Illustration by David Simonds
Posted on 10/05/2008 3:47:52 PM PDT by TigerLikesRooster
Blocked pipes
Oct 2nd 2008 | LONDON AND NEW YORK
From The Economist print edition
When banks find it hard to borrow, so do the rest of us
Illustration by David Simonds
ANY good tradesman will tell you the importance of the bits of a house that you cannot see. Never mind the new kitchen: what about the rafters, the wiring and the pipes? So it is with financial markets. The stockmarkets are the most visible: as they soar or swoon, the headline-writers get to work. The money markets, however, are the plumbing of the system. Normally, they function efficiently and unseen, allowing investment institutions, companies and banks to lend and borrow trillions of dollars for up to a year at a time. They are only noticed when they go wrong. And, like plumbing, when they do get blocked, they make an almighty stink.
At the moment, these markets are well and truly bunged up. In the words of Michael Hartnett, a strategist at Merrill Lynch, “the global interbank market is effectively closed.” The equivalent of a run on banks has been taking place, without the queues of depositors seen outside Northern Rock, a British mortgage bank, last year. This stealthy run has been led by institutional investors and by banks themselves.
Many banks have had to be rescued by rivals or the state. This week the Irish government felt compelled to guarantee the deposits and some other liabilities of the country’s six largest banks. Surviving banks have become ultra-cautious—“just taking things one day at a time,” says Matt King, a strategist at Citigroup.
The effect has been most dramatic in the overnight rate for borrowing dollars. Bank borrowing costs reached 6.88% on September 30th, more than three times the level of official American rates....
(Excerpt) Read more at economist.com ...
Ping!
Good analogy, and scary as hell!
The big bailout is a bandaid solutuion to a hemhorrage.
That very scary Tiger
Thanks for posting that link.
If banks want money to lend they should pay a decent intrest rate on their savings accounts.
If this where real paper, as opposed to numbers in a computer, you could paper the planet six feet deep with all this junk.
The ‘bailout’ is no bailout. The Credit Default Swaps and other derivatives are now known to have been so overleveraged that they can NEVER have signigicant value, and might as well be called ZERO or close to it. Banks will not lend to each other UNTIL the detritis is exposed and CLEARED. Therefore the collapse will continue. False values cannot be hidden any longer. All govt actions in Europe and the US only prolongue and worsen the damage. Recapitalization of banks cannot occur unless the entire ‘shadow banking system’ is cleared from the books. The derivatives debt is $10 to $20 trillion by recent estimates (just the interest payments that must be borrowed for the rollovers of a conceptual over $1 QUADRILLION quoted by the Bank of International Settlements), and, all the G7 countries are swamped many times over by this debt. Do not think bailout...it is the Titanic and the stern is almost perpendicular.
They left out the full quote:
"I'm just happy to be here and hope I can help the bank. I just want to give it my best shot and good Lord willing, things'll work out. Gotta play 'em one day at a time. A good friend once said - This is a very simple game. You borrow the money, you deposit the money, and you lend the money. Sometimes you win, sometimes you lose, and sometimes you go bankrupt."
For 25 years, from 1981 to 2006, it paid to be both a lender and borrower. As interest rates fell, bonds, equities and more tangilbe assets (homes) increased in value. It appears that rates fell too far and were inappropriately priced for the risks the lenders were taking. It will take some time and some deflation in the value of portfolios, particularly leveraged portfolios, for this situation to right itself. We will have, and probabaly already are having, the first real recession since the early 80’s.
The plan changes the accounting rules back to the good old days. No mark to market. And the band plays ons.
“Neither a borrower nor a lender be; for loan oft loses both itself and friend.”
Shakespeare
Mark to make-believe won’t work any more. The jig is up.
Unfortunately, a whole generation of business school “geniuses” bought into the notion that leverage (i.e. debt) makes sense.
We’re seeing why it doesn’t.
Your so right. Back in the Houston Bust days we had lenders who loan on the same real estate many times over only to find out the title company did not file the liens. This can be applied to the current financial markets. Once the cat is out of the bag no one can rely on the current information. Thus financing dries up.
The Wall Street Bust by Doug Noland October 02, 2008
The Wall Street Bust: I still owe readers a thorough analysis of the Q2 2008 Flow of Funds. For now, I’ll just point out some data relevant to The Current State of Acute Fragility.
Looking back, Total Non-Financial Debt (NFD) expanded $578bn during 1994. By 1998, NFD growth for the year had surpassed $1.0 TN. Non-Financial Credit increased $1.153 TN in 2001, $1.415 TN in 2002, and $1.676 TN in 2003, before reaching the $2.0 TN milestone in 2004. Incredible as it was, debt expansion then surged over the next fateful three years. Growth rose to $2.319 TN in 2005, $2.428 TN in 2006 and then to last year’s record $2.561 TN.
Importantly, this historic Credit Inflation inflated asset prices, incomes, corporate cashflows/earnings, government revenues, and various types of spending throughout the U.S. and global economy. It was a self-sustaining Bubble bolstered by ongoing Credit excesses, asset inflation and resulting purchasing power gains. But NFD growth slowed sharply to an annualized $1.726 TN during this year’s first quarter and then sank to $1.127 TN annualized during the second quarter. Credit growth is now in the process of collapsing.
At this point, there is clearly insufficient Credit expansion to support inflated asset markets; incomes and household spending; corporate cash flows and investment; and government receipts and expenditures. Lending markets are frozen, securitization markets broken, corporate and muni debt markets in disarray, derivatives markets in shambles, and the leveraged speculating community is engaged in panic de-leveraging. As a consequence, the over-indebted household, corporate and state & local sectors now face a devastating liquidity crisis.
We are today witnessing the Acute Stage of Bursting Credit Bubble Dynamics. It’s an absolute debacle, and there’s little our well-intentioned policymakers can do about it other then try to slow the collapse. To be sure, there were momentous effects to both the Economic and Financial Structures during the Bubble period between 1994’s $578bn Non-Financial Debt Growth and 2007’s $2.561 TN. It is also worth noting that Financial Sector Debt expanded $462bn in 1994 compared to $1.753 TN in 2007. Mortgage debt almost doubled in the six years 2002 through 2007 to $14.0 TN, while Financial Sector borrowings rose 75% to $16.0 TN. This Credit onslaught fostered huge distortions to the level and pattern of spending throughout the entire economy. It is today impossible both to generate sufficient Credit and to main previous patterns of spending. Economic upheaval and adjustment are today unavoidable.
Over the years I’ve chronicled this historic Bubble in Wall Street Finance. It is worth recalling today that Wall Street assets began year 2000 at about $1.0 TN and ended 2007 at $3.0 TN. The ABS market surpassed $1.0 TN in 1998 and ended 2007 at $4.5 TN. GSE assets surpassed $1.0 TN in 1997 and ended last year at almost $3.4 TN. Agency MBS surpassed $2.0 TN in 1998 and closed 2007 at almost $4.5 TN. “Fed Funds and Repos” reached $1.0 TN in 2000 and ended 2007 at $2.1 TN. This Bubble in Wall Street Finance was one of history’s most spectacular Credit expansions. It also comprised the greatest use of speculative leverage ever.
Despite last summer’s collapse in private-label MBS and related markets, the faltering Wall Street Bubble nonetheless persevered up until the Lehman collapse. While it was problematic that overall system Credit growth had slowed markedly, there remained key sectors of Credit and risk intermediation that remained very much in expansionary mode. In particular, GSE-related obligations, bank Credit, and money market fund assets had expanded rapidly in spite of the subprime collapse. Importantly, the speculator community had maintained easy access to cheap finance. As I have noted often, despite the unfolding bust in mortgage and risk assets, market faith in “money” and the core of the system had held steadfast. This all ended abruptly three weeks ago with the Lehman filing.
Today, confidence has been shattered, and Wall Street finance is a complete and unsalvageable bust. The spigot for Trillions of finance - that for years fueled the asset markets and U.S. Bubble economy – has been essentially shut off and dismantled. In particular, Wall Street finance was a mechanism for intermediating higher-yielding riskier loans. This finance provided rocket fuel for both residential and commercial real estate markets – and the attendant wealth effects. Wall Street finance also grew into the key source of finance for auto purchases, student loans, Credit cards, municipal finance and various business enterprises. Many of these loans were of a risk profile unappealing to traditional bank lending – and, hence, provided the type of higher yields quite appealing to the speculator community.
And, importantly, as the stature of Wall Street finance grew its impact upon the real economy became embedded deep into the Economic Structure. Or, stated differently, risky loans came to play a major role in determining spending and investment patterns throughout the “Bubble” economy. Wall Street finance became a major direct and indirect generator of household incomes and corporate profits. Moreover, Wall Street finance came to dominate the flow of finance both in and out of the securities markets. Wall Street could create its own liquidity and funnel it into the U.S. and global markets – and earn unimaginable returns in the process.
It is today impossible to comprehend the full ramifications from The Bust in Wall Street Finance. Yet we can be rather certain that for the foreseeable future much less Credit and liquidity will be directed to the asset markets. And, at the same time, there will be significantly less Credit Availability for riskier loans of all varieties – for the household, business, financial and the government sectors. Few appreciate that these dynamics are extremely problematic for the U.S. Bubble Economy – an economic system that had come to a large extent to be governed by asset-based and high-risk lending. These dynamics are at the heart of today’s Acute Financial and Economic Fragility and the resulting imploding markets.
The leveraged speculating community played such an integral role in the overall Credit Bubble and, more specifically, to the Bubble in Wall Street Finance. They were instrumental in both spurring financial sector Credit creation/leveraging, while directing this Flood of Finance to the asset markets. And the more the leverage and the greater the Flow to inflating markets, the higher the returns generated by this expanding pool of speculative finance. And the greater the returns, the more robust the “investment” flows into the hedge fund community – spurring more leverage and more potent fuel for additional self-reinforcing asset inflation. Well, this historic speculative Bubble is now in the process of blowing up. One of the greatest manias ever – surely The World's Greatest Episode of “Ponzi Finance” – is absolutely coming apart. And the wreckage is accumulating in all markets – everywhere.
Here at home, our maladjusted economic system will only be sustained by somewhere in the neighborhood of $2.0 TN of new Credit. It’s simply not going to happen. The $700bn from Washington would seem like an enormous amount of support. In reality, it’s nowhere even close to the amount necessary for systemic stabilization. To the $2.0 TN or so of new Credit required this year (and next) add perhaps as much as several Trillion more necessary to accommodate speculative de-leveraging (liquidations forced by huge losses). Importantly, the Bust in Wall Street Finance has ensured that insufficient liquidity will be forthcoming to maintain inflated asset prices and sustain the Bubble economy – creating catastrophe for the leveraged speculating community.
The “Freidmanites” thought they understood the (post-crash) policy mistakes that led to The Great Depression. They believed the “Roaring Twenties” was the “Golden Age of Capitalism.” The great bust could have been avoided with a simple ($5bn or so) banking system recapitalization. As we are witnessing today, the issue is not some manageable amount of new “capital” to replenish banking system losses. Instead, the predicament is the massive and unmanageable amount of new Credit necessary to, on the one hand, sustain a mal-adjusted Bubble Economy and, on the other, the Trillions more required to accommodate a gigantic speculative de-leveraging. I have a very difficult time seeing a way out of this terrible mess.
Yes. I read what you have posted earlier today. Knowing that this year we must borrow $6 in order to increase our GDP by a $1 suggests a hysterical historical high-point never to be exceeded again. Never has a nation borrowed so much to achieve so little.
Social security, healthcare are bankrupt concepts, and the shadow banking system composed of fraudulent credit derivative instruments of American invention, now called upon by the world to be repatriated back to the US taxpayer to die, are the immediate functions in American life relating so largely to our discomfort. As we are not an adequately industrialized country at the present, and under a ‘mandate’ to reduce our energy consumption, there is little recourse than to dramatically reduce our social spending requirements. The world does not wish to support our social program anymore, and they no longer desire our credit derivatives. These are the unpalatable issues our polilticians must step up to the plate to deal with. Socialism is not affordable.
Good article.
They left out a few of the details - like banks hoarding funds because of their playing in the CMO market - but very interesting reading nonetheless.
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=32657360
We're trying to round up as many Yield Plus shareholders as we can. I've heard that almost all of these folks are Ameritrade clients. If you're with Ameritrade and don't know where every dollar is, you might check your account to verify that some of it isn't stashed in funds run by The Reserve. Currently for RYPQX, Ameritrade isn't showing any hit to the bottom line, but that information is out of date.
This fund (and a few related) "broke the buck" recently, and at this point, we have no idea how much the fund is worth or when we will get (any of) our money back. If you know anyone invested in Yield Plus, please let them know, as well... Thanks, Sylow
Do you have access to FNC? There is an expose on Fannie and Freddie right after Hannity’s America.
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