End of the World As We Know It

[ddrueding]

The government has learned that so long as they keep the normal people doing their normal thing, they could nuke France without an uprising. They are doing everything they can to maintain the status quo until they are out of power, then they can blame the depression on their opponents.

 

[timwhit]

Hypothetical example:

Invest $100 in India. Assume $1 = Rs. 40 (Indian Rupee). Value = Rs. 4,000

$ appreciates by 10%. $1 = Rs. 44. If you liquidate your holdings, Rs. 4,000 / Rs. 44 = $90.91, assuming the value of your investment did not appreciate or depreciate.

This would not be a disadvantage if you spent that money outside of the U.S., because the $ appreciation will work for you (assuming the $ rose against all currencies). If you spend it in the U.S., you lose, unless the purchasing power of the $ rose inside the U.S. as well.

In reality many countries tightly control the exchange rate. The exchange rate was $1 = Rs. 45 for a long time. Then around Sep. 2007, it became $1 = Rs. 40. It is hovering in the Rs. 39.50 range now. Speculation has it that if the Indian govt. was not controlling it, it would become Rs. 35 in a matter of days (reflecting the true value of the two currencies), and would stabilize at Rs. 15 within a year!

The IT companies (and all other exporters) in India are howling, because it materially affects their profits since their overseas profits translate to fewer rupees.

Mubs, are you sure you did this math correctly?

By "US currency inflates by 10%," I mean that the US Treasury prints 10% more money this year, which would devalue the American dollar by 10% compared with another currency that isn't pegged to the dollar.

So, if I bought $100 worth of Indian Rupees at 40 rupees per dollar. Then, 10% more dollars are printed, each dollar would be worth 36 Rupees. Then, if I converted the Rupees back to dollars I would have $111, which would essentially be worth the same amount as the investment.

I believe that buying a mutual fund that invests in a foreign currency would have the same effect as simply buying the currency.

Please correct me if I'm wrong.

 

[time]

Seven and a half weeks on, things are still moving in the same direction. As expected, the US dollar has started to collapse.

US no longer world's biggest economy

 

[ddrueding]

I think the headline is a bit sensationalistic. The US economy is not as large as all 15 countries that use the Euro. When a single other country has an economy the same size, let me know.

Granted, our economy is in the can and not getting better any time soon, but the title is a bit much.

 

[time]

Only 15 of the 27 EU states use the euro - the UK, for instance, doesn't.

The EU states retain their own sovereignty (and therefore military), but functionally they're pretty similar to the United States. That is, for most practical purposes, the EU can be viewed as a single country. The linked article is only referring to the economy (or that part that uses the euro, the so-called Eurozone), which is definitely a single entity when compared to the US.

The US has 300 million people in 50 states, all of which use the dollar.

The Eurozone has 317 million people in 15 states (mainly France, Germany, Italy and Spain) that use the euro.

Looking at comparitive GDP from 2006, it appears that the US economy has lost nearly one fifth of its value since 2006 (the Eurozone's also grew a few percent).

Six years ago, the US dollar was worth 1.13 euro
Five years ago, the dollar was worth 0.93 euro
Four years ago, the dollar was worth 0.82 euro
Three years ago, the dollar was worth 0.75 euro
Two years ago, the dollar rebounded to 0.83 euro
One year ago, the dollar was worth 0.75 euro
Today, the US dollar is worth 0.64 euro

That's a reduction of 43% in six years, hardly surprising given the massive trade imbalance. I reckon 0.60 euro isn't too far away.

BTW, as the 51st or 52nd state, Australia isn't necessarily in that much better a position, so don't get the idea that we're gloating or anything.

 

[ddrueding]

I didn't mean to sound defensive or anything, I was just under the wrong impression when I read the headline. You do, however, make a valid point.

 

[time]

Wow, the ride just got scarier.

Fed moves to bail out major US bank

Bear Stearns gets emergency funds

On March 10, 2008, Bear Stearns formally denied market rumors that it had developed cash liquidity problems. Yet, on March 14, 2008, the Associated Press reported that JPMorgan Chase, in conjunction with the Federal Reserve Bank of New York, would provide temporary funding because "Bear Stearns says its liquidity significantly deteriorated over the past day and the temporary funding will help it continue operating normally." The article further quoted Bear Stearns as indicating "there is no guarantee any permanent strategic alternatives will be successful."

In case anyone didn't get it, a major bank just fell over.

 

[ddrueding]

There is nothing like rumors of a bank being financially unstable to make a bank financially unstable. Whether they were or not, this is the environment that runs on banks require.

 

[time]

Another bank. IndyMac sacked 3800 workers and started stripping itself before the FDIC took it over. Apparently, it's the 2nd or 3rd biggest bank collapse in American history.

What's really scary is the storm cloud hanging over Freddie Mac and Fannie Mae. Twelve trillion dollars of loans and guarantees, or about half the US mortgage market! The feds will need mighty deep pockets to bail them out, if it comes to that.

 

[ddrueding]

The discussion that I'm hearing is whether it is better for the economy as a whole to have them collapse or to have an extra $12,000,000,000,000 in national debt. That would more than double it.

 

[Fushigi]

Well, there's little reason to believe that all $12x10EXP12 in loans would be bad debt. Or even a majority, really. How many mortgages does that represent? How many of those are in default? Those two values should be easy enough to come by. The trickier question is how many mortgages are about to default or will default if the economy leads to higher unemployment, high inflation, or stagnant/declining wages.

 

[time]

I see that Wikipedia has already corrected the 12 trillion dollar factoid. In fact, 12 trillion dollars is the value of the entire US mortgage market. Freddie Mac and Fannie Mae account for 5 trillion of that. Sorry for any confusion.

Anyway, it's been a long time since my last post (one day), and the feds have agreed to bail them out, albeit by elevating them to the status of real banks.

 

[ddrueding]

Lets see if I understand this correctly:

1. Investors want "in" on some plays that are too risky to be insured by FDIC.
2. "Investment banks" are created for this purpose.
3. These institutions are able to show better performance during good economic times due to being able to take bigger risk.
4. Because they show better performance, everyone and their grandmother invest there instead of the FDIC insured methods.
5. When the economy turns south, too much of the country's investment is in uninsured forms, and must be rescued anyway.
6. Because of the bailout, these investment banks are forced under the same rules and protections of normal banks.

So here is my new prediction!

7. Investors want "in" on some plays that are too risky to be insured by FDIC.
8. Some new institutions are created for this purpose.

Sound familiar?

 

[LunarMist]

The world will still be here, regardless of finance or even extinction of humans.

 

[mubs]

After Indymac Bank, now there are rumblings about Wachovia.

 

[Stereodude]

After Indymac Bank, now there are rumblings about Wachovia.

Why? Did Charles Chuck-U Schumer release an open letter to start a run on them too?

No bank can withstand a run on it, so these rumors are going to be self fufilling prophecies if the public believes them. Given the frenzy the media has the public in, I'd say it's likely we're going to see a lot more of this.

 

[mubs]

It's not rumor. Some analyst bugger thinks Wachovia is severely exposed in the mortgage crisis. They were a nice, solid bank, then thy got greedy, buying up other financial institutions for incredibly high valuations. Then the sub-prime shit happened.

 

[ddrueding]

It's not rumor. Some analyst bugger thinks Wachovia is severely exposed in the mortgage crisis. They were a nice, solid bank, then thy got greedy, buying up other financial institutions for incredibly high valuations. Then the sub-prime shit happened.

I can second that. They didn't exist in my area before the boom, now they are everywhere. I suspect they must have played fast and loose to get there so quickly.

But Stereodude is right; these banks will only collapse if everyone pulls their money. I wouldn't be surprised to see their stock collapse, though.

 

[Gilbo]

Now the Fed is planning outright Socialism for the Rich fucks who got all of us into this mess. It doesn't get much more disgusting than this.

Freddie Mac & Fannie Mae should be nationalized and all the holders of outstanding Agency MBS's & Agency Debt need to take a haircut. The debt needs to be forcibly restructured to whatever level can actual be paid off using the assets the two enterprises have over the time period that makes the most sense. American Taxpayers subsidized a 100 bond point spread on Freddie Mac & Fannie Mae Agencies, to the tune of a cost of $50 billion dollars a year (the vast majority of which went to China, the middle east, Russia & Asia) - entirely because these Agencies & Securities were supposed to be riskier than U.S. Treasury Bonds. But greedy fools bought them anyway, and now they're getting a bailout after additionally raking in the aforementioned $50 billion a year on top of it... it's insanity.

At the best current estimates you know how much the holders of those Agencies would lose if the U.S. government nationalized the companies and restructured the terms so taxpayers didn't have to pay the bill? 5%. But instead the American taxpayer should take on trillions in risk. The total liabilities of Freddie Mac & Fannie Mae are approximately 5 trillion dollars. That's as large as the total existing, outstanding U.S. Government debt. You'll double the total U.S. Government debt... I know under the proposal Congress is supposed to limit the liability, but exactly how far down that road are they going, and why in hell even start down it in the first place. These people bought risky financial products, chasing higher returns. They need to accept the downside risk just like they pocketed the upside profit when things were good.


In 2001-2005 holders of Argentinian government bonds took a 75% haircut - makes a 5% one look not bad eh? When most corporations go Chapter 11 the average haircut is 30%.

If the U.S. Government didn't shit itself everytime China so much as glanced at it (China owns at least $10 billion in the housing giants and is the single biggest holder of the Agency MBS's that are outstanding --it also finances a massive amount of the U.S.'s massive annual account deficit), and the people running the U.S. Government didn't suck so much investment banker cock, this farce wouldn't have gone on this long.


I'm sorry if I sound pissed; Canadians don't even need to foot this bill, but it still makes me sick. Of course it's also screwing up our economy just because we're nearby...

 

[Gilbo]

I really like this quote from William Ackman (in a CNBC interview) on the implicit guarantee that everyone bet on:

"I think the whole 'government-sponsored' nature of the entities is going to start to fade," Ackman said. "The only reason you need government sponsorship is you were levered 140 to 1. 'Heads I win, tails the taxpayer loses' is not a good structure."

That sums up everything important about the situation.

The Government gave them a special sanction to go way past the leverage ratios typically required of enterprises of their type, and with that, came an implicit guarantee - it was always the taxpayer that was going to lose in the end, but in the meantime a ton of investors & bankers were going to get very, very rich.

 

[ddrueding]

I agree with your assessment and conclusions, but you don't have to be nearby, I suspect this will screw over the rest of the planet soon enough...

 

[Stereodude]

But despite all that somehow yet again the solution to rampant gov't failure is more gov't?

 

[ddrueding]

The govt failure was trusting a public service to a private company. If the service really was vital to the country (and it seems that it was), it needs to be completely run by the gov't. If it isn't mandatory, then let it be private and let it fail.

 

[ddrueding]

I think looking to other countries isn't a bad idea here...IIRC, many others include this service in the gov't.

 

[Stereodude]

I know under the proposal Congress is supposed to limit the liability, but exactly how far down that road are they going, and why in hell even start down it in the first place.

Congress never thinks very far down the road. They're legislation always has unintended consequences. Look at Welfare, Medicare, Medicaid, Social Security, Immigration, Freddie & Fannie, etc, etc, etc... They all have solvency problems, or some big gotcha that was never foreseen that comes back to bite us in the butt later. Congress never wants to fix anything either because that would require hard unpopular decisions. They just slap a bandaid on it, and let someone worry about it after they're out of the office.

But lets just socialize everything and get it over with!

 

[Gilbo]

I can second that. They didn't exist in my area before the boom, now they are everywhere. I suspect they must have played fast and loose to get there so quickly.

But Stereodude is right; these banks will only collapse if everyone pulls their money. I wouldn't be surprised to see their stock collapse, though.

Unfortunately, that's not the case. It's not a liquidity or capitalization crisis; it's a solvency crisis.

These companies made highly-leveraged investments and they packaged the associated liabilities into a variety of off-balance sheet vehicles (to keep them off their books so investors couldn't see them and the regulators missed them, because they were retarded or lazy or some combination of both). These liabilities are now becoming due because of a downturn in the market.

On top of this the institutions that hold these liabilities off their balance sheets are in a highly interlinked network of counterparty agreements (like Credit Default Swaps) that carry nearly incalculable risk (it's a Complex System in the mathematical sense). This risk is essentially impossible to calculate due to the complexity of these vehicles. Which is why smarter investors (like Warren Buffett), refused to go near them - he actually called them "Financial Weapons of Mass Destruction" due to this characteristic that they had of nearly incalculable downside risk.


Because of all this, we've seen massive writedowns due to these off-balance sheet liabilities, and they aren't even close to over. As they accumulate, it starts to become more and more obvious when a company is no longer solvent. Liquidity (i.e. from deposits) doesn't even come close to being part of the problem. When your company is worth less than zero, it doesn't matter how much you have in the bank - it's way too late. These companies made very risky bets, using massive leverage, and obscured the potential liabilities while booking immediate profits to please share holders.

Now those liabilities are coming due and it's becoming obvious that they are exceeding the total assets of these companies (they were happy to be transparent with their assets of course). Several of these companies are worth less than zero dollars right now. What everyone is trying to figure out is who, because, as I said before, the potential downside liabilities of these vehicles are difficult to calculate and most of them have been kept of corporate balance sheets (so even a very critical shareholder would have been unaware of them). People are taking writedown after writedown and shareholders are wondering when the fuck is it going to end?


The even more terrifying question is what sort of counterparty risk have other companies assumed in the highly complex and opaque derivatives market that will be triggered by the failure of the genuine insolvent ones... In this case, otherwise solvent companies may end up being dragged in. Of course, they should never have taken on liability they couldn't understand.

 

[Stereodude]

The govt failure was trusting a public service to a private company. If the service really was vital to the country (and it seems that it was), it needs to be completely run by the gov't. If it isn't mandatory, then let it be private and let it fail.

It's failing because it's gov't run, not because the gov't didn't run it enough. Freddie and Fannie had all sorts of advantages no private bank had. They effectively had access to an unlimited money supply at lower rates than any other bank, they're immune from regulation / oversight by the SEC or anyone else, they don't pay taxes, they have every advantage possible and they still couldn't keep themselves healthy.

I'd also argue your contention that the gov't should be in the mortgage business.

 

[ddrueding]

Freddie and Fannie had all sorts of advantages no private bank had. They effectively had access to an unlimited money supply at lower rates than any other bank, they're immune from regulation / oversight by the SEC or anyone else, they don't pay taxes, they have every advantage possible and <yet the privately-run company didn't> keep themselves healthy.

I think that is the problem. Giving all those advantages yet still allowing them to be a for-profit enterprise was the failure.

I'd also argue your contention that the gov't should be in the mortgage business.

I've read that Freddie and Fannie helped significantly to put large numbers of people into their own homes. Whether or not this is a good thing is a different argument, and I agree with jtr's anti-suburban leanings.

 

[Gilbo]

Congress never thinks very far down the road. They're legislation always has unintended consequences. Look at Welfare, Medicare, Medicaid, Social Security, Immigration, Freddie & Fannie, etc, etc, etc... They all have solvency problems, or some big gotcha that was never foreseen that comes back to bite us in the butt later. Congress never wants to fix anything either because that would require hard unpopular decisions. They just slap a bandaid on it, and let someone worry about it after they're out of the office.

But lets just socialize everything and get it over with!

I'm not for socializing or nationalizing in general, but if a company is too big too fail, you don't bail it out at taxpayer expense, you let the people that assumed the risk to make the profit they deserved take the hit.

That's capitalism at it's most basic. If you assume the risk, you get the money.

These bankers & investors want all the money with none of the risk? They're begging for a friggin' handout after pocketing their profits for all those years. Come on. The only reason I'm suggesting nationalization instead of traditional collapse is that people who didn't assume any risk, and didn't share in the profits are getting dragged into it.

Make no mistake about it, Freddie Mac & Fannie Mae collectively secure & manage nearly 50% of all the mortgages in the entire United States of America. Around 5 trillion dollars in debt - as I mentioned above we're talking about a default as large as the entire United States Governments total outstanding debt (which is approximately the same size)! This is serious beyond the pale. Bear Stern's was nothing... American Taxpayers assumed $30 billion in liabilities for Bear Stern's on behalf of J.P. Morgan (all of which they'll likely lose, since there's no longer any market for the the poisonous & complex securities & derivatives the company was peddling). Total capitalization of the entire Federal Reserve is about $800 billion off the top of my head, about 50% of which is unavailable because it's been loaned & swapped through Paul Bernanke special vehicles to other banks who also got themselves into messes. But we're talking 5 trillion.

This is a serious situation. Hell, I think you could charge the inept managers of these Government Sanctioned Enterprises with treason all things considered. I could find you 12 people who'd convict...


I will agree with you on one thing Stereodude, less, milder market intervention, earlier, (like proper regulation and the enforced imposition of honest accounting practices) would have been far suitable to massive intervention that American taxpayers and their government will now be forced to undertake.

 

[Gilbo]

It's failing because it's gov't run, not because the gov't didn't run it enough. Freddie and Fannie had all sorts of advantages no private bank had. They effectively had access to an unlimited money supply at lower rates than any other bank, they're immune from regulation / oversight by the SEC or anyone else, they don't pay taxes, they have every advantage possible and they still couldn't keep themselves healthy.

I'd also argue your contention that the gov't should be in the mortgage business.

I agree. The entire misadventure that has been the U.S. Governments attempts to enable more people to own homes has been a disaster.

The credit bubble is partially due to the cheap credit the government consciously made an effort to provide. And obviously, said cheap credit is going to drive home prices way above where they should be. You also shouldn't be able to deduct the interest on your mortgage, that's another insane idea that encourages poor financial behaviour (specifically, buying a house more expensive than you should because it's a tax-deductible investment) --of course, they're never going to be able to end that now.



This isn't to say that there was a lot of idiocy and malevolence on the private side. The liar loans were done by private banks. The sketchy securities & agencies were packaged here as well (although the U.S. Government invented them I suppose). These people need to reap their just rewards as well.

American Taxpayers are sure going to have pay for their governments mistakes. They seem to be paying more & more frequently now... Actually I guess the government just cuts taxes and borrows the money from China and the Middle East. My point is, eventually you'll have to pay.

 

[Gilbo]

I think that is the problem. Giving all those advantages yet still allowing them to be a for-profit enterprise was the failure.



I've read that Freddie and Fannie helped significantly to put large numbers of people into their own homes. Whether or not this is a good thing is a different argument, and I agree with jtr's anti-suburban leanings.

I don't think there's anything wrong with renting. Whether it's financially better in the long run though, depends on your particular market conditions. There are several areas in Ottawa where it would be better for me to rent than buy, if I invested the balance as retirement savings -I'd also have far more flexibility, and less debt!

Part of the problem in the U.S. is that deducting the tax on your mortgage makes buying so tempting. Seeing as how politicians can never end that practice now, they should at least allow you to deduct rent too. I don't know if that would balance the market out or not, but superficially it would encourage people to look at both options.

 

[ddrueding]

American Taxpayers are sure going to have pay for their governments mistakes. They seem to be paying more & more frequently now... Actually I guess the government just cuts taxes and borrows the money from China and the Middle East. My point is, eventually you'll have to pay.

I think you are onto something here. The US hasn't paid it's debts at all during this administration. Politicians are learning from CEOs, maximum shareholder/voter popularity in the time frame that they care about does not come from solid practices; it comes from squeezing everything you can out, taking your bonus, and leaving the mess to the next guy.

 

[ddrueding]

Following my logic, who's to say that the gov't won't follow the examples of Middle America and run up the credit card bills before filing bankruptcy.

 

[Stereodude]

I think that is the problem. Giving all those advantages yet still allowing them to be a for-profit enterprise was the failure.

It is not really a private company. It's a gov't run company that is private held. You can't blame the "private" aspect of it on it's failure. The gov't aspect is responsible for it's failure.

I've read that Freddie and Fannie helped significantly to put large numbers of people into their own homes. Whether or not this is a good thing is a different argument, and I agree with jtr's anti-suburban leanings.

I don't care if they helped or not. They have no business doing that. Helping people into a house they can't afford isn't really "help".

Lastly, jtr is a closest socialist (in that regard) who wants us all to live in gov't run housing in big cities like happened in the USSR.

Frankly I think Fannie and Freddie are just a big scam to get as many people dependent on the gov't as possible. People think they need gov't help to buy a house.

 

[ddrueding]

Lastly, jtr is a closest socialist (in that regard) who wants us all to live in gov't run housing in big cities like happened in the USSR.

Although I agree that jtr wants everyone to live in large buildings in large cities, and I agree with him that the math works out better that way (even though I don't want it). I don't think he ever said "gov't run housing". Having recently come back from Moscow, I can't imagine a worse idea.

 

[Stereodude]

I don't think he ever said "gov't run housing".

That's kind of the implied conclusion of having the gov't tell people where they can and can't live and taking away their cars and making them use public transportation.

 

[ddrueding]

That's kind of the implied conclusion of having the gov't tell people where they can and can't live and taking away their cars and making them use public transportation.

I don't recall him encouraging forcing. I remember him saying that encouraging suburbs in the first place was a mistake, and that encouraging urban living through better public transportation and less tax incentives for home ownership was a good thing, and I agree with all that.

 

[Gilbo]

It is not really a private company. It's a gov't run company that is private held. You can't blame the "private" aspect of it on it's failure. The gov't aspect is responsible for it's failure.
I don't care if they helped or not. They have no business doing that. Helping people into a house they can't afford isn't really "help".

Lastly, jtr is a closest socialist (in that regard) who wants us all to live in gov't run housing in big cities like happened in the USSR.

Frankly I think Fannie and Freddie are just a big scam to get as many people dependent on the gov't as possible. People think they need gov't help to buy a house.

The biggest problem is that, disregarding whether or not more home ownership is good or bad, Freddie Mac & Fannie Mae drove home prices up, in retrospect it's an inevitable consequence of giving people access to cheaper credit! They created a massive property bubble.

So, in the end, they did the exact opposite of what they were supposed to! Housing didn't become more affordable or more accessible, the market only adjusted the prices higher to compensate for the greater availability of cheap credit. Classic unintended consequence, but a pretty obvious result if you consider that the housing market in the U.S. is a free market, and peoples' buying power in that market is determined by the availability of credit.

To top it all off, tons of people are caught in brutal, potentially fiscally ruinous equity situations now that the market has rebalanced itself and the bubble is blowing up. Banks are very displeased if you owe $400,000 on a house that is now worth only $350,000...

 

[Stereodude]

The biggest problem is that, disregarding whether or not more home ownership is good or bad, Freddie Mac & Fannie Mae drove home prices up, in retrospect it's an inevitable consequence of giving people access to cheaper credit! They created a massive property bubble.

So, in the end, they did the exact opposite of what they were supposed to! Housing didn't become more affordable or more accessible, the market only adjusted the prices higher to compensate for the greater availability of cheap credit. Classic unintended consequence, but a pretty obvious result if you consider that the housing market in the U.S. is a free market, and peoples' buying power in that market is determined by the availability of credit.

You pretty much hit the nail on the head. The gov't has been tampering with the housing market for a long time (through Fannie and Freddie suppressing interest rates on high risk people and loose fiscal policies creating easy / cheap credit) and now they try to pretend they had no part in the problem, but more involvement from them is needed to fix it.

The same thing happens anywhere they get involved. If the gov't makes school tuition tax deductible or gives tuition tax credits the only thing that happens is that education get more expensive because you're effectively not paying as much for it anymore and they raise the price to compensate.

 

[Gilbo]

This article cites some good data illustrating that most of the really bad loans were done by private institutions.

Of course, it doesn't clear the GSEs (Government-Sponsored Enterprises, i.e. Freddie Mac & Fannie Mae), but it does illustrate that they didn't single-handedly cause the crisis. There's a lot of blame to go around on all sides. There's no doubt that many private corporations hid these liabilities through contemptible accounting practices using off-balance sheet vehicles like Qualified Special-Purpose Entities. There's also no doubt that the government's implicit guarantee of the GSE's and the relaxation of leverage ratio requirements for them and them alone caused similar problems.

Basically everyone got greedy, and either broke the rules (in spirit anyway) or rewrote them (like the government did for the GSE's), and in the end we (well the average American Taxpayer) is getting screwed for it. Wall Street and their corrupt politician buddies have now routinely and actively attempted to socialize losses while continuing to reap private gains. They did in the Tech crisis, and they really did it this time.

Someone else need to slap some sense into the accountants there as culpable as anyone else.