Senator Christopher Dodd is talking about extending the bailout from the financial firms to homeowners facing mortgage foreclosures-- as if the point of all this is to play Santa Claus.
The huge federal debts that we already have are the ghosts of Christmas past.
Financial institutions are not being bailed out as a favor to them or their stockholders. In fact, stockholders have come out worse off after some bailouts.
The real point is to avoid a major contraction of credit that could cause major downturns in output and employment, ruining millions of people, far beyond the financial institutions involved. If it was just a question of the financial institutions themselves, they could be left to sink or swim. But it is not.
We do not need a replay of the Great Depression of the 1930s, when the failure of thousands of banks meant a drastic reduction of credit-- and therefore a drastic reduction of the demand needed to keep production going and millions of people employed.
But bailing out people who made ill-advised mortgages makes no more sense that bailing out people who lost their life savings in Las Vegas casinos. It makes political sense only to people like Senator Dodd, who are among the reasons for the financial mess in the first place.
People usually stop making ill-advised decisions when they are forced to face the consequences of those decisions, not when politicians come to their rescue and make the taxpayers pay for decisions that the taxpayers had nothing to do with.
The Wall Street Journal, which has for years been sounding the alarm about the riskiness of Fannie Mae and Freddie Mac, recently cited Senator Christopher Dodd along with Senator Charles Schumer and Congressman Barney Frank among those on Capitol Hill who have been "shilling" for these financial institutions, downplaying the risks and opposing attempts to restrict their free-wheeling role in the mortgage market.
As recently as July of this year, Senator Dodd declared Fannie Mae and Freddie "fundamentally strong" and said there is no need for "panicking" about them. But now that the chickens have come home to roost, Senator Dodd wants to be sure to get some goodies from the rescue legislation to pass out to people likely to vote for him.
Don't make any bets on how this situation is going to turn out-- except that we can predict that politicians will blame the "greed" of other people. You can bet the rent money on that.
Ping
On Friday, the mkt players were optimistic: LIBOR (a measure of banks' confidence) rose, and the FF/ED spread narrowed 36 pts. That's a LOT, for those FReepers not familiar with it.
Yesterday and today, LIBOR has fallen sharply, and the FF/ED spread has widened CONSIDERABLY. As has the famous T-Bill/ED (or 'TED') spread.
Volatility in ED, FF, TB and EM (that's the mkt symbol for LIBOR, for some reason) has also risen sharply.
Plain English, bottom line: we're not only not OUT of the woods in this mess, we're deeper into the forest.
Believe this or not, I really don't give a damn; however, just as Dirty Harry told the punk, ''You've gotta ask yourself a question. Do I feel lucky? Well, DO ya, punk?''
To protect your assets, either convert to gold or cash; to take proactive measures (and this is risky, btw) until the Regress decide what to do, sell Dec Eurodollar futures. Any futures brokerage can handle the trade. About $1300 required per contract (be wise, and put up $3000 per), $25 per 'penny', i.e. from 96.40 to 96.39 would be a $25 move.
Or not. Do what you like, m'friends, but the notion of sitting back and letting IRAs and SEPs and 401ks and 403bs just accumulate is very, VERY dangerous now.
Good luck to all -- especially the optimists, you'll need it.
I'd be doing the "happy dance" if this statement were true.
This will end up costing $2 trillion minimum, and more likely $5 - 8 trillion if Paulson can sell enough bonds through the $700 billion bailout vehicle. I think that it would stop at $2 trillion though - because foreign countries would consider America an interesting 200+ year experiment at that point.
Great post.
As a favor to many FReepers here, can you expand on your explanation in more 'generic' language and give some web sites and symbols where they can track the financials that you use?
I've tried to do the same thing to help folks understand Credit Default Swaps and think that it would be invaluable in order to help people prepare for what's coming.
Thanks!
or
Click on 'Financials' at Futuresource to see front-month futures quotes.
For information on how the interest-rate mkts have historically behaved in times of stress (all of which stress historically caused by goobermint, btw), you might consult:
which is my historical price research and analysis website. No commercial here, I assure you -- anyone can use the site completely free for a month. The site IS designed for traders, so it is NOT a good place for Joe Citizen to go -- no insult at all, but a non-trader will have difficulty getting practical information (a trader will NOT have this difficulty).
This whole situation is very ugly and needlessly so. Were we, as a nation, sufficiently intelligent enough to assassinate the entire Regress (see Clancy's novel, Debt of Honor), the problem would be taken care of -- can't say 'solved', because that's false-to-fact -- in at most a year or two.
FReegards!
US Treasuries are listed on the CBOT, and eurodollars are CME (CME now owns CBOT). You can go to their website and find them...Dec08 is the front month for the treasuries, and Sep09 is front month for eurodollars but they’ve been crazy lately so some people have gone ahead and rolled to Dec09.
I trade their futures, but my time frame is minutes to hours so I can’t speak to big picture stuff as well. They’ve been buying the crap out of short-term stuff (2yr) even after its yields hit abysmally low levels, meaning institutions just want some safe place to park their money regardless of the fact they’re getting less than inflation (”flight to quality” taken to extremes).
I am wont to say the taxpayers had exactly to do with it. They elected them.
Then I thought of how many do not pay taxes.
yitbos
May God give all of us wisdom as we go forward.
Thanks!
I didn't see the actual numbers, but heard that 3 month T-bills actually went to a negative rate for a short time last week. Is this true?
I can’t tell you for sure because we don’t trade them (30/10/5/2yr only), but I’d highly doubt the 3-month went negative. It probably went negative in real terms (ie, its nominal rate minus inflation meant negative real gain), which is about where the 2yr is now.
A negative nominal rate is very rare...that means you’re paying someone to borrow money from you. It happened in Japan in 1998, but that was the government effectively paying people to take out loans, hoping to spur productivity (their economy has been completely stagnant for 15+ years).
We’re don’t have Japan’s long term problems, and since treasuries are government debt a negative rate on them would mean you’d be paying to lend the gov’t money. No one would buy treasuries (makes sense...low yield = high price, so you’d want to sell any treasuries you had, and if you didn’t have any you’d want to get short...selling treasuries is the same thing as borrowing money, which everyone would like to at a negative interest rate).
A lot of people drew parallels near the beginning of this year when the Fed cut rates to below inflation, because the argument could be made the funds rate was below inflation (depending on how you measure inflation). But that’s different from having an actual negative rate...
That's what I'm talking about. It happened last Wednesday for a short time. Investors were actually willing to pay for the safety of the T-bill.
Intra-day, anything can happen, but I think that story is very unlikely. Fed Funds (overnight interest rates, theoretically more sensitive than 90-day TBills) never got above 98.50. Hard to imagine that 90-day Ts traded more than 150 bps above Fed Funds. Downright impossible to believe, actually.
^ Wow, I need to be more careful with the editing. Lotsa typos.
Anyway, what I meant was when they cut the Fed rate below last year’s inflation numbers, people considered the real rate to be negative. That was before we had this year’s numbers obviously, and you can fudge them a little bit depending on whether you’re looking at CPI, considering food/energy costs, etc, but since then people have continued buying short term treasuries to the point where it really isn’t ambiguous.
The 2-yr is effectively negative, the 3-month must be, and the 5-yr is probably close...but that’s all in real terms. They still have (and always should have) positive nominal rates, albeit small ones.
It was an article that I read from a financial web site, so I'm sure that you're right. Those reporters are downright scary in their ignorance.
The key to watch is LIBOR, in my humble view. It's tanking, too, down 22 pips or thereabouts today. When **LIBOR** steadies up -- whenever that occurs -- buy Eurodollars and sell Fed funds against. Hell's bells, the spread on Z ED/FF is 163 pips -- that's OVERNIGHT paper vs 90-day paper. Where's it supposed to go? 200 bps? 300? Give me a break, mate. A little steadying up in LIBOR and this spread moves back to 60-70-80 pips.
Nonetheless, LIBOR is what to watch for right now.
Good trading to you!
Calling most financial reporters ‘ignorant’ is arguably the most charitable thing ever said about them. I’ve collected ‘’financial reporters’ ‘’ howlers for years, and you literally CANNOT believe the simple cretinousness of a number of these howlers.
Hell, I have an economics major and I trade this stuff for a living every day, and I don’t feel qualified making big picture calls.
My bosses, who’ve been doing this stuff since the early 90s and (by their results) are very, very, very good at it, don’t consider themselves able to make the calls these reporters who padded their schedules with Sociology 101 and Contemporary Family Issues are trying to make every day.
Doom-and-gloom to have us running to the politicians to trade individual freedoms for handouts is all they have to offer. What kind of person dreams of sending the serfs crying for dependence on community “organizing” parasites is beyond me...
''When the shjt hits the fan, which it does every few years, the impossible becomes the probable.'' -- Rich Hartman (G-d rest his soul).
Certainly true a year, two years later, and I daresay still true today. D'accord?
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