No one wants to hold risk …
In July, the TIC data indicated that foreign central banks migrated in mass toward the Treasury market.
Today everyone did.
The 3 month Treasury bill now yields nothing. The Treasury though will give you your money back …
The fall in Treasury yields came even as the US government indicated that it was going to issue a lot of bills and bonds to help the Fed grow its balance sheet.
I guess this is what a close to systemic financial crisis in the US looks like.
The broker-dealers were performing many of the economic functions of banks: The expansion of their balance sheets financed a lot of credit expansion in the US over the past few years. They no longer can access the debt market. That is a problem.
I think the global problems can snowball and put an end to US
a. Russia stock market crisis
b. china, stock and growuth crisis
c. India inflation crisis.
To add to these.. hedge funds playng the game wuth FED…
Its DONE IN
Mama Mia. Woulda yous guys stop all yous belly aching. Yous shoulda be glad the feds is being goodfellas and give’n us a safe place to stash our rolls.
It ain’t safe walk’en around the sreet wid it no more.
[...] interbancário, e a fuga para a (relativa) segurança dos títulos do tesouro americano está empurrando os yields para perto de zero. Paul Krugman está assustado, e não é para menos. Tem gente muito qualificada dizendo que a [...]
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You’re producing new posts faster than banks are failing.
If this is what a close to systemic financial crisis looks like, I’d hate to see a systemic one!
DC: In fact, AIG raided $20 billion from the New York state employee pension and annuity accounts to cover financial derivative losses.
Twofish: Because otherwise those losses would have been borne by the banks and then by depositors.
DC: Who are you kidding? What AIG did was pure thievery. That’s not too much different than a criminal robbing a bank at the point of a gun, or a white collar criminal embezzling a company’s payroll account.
I think you need to take an Economics 101 class over again. Free market capitalism isn’t stealing retirement pension money from old ladies. Free market capitalism requires “rules and regulations” that are enforced to ensure a “fair playing field”.
It’s clear that the US government regulatory agencies have been hijacked by the Wall Street special interest lobby. There are trillions of dollars held in Level-3 “mark to imaginary model” assets that no one has any idea how much the stuff is really worth. Most of the stuff is really subprime garbage marked to the valuation of gold and platnium. The US Accounting system permitting Enron-style fraud and corruption is in total shambles. Why bother to have a capitalism system that doesn’t produce anything but fraudulent accounting balance sheet?
for a picture to illustrate this post – imagine a helicopter dropping confetti into a bonfire.
Moldbug, there is another shoe to drop: When will foreign central banks decide they have enough US$, driving up long-term interest rates?
Global Systemic Distrust
http://globaleconomicanalysis.blogspot.com/
“There’s almost nothing being traded in the money markets. Nobody trusts anyone else.”
Welcome to the wonderful world of derivatives and 30 times leverage Mr. Bernanke. Not many can claim to threaten the world’s financial system. It took years of hard effort, but you, Greenspan and the Fed, in conjunction with fractional reserve lending, managed to pull it off. You and the Federal Reserve should be proud. Stand up and take a bow.
“Moldbug, there is another shoe to drop: When will foreign central banks decide they have enough US$, driving up long-term interest rates?”
Interest rate swaps will be the next blow out after we are finished with the CDS.
RR,
If China sells, Washington will be buying. Net impact: whatever China exchanges its dollars for goes up.
I wouldn’t expect this any time soon, although the anti-US axis (Iran, Russia, Venezuela) could certainly have some fun with Au/USD. Perhaps that’s already what’s going on. But China is certainly not in this category, at least not yet – making waves is the opposite of what the PRC wants.
«The 3 month Treasury bill now yields nothing. The Treasury though will give you your money back»
That’s not even true — at least it is only true for USA investors. For investors that do their accounts in currencies other than the dollar, the Treasury most definitely will not be giving them their money back.
blissex, there’s nothing definite about that.
What we are witnessing these days in the U.S. is a massive wealth transfer from taxpayers, savers and retirees to banks, their creditors and their managers. On the one hand, the Fed has pushed real interest rates deep into negative territory to help troubled banks, and, on the other hand, the American taxpayers have foot the bill for bailing out very large financial institutions.
smoke: What we are witnessing these days in the U.S. is a massive wealth transfer from taxpayers, savers and retirees to banks, their creditors and their managers.
Ummm. Most people are creditors to banks. Got a checking account somewhere? Savers are bank creditors, that’s the definition of saver.
smoke: the American taxpayers have foot the bill for bailing out very large financial institutions.
Oh please grow up. The root cause of this is that Americans want to maintain an unrealistically high standard of living while fighting a war in Iraq. Politicians are catering to the whims of the voters by not telling people the truth, and you have an entire industry that is willing to cater to the whims and fantasies of the American voter.
The bill has got to be paid somehow by someone. Go ahead and blame the bankers and the politicians and everyone else, while being completely guilt-free while borrowing money in a home equity loan and maintaining huge credit card balances. It’s not your fault. Nothing is your fault, and there are a lot of people who want your vote or your money that will tell you that because that is what you want to hear.
Pity it isn’t the truth.
It’s ironic that A.I.G. is getting bailed out by the AMERICAN taxpayer long after they turned their back on AMERICAN jobs. In 1995, AIG outsourced their entire IT department to India and threw away thousands of American jobs. Why doesn’t AIG beg the Indian government for a bailout?
[...] From Brad Setser…. The 3 month Treasury bill now yields nothing. The Treasury though will give you your money back … [...]
Yeah, listen to twofishes. I gotta a Uncle Guido whos makes a good live’n offa making 30% loans to yous goombas. Then yous complain about borrowing the money and say yous ain’t got it no more and don’ta pay back.
Uncle Guido hates that! He don’t go running to the feds for help neither. He knows where the problem lives.
Could it be that markets are crashing because the Fed didn’t bail out AIG? A loan at LIBOR + 850 doesn’t make AIG’s balance sheet any better. It may resolve liquidity problems for a while. However, if AIG is really insolvent, then AIG will fail anyway.
Perhaps what the market really wanted was a Bear Stearns deal where the Feds assume all of the bad debts.
Not sure, but a thought.
Pete, my young boy, the feds want to terminate AIG, not save the goombas.
You wanna get saved, yous go to church. Not the government.
Looks like T Bills are scarce, so expensive. Are we now dealing with solving the housing crisis or the final phase of the great financial services industry shakeout that started when stockbroking was deregulated in the 1970s?
I do not know but I think people are getting a little excited. There are parts of AIG that deserve to be bailed out (if necessary) and other parts that will hurt no civilians if they fail. This one is a little more complicated than Lehman, that’s why it is being kept on ice.
Cash is king but where to keep it?
I can’t tell whether Cedric Regula’s comments are merely hysterical or hysterically insightful, but they sure crack this occasional poster up.
Also, thanks, Brad, for all of your excellent work here. This blog has been the first and last place I stop for many months now, and it continues to be worth every minute of my time.
Rien Huizer said:
“Cash is king but where to keep it?”
Simple: gold.
“The broker-dealers were performing many of the economic functions of banks: The expansion of their balance sheets financed a lot of credit expansion in the US over the past few years. They no longer can access the debt market. That is a problem.”
Is it really? I.e., was that credit being used wisely? And if not, isn’t a good thing for a junkie to have his credit line cut?
The point is: isn’t it possible that the “fundamental business” to which that credit was being applied was “fundamentally” unsound, as J. H. Kunstler recently wrote:
“what we developed over the past decade in America was not an “information economy” or a “consumer economy” but a suburban sprawl building economy, meaning an economy dedicated to building a living arrangement with no future. The climax of the sprawl building economy occurred in absolute lockstep with the climax of peak oil. You can date it virtually to the month — May, 2005. After that, the future asserted itself and all the financial expectations bound up with sprawl-building went up in a vapor — including the value of mortgages on suburban houses. Everything that followed has been an attempt to cover up this basic reality: that the way we live in America can’t continue.”
I like Cedric, too. And I think some plain talk is valid and pertinent at this stage. What happens on the mean streets of Detroit and Los Angeles as a consequence, if you see what I mean.
[...] Setser puts it well: I guess this is what a close to systemic financial crisis in the US looks like. [...]
DC: AIG outsourced their entire IT department to India and threw away thousands of American jobs.
AIG was playing the currency ‘pegs’ the BRIC counties had created that gives their exports (and labor markets) an unfair competitive advantage. They along with many other US multi-nationals did this to remain competitive. From the easy US credit to the US job out-sourcing, ultimately it is the BRICs who are accountable for this mess.
AIG: “AIG was playing the currency ‘pegs’ the BRIC counties had created that gives their exports (and labor markets) an unfair competitive advantage. They along with many other US multi-nationals did this to remain competitive. From the easy US credit to the US job out-sourcing, ultimately it is the BRICs who are accountable for this mess.”
Come now. This is a partial argument if I ever read one. If the method by which BRIC countries depress their currency is the acquisition of US debt, and the US chooses to continue its borrowing, is it really fair to fault the former without mention of the latter?
Sorry, misattributed aim’s post to AIG – guess what was on my mind!
aim: ultimately it is the BRICs who are accountable for this mess.
Ultimately its everyone and anyone’s fault except for my own.
Schaeffer: Perhaps what the market really wanted was a Bear Stearns deal where the Feds assume all of the bad debts.
The Feds assumed about $30 billion of the bad debts of Bear-Stearns. This may or may not have been all of it.
Brad, I would be interested in your updated view of the CA deficit and the dollar, now that we know what 2Q looked like and are seeing the response of the currency markets to the crisis.
> Come now. This is a partial argument if I ever
> read one. If the method by which BRIC countries
> depress their currency is the acquisition of US
> debt, and the US chooses to continue its
> borrowing, is it really fair to fault the former
> without mention of the latter?
If one lends money to people who haven’t a prayer of being good for it, one *is* the problem, completely.
The fact that the borrower is a deadbeat loser with no ability to pay back the capital, let alone interest, doesn’t put them to blame for taking free loans with no collateral requirements….it just makes them deadbeat losers.
Was there anyone who really thought a couple making under $100K a year was good for a $1M dollars in debt at 5%? Seriously?
That’s just stupid.
Brad,
Please help me understand a couple of issues. First, why is it that banks (primarily broker dealers) depend so greatly on overnight lending practices. It seems odd to me that lending to one another is such an important function of banks. Are the overnight lending practices required for regional banks to have access to the funding from the fed? Secondly, is it economically possible for the fed to go bankrupt? Wouldn’t they simply print money to cover their financial obligations. It would seem that perceived fed risk and undue financial exposure would simply cream the dollar. I suppose that is what we saw today???
Charles — i am confused about the $. it rallied in ways i do not feel i understand.
jeff — the fed cannot really go bankrupt. it could need to be bailed out by the treasury, or it could need to print cash to cover its obligation. but bankruptcy isn’t a realistic risk.
Ian– thanks for the kind words
Dr. Setser
I came across this link over at the RGM.NB-blog and was wondering what you would think about it. As a layman one does get the impression people in China are starting to nail woodplanks onto their windows to wheather the storm:
UPDATE 1-China paper urges new currency order after tsunami … – 17 Sep 2008 … Updates with comments from Communist Party magazine in paragraphs 4 and 14-16) By Chris Buckley BEIJING, Sept 17 (Reuters) – Threatened by a …
http://www.reuters.com/article/usDollarRpt/idUSPEK2402720080917?sp=true
As allways thank you for sharing your great insight.
Best BMH
BMH:
If the world switches to another international settlement and reserve currency, it wouldn’t really hurt the US, because the US never really benefitted from it in the first place. Claims here about “dollar hegemony” have been discredited a long time ago. In fact, if China de-pegged from the dollar, it would be exactly what the US has been calling for. The US will benefit greatly because free market distortions will finally stop. The US will get what it wanted because the markets will finally determine a currency’s value, not government intervention of money supply.
@leland
thanks for the reply.
The chinese experts quoted in the article are rather vage I would say. I cannot draw a definite conclusion as to how they are going to react. The most interesting point for me is how openly they voiced their concerns. As to depegging from the dollar I think it is a double-egged issue. Consequences for the USA might be very different depending on who depegs, eg. China versus oilexporting middle eastern countries.
Anyway my line of thinking was rather: Oh oh who is going to inject those monthly 60 b dollars into the US economy it has come to depend on in the future. And from what i understood Dr. Setser has provided data that the foreign financial inflows don,t have as forceful a current as they used to have.
Best
BMH
«If the world switches to another international settlement and reserve currency, it wouldn’t really hurt the US, because the US never really benefitted from it in the first place.»
Well the problem is that “the US” is a meaningless expression, because it is far too generic.
The dollar being a reserve currency has enabled a policy of a strong dollar and low interest rates.
This has means that USA companies have had a great time disinvesting from the USA and moving whole industries to countries with cheaper labor, boosting the incomes of management and shareholders; it has also means that the USA Republican party has been able to fund tax cuts for the wealthy and wars which give huge war profits to large corporates with really cheap debt.
Sure, most USA residents have lost by an artificially high dollar and low interest rates, as it has subsidized the outsourcing of their jobs, and allowed reducing taxes mostly only on the rich, but for a while they also have enjoyed extracting cash from the few assets they owned too.
From IHT, Asian Savers losing total confidence in US financial system
http://iht.com/bin/printfriendly.php?id=16254927
In Asia, bloom is off the U.S. rose
By Keith Bradsher
Thursday, September 18, 2008
HONG KONG: Tremors from Wall Street are rattling Asian confidence, leading many investors to question the wisdom of being invested in the United States to the tune of trillions of dollars.
Asian investors were starting to show hesitation even before the financial earthquake of the last week. Now, a wariness toward the United States is setting in that is unprecedented in recent memory, reaching from central banks to industrial corporations, from hedge funds to the individuals who lined up here to withdraw money from the American International Group on Wednesday.
Asian savings have, in essence, bankrolled American spending for decades, and an Asian loss of confidence in American financial institutions and assets would have dire consequences for the U.S. government and American taxpayers.
The potential for panic is stoked by Asian news organizations, which tend to focus more on business and economics than on politics, which can be touchy here. Their coverage has been obsessive and unrelentingly negative about the bankruptcy of Lehman Brothers, Merrill Lynch’s rush to find a buyer, and the turmoil at AIG.
The nonstop deluge of bad publicity for American investments seems to be seeping into the consciousnesses of the rich and middle class across Asia.
“I do not believe in U.S. financial institutions anymore; I don’t think any U.S. bank is safe anymore,” said Wang Xiao-ning, a Hong Kong homemaker.
KnotRP Says: “If one lends money to people who haven’t a prayer of being good for it, one *is* the problem, completely.”
Yes. It *is* the problem, but *whose* fault is it? Is it fair to blame *just* the reckless lender? What about the reckless borrower? A sane person will blame *both*.
Going back to the parent, if a depressed currency makes it rational for AIG to send jobs out of the States, and what allows that currency to remain depressed is *both* reckless borrowing by the US Government *and* reckless lending to the US Government, and you’re going to go round flinging blame, you have to blame *both* parties in the lending.
Why doesn’t Democratic Party honcho Robert Rubin demonstrate some integrity by speaking out against the “corporate welfare” bailouts of Wall Street?
AIG bailout upsets Republican lawmakers
http://www.cnn.com/2008/POLITICS/09/17/aig.bailout.congress/index.html
WASHINGTON (CNN) — Key Republicans on Capitol Hill blasted the Treasury Department and the Federal Reserve on Wednesday for orchestrating an $85 billion bailout of insurance giant American International Group.
“Once again the Fed has put the taxpayers on the hook for billions of dollars to bail out an institution that put greed ahead of responsibility and used their good name to take risky bets that did not pay off,” said Sen. Jim Bunning, R-Kentucky, a member of the Senate Banking Committee.
A spokesman for Sen. Richard Shelby of Alabama, the top Republican on the committee, said the senator “profoundly disagrees with the decision to use taxpayer dollars to bail out a private company” and is upset the government has sent an inconsistent message to the markets by bailing out AIG after it just refused to save investment bank Lehman Brothers from bankruptcy.
“The American taxpayer should not be asked to unwillingly assume the inordinate risks that financial experts knowingly undertook, particularly when taxpayer exposure is increased by the ad hoc manner in which these bailouts have been engineered,” said Shelby’s aide, Jonathan Graffeo.
«AIG bailout upsets Republican lawmakers»
That the Republicans in Congress are playing the part of opposition to their own administration and to the interests of their sponsors in Wall Street after endorsing all the previous activities that led to this can only mean one thing…
That the Republican party have come to the conclusion that McCain is not going to be elected, and that it is best to position themselves to blame Obama for bailouts with taxpayer money and stoking inflation as soon as he takes office.
You may notice that all the measures being taken by Paulson, Bernanke and Cox are temporary (loans, limited-duration accounting exemptions, …), that is just kicking the can down the road. Then if Obama confirms them, he is fiscally irresponsible, if he does not, the recession is his fault.
DC: Why doesn’t Democratic Party honcho Robert Rubin demonstrate some integrity by speaking out against the “corporate welfare” bailouts of Wall Street?
Because as I’ve pointed out many times, Wall Street types are mostly Democrats that actually believe in large amounts of government intervention in the markets, and really aren’t ideologically allied with anti-government Republicans (who I should point out are from southern states.)
Markets don’t work without government intervention, because the government intervened too little over the last ten years, it has to intervene very heavily now to clean up the mess due to under-regulation.
> you have to blame *both* parties in the lending.
It took both to make it happen, I will grant.
But if you give OPM to deadbeat losers who
are speculating on assets where said assets
are the only loan collateral, I find it hard to
blame them….the lenders offered a free lunch,
and they took it.
Advice: don’t offer a free lunch. people will take it.
Blame lies with the people who recklessly lent out OPM. Period. They should’ve known better.
KnotRP Says: “It took both to make it happen, I will grant.”
KnotRP Says: “Blame lies with the people who recklessly lent out OPM. Period. They should’ve known better.”
I don’t see how you can reconcile both of these statements. When you’re already saying the lender “should’ve known better”, what’s so hard about *also* saying the borrower “should’ve known better”. As you said, it took both to make it happen. It’s completely uneven to assign all blame to just one.
How do I reconcile blame going to only one party? You must be from the “poor people
are sharks” school of thought….well, try
to grasp the idea:
One party was foolish.
They were told housing prices only went up.
They were told now is the time to buy.
They were told to “state” their income, wink wink.
They were sheep.
I’m not in the habit of blaming sheep for
being eaten by wolves.
The lenders, however, lent OPM to speculators.
They only required the asset itself as collateral.
They lied, about many things, to the sheep.
They were professionals – they knew better.
But they were using OPM, so they didn’t have to care.
The recklessness was possible because they
were offloading the garbage onto others.
I blame them, for being knowingly reckless.
The professionals monetized past trust.
That’s why we’re fresh out of it.
KnotRP: “You must be from the “poor people are sharks” school of thought”
The reckless borrower I’m speaking of is the US government. This is clear if you read any of my comments.
Must’ve skimmed too fast, Ian, so thanks for the clarification, but I still don’t blame borrowers who know free money when they see it, even if it’s in the form of the US government. It’s much like “the first hit is free” in the drug trade….I argued before, on this blog, that the Chinese were practically making foie gras of the US. it’s an attempt to set up a dependancy. If one knowingly loans money to someone who cannot possibly be good for it, I just cannot blame the borrower in that case, because the lender did not credibly rely on the borrower’s ability to repay when making the loan. There was no “fool me once” event, so no original blame.
What’s more interesting is that the US government has apparently learned it cannot default on the Chinese (which is why it had to backstop the implicitly backed agency debt instead of giving it a hair cut). The US couldn’t afford losing it’s biggest financiers. I warned that we might get jammed up like that, many moons ago in this blog’s comment section.
KnotRP: “I warned that we might get jammed up like that, many moons ago in this blog’s comment section.”
So, if you knew the borrowing was reckless, and I knew the borrowing was reckless, and Brad knew the borrowing was reckless, and just about everybody in the whole world knew the borrowing was reckless, what can possibly excuse the US government not knowing the borrowing was reckless?
Are we really descending to this level of irresponsibility now? You can’t say “you should have known better” to the government of the most powerful nation on Earth? But you somehow can say it to rising powers?
Come on. That is an absurd hypocrisy. “You should have known better” is either a valid criticism of everyone or it’s a valid criticism of no one.
Ian – ok, so I see were you are coming from now. You have a reasonable position staked out, but I also have a lower appraisal of the situation than you. The US government isn’t a thinking entity, imho. It doesn’t act like an intelligent being. It’s a collection of individuals working to wrangle their slice of the tax payer….it’s not thinking about the damage to the tax payer from overgrazing, offshoring, or anything else….in that sense, it’s inanimate. There is no long term, in DC. There is only the now and what’s in it for “me” (and the lobby behind “me”).
So you want to blame the US government?
Go ahead. I won’t quibble. But it seems meaningless to me….like blaming a toaster for not producing a cup of coffee. it’s simply not organized to make good long term choices for the US citizen. It’s organized to maximize extraction. It’s doing what it was designed to do….but too well (or the host it’s feeding off is becoming too weak to sustain it). The parasite
needs to be careful to not kill the host, but I
just don’t see how the US government does that, organizationally…it’s just not built into the system.
KnotRP: “The US government isn’t a thinking entity, imho.”
And? If that kind of reasoning deflects blame, then all governments are blameless. Even petty dictatorships. It’s not like Kim Jong Il personally signs every check his government writes.
So now we’re all blameless, yay! Except, no, I was responding to the ridiculous blame-flinging going on earlier in this thread. It ain’t all China’s fault. It ain’t all America’s fault. Each voluntarily entered agreements that are now screwing everyone.
Adults take responsibility for their own choices. Children don’t. I know which group I belong to – in this argument, anyway.
“…then all governments are blameless.”
I’m willing to assign blame to the citizens,
if they vote in the government that’s not
doing the right thing. Do we agree now?
As for dictators – they have concentrated
executive power, so I’m perfectly willing to
blame dictators for their actions.
I would add that blame is an uninteresting concept, unless one plans to have ill gotten gains disgorged. I don’t see that happening, so…
[...] No one wants to hold risk … – “I guess this is what a close to systemic financial crisis in the US looks [...]
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