Posted on 05/21/2010 6:49:42 AM PDT by SeekAndFind
U.S and world stock markets are slumping badly as intensified systemic risks from the Greek and European debt-default contagion continue to spread. Disciplinarian markets of stocks, bonds, gold, and currencies are signaling the inadequacy of European Union rescue plans and the global fear that economic recovery will be blunted.
Europe is the main source of the current upheaval. Specifically, the biggest issue right now is short-term funding. Key funding risk indicators, such as LIBOR and various short-term swap spreads, are showing credit and liquidity stress in Europe. Interbank funding looks increasingly sloppy and worrisome. These are dangerous market signals.
The repo market for bank-to-bank loans was the source of the credit freeze back in the fall of 2008. And while today's funding risks are not even remotely as bad as they were back then, liquidity stresses seem to worsen with the passing of each day. If these funding problems keep worsening, along with stock markets that keep declining, all hell will break loose. Another meltdown is possible.
So I have a thought.
In the autumn of 2008, when financing markets completely froze up during the very worst of the credit meltdown, the FDIC guaranteed all bank debt, from 30 days out to 30 years. In addition, the Fed and Treasury essentially guaranteed overnight lending in the repo market and the commercial-paper market for bank debt. It worked.
At the time, the repo market for interbank loans was about $20 trillion, vastly greater than the $1.2 trillion volume of subprime mortgages. And when the repo market was rescued through the loan guarantees, the financial system gradually started to heal -- although it took several months. (An end to mark-to-market accounting in March 2009 would aid that healing process.)
So it's my contention that the Europeans must now embark on a similar program. The EU/IMF rescue plan, which consists of $1 trillion in loans and loan guarantees for government sovereign debt, must be expanded to include a blanket loan guarantee for all European bank debt, short term and long term. A Europe-wide, centralized, deposit-guarantee system should also be developed. Right now bank deposits are insured by individual countries, like Greece. This is not credible. (Hat tip to investor David Kotok for this deposit-guarantee thought.)
A loan-guarantee program to backstop the banks in Europe and sovereign debt will put an end to this crazy Greek drama that is pulling down markets everywhere and threatening the economic recovery. As a free-market advocate, I don't like this sort of government intervention. But we're talking emergency here. Systemic global emergency.
In the U.S., the loan-guarantee blanket was a vastly more efficient and cheaper way to rescue the financial system than the $700 billion TARP plan to inject money into the banks. Unlike TARP, which still lives on, the loan guarantees were removed in 2009.
So the Europeans must be bolder and more aggressive with their financial safety net. And if a program like this were to be announced, in all likelihood the guarantees would never have to be funded, or wouldn't really be necessary. In other words, the safety net will be a lot cheaper than simply pouring more loan subsidies into Europe's welfare state.
These bank-loan guarantees would be temporary, perhaps a year in length. And they would buy time for the essential budget restructuring necessary to slash spending and curb the welfare-state excesses in southern Europe, or perhaps all of Europe. These government-shrinking steps will free up private-sector resources to spur growth.
It may also be necessary to restructure the Greek debt, with creditors taking a haircut. But a big-bang approach to backstop Europe's banks and its bad-behaving, out-of-control-spending countries is, I believe, a necessary step in halting the contagion threats and restoring calm to the stock markets and financial system.
After several brutal years of recession, the possibility of global recovery must be strengthened by emergency actions from Europe. The world has already suffered enough. That's why a guarantee safety net -- one that must be conditioned on a radical restructuring of Europe's sad budget affairs -- is a necessary emergency measure.
And make no mistake about it. The U.S. is part of the budget disarray. Right now, the U.S. government bond market is getting a pass from the European funding crisis. But that pass will not be forever. Even while American corporations have returned to profitability, the sagging U.S. stock market and rise in the dollar/gold price are huge warnings to Washington, D.C., that a radical budget adjustment must be put on the table immediately.
The safety net is part of the problem, not the solution. Disappointed in Kudlow.
Since capitalism will rise from the ashes faster than socialism, and since a total economic collapse would likely suppress global travel and interaction for a while, Why try to stave off economic world collapse at all? If you aren't a hedonist who lives primarily for your possessions I mean?
Like a family who has lost everything in a fire, you rebuild.
The communists and socialists will have a much harder time rebuilding.
All things considered, this disenfranchises the bureaucracies, who live off the populace like leaches.
It's not these short-term measures given to lending facilities that are/were the problem. It's the increased LONG-TERM entitlement programs that are sinking us IMO.
You've got to be joking.
There comes a point where rebuilding is faster and cheaper than renovation.
I probably have a vastly different perspective than you do, as I spent a large portion of my adult life living out of two seabags and an alice pack. Houses computers,cars etc... are not in any way irreplaceable essentials to me.
So, not only should the world pony up cash to save Greece, etc., we should also guarantee any loans they might want? Do we have any proof that this would be more successful than Obama’s mortgage re-writing program (re-defaults of over 50%)?!?!
I posted this same article yesterday, but added the appropriate Barf Alert.
It’s been my opinion for a decade now (ever since I first heard the phrase “compassionate conservatism”) - that the American public will not give up on the government sugar tit until they have had their noses rubbed in its failure. Good. And. Hard.
You want loans?!?! I want deeds.
We have to remember that not all people who are self-professed conservatives agree about the solution when it comes to financial crisis of the magnitude we are facing now ( which is worldwide ).
For instance, Michael Medved, who is as conservative as they come and even sometimes subs for Rush Limbaugh disagrees with those who claim that Obama is intentionally trying to wreck the US economy.
Medved asks the question :
“If President Obama really means to wreck the U.S. economy (as many influential conservatives stridently insist) then why didn’t he finish the job when he had the chance—in September, 2008? The argument for Obama’s ruinous intentions can’t account for his unequivocal endorsement of the Bush financial rescue plan just two months before the presidential election.
According to those who believe that deliberate devastation represents the prime item on the presidential agenda, Barack Obama is a liberty-hating radical who wants to replace our free market system with a socialist dictatorship or, at best, a French-style welfare state. The president’s most suspicious detractors argue that the only way he can realize his Marxist dreams involves engineering the collapse of our free market system and then imposing a government-controlled economy more to his liking. This logic concludes that in order to cement his hold on power, he’ll eventually make the people so destitute and desperate that they will turn to federal protection in a state of utter dependence.
The most obvious rebuttal to these paranoid delusions concerns the re-election imperative. Barack Obama must face the electorate in just two and a half years, and presidents who preside over financial collapse or national hardship win scant support for “four more years.” With this in mind, it’s hard to imagine the president going to bed at night, praying the unemployment rate will rise the next day, or that the Dow Jones average will go down. Presidents yearn for positive economic outcomes not because they’re selfless humanitarians but because, like all politicians, they possess a well-developed instinct for self-preservation. If the economy crashes under Obama’s watch the public would be more likely to blame Obamunism rather than capitalism, and to throw out the Democrats before they threw out the free market system. “
Medved also makes the following reasoning regarding his support for the necessity of TARP :
“Some skeptics still insist that providing the TARP money actually did more damage than good to the financial system, and thereby can explain Obama’s support for the rescue as still somehow reflecting his hatred of the free market. But that line of reasoning rests on arguments about the economy’s long-term health, not its immediate performance in the months before the election. No economic analyst doubts that a final defeat of the Bush bailout would have produced a devastating wave of major failures in the financial world and a near total freeze of the banking system. When the House of Representatives narrowly turned down the TARP proposal in its first vote on September 29th, Wall Street responded the next day with the greatest one-time loss in Dow Jones history -— plummeting a gut-wrenching, unprecedented 777 points. That experience helped persuade additional Democrats, and 91 of 199 Republicans, to go along with both presidential candidates and to approve the package.
And what if Obama had split with McCain and Bush, aligning himself with overwhelming public opposition to the bailout, and blocking its approval in Congress? When the market collapsed and companies went under, there’s no chance the public would have blamed the candidate criticizing Bush and Paulson more than they blamed the candidate (McCain) who backed them. In fact, populist opposition to TARP, combined with the resulting financial catastrophe, would have produced an even greater margin of victory for Obama and the Democrats. Instead of winning by 7 percentage points, the Democratic nominee could have easily won by an historic landslide of 20 points or more. “
Every path before us includes lots of suffering. Avoiding it seems pointless. I understand why some might want to minimize the suffering, but I'm not at all sure that's smart. I say: let the world take it's medicine. As you indicate, the US -- if it returns to it's proper principles -- is likely to recover far faster than anyone else.
Problem is when the entire system crashes too many GOOD people get smashed. Personally, I don't want to see that many people's houses get burned down and have to rebuild and start over...OK the Reids and Dodds yes...but not the good folks who have already spent their energy building for decades. Generally, when something like that happens the cockroaches are the ones who get in power...Vive La Revolucion types.
He's an idiot, all that did was (literally) paper over the problem. We kept the old debt, created new debt, and set up the next meltdown (in this case starting in Europe).
Medved is an idiot too. That unprecedented 777 points would easily be exceeded by the recent losses without PPT, circuit breakers and the rest of it. Mostly the loss was pure blackmail when Schumer announced that insurance companies (i.e. guaranteed annuities) would fail the day before. All TARP did was postpone the inevitable, make it more expensive and guarantee either hyperinflated dollars or US default.
This sort of nonsense is why I find it difficult to understand why anyone in the GOP listens to Kudlow.
Let’s see: Iceland tried exactly what Kudlow is proposing. How is it that Kudlow can’t seem to recall the results of that?
He seems to have the memory of a goldfish...
EXACTLY.
By suspending the requirement for real mark-to-market, we chose the path of the Japanese, where they had to keep throwing money into the banking system by keeping interest rates near zero or at zero for years and years.
It is better to use real accounting, and then take under banks who fail as a result, than to “extend and pretend” as the Fed/Treasury are doing now.
Guys like Medved (and on many days, even Limbaugh) drive me up a wall with their simplistic, child-like understanding of the banking system.
They continue to defend the rapacious greed of the banksters, not caring (because they fail to understand) the nature and scope of the fraud being committed by the banksters.
The evidence starting to come out of Goldman makes it quite clear that these organizations are no champions of a “free market,” nor are they conducting themselves in a manner that benefits the US economy.
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