The Crisis & What to Do About It - by George Soros - The New York Review of Books
The salient feature of the current financial crisis is that it was not caused by some external shock like OPEC raising the price of oil or a particular country or financial institution defaulting. The crisis was generated by the financial system itself. This fact--that the defect was inherent in the system --contradicts the prevailing theory, which holds that financial markets tend toward equilibrium and that deviations from the equilibrium either occur in a random manner or are caused by some sudden external event to which markets have difficulty adjusting. The severity and amplitude of the crisis provides convincing evidence that there is something fundamentally wrong with this prevailing theory and with the approach to market regulation that has gone with it. To understand what has happened, and what should be done to avoid such a catastrophic crisis in the future, will require a new way of thinking about how markets work.
Nov. 22 (Bloomberg) -- The U.S. government may step in to rescue Citigroup Inc. after a crisis in confidence erased half the bank's stock-market value in three days, according to investors and analysts. Citigroup's $2 trillion of assets dwarfs companies such as American International Group Inc. that got support from the U.S. government this year. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke may favor a rescue to avoid the chaotic aftermath of Lehman Brothers Holdings Inc.'s bankruptcy in September. "Citi is in the category of `too big to fail,'" said Michael Holland, chairman and founder of Holland & Co. in New York, which oversees $4 billion. "There is a commitment from this administration and the next to do what it takes to save Citi." One option is for the Federal Reserve and U.S. Treasury to create a special vehicle to purchase bad assets from Citi. The Fed has already erected several such funds, such as the Commercial Paper Funding Facility, to provide liquidity to the financial system. Typically, the Treasury would provide some first-loss equity or insurance fee, such as $50 billion provided to the CPFF, to protect the central bank and give the fiscal authority a stake.
Nov. 22 (Bloomberg) -- The U.S. government may step in to rescue Citigroup Inc. after a crisis in confidence erased half the bank's stock-market value in three days, according to investors and analysts.
Citigroup's $2 trillion of assets dwarfs companies such as American International Group Inc. that got support from the U.S. government this year. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke may favor a rescue to avoid the chaotic aftermath of Lehman Brothers Holdings Inc.'s bankruptcy in September.
"Citi is in the category of `too big to fail,'" said Michael Holland, chairman and founder of Holland & Co. in New York, which oversees $4 billion. "There is a commitment from this administration and the next to do what it takes to save Citi."
One option is for the Federal Reserve and U.S. Treasury to create a special vehicle to purchase bad assets from Citi. The Fed has already erected several such funds, such as the Commercial Paper Funding Facility, to provide liquidity to the financial system. Typically, the Treasury would provide some first-loss equity or insurance fee, such as $50 billion provided to the CPFF, to protect the central bank and give the fiscal authority a stake.
to create a special vehicle to purchase bad assets from Citi
yup, a chamberpot for their highnesses, pronto!
special vehicle, my ass...
how long are the public going to continue wiping their incontinent nether regions?
especially a public that's seeing the gold of years of hard work stored in savings plans and pensions, turned to shit by these reverse midas's...
who's going to bail out the government, when it's finished bailing out its friends?
prole power, that's what. put yer shoulder to the wheel, don't just sit there watching the money channel, do something meaningful to bring change, go shopping!
earn to shop, cradle to grave, 'appy sheeple, we!
funny how the chinese are discovering the joys of capitalism, while we in the west are heading towards socialism (but don't you dare call it that!).
blend well, allow to precipitate, and what will be left?
communocapitalism? capitocommunism?
oh, well i'm sure our enlightenment principles will arrive to save the day, lol.
funnier, still, i actually have forced myself to believe that, or i'd throw in the towel...
yes we can... ~Government budget deficits are not nearly as dangerous as the deficits we have created in vital and complex natural systems.~ Naomi Klein.
The Government is using the threat of a wholesale nationalisation of banks in an attempt to force institutions to lend billions to small companies struggling to survive as Britain slips into recession. Downing Street yesterday made plain its fury over high street banks which refuse to use the massive injection of taxpayers' money they have received to come to the rescue of businesses hit by the credit crisis. Lenders have also faced criticism over interest rates charged to homeowners and for stepping up repossessions. Meanwhile, Gordon Brown dismissed suggestions that he should take advantage of his reviving popularity by calling a June general election, insisting he was fully focused on steering Britain out of the downturn, starting with Monday's pre-Budget report. It will spell out plans for tax cuts and assistance for the country's 4.7 million small firms. The aid will be funded by increases in government borrowing, which is on course to exceed £100bn next year. Alistair Darling, the Chancellor, will also announce that taxes will have to rise in the medium term to reduce the national debt. The financial stimulus package is designed to breathe new life into the economy but Mr Darling fears the behaviour of the banks could undermine the moves.
The Government is using the threat of a wholesale nationalisation of banks in an attempt to force institutions to lend billions to small companies struggling to survive as Britain slips into recession.
Downing Street yesterday made plain its fury over high street banks which refuse to use the massive injection of taxpayers' money they have received to come to the rescue of businesses hit by the credit crisis. Lenders have also faced criticism over interest rates charged to homeowners and for stepping up repossessions.
Meanwhile, Gordon Brown dismissed suggestions that he should take advantage of his reviving popularity by calling a June general election, insisting he was fully focused on steering Britain out of the downturn, starting with Monday's pre-Budget report.
It will spell out plans for tax cuts and assistance for the country's 4.7 million small firms. The aid will be funded by increases in government borrowing, which is on course to exceed £100bn next year. Alistair Darling, the Chancellor, will also announce that taxes will have to rise in the medium term to reduce the national debt. The financial stimulus package is designed to breathe new life into the economy but Mr Darling fears the behaviour of the banks could undermine the moves.
Is this what the U.S. will need to do to Citigroup and the rest of the lot? Truth unfolds in time through a communal process.
Also, most banks are partly international, so nationalising (say) Barclays would be an interesting administrative challenge - far more complicated than nationalising NR or B&B.
Likewise I doubt the US will nationalise anything or anyone, because that would be [shudder...] socialism.
The recipients of bailout money to date are probably waiting to see if the terms of their credit default liabilities are triggered. I remain convinced that these products need to be voided or quickly unwound. If triggered, they could set off a financial Armageddon. That creates the mother of all financial uncertainties, with the consequences we see all around. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
Two paragraphs in particular jumped out at me, excerpted by Pettis from a response he wrote to an Op Ed by Niall Ferguson:
Today it is China who is exporting overcapacity and it is the US who is consuming too much, fed by Chinese financing. With the collapse of bank intermediation US households and businesses are cutting consumption and raising savings. This is a necessary adjustment. Calling on the US government to engage in massive fiscal expansion to replace lost private demand is crazy. It means that we should continue the current game that has led us into so much trouble, but instead of having US over-consumption and rising debt at the private level we must have it at the public level. If Keynes were around today he would probably make the same point he did over 60 years ago. Demand must be created by the current account surplus countries, which have, to date, relied on net exports to protect themselves from the consequence of their overcapacity. They must force demand up quickly in order to close the gap, and since expecting private consumption to rise quickly enough is unrealistic, it has to be public consumption - a large fiscal deficit.
If Keynes were around today he would probably make the same point he did over 60 years ago. Demand must be created by the current account surplus countries, which have, to date, relied on net exports to protect themselves from the consequence of their overcapacity. They must force demand up quickly in order to close the gap, and since expecting private consumption to rise quickly enough is unrealistic, it has to be public consumption - a large fiscal deficit.
Is that true? Would Keynes have objected to the US government's trying to engage in massive fiscal expansion to replace lost private demand?
As for the second paragraph, as Pettis must surely know already, China is following the Keynesian prescription exactly. I don't quite understand why Pettis does not acknowledge that China is already doing what he recommends it should do, or at least the first half of his recommendation:
China needs to resolve this problem by expanding fiscally, not by stimulating exports.
His complaint about stimulating exports and restricting imports is well taken, though, and I will be paying more attention to that issue especially in light of headlines like "'China, US should fight protectionism'". Truth unfolds in time through a communal process.
Many migrant workers in south China's Guangdong Province returned to their home provinces in the wake of the global financial crisis. But it is not the only reason, officials of the local labor and railway authorities said. China's latest decision to expand transfers of land-use rights held by farmers also attracted some migrant workers to rush home. Liu Hong, a farmer of Sichuan, was waiting for a home-bound train with his wife at Guangzhou Railway Station this week. "We need to finish some sub-lease documents and come back to work as soon as possible," he said. The trip was made after China issued a breakthrough rural policy last month, allowing farmers to lease their contracted farmland or transfer their land use right, which will give farmers opportunities to conduct scale management and new business operations. In the past, farmland was collectively owned, but meted out to farmers in small plots on long term leasing contracts.
Many migrant workers in south China's Guangdong Province returned to their home provinces in the wake of the global financial crisis. But it is not the only reason, officials of the local labor and railway authorities said.
China's latest decision to expand transfers of land-use rights held by farmers also attracted some migrant workers to rush home.
Liu Hong, a farmer of Sichuan, was waiting for a home-bound train with his wife at Guangzhou Railway Station this week.
"We need to finish some sub-lease documents and come back to work as soon as possible," he said.
The trip was made after China issued a breakthrough rural policy last month, allowing farmers to lease their contracted farmland or transfer their land use right, which will give farmers opportunities to conduct scale management and new business operations.
In the past, farmland was collectively owned, but meted out to farmers in small plots on long term leasing contracts.
Worst of financial crisis yet to come: IMF chief economist Adam Dupont (From The Raw Story) Published: Saturday November 22, 2008 ZURICH, Switzerland (AFP) -- The IMF's chief economist has warned that the global financial crisis is set to worsen and that the situation will not improve until 2010, a report said Saturday. Olivier Blanchard also warned that the institution does not have the funds to solve every economic problem. "The worst is yet to come," Blanchard said in an interview with the Finanz und Wirtschaft newspaper, adding that "a lot of time is needed before the situation becomes normal." He said economic growth would not kick in until 2010 and it will take another year before the global financial situation became normal again. -Skip- Withdrawals of capital leading to problems of liquidity "can be so significant that the IMF alone cannot counter them," he said, adding that massive withdrawals of investments from emerging countries could represent "hundreds of billions of dollars. "We do not have this money. We never had it," he said.
ZURICH, Switzerland (AFP) -- The IMF's chief economist has warned that the global financial crisis is set to worsen and that the situation will not improve until 2010, a report said Saturday. Olivier Blanchard also warned that the institution does not have the funds to solve every economic problem.
"The worst is yet to come," Blanchard said in an interview with the Finanz und Wirtschaft newspaper, adding that "a lot of time is needed before the situation becomes normal." He said economic growth would not kick in until 2010 and it will take another year before the global financial situation became normal again.
-Skip-
Withdrawals of capital leading to problems of liquidity "can be so significant that the IMF alone cannot counter them," he said, adding that massive withdrawals of investments from emerging countries could represent "hundreds of billions of dollars.
"We do not have this money. We never had it," he said.
Dollar Strength Sustainability Friday, 21 November 2008, by London Banker Coincident with the passage of the Paulson Plan in early October, the top prime brokers (MS, GS, JPM) issued margin calls on hedge funds which raised the average margin required from about 15 percent to about 35 percent. At a time of fragility in global markets and global confidence, this was equivalent to the sudden contraction of global market liquidity by a trillion dollars or so. A huge sell off in quality assets followed as hedge fund managers struggled to meet the margin calls. -Skip- Trillions of dollars of value were wiped off the balance sheets of the world's investors over the next few weeks as forced selling forced prices lower and lower. Adding to the selling pressure, many hedge funds were simultaneously raising cash for redemption demands of investors also squeezed by margin calls by their creditors. I'm sure none of this was intentional (wink, wink). I'm sure there was no coordination among the prime brokers (nudge, nudge). I'm sure it would never occur to anyone in the Wall Street prime brokerage banks that manipulation of leverage could create profitable trading opportunities (cough, cough). -Skip- At the same time, we observed a huge expansion in the monetary base as the Fed doubled its balance sheet and Paulson doled out taxpayer largesse to Wall Street. The banks began to accumulate massive reserves and Treasury yields crashed lower, especially at the short end. Treasuries gained value as the prime brokers parked the incoming margin cash in the safest, most liquid asset - the primary collateral for all interbank obligations too. These reserves and Treasuries are just sitting in the Fed and not contributing one iota to the stimulation of the economy. -Skip- What happens to the global markets when the deleveraging stops? What happens when there are no more global margin calls on the surviving hedge funds? Will anyone want to buy dollars when they don't need them to repay dollar debt?
Coincident with the passage of the Paulson Plan in early October, the top prime brokers (MS, GS, JPM) issued margin calls on hedge funds which raised the average margin required from about 15 percent to about 35 percent. At a time of fragility in global markets and global confidence, this was equivalent to the sudden contraction of global market liquidity by a trillion dollars or so. A huge sell off in quality assets followed as hedge fund managers struggled to meet the margin calls.
Trillions of dollars of value were wiped off the balance sheets of the world's investors over the next few weeks as forced selling forced prices lower and lower. Adding to the selling pressure, many hedge funds were simultaneously raising cash for redemption demands of investors also squeezed by margin calls by their creditors.
I'm sure none of this was intentional (wink, wink). I'm sure there was no coordination among the prime brokers (nudge, nudge). I'm sure it would never occur to anyone in the Wall Street prime brokerage banks that manipulation of leverage could create profitable trading opportunities (cough, cough).
At the same time, we observed a huge expansion in the monetary base as the Fed doubled its balance sheet and Paulson doled out taxpayer largesse to Wall Street. The banks began to accumulate massive reserves and Treasury yields crashed lower, especially at the short end. Treasuries gained value as the prime brokers parked the incoming margin cash in the safest, most liquid asset - the primary collateral for all interbank obligations too. These reserves and Treasuries are just sitting in the Fed and not contributing one iota to the stimulation of the economy.
What happens to the global markets when the deleveraging stops? What happens when there are no more global margin calls on the surviving hedge funds? Will anyone want to buy dollars when they don't need them to repay dollar debt?
