The 2008 Economic Crisis

[Brandan Kraft]

[color=blue]In actual fact, the first group the U.S. will default on will be its own citizens and private investors, not the foreign government investors which are the most risky to disappoint.

That's a sure fire way to lose an election, don't you think?

[Brandan Kraft]

Bob,

We of course can see that the Fed has taken the inflationary route to print its way out of a major depression and have the Gov't pay off its debt to SS and Medicare recipients. I have a question for you - do you think they have a shot at pulling it off? Can they continue to lie about the real inflation index and mask it with the fake CPI? I think people will eventually wise up to their game don't you think?

Brandan

[Robert R. Higby]

According to the numbers presented by the Comptroller General in the interview with Glenn Beck that you posted, they don't have a chance at pulling it off. Especially once the government can't keep financing its ever-burgeoning debt with low interest rates--once the dollar is devalued and causes inflation to the point that the Fed must raise them dramatically.

On the matter of risking re-election, it isn't even going to be on the politician's minds. The first wave of default will likely come after a foreign government like China loses confidence in the U.S. ability to pay and calls in their debt. In a matter of about a week special meetings of Congress and the President will have to:

1. Immediately raise taxes.
2. Cut a big chunk of Federal government jobs.
3. Cut payments on certain expensive programs (military contracts, etc.)
4. Cut Social Security and Medicare expenditures by placing an immediate freeze on new recipients entering the system (until they decide what to do next).
5. Freeze re-payment of T-bills for citizens and private investors (until they decide what to do next).

and other things that we might imagine. In a crisis that demands severe action there is no time to consider the political fallout; the public wants confidence that any type of immediate stability in the economy is being addressed.

[Brandan Kraft]

1. Immediately raise taxes.

It won't fly - that's my opinion - not with everyone struggling financially.

2. Cut a big chunk of Federal government jobs.

I see that happening for sure.

3. Cut payments on certain expensive programs (military contracts, etc.)

Yes - I can see that as well.

4. Cut Social Security and Medicare expenditures by placing an immediate freeze on new recipients entering the system (until they decide what to do next).

That won't fly with the American public - not without a revolt!

5. Freeze re-payment of T-bills for citizens and private investors (until they decide what to do next).

I can see that happening.

and other things that we might imagine.

USPS could cut saturday delivery! National lands and parks and infrastructure could be sold.

In a crisis that demands severe action there is no time to consider the political fallout; the public wants confidence that any type of immediate stability in the economy is being addressed.

There WILL be humongous political fallout if the welfare and the medicare / ss stops. I predict that there will be riots and possible civil war if that happens.

[Brandan Kraft]

International experts foresee collapse of U.S. economy

And you thought that I had a gloomy outlook on the economy. Now the bad news pops up everywhere.

Harry Koza in the Globe and Mail quotes Bernard Connelly, the global strategist at Banque AIG in London, who claims that the likelihood of a Great Depression is growing by the day.

Martin Wolf, celebrated columnist of the U.K.-based Financial Times, cites Dr. Nouriel Roubini of the New York University's Stern School of Business, who, in 12 steps, outlines how the losses of the American financial system will grow to more than $1 trillion - that's one million times $1 million. That amount is equal to all the assets of all American banks.

Every day now, thousands of people all over the U.S. and Great Britain are walking away from their homes - simply mailing their house keys to the banks - as housing bailout plans fail.

With unemployment growing, the next phase will hit commercial real estate making the financial institutions the unwilling owners not only of quickly depreciating houses, but also of empty strip malls and even larger shopping centres.

The next domino to fall will be credit card defaults, and after that... who knows? There are so many exotic funds out there, with trillions of dollars in paper - or rather computer-screen money - all carrying assorted acronyms, and all about to disintegrate into nothingness. Over the next couple of years, scores of banks that have thrived on these devices, based on quickly disappearing equities, will fail.

The most frightening forecast so far comes from the Global Europe Anticipation Bulletin (GEAB), available for 200 euros - about $300 - for 16 issues annually. Its prediction is quite specific.

Where my warnings never spelled out an exact date, this think tank has it pegged precisely. Here are its very words:

"The end of the third quarter of 2008 (thus late September, a mere seven months from now) will be marked by a new tipping point in the unfolding of the global systemic crisis.

"At that time indeed, the cumulated impact of the various sequences of the crisis will reach its maximum strength and affect decisively the very heart of the systems concerned, on the front line of which (is) the United States, epicentre of the current crisis.

"In the United States, this new tipping point will translate into - get this - a collapse of the real economy, (the) final socio-economic stage of the serial bursting of the housing and financial bubbles and of the pursuance of the U.S. dollar fall. The collapse of U.S. real economy means the virtual freeze of the American economic machinery: private and public bankruptcies in large numbers, companies and public services closing down."

The report goes on to say that we are entering a period for which there is no historic precedent. Any comparisons with previous situations in our modern economy are invalid.

We are not experiencing a "remake" of the 1929 crisis nor a repetition of the 1970s oil crises or 1987 stock market crisis.

What we will have, instead, is truly a global momentous threat - a true turning point affecting the entire planet and questioning the very foundations of the international system upon which the world was organized in the last decades.

The report emphasizes that it is, first and foremost, in the United States where this historic happening is taking an unprecedented shape (the authors call it "Very Great U.S. Depression").

It continues to predict that, although this crucial event is global, it will be the beginning of an economic 'decoupling' between the U.S. and the rest of the world. However, non 'decoupled' economies will be dragged down the U.S. negative spiral.

Concerning stock markets, the GEAB anticipates that international stocks would plummet by 40 to 80 per cent depending where in the world they are located, all affected in the course of the year 2008 by the collapse of the real economy in the U.S. by the end of summer.

The European authors of this report - it appears simultaneously in French, German and English - state that they simply and without prejudice try to describe in advance the consequences of the ominous trends at play in this 21st-century world, and to share these with their readers, so that they can take the proper means to protect themselves from the most negative effects.

So there you have it. Three reports from three different sources, all well regarded, and all pointing to a disastrous fall-out from our monetary moves.

[Brandan Kraft]

I'm seeing more gloom and doom articles everywhere...

[Brandan Kraft]

Banks face "systemic margin call," $325 billion hit: JPM

[Brandan Kraft]

Here's a good one I saw from late Feb.

http://www.cnbc.com/id/23350846/site/14081545

Zell Sees Start of Housing Recovery in the Spring

By CNBC.com | 26 Feb 2008 | 09:43 AM ET

The US economy will avoid recession as the housing market begins to
recover this spring, according to billionaire investor Sam Zell.

Speaking on “Squawk Box” this morning, Zell attributed much of the
current economic troubles to fear-mongering and politicking by
Democratic presidential contenders Hillary Rodham Clinton and Barack Obama.

“Obviously what we have going on is an attempt to create a
self-fulfilling prophecy,” said Zell, chairman of Equity Investments
Group and owner of the Chicago Cubs, Chicago Tribune, Los Angeles Times
and other companies. “We have two Democratic candidates who are vying
with each other to describe the economic situation worse.

“The reality is that if you live on Wall Street and you’re in the credit
markets the world couldn’t be worse. If you’re a farmer and you’re
getting $25 for your wheat, you’re having a great time. If you’re a CEO
and you’ve got a balance sheet that’s bullet-proof, you’re in a great
position. This whole thing is way out of control, way out of hand.”

Zell said that although he doesn’t try to pick bottoms in markets he
believes housing has hit its nadir and will turn around this spring as
inventory clears out.

As for the credit situation, he projected that once markdowns are out of
the way banks will begin to regain their footing.

In the wide-ranging interview, Zell also voiced support for Federal
Reserve Chairman Ben Bernanke.

“I think he should be renewed when his term is up. I think one of the
positives of the United States is having people in the position of the
Federal Reserve (chairman) for long periods of time,” Zell said.

“I think Bernanke’s reduction in interest rates has been spot-on,
because basically we’re going to fix the credit markets by creating a
big enough spread between the risk-free cost of capital and what’s
available so that greed overtakes fear and the game begins again.”

[Brandan Kraft]

Saw this guy's post on the economy...

For all you that believe in all the Doom & Gloom (tm), here’s a couple of fun *FACTS* you might wanna think about before jumping off the cliff :

- The United States of America *MANUFACTURES* 25% of the worldwide global output of all manufactured goods. More than the next three nations combined - in descending order -Japan, China, Germany. The difference is we don’t make toothpicks anymore. Those jobs are going to China. You want to work in manufacturing in US ? Now you need a 4 year college degree minimum, in, say, Biotechnology or Chemical Engineering. In terms of manufacturing salary numbers total in US, the numbers have never been greater. Example - seamstress jobs in textile industries that paid 40k a year are gone to China, replaced by biotechnology laboratories producing next generation proteomics drugs. Those jobs are 60-80k / year.

- The United States has the most largest (by a factor of 4x vs the next one down, Japan) and the most diversified economy in that has ever been in existence.

- Chinese hold less than *ONE* trading day’s worth of volume in US Treasuries.

- The Housing industry comprises around 2.5% of the GDP. If the whole damn thing were to go to ZERO, it’d only represent a mild recession. However, 97% of all mortgages out there *are* performing.

- The United States is THE ONLY huge market in the world that is completely uniform and integrated across all dimensions - fiscal, monetary and political. In contrast, EU only has uniform monetary policy. In terms of politics they couldn’t disagree more on some things. Fiscal policies vary from area to area within different countries, never mind the Eurozone as a whole. We are rock of Gibraltar politically compared to the Europeans. Think of Italy, for example - they have themselves a new government every 6-9 months, on the average. Now where would you prefer to have your money for the real long term ? I won’t even talk about European demographics.

All the doom and gloom and doomsday reports can’t change the *actual* reality. It’s important to know and remind one self what that really is and means before selling all your stocks and buying gold or electing socialists.

[Highlyfavored]

Hey BK, why do you have to be so negative?

[Brandan Kraft]

Mortgage lenders see more borrowers give up

Nationwide, more than half the borrowers who lose their homes through foreclosure never answered their lenders' calls or letters, according to Freddie Mac. And an MBA analysis found that 23% of loans in foreclosure last fall were to homeowners who had no contact with their lenders, and that an additional 18% were to absentee owners.

The numbers help explain why it's so difficult to reverse the trends of rising foreclosures and falling property values. Even some homeowners who can afford to pay their mortgages are defaulting, Lauria says, because their house might have lost 30% of its value, and they figure it will be a long time before it's worth what they paid for it.

Freddie Mac, Fannie Mae Plunge on Concern Over Losses

Freddie Mac and Fannie Mae, the largest U.S. mortgage finance providers, plunged to the lowest since 1995 in New York Stock Exchange trading on concern they may face increasing losses as the housing slump deepens.

Freddie Mac fell as much as 16 percent after Credit Suisse analyst Moshe Orenbuch said the McLean, Virginia-based company may have writedowns of as much as $5 billion because of losses on some mortgage bonds. Washington-based Fannie Mae dropped as much as 19 percent after Barron's said its solvency may be tested.

The Face-Slap Theory

Friday’s employment report — which was so weak that it had many economists declaring that we’re already in a recession — was bad news. But it was actually less disturbing than what’s going on in the financial markets.

The scariest thing I’ve read recently is a speech given last week by Tim Geithner, the president of the Federal Reserve Bank of New York. Mr. Geithner came as close as a Fed official can to saying that we’re in the midst of a financial meltdown.

To understand the gravity of the situation, you have to know what the Fed did last summer, and again last fall.

As late as August the favorite buzzword of financial officials was “contained”: problems in subprime mortgages, we were assured, wouldn’t spread to other financial markets or to the economy as a whole.

Soon afterward, however, a full-fledged financial panic began. Investors pulled hundreds of billions of dollars out of asset-backed commercial paper, a little-known but important market that has taken over a lot of the work banks used to do. This de facto bank run sent shock waves through the financial system.

The Fed responded by rushing money to banks, and markets partially calmed down, for a little while. But by December the panic was back.

Again, the Fed responded by rushing money to banks, this time via a new arrangement called the Term Auction Facility. Again the markets calmed down, for a while.

But again, the respite was only temporary. Last month another market you’ve never heard of, the $300 billion market for auction-rate securities (don’t ask), suffered the equivalent of a bank run. Last week two big financial companies announced that they had been unable to raise the cash demanded by their lenders. Even Fannie Mae and Freddie Mac, the giant government-sponsored mortgage agencies long regarded as safe places to put your money, are now having trouble attracting funds.

One consequence of the crisis is that while the Fed has been cutting the interest rate it controls — the so-called Fed funds rate — the rates that matter most directly to the economy, including rates on mortgages and corporate bonds, have been rising. And that’s sure to worsen the economic downturn.

What’s going on? Mr. Geithner described a vicious circle in which banks and other market players who took on too much risk are all trying to get out of unsafe investments at the same time, causing “significant collateral damage to market functioning.”

A report released last Friday by JPMorgan Chase was even blunter. It described what’s happening as a “systemic margin call,” in which the whole financial system is facing demands to come up with cash it doesn’t have. (A financial joke making the rounds, via the blog Calculated Risk: “Who is this guy Margin that keeps calling me?”)

The Fed’s latest plan to break this vicious circle is — as the financial Web site interfluidity.com cruelly but accurately describes it — to turn itself into Wall Street’s pawnbroker. Banks that might have raised cash by selling assets will be encouraged, instead, to borrow money from the Fed, using the assets as collateral. In a worst-case scenario, the Federal Reserve would find itself owning around $200 billion worth of mortgage-backed securities.

Some observers worry that the Fed is taking over the banks’ financial risk. But what worries me more is that the move seems trivial compared with the size of the problem: $200 billion may sound like a lot of money, but when you compare it with the size of the markets that are melting down — there are $11 trillion in U.S. mortgages outstanding — it’s a drop in the bucket.

The only way the Fed’s action could work is through the slap-in-the-face effect: by creating a pause in the selling frenzy, the Fed could give hysterical markets a chance to regain their sense of perspective. And to be fair, that has worked in the past.

But slap-in-the-face only works if the market’s problems are mainly a matter of psychology. And given that the Fed has already slapped the market in the face twice, only to see the financial crisis come roaring back, that’s hard to believe.

The third time could be the charm. But I doubt it. Soon, we’ll probably have to do something real about reducing the risks investors face.

A plan to restore the credibility of municipal bond insurance would be a start (how crazy is it that New York State, rather than the federal government, is taking the lead here?). I also suspect that the feds will have to get explicit about guaranteeing the debt of Fannie and Freddie, which really are too big to fail.

Nobody wants to put taxpayers on the hook for the financial industry’s follies; we can all hope that, in the end, a bailout won’t be necessary. But hope is not a plan.

MUST READ! A Quick Look At The Credit Crisis

... snip ...

The really fun news is that this is only the tip of the iceberg. "Credit default swaps" can be thought of as freelance monoline insurance on any kind of debt obligation. But unlike with monoline insurance, nobody knows who is obligated to pay or whether he is able to do so. It is estimated that there are about $43 trillion in credit default swaps. (6)

With frozen credit markets, capitalism has come to an end. Making things doesn't pay, and now you can't lend money to make money. What is a capitalist -- excuse me, entrepreneur, going to do? Naturally he will look to the Fed for a rescue. Free markets are fine and dandy unless I need a bailout. The Fed has the right to print money and lend it to banks. Great business if you can get it. The Fed, to unclog the arteries of the credit system, lowers its interest rate. But to whom are you going to lend money? Nobody knows which banks are already bankrupt, and now even the little guy is no longer finding his obligation to pay all that much of an obligation. In the end the whole credit system depends upon the social convention that debts ought to be repaid, and this social convention seems to be dissolving. When people begin walking away, lower interest rates are not going to help.

[Robert R. Higby]

Right now a person with the 'traditional' positive credit profile can still get a loan on 'traditional' terms.

Anyway, all of this is very interesting to consider but in the final analysis it is the Lord who rules IN FAVOR of all of the elect! If He can create the worlds out of nothing He can certainly put gas in our tanks, food on our tables, shelter over our heads, and the joy of the incomparable gospel in our souls!

We don't need to fear for the future as those who have no hope do; our confidence rests on an entirely different basis than theirs!

[MCoving]

Right now a person with the 'traditional' positive credit profile can still get a loan on 'traditional' terms.

Anyway, all of this is very interesting to consider but in the final analysis it is the Lord who rules IN FAVOR of all of the elect! If He can create the worlds out of nothing He can certainly put gas in our tanks, food on our tables, shelter over our heads, and the joy of the incomparable gospel in our souls!

We don't need to fear for the future as those who have no hope do; our confidence rests on an entirely different basis than theirs!

AMEN BOB!!!! That is exactly how I feel.. I kind of understand what is going on in our economy but I am not into that much. I cannot even answer the poll because its speculation. Whether its going to be really bad or not I know that the Lord is there through it all. That my life will be just fine. Whatever happens is the Lords Will. And I will take each day at a time.. so if it starts to get bad I'll deal with it then.. rather than think upon it now and guess to how I'd respond if things got bad. Plius I know my immediate family.. and us as God's children will take care of each other. So BRING IT ON!!! If the economy is going to fall then fall it must if that be the Lord's Will. We have all we need in this life,, and thats our God. He will provide just like He does with the sparrows.

Mary

[Brandan Kraft]

Economy weak but not enough for recession: report

[Brandan Kraft]

Right now a person with the 'traditional' positive credit profile can still get a loan on 'traditional' terms.

Anyway, all of this is very interesting to consider but in the final analysis it is the Lord who rules IN FAVOR of all of the elect! If He can create the worlds out of nothing He can certainly put gas in our tanks, food on our tables, shelter over our heads, and the joy of the incomparable gospel in our souls!

We don't need to fear for the future as those who have no hope do; our confidence rests on an entirely different basis than theirs!

Amen Bob. One thing I've thought about is how an economic depression would be GOOD for the elect. There are many ways in which it might help.

[MCoving]

Amen Bob. One thing I've thought about is how an economic depression would be GOOD for the elect. There are many ways in which it might help.

hehe AWESOME THOUGHT!

Rom 8:28, (NASB), And we know that God causes all things to work together for good to those who love God, to those who are called according to His purpose.

I think it's good to be aware of the economic crisis and discuss it like everyone has. Consider how it may affect you and have a plan just in case. But its also good to see the other side which Bob described.. and Brandan here. That it'll be okay. That all things, including this recession, will work out for our good. Even if we don't notice how it would at first, God knows and makes it work out for our good.

Cool huh? In all things, even the bad.. God works in it, causing it so that He can have absolute complete control to make sure His children are blessed and taken care of.

[marcuslid]

If He can create the worlds out of nothing He can certainly put gas in our tanks, food on our tables, shelter over our heads, and the joy of the incomparable gospel in our souls!

We don't need to fear for the future as those who have no hope do; our confidence rests on an entirely different basis than theirs!

And it will be a testimony too the Lord Jesus' worth when other see God's people not getting worked up about these (earthly) things.

[Brandan Kraft]

Fed to Lend $200 Billion, Take On Mortgage Securities

March 11 (Bloomberg) -- The Federal Reserve, struggling to contain a crisis of confidence in credit markets, will for the first time lend Treasuries in exchange for debt that includes mortgage-backed securities.

The Fed said in a statement in Washington it plans to make up to $200 billion available through weekly auctions. Officials told reporters on condition of anonymity that the program may be increased as needed. The Fed coordinated the effort with central banks in Europe and Canada, which plan to inject up to $45 billion into their banking systems.

Oil is at $109.00 today... When will demand be driven down?

Buyout Industry Staggers Under Weight of Debt

With their big paydays and bigger egos, private equity moguls came to symbolize an era of hyper-wealth on Wall Street.

Now their fortunes are plummeting.

Celebrated buyout firms like the Blackstone Group and Kohlberg Kravis Roberts & Company, hailed only a year ago for their deal-making prowess, are seeing their profits collapse as the credit crisis spreads through the financial markets.

Investors fear that some of the companies that these firms bought on credit could, like millions of American homeowners, begin to buckle under their heavy debts now that a recession seems almost certain. The buyout lords themselves suddenly confront gaping multibillion-dollar losses on their investments.

The American Bond Crisis

I was talking to the head of the fixed income desk of a major investment bank in London the day last week when agency debt spreads increased more than 90 basis points over US Treasuries. Agency bonds, namely mortgage bonds from GSEs, have an implicit US government guarantee so they usually trade close to treasuries with little spread.

Then all of a sudden they didn’t. The reason? Leverage – and lot's of it. In fact, my friend told me, there is by his estimate $6 trillion in excessive leverage built up over the past ten years that has to be unwound. So the credit crisis that started June 2007 with obscure financially engineered debt products such as CDOs has not evolved to include bonds presumably backed by the US government. Guess what’s next after Agency debt? You guessed it!

Our road to the American Bond Crisis starts with another note from my pal Rick Ackerman today. He recently published Inflation's Last Gasp and attributes a number of comments on inflation to me.

As Ronald Reagan would say, “There he goes again!”

.....


So forget wage inflation. The only inflation input that is necessary to keep building inflation expectations in the US economy is the rising price of everything priced in dollars, even as the recession deepens.

But wait, you say. In a recession demand falls and goods prices with it. Well, that was true back when producers weren’t good at anticipating a fall in demand and cutting back on production ahead of it. Welcome to the 2000s and computers and the Internet. In the 1930s producers didn’t have the tools or data to cut production ahead of falling demand. Now they do, and they will, and they have.

For example, since 2004 oil demand has been falling everywhere except where it is subsidized by government – China, India, oil producing countries – as prices rose 400% in dollars. But what happens to poor J6P if jobs are scarce and inflation is eating up his meager savings and he's out of new sources of credit all at the same time?

As I've said, this is not your average business cycle recession.


....

Debt defaults are rising. Credit is tightening. Unemployment is rising. It’s getting ugly out there.

How about we throw a US Treasury bond crisis into the mix?

I was talking to the head of the fixed income desk of a major investment bank in London the day last week when agency debt spreads increased more than 90 basis points over treasuries. Agency debt has an implicit US government guarantee so they usually trade close to treasuries with little spread. Then all of a sudden they didn’t. The problem? Leverage. In fact, my friend told me, there is $6 trillion in leverage that has to be unwound.

....

What happens to inflation in an American Bond Crisis? Why hypothesize when there are recent real world examples to learn from?

Let’s take a look at what happened to Russia during their bond crisis in 1998. See money growth and inflation declining steadily from 1995 to 1998? Then... whammo! The Russian Bond Crisis hit.

The year it hit in 1998 GDP growth was –4.9%, a serious recession. Must have had price deflation after that, right?

Nope. That year inflation averaged 84.4%.

Can that happen in the USA? Not to the extent of the Russian Bond Crisis because the Russians had way too much short term debt owed in foreign currencies. US foreign debts are largely long term and owed in US currency. A uniquely American version of the process is occurring.

But why am I arguing with you using examples? You tell me, "As you will have long since surmised, I prefer to argue the case for deflation more from instinct than in accordance with economic theory."

This is just the real world, not the colorful make-believe world based on imagination and intuition where leaches work as well as aspirin. In the real world the currencies of defaulting countries do not appreciate, they depreciate. Show me a country with a depreciating currency and all-goods price deflation and I will gladly slap on a leach or two next time I'm ill.

Central Bankers "Pull Out All The Stops"

The Fed is taking this step to avoid complete financial collapse. That much is becoming evident very quickly. They are using up their bullets much more quickly than they want to, thus confirming the severity of the state of the financial system, something Minyanville has been pointing out for some time.

Their last bullet comes when they directly lend to some major institution in a big way to avoid its collapse.

As far as this move, it does nothing to solve the solvency issue. The Fed is just saying we will take that risk for the market. That is very similar to nationalization. The irony is that the Fed continues to address the situation as if it is a dislocation from fundamentals (or they continue to hope that people view it that way. In actuality this is exactly what should be happening to these credits: the market should destroy them.

The government will never give up trying to forestall the inevitable, but that does not mean they have the power to do so. Stay the course: It is still early in this unwind with more flawed logic from the government to come.

[Brandan Kraft]

Our SOLUTION!

[Brandan Kraft]

Stocks up 400 points today thanks to money injections by the Fed. That was a drastic move for the central bank to take... I hope their plan works, unfortunately, I don't believe it will - this crisis is too big to avert indefinitely in my opinion.... Time will tell.