"We are Going over the Edge"

After this news:

A grim morning: Double plus ungood news on multiple fronts this morning. The credit crunch is getting worse: LIBOR jumped again, the TED spread is at a new record. Bad news on employment: payrolls down 159,000, average work week down, official unemployment rate flat at 6.1 percent but broad measure (U6) up from 10.7 to 11.

We are going over the edge.

The track record: This chart shows U6, the broadest measure of unemployment and underemployment from the Bureau of Labor Statistics. (No data available before 1994.) ...

Feel the boom

I was glad to see this:

House Approves Bailout on Second Try

Comments

[Robinia]

Alright, that does it. I am going to get unglued from the computer, and go get a second orange juice and vodka before three o'clock (not my habit at all, not even on Friday).

A body can only take so much bad news at once.

[matt]

Glad to see it? This "bail out" will do nothing. This is why the market all week has been "voting" against the bailout. Notice the market dropped on news of it passing (both in senate and house). The market doesn't want the bail out. The bailout doesn't address the cause of the problems, and just wasted more money and Fed fire power.

Krugman is right. We are going over the edge - with or without the "bail out".

The bail out passing, makes no difference.

[Mark]

Warren Buffet's simple math is compelling: "if you have a 20 percent fall in value of a $20 trillion asset, that’s $4 trillion." Hopefully, 700 million will be deployed wisely to round off some of the rough edges on the way down. Skepticism and cynicism aside, it's in nobody's interest for the people implementing this program to fail.

[TigerPaw]

I think this is partially just about the politicians wanting to be seen "doing something". What they're doing not being nearly as important in their view as just that it's something.

It'll have to wait until whichever of the two candidates gets elected, selects a cabinet, sacks the current set of chairwarmer appointees and installs a new set etc. before anything is really done. So ... springtime at the earliest before anything happens.

We're pretty much on our own until then.

[Matt]

"We're pretty much on our own until then."

Sad, but so true.

[cas127]

Watch the dollar (and therefore import prices) and we'll see how glad everybody should be.

Because the world's savers will endure *any* level of increased default/depreciation risk for the US dollar, right?

Right?

Better frigging hope so.

The Treasury market is the last to fall but fall it will.

The Fed can manipulate US interest rates (artificially downward) but it can't manipulate international interest rates or foreign exchange rates.

International capital flows run the show now and the Congress just slit America's long-term economic throat.

[anne]

"The Treasury market is the last to fall but fall it will."

Care to explain just how, which would seem quite a trick to explain?

[esb]

The equity markets are voting on the vote.

A lock limit down day is a possible if not probable outcome very soon.

If so, look out for a dramatic multiple central bank action.

The best day for it would be two days following the US election, with the meeting of the ECB.

I wonder if events will give them the month.

In any event, the nimble will have the opportunity to double their net worths in a properly executed leveraged gold miner trade over a single week,

only requiring getting the entry day correct, the day before Bernanke shocks the world.

[don]

Cas 127:
You are exactly right.
Anne:
It has happened to many treasuries before. Care to explain why it can't happen to the U.S. Treasury? All the others could print money, too. You seem to rely on the free ride America gets from having a reserve currency. But global dollar holdings are far in excess of what is needed merely to support the monetary bases abroad. Do you ever visit Brad Setser's website?

[esb]

Think of Paulson as a hapless superhero with a multi function infinite power device.

"I'm going to save the world!!"

Poof.

"Oops, wrong button."

[plan]

Does this mean that the plan will at least prevent the Depression from starting next week, or does this mean the plan is irrelevant and the Depression will start next week, or does this mean the plan is irrelevant and the Depression never would have started anyway?

[kthomas]

I'm not happy to see this Bail Out approved. But I am glad Prof Thoma is happy.

[Robert Edele]

There's plenty of evidence that treasuries are currently in a bubble. Despite huge amounts of new supply and plenty of inflation, yields are under 1% for short-term bills and not that much better for long-term bonds. Furthermore, the US is a net debtor nation with an overvalued currency, exposing foreign buyers to plenty of long-term currency risk.

[esb]

There will be no depression.

Pay attention to the Fed balance sheet as it will be expanded to whatever level is required to prevent it, multiples of its 1July2007 levels.

Watch out for direct lending to states (starting with California), cities, possibly counties and perhaps even a special district or two.

Positioning against Bernanke is close to effortless, and has been for the past year.

[Sean]

Well, the bailout will tide us over for a bit. But it's just another step up of the artificial inflation of the economy from government forces.
The collapse will happen.
So, like TigerPaw says, we are on our own.
And if social order ever collapses with the economy...well, I hope you know how to use a gun.

says...

"The bail out passing, makes no difference."

You forgot something. That's $700B we don't get to spend on infrastructure.

[Carl]

Mark is right. 700 Billion can, if used wisely buy an ounce of prevention. Depression is now unlikely, if our trading partners can continue to hold it together. If EU goes down, we'll probably go down with them. Thank the Fed and never bet against Dr. Bernanke.

[hari]

This downside was more or less inevitable for some time, as we have discussed the historical decline and fall of American financial and political hegemony world-wide. Rise of emerging markets in China and India and Asean countries and globalization of trade and services.

However, if during this difficult period important q's are addressed and policy framework developed to change direction and open up dialogue with counterparts in EU/Asia and BRIC, it would definitely go a long way to ensure the future perspective is not as dire as it looks right now....

The fact remains that this downside might be more severe than expected, as it currently grips almost all EU countries and their treasuries - ie. schadenfreude is not the name of the game.

More cooperation and policy perspective is required to mitigate any potential for a prolonged stagflation and more.

[Holly W.]

I'm glad to see the bailout finally pass, too. Maybe it will finally give banks the nerve to start lending again, even if the stock market seems to be unhappy at the moment (but isn't that partly due to the lousy jobs report?). I do wish the plan had passed Monday, without having to be so larded up, though.

[Jesse]

There is decent evidence of a eurodollar squeeze in progress, primarily in Europe, which is stressing their banks considerably, and one of the reasons why the Fed took the Euro.USD swaps to 600+B, and why the TED spread blew off the roof.

http://tinyurl.com/4mxed4

[anne]

October 3, 2008

Has the Bailout Already Failed?
By Paul Krugman

OK, I know that’s premature. And I place no weight at all on the fact that the Dow plunged after the vote.

But it is interesting that short-term Treasury yields are down — only 0.13% on one-month — suggesting that the flight to safety continues unabated. Against this, John Jansen * reports some signs that money markets are unfreezing, slightly.

We’ll learn more next week. But I have a prediction: well before January 20, Congress will be asked to vote on bailout 2.0.

* http://acrossthecurve.com/?p=1788

[anne]

http://acrossthecurve.com/?p=1786

October 3, 2008

Money Market Turning (Imperceptibly)
By John Jansen

[The proper Krugman link.]

[Winslow R.]

"don says...
Cas 127:
You are exactly right."

Don with a economic framework that is almost identical to my own, I don't know how we come up with such divergent views on outcome. Is it due to our political expectations?

Perhaps you are looking at the long-term ...... calling a disaster that could be avoided, way in advance. Kind of like Roubini calling the recession multiple times before it happened and could have been avoided.

Yes, if we elect McCain and bungle the printing of new tsy secs on misadventures like Iraq, you could be correct. But for example, an alternative view is we elect Obama and spend new deficit spending on new energy technologies so we break the stranglehold of Saudi Arabia and Russia.

Must you insist we are doomed when there is still hope?

[Patrick]

"eurodollar squeeze in progress"

Ah ... so It's not just a flight to safety, it's a flight to cash. Makes sense when anticipating a debt-deflation spiral; those dollars are going to buy a whole lot more in the future.

It also explains why central bankers haven't been talking about a rate cut - it wouldn't do any good anyway since we're probably in liquidity trap territory.

[don]

Winslow R:
I would be delighted to be proven wrong. My view comes from an assessment of the relative magnitudes of the overvaluation in assets compared with what taxpayers can afford to spend to prop up the assets. Of course, they will be willing to borrow whatever it takes, but the question is whether they can be trusted to make good on the debt. As was pointed out, there is no easy way out of big imbalances from credit over-extension.
It can't all be blamed on Greenspan, though he was certainly an 'enabler.' Currency interventions by Asian countries and the yen carry trade (which was encouraged, I think, by an implicit guarantee that Japan's finance minister would not allow too much yen appreciation) contributed importantly.
Nor is our behavior in the face of the entitlement overhang encouraging.

[donna]

Isn't that the motto of the Republican party: "You're on your own!"

[Winslow R.]

"As was pointed out, there is no easy way out of big imbalances from credit over-extension. "

Government can raise what it pays in wages/benefits as well as minimum wage to whatever level is needed. Easy.

Economically you should see it is possible to remove the debt load contraints on the financial economy. Then your fears of deflation should evaporate into fears of possible resource constraints on the real economy, hence inflation.

Politically it may not be possible to raise U.S. wages to even test where that inflationary limit is and instead we continue with severe deflation.

Resource constraints have previously been tested by China demanding a large share of world growth. Too large a share in my opinion as it gave the Saudis monopoly power over the price of oil. Its time China slows their growth so that the Saudis lose their monopoly and other economies can grow too without severe inflation.

[Hyper Inflationary Depressions Are Worse]

Great, fighting "deflation" a couple of years back has driven us to the brink of the abyss. A rerun of the 1920s, with low interest rates being funneled into a leveraged bubble that destroyed the economy. Only this time we may get a hyper inflationary depression like Germany did, with 40% unemployment. Hyper inflationary depressions are historically much worse than mild deflation.

[Winslow R.]

"Nor is our behavior in the face of the entitlement overhang encouraging."

With interest rates bouncing off the zero bound, this is the least of our problems. In the future, perhaps, but right now, who cares?

[Winslow R.]

"Great, fighting "deflation" a couple of years back has driven us to the brink of the abyss."

We chose to fight deflation with

1) tax cuts for the wealthy
2) wasteful war in Iraq
3) credit bubble driven growth rather than an income driven increase

The collapse of the credit bubble seems to have been purposefully engineered for the benefit of those currently holding tsy secs.

" Only this time we may get a hyper inflationary depression like Germany did, with 40% unemployment. "

Remember how Germany 'solved' this problem of unemployment?

[ken melvin]

There simply has to be a better way.

[Bruce Wilder]

Patrick: "It's not just a flight to safety, it's a flight to cash. Makes sense when anticipating a debt-deflation spiral; those dollars are going to buy a whole lot more in the future. . . . we're probably in liquidity trap territory."

That's my view, as well.

Cas127 is technically correct when he says, "The Treasury market is the last to fall but fall it will." But, I doubt he understands it the way I do.

Really, I don't think I "understand" it at all, except that I imagine that there are way too many dollars and dollar securities floating around the world, and when the deflationary crash is over, in four months or six months or a year, or however long it takes, there will still be a lot cash dollars abroad, that nobody really anticipates wanting or needing the future, and then there will be a rush on U.S. real assets: real estate and businesses.

The policy dilemma will be real: do we sell a significant fraction of the country (of the country's productive resources), paying after long last for decades of cheap gas and the war with Iraq? Or, do we accept a furious inflation, driven by the coming home of these excess dollars?

I'm probably being excessively melodramatic, but I think the problem is real and must manifest. For years, economists wondered whether we would have a soft landing or a hard landing. Hard won. Now, the question, is how hard will hard play out?

[esb]

There is a third option, a flat out default, in whole or in part, possibly involving a change in currency.

What amazes is that the economic mismanagement of the last eight, twenty-one or thirty-seven years has brought the USA to a point in history where a single sentence pronouncement of a single civil servant in a third world country (PRC) could significantly and irreparably diminish he American people and most likely result in a succession of wars both small and large.

Such a pronouncement could be something akin to simply stating that the expanded holding of the direct obligations of United States of America represents a higher level of risk than the PboC wishes to assume at this time.

China is a country with eight thousand yars of written history. The unique opportunity that has arrived will be fully recognized. Whether it is allowed to pass without action will be a decision of political policy, not economic.

This will be the most interesting month of my 62 year life.

And the one with the greatest opportunity for profit and/or loss.

[Winslow R.]

BW wrote: "Hard won. Now, the question, is how hard will hard play out?"

As long as China remains undemocratic and therefore lacks the sufficient ability to deficit spend on its own, it will depend upon U.S. demand to provide economic stability.

For that matter all countries that lack the ability to issue sovereign bonds (in their own currency) in an efficient manner contribute to the U.S. position as consumer of last resort and therefore create demand for U.S. tsy secs. Even Europe, with its Euro, finds it depends upon the U.S. for stability due to its unwillingness of the countries of Europe to create sufficient deficits to create aggregate demand. On net European deficits are too small so they depend upon the U.S., just like China, despite their democratic government institutions.

If these countries started spending U.S. dollars that would just put America back to work while their own people suffered from lack of demand.

If there ever is an excess of U.S. dollars in circulation, we can raise interest rates or tax them out of circulation.

Right now a lack of 'excess' U.S. dollars is the problem that must be dealt with.

[Winslow R.]

"Such a pronouncement could be something akin to simply stating that the expanded holding of the direct obligations of United States of America represents a higher level of risk than the PboC wishes to assume at this time."

We can only hope!

China needs to SLOW DOWN their accumulation of tsy secs and slow their economy so there are sufficient natural resources to allow the rest of world to grow without global inflation.

[Lafayette]

The Cassandras come out of the woodwork

Matt: The bail out passing, makes no difference.

Stick around, oh ye of little faith. We shall hold you to your word.

[Winslow R.]

"Matt: The bail out passing, makes no difference.
Stick around, oh ye of little faith. We shall hold you to your word."

It will be difficult to distinguish the effects between Paulson's bazooka and his latest weapon a small 700 billaton nuke.

New Loans (in particular Fannie and Freddie MBS)
The bazooka was built to target new loans thus increasing liquidity while lowering interest rates below 'market levels'.

Thing to watch for, fall in mortgage interest rates.

Old Loans (pretty much anything)
The nuke is targeted mostly at solvency as these loans have already been made, they are just failing. The question that remains is will the government overpay allowing the government to recapitalize the financial sector and thus helping liquidity?

Thing to watch for, end to financial sector bankruptcy.

Both, some of both or neither tool (weapon) could be used. The unknown, unknowable (unless you are Paulson or a close associate) is which tool will be used and how.

We mortals can only read the tea leaves. Predictions are based on understanding politics not economics at this point. Paulson, a political figure, has the economic/political power.

says...

"We’ll learn more next week. But I have a prediction: well before January 20, Congress will be asked to vote on bailout 2.0."

It seems we have plenty of time should this event happen again. Do any of you think Paulson and Bernanke will make any other provision except for another last second bailout. Do any of you think they're going to propose any other options to utilizing 700B? Or will this be the only course of action to be done once again at the last second?

The fear mongers and supporters of the bailout bill are probably getting buyers remorse and they are now hedging. You can see the new battle cry, "Of course, it didn't work. 700B was too, too little." We've all been had thanks to them.

[Lafayette]

Regime change

WR: The question that remains is will the government overpay allowing the government to recapitalize the financial sector and thus helping liquidity?

Just getting the stuff off their books helps the remaining cash flow build their asset positions and allow the banks to start inter-lending again. The consequence of that is likely to have a reverse domino effect upon the Credit Mechanism.

The damage is done in terms of the real actors in this drama, the consumers. They’ve decided to pull back spending, so a further fall in economic performance is assured. The resurrection will take its natural course over the coming 12 months.

The real question is: “Where will Obama find the money for a Keynsian recovery?”. He shall have to borrow it from the rest of the world and pay a premium to do so. We can therefore expect debt maintenance to explode – and therefore the tax revenues (to pay for it) as well.

Paulson, a political figure, has the economic/political power.

In a lame-duck presidency, who named a pyromaniac to head the fire brigade? Thirty days from “regime change”? Laughable.

The Congressional oversight committees, set up expressly to watch over the bailout, are the real power brokers. Paulson was fighting to assure that his 250 megabuck “bonus” was not clawed back. It would be nice were that to be the case.

He is a negligent as any of the other Robber Barons who led Wall Street down the road to hell in search of lucre. So, he does not deserve a "performance bonus" for having help instigate this mess. (His ex-company was amongst the first to run for shelter by becoming a "commercial bank".)

[Winslow R.]

Laff wrote: "Just getting the stuff off their books helps the remaining cash flow build their asset positions and allow the banks to start inter-lending again. "

Not true. If the government doesn't 'overpay' the banks will receive less income from the tsy secs than they were receiving from the assets they traded them for (trading an asset paying minimum 6% for one that pays less than 4%). Lending would also not increase as a bank's capital position would not change and bank lending is capital restrained.

Laff wrote: "The real question is: “Where will Obama find the money for a Keynsian recovery?”. He shall have to borrow it from the rest of the world and pay a premium to do so. We can therefore expect debt maintenance to explode – and therefore the tax revenues (to pay for it) as well."

Something to be worried about later, if inflation ever becomes a problem.

"The Congressional oversight committees, set up expressly to watch over the bailout, are the real power brokers. "

Perhaps.

[Lafayette]

Gone-gone

WR: Something to be worried about later, if inflation ever becomes a problem.

Later, we are all dead.

The economy needs kick-starting now, not later. And with the rate of indebtedness already nearing an all-time high of 350%, see here, it aint gonna be easy given the sums needed.

Lead-head is, finally, a walking-dead and nothing can be done before January -- three months of listless immobility, that will cost the economy at least a percentage point in unemployment.

Time to pay the piper the precious toll of mindless economic policy for almost a decade. Ten years lost down the plughole. The go-go economy is gone-gone.