Financial topics

[Higgenbotham]

http://in.news.yahoo.com/euro-zone-cris ... nance.html

"In nearly 20 years of dealing with EU issues, I've never known a state of affairs like we are in now," one euro zone diplomat said this week. "It really is a very, very difficult fix and it's far from certain that we'll be able to find the right way out of it."

"For two years we've been pumping up the life raft, taking decisions that fill it with just enough air to keep it afloat even though it has a leak," the diplomat said. "But now the leak has got so big that we can't pump air into the raft quickly enough to keep it afloat."

"The Greeks might say they are in such a mess that to survive they we need to ease up the austerity a bit, and to still regain debt sustainability they will have to default on 30-40 percent of the loans," one euro zone official said.

"There would be a lot of people saying this is understandable, so maybe this makes sense and maybe we could have a reasonable discussion among the member states on how Greece can move forward," the official said.

The official speculated that euro zone debt forgiveness for Greece could be made dependent on progress in structural reforms or that it could be reviewed once Athens has to start paying back the capital of the loans in 10 years.

"Maybe we could agree to give debt relief of, say, 25 percent to make possible some changes in the programme. Then we implement that for six months or a year and maybe we find out that we need to give them another 25 percent and at the end of the day we might get to a stable situation," the official said.

[Higgenbotham]

Posted last month:

My idea from an old post is at some point the crash will outrun the ability to counter it. By the time that happens, the size and/or speed of the crash will be immense, given how far the interventions have taken us from reality. From 2010:

A relevant note on this--a headline from yesterday said something to the effect that Geithner is saying speed of response is critical at this juncture. There are limits and the bigger the bubble gets, the faster it leaks when it does start leaking, and the faster the authorities have to move to grow it bigger until finally there comes a time when they cannot move fast enough.

Reading some of these recent articles gives me the idea that the banks have figured this out and they know they are screwed.

Fascinating thought Higgie. Is there anything on the web on this?

Richard, the second quote in the post above is now the closest I've seen anyone in an official capacity come to saying something similar:

"For two years we've been pumping up the life raft, taking decisions that fill it with just enough air to keep it afloat even though it has a leak," the diplomat said. "But now the leak has got so big that we can't pump air into the raft quickly enough to keep it afloat."

[Reality Check]

My idea from an old post is at some point the crash will outrun the ability to counter it. By the time that happens, the size and/or speed of the crash will be immense, given how far the interventions have taken us from reality. From 2010:

A relevant note on this--a headline from yesterday said something to the effect that Geithner is saying speed of response is critical at this juncture. There are limits and the bigger the bubble gets, the faster it leaks when it does start leaking, and the faster the authorities have to move to grow it bigger until finally there comes a time when they cannot move fast enough.

Reading some of these recent articles gives me the idea that the banks have figured this out and they know they are screwed.

Geithner was one of the authors of the original 800 Billion dollar bailout fund ( circa September-October 2008 ) it was suppose to buy the "Toxic Assets" from the banks ( it was used for other purposes of course ).

Geithner was also the one who came up with the 2009 Public-Private partnership plan which was also supposed to buy the "Toxic Assets" from the banks. Geither and the Obama administration patted themselves on the back for fixing the Toxic Asset problem with that plan. But, of course, that plan required the banks to mark the toxic assets down closer to true market value, so that plan was never implemented either.

The problem and risk have been identified before by Geithner. Several times. He even came up with multiple plans to fix "the little debt bubble problem". Those plans were never implemented and instead the FED just printed Trillions of dollars and loaned the money to the banks "secured" by the "Toxic Assets", and charging near zero percent interest. The toxic assets were of course still valued at 100% of face value when the collateral value was calculated, so the banks never had to write the toxic assets down to market value nor was the bubble deflated.

Reading some of these recent articles gives me the idea that the banks have figured this out and they know they are screwed.

The investment banks were all bankrupt ( circa 2007-2008-2009 ). The so-called re-capitalization was just the FEDs money and, to a much smaller extent, taxpayer money. The owners and executives of the banks no longer have any of their own money at risk. They are gambling with taxpayer guaranteed depositor money at this point.

The bankers are earning profits on other peoples money, so all the interest and all the profits they are earning off that money is pure profit ever since the banks went bankrupt, they, the bankers, have no capital at risk at all. They are no longer private banks. They are government enterprises where the risk goes to the tax payers and the profits go to the bankers.

I understand that you are just saying the bankers may be changing strategy because the end of the free ride may be near, but we should be clear they are not risking their own money by dragging it out as long as possible.

[Reality Check]

"The Greeks might say they are in such a mess that to survive they we need to ease up the austerity a bit, and to still regain debt sustainability they will have to default on 30-40 percent of the loans," one euro zone official said.

"There would be a lot of people saying this is understandable, so maybe this makes sense and maybe we could have a reasonable discussion among the member states on how Greece can move forward," the official said.

The official speculated that euro zone debt forgiveness for Greece could be made dependent on progress in structural reforms or that it could be reviewed once Athens has to start paying back the capital of the loans in 10 years.

"Maybe we could agree to give debt relief of, say, 25 percent to make possible some changes in the programme. Then we implement that for six months or a year and maybe we find out that we need to give them another 25 percent and at the end of the day we might get to a stable situation," the official said.

This sounds similar to what happened between Germany and the rest of Europe between World War I and World War II.

After several years of partial loan forgiveness 100% of Private Bank loans to Germany and 100% of Government loans to Germany were forgiven and then the "New German Currency" issued after the forgiveness, and German banks, became stable and the banks and the currencies of the European countries that forgave the debts to Germany collapsed.

[Higgenbotham]

Those plans were never implemented and instead the FED just printed Trillions of dollars and loaned the money to the banks "secured" by the "Toxic Assets", and charging near zero percent interest. The toxic assets were of course still valued at 100% of face value when the collateral value was calculated, so the banks never had to write the toxic assets down to market value nor was the bubble deflated.

The investment banks were all bankrupt ( circa 2007-2008-2009 ). The so-called re-capitalization was just the FEDs money and, to a much smaller extent, taxpayer money. The owners and executives of the banks no longer have any of their own money at risk. They are gambling with taxpayer guaranteed depositor money at this point.

I reviewed this article from last year earlier tonight and am less amused (than I was last year).

http://www.rollingstone.com/politics/ne ... z224S46uR2

I understand that you are just saying the bankers may be changing strategy because the end of the free ride may be near, but we should be clear they are not risking their own money by dragging it out as long as possible.

What I'm saying is there will come a point when the money can't be pumped in fast enough to mask the insolvency of the financial system. That's what I meant when I said that Ben forgot about profits when he gave his helicopter speech. If the insolvency of the financial system is unmasked, then its value would then recognized as being pretty close to zero (Lehman all over again only this time there is no saving anything by means of intervention), and since the worldwide banking system is all connected together, what the European diplomat said probably applies here in the US too, within a few weeks or months.

[aedens]

And in more news of interest, if a bit off topic, an HSBC senior bank manager falls to his death... Leave it to the Brits to note that he wasn't wearing a tie when he fell... bad taste, that.
http://www.telegraph.co.uk/news/uknews/ ... anker.html
"Michael Foreman, 48, fell from a fifth-floor balcony in the members’ bar area of the gallery on the South Bank last Tuesday evening.
The banker, who lived in Grays, Essex, with his wife Janet, was reported missing the day before he died. ht sw

Drug lords ban crack in favelas. http://www.aljazeera.com/indepth/featur ... 25735.html

[Reality Check]

What I'm saying is there will come a point when the money can't be pumped in fast enough to mask the insolvency of the financial system. That's what I meant when I said that Ben forgot about profits when he gave his helicopter speech. If the insolvency of the financial system is unmasked, then its value would then recognized as being pretty close to zero (Lehman all over again only this time there is no saving anything by means of intervention), and since the worldwide banking system is all connected together, what the European diplomat said probably applies here in the US too, within a few weeks or months.

I agree that if they keep trying to pump ever more money in - as in print money and pump it into the banks - at some point that will no longer work. This falls under the category of: "when something can not continue, it will stop".

I also recognize at some point "they" may just decide to stop pumping it in at an ever increasing rate, even if it still is working at the time the decide to stop.

I personally do not have the knowledge, nor the skill, to predict when either of those two events will take place, nor do I have the knowledge, nor the skill, to suggest your estimates of a few weeks, or a few months, is wrong.

[aedens]

Trade what is in front of you and not what u think should be in front of you.

http://www.youtube.com/watch?v=DDSUu38r ... re=related

government securities or banks to eventually - banks after election H no sane Corporate will open but update a line.
Geo Corp is cleaning out the dead wood in the sector IMO. He is not to be trusted as a friend who mistreats his own family.
You toast them for a nickle you will never see another....

until they can blame "those guys" OLD I sincerly think they do not even pretend to care.

Same: Yea I caught up, I agree and a few stable segments may be washed over is what we are watching. Housing here is in a slowing spiral and dead on the hoof. I was corrected on a net roll over, but factors the same inertia to shape.

we are told, because of too much corporate debt, or the refusal of banks to face up to their losses. http://www.moj.go.jp/
nope the flow to cover acount from Euro a few months back punctuated what was seen in circa 79 regional recession ensued on cap raid
we captured this here in signal from boj. This is hindsite note from raw flooding I seen and recourse done much earlier. It was painfull until terms
meted.
However, it is fairly straightforward to see that if we have a "Tobin's q" model of investment, in which periods of high investment are associated with a high real price of assets, a positive marginal product of capital is no guarantee that individuals face a positive real rate of return.
http://www.youtube.com/watch?v=WjlaCBI8 ... re=related

As they posit Monetary policy: It may seem strange to return to monetary policy as an option. After all, haven't we just seen that it is ineffective? But it is important to realize that the monetary thought experiments we have performed have a special characteristic: they all involve only temporary changes in the money supply.
however, that the basic premise - that even a zero nominal interest rate is not enough to produce sufficient aggregate demand - is not hypothetical: it is a simple fact about now. Unless one can make a convincing case that structural reform or fiscal expansion will provide the necessary demand, the only way to expand the economy is to reduce the real interest rate; and the only way to do that is to create expectations of inflation.
Fisher, Irving, (1933), “The Debt-Deflation Theory of Great Depressions,” Econometrica, Vol. 1, no. 4.
http://generationaldynamics.com/forum/v ... chk#p13737

Evidence from public opinion polls and corporate bond markets shows that FDR’s policies prevented a robust recovery of long-term private investment by significantly reducing investors’ confidence in the durability of private property rights. Not until the New Deal/war economy ended and resources became available for peacetime production did private investment—and the nation’s economic health—fully recover.
If they take the nickel now its over. Inflection point for me is here albeit somewhat early.
http://www.youtube.com/watch?v=Tja6_h4lT6A
These ambitious men were not naïve; they were overconfident about their ability to manipulate.
Zechariah

[Higgenbotham]

I agree that if they keep trying to pump ever more money in - as in print money and pump it into the banks - at some point that will no longer work. This falls under the category of: "when something can not continue, it will stop".

I also recognize at some point "they" may just decide to stop pumping it in at an ever increasing rate, even if it still is working at the time the decide to stop.

I personally do not have the knowledge, nor the skill, to predict when either of those two events will take place, nor do I have the knowledge, nor the skill, to suggest your estimates of a few weeks, or a few months, is wrong.

I don't have that skill either. Hell, I couldn't be pinned down as to what "a few" means. It could probably be justified as being anywhere from 2 weeks to 11 months. About the most I can say is that something that I said 2 years ago could happen (vaguely and conceptually) has now been attributed in a news story to a person with detailed knowledge of the situation. And continental or global financial failures of this type, once the risks get to a certain size, probably don't get better and probably spread because that's what has happened in the past. The last episode went from a few billion in Bear Stearns subprime funds (12 billion I think it was) losing 90% of their value to Bear Stearns going under 8 months later to Lehman going under 6 months after that. After that happened, and the global financial system was propped back up, I estimated there would be another 3 years max before the next crisis hit. That was based on all the similar crises that have happened throughout history that I'm aware of. I pointed to the example of the partial collapse of the European banking system in 1343. The City of Florence (there were no countries at the time) rescued the banks in 1343 with public money, and the rest of the big banks eventually collapsed anyway in 1346. In the present case, there was a Fall 2011 unraveling that appeared to be the end of the prop job, further rescue measures were taken, and the insolvency has now been papered over for a longer period of time than I could have predicted based on anything I knew in 2008 or 2009. Since then, the banks have grabbed enough loot that it appears to me the danger is that the US economy has become insolvent, on average, based on a balanced budget, which is inevitable eventually, either through actual default or indirect default via hyperinflation and destruction of the bond market. But I don't think it would be possible to back that assertion with facts - I made an attempt that would need a lot of refining to be worthy of being considered a good attempt. Even a good attempt has too many assumptions to be reliable. Only time will tell. In my estimation, this time really is different enough historically and complex enough that nobody can make high probability guesses but nonetheless there will people who will try for various reasons. Speaking of which, Roubini's last estimate was Spain and Italy will be unable to get funding in 3 months. I think you quoted something earlier that gave 2013 as his time for the next set of problems to hit. He may have moved that up.

[Reality Check]

I agree that if they keep trying to pump ever more money in - as in print money and pump it into the banks - at some point that will no longer work. This falls under the category of: "when something can not continue, it will stop".

I also recognize at some point "they" may just decide to stop pumping it in at an ever increasing rate, even if it still is working at the time they decide to stop.

I personally do not have the knowledge, nor the skill, to predict when either of those two events will take place, nor do I have the knowledge, nor the skill, to suggest your estimates of a few weeks, or a few months, is wrong.

I don't have that skill either. Hell, I couldn't be pinned down as to what "a few" means. It could probably be justified as being anywhere from 2 weeks to 11 months.

At the risk of sounding like an ethnic stereo type,

My lack of knowledge and skill far exceeds that. I could just as likely "see" this going on a few years if a crisis war NEVER occurs to intervene in the financial disaster.. Or, if a crisis war does start, I could see the U.S. economy 'saved' by a ramp up to war similar to what happened to a previously economically bankrupt Great Britain in World War II.

But I lack the knowledge and skills in the economic area to even suggest that is even a possible alternative to a few weeks or few months. Mine is just a fictional speculative scenario, your estimate is obviously not.