Just how bad is it?

The financial crisis remain an enigma, something kind of distant and amorphous. This column made it sound a lot more real, and the comments are spirited as well.

Even if Congress backs the Paulson bail-out, the $700 billion blast cannot save the US, Britain or the world from the deepest economic slump since the Thirties. If Congress balks, God help us. The credit system is suffering a heart attack. Inter-bank lending is paralysed. Funds are accepting zero interest on US Treasury notes for the first time since Pearl Harbour, because no bank account is safe.

Wherever you look – dollar, euro, sterling Libor (the rate at which banks lend to each other), or spreads on credit derivatives – the stress has reached breaking point. If borrowers cannot roll over the three-month loans that are the lifeblood of business, they will default en masse.

“Money markets are imploding. If no action is taken very soon, there is a significant risk that the global economy will collapse,” says BNP Paribas. Almost every trader says much the same thing. So does US treasury secretary Hank Paulson, who as Toby Harnden reports, literally dropped on bended knee to beg help from Democrats on Capitol Hill.

Republican refuseniks – defying their president – have a grim responsibility if they now tip America over the edge, setting off the “adverse feedback loop” that so terrifies the US Federal Reserve. Like players in a Greek tragedy, they seem determined to repeat the “liquidation” policy that led to the Great Depression – and to Democrat ascendancy for years.

Lehman Brothers’ collapse showed the chain of inter-connections that can cause mayhem across a clutch of different markets. That was just one bank – albeit with $630 billion or so in liabilities.
Credit is the lubricant of a modern economy. A seizure now would probably lead to the bankruptcy of General Motors and Ford in short order, but it would not stop with the US car industry. Waves of job losses would set off a self-feeding spiral. Yet more people would default on their mortgages (and car loans), driving house prices down even further. That, in turn, would threaten the solvency of the best banks. That is the way to Armaggedon.

As Mr Paulson says, US taxpayers are on the hook whether they like it or not. A $700 billion fund to soak up toxic debt and stabilise the credit market is the cheapest way out. It is certainly cheaper than Depression.

No way out. I really can’t say it enough: Get rid of your dollars. At times like this, history shows, the safest place for your money is stuff, or foreign currency. ABD.

This is not the time to give the keys to the kingdom to a clown.

______________

Richard Burger is the author of Behind the Red Door: Sex in China, an exploration of China's sexual revolution and its clash with traditional Chinese values.

The Discussion: 42 Comments

Let’s play a game and connect the dots:

http://www.chinadaily.com.cn/china/2008-01/04/content_6372001.htm

“The country’s top leaders have repeatedly called for a bigger role of consumption in the economic growth to relieve its reliance on investment and export. The point was stressed again at the National Congress of the Communist Party of China in October last year.”

http://www.atimes.com/atimes/global_economy/hi27dj01.html

“Even more intriguing, economic recession in the US and slower economic growth in China could speed the reorientation of China’s economy away from external-demand-driven growth toward private-consumption-driven growth.”

September 29, 2008 @ 8:13 pm | Comment

All of this sounds a too alarmist to me. I agree that we shouldn’t be handing over the reigns of power to a clown though.

September 29, 2008 @ 8:16 pm | Comment

Even less subtle…

http://chinadaily.cn/china/2006-11/04/content_724473.htm

“It is in the interests of China itself and the world that it moves away from excessive reliance on exports,” said Volcker, who once headed the UN’s Independent Inquiry Committee into its Oil-for-Food Programme.

The former US Federal Reserve chairman suggested there should be more restraint on the monetary side.

“There are many instruments to do that,” he said, without going into detail.

Which “instruments” is he referring to exactly ?

September 29, 2008 @ 8:18 pm | Comment

Congress has once again (quite predictably) failed the American electorate. Passage of this bill was just like authorizing the attack on Iraq. One has to wonder about the competency of a body of legislators who continue to hand over more and more authority to a guy who, through his actions and demeanor, seems to be a moron.

Richard, I think your views on this bailout are spot on. We are in for a very bumpy ride that only Wall St. insiders are going to enjoy.

September 29, 2008 @ 8:38 pm | Comment

Let’s play a game and connect the dots:

http://www.chinadaily.com.cn/china/2008-01/04/content_6372001.htm

“The country’s top leaders have repeatedly called for a bigger role of consumption in the economic growth to relieve its reliance on investment and export. The point was stressed again at the National Congress of the Communist Party of China in October last year.”

http://www.atimes.com/atimes/global_economy/hi27dj01.html

“Even more intriguing, economic recession in the US and slower economic growth in China could speed the reorientation of China’s economy away from external-demand-driven growth toward private-consumption-driven growth.”

Even less subtle…

http://chinadaily.cn/china/2006-11/04/content_724473.htm

“It is in the interests of China itself and the world that it moves away from excessive reliance on exports,” said Volcker, who once headed the UN’s Independent Inquiry Committee into its Oil-for-Food Programme.

The former US Federal Reserve chairman suggested there should be more restraint on the monetary side.

“There are many instruments to do that,” he said, without going into detail.

Which “instruments” is he referring to exactly ?

Btw richard, is it forbidden to extrapolate and read between the lines of the commonly “accepted medias and news” ?

The reason I bring these points is that I respect your blog and your articles. You seem to be a a well informed and educated person. And I am curious to have your take (and other readers of your blog) on these questions. My goal is not to promote wacko theories or else, but maybe just to bring a different perspective at the table and explore other non mainstream ideas.

September 29, 2008 @ 8:46 pm | Comment

Can you at least explain why you are deleting my posts ?

September 29, 2008 @ 9:31 pm | Comment

Bao, I didn’t delete anything. Maybe got caught in the spam filter.

September 29, 2008 @ 11:19 pm | Comment

All of this sounds a too alarmist to me.

If someone told you six month ago Bear Stearns, Lehmann Bros, Merrill Lynch, AIG, Washington Mutual and others would all go under , one right after another, you would have said it was alarmist. And I would have agreed. It would have been unthinkable. Now the unthinkable is here. It happened, and it’s the start, not the finish. It’s those who are convinced it’s alarmist who will get burned the most. Like the shareholders of the above companies who thought the buzz was alarmist. Normally I would agree; when I see the companies that constitute the very pillars, the very foundation of the US economy, folding around us, I know we are at a time when we have to “think different.” I started being alarmed just about a year ago, and converted all my assets (not many) into commodities and gold, which are up over 20 percent. Not great, but when you look at the stock market today, I’m delighted I caught on early.

Update to my comment:

If you think this sounds alarmist, please see this article over at the staid and conservative Wall Street Journal. The unthinkable really, really is here.

Two weeks ago, Wall Street titans and the government’s most powerful economic stewards made a fateful choice: Rather than propping up another failing financial institution, they let 158-year-old Lehman Brothers Holdings Inc. collapse.

Now, the consequences of that decision look more dire than almost anyone imagined.

Lehman’s bankruptcy filing in the early hours of Monday, Sept. 15, sparked a chain reaction that sent credit markets into disarray. It accelerated the downward spiral of giant U.S. insurer American International Group Inc. and precipitated losses for everyone from Norwegian pensioners to investors in the Reserve Primary Fund, a U.S. money-market mutual fund that was supposed to be as safe as cash. Within days, the chaos enveloped even Wall Street pillars Goldman Sachs Group Inc. and Morgan Stanley. Alarmed U.S. officials rushed to unveil a more systemic solution to the crisis, leading to Sunday’s agreement with congressional leaders on a $700 billion financial-markets bailout plan.

The genesis and aftermath of Lehman’s downfall illustrate the difficult position policy makers are in as they grapple with a deepening financial crisis. They don’t want to be seen as too willing to step in and save financial institutions that got into trouble by taking big risks. But in an age where markets, banks and investors are linked through a web of complex and opaque financial relationships, the pain of letting a large institution go has proved almost overwhelming.

I’m not sure we’re being alarmist enough. We are in a vortex right now that’s dragging down everything in its path. It is the perfect storm of chain reactions, as financial institutions are forced to sell assets to pay for bad loans, and as they sell more assets, the value of assets keeps plummeting as everyone sells. The result is collapse. That;s what the treasury proposal is trying to come to grips with, but I don’t think they can. The problem is simply too big.

September 29, 2008 @ 11:43 pm | Comment

Getting paranoid now.. Sorry for that. But really, Richard what is your opinion about a larger scheme? Do you ever ponder this possibility ? I know it sounds stupid… But I have the feeling that you actually think about this. Any opinion about this ?

September 30, 2008 @ 12:30 am | Comment

Later, I’m afraid – to sleep now, then have classes every day during the holiday, so I’ll be a bit less prolific than usual.

September 30, 2008 @ 12:33 am | Comment

http://money.cnn.com/2006/06/20/news/companies/aig_stock/index.htm

“At some point, it makes sense to own it but in my opinion, there is still a lot of uncertainty of what AIG will ultimately look like.”

Why oh why… I am sorry, I am not answering a lot of question here, I know. And it’s on purpose. I think that people need to draw their own conclusions here. But I can only feel sad for you for not withdrawing from the market before it was too late. The signs have been all over the place for years. Again, reading between the lines, is the simple answer.

September 30, 2008 @ 12:43 am | Comment

I’m impressed how the Fed is acting to marry these large banks (WaMu, Wachovia) with other banks. My bank (Wachovia) failed today, as has been predicted for nearly a year, and I predicted last week would happen this week. No surprise and it doesn’t worry me at all, as now I will work with Citigroup.

There haven’t been any surprises yet that I can think of. AIG, Lehman… all well known to have been well-documented in the weeds for a long time. Seems like the Fed is taking the best course for these.

Richard, love you much but if everyone reacted like you the world economy would tank.

September 30, 2008 @ 1:32 am | Comment

Oh dear – the bailout was voted down 228 to 205. According to CNN, circa 60% of Democrats voted for but less than a third of Republicans.

September 30, 2008 @ 2:47 am | Comment

I completely agree with this post.

The current US Federal Debt is about 8 Trillion. Today, the social security account for the US gov’t is still being used too much, and is still positive in revenue. When the “baby boombers” retire in about 2010, the social security account will be eaten very very quickly, and social security account will be negative very very soon. Add this to the Federal debt, and the picture will be a horror movie.

The problem of course is that America is a credit card economy. It has a credit card, which is supported by its good (at least for now) reputation, its dollar, and its military power. Using this credit card, it can spend as much as it wants and have other countries pay for it, and he just needs to give other countries green papers in exchange. This scheme has worked and gave Americans very rich lifestyles like a big house, SUV’s, big shopping malls, driving to the gym to exercise, etc. And Americans think this is what life “should” be. Of course one day they will wake up and realize this credit card stopped working, and other countries refused to continue this game.

Then, it will really come as a shock to Americans. Americans are not used to living in small crowded houses, biking to work, eating frugally, and paying for things on time. So once their life reverts to this state, they will start to feel angry, to feel “robbed”, and what happens next?

Some politician will be elected who will use China or India or any third world countries as the reason for the decline in America’s living quality, decline in industry, in jobs, in government services, in everything. Everything must be China’s fault! And this message will be enjoyed by most citizens, and very soon, very soon. A Chinese or Indian immigrant family one day will wake up and see their houses painted with racial messages by Americans, seen their windows smashed at night, called to “go home!” on the streets. This will soon go out of control. The pecularity about American society is there is no cohesion, all these different races and ethnics only live in peace when time is good, when time is bad, it’s everyone on its own, because there’s no common roots for all of them, no sense of loyalty or belonging. So soon, it will be whites vs blacks, yanks vs kikes, Chinese vs Mexicans, and this American pirate ship will start to sink like the Titanic.

My advice for Chinese living in America is, leave as soon as you can, if you cannot leave, then buy a gun, and all move to the West Coast and away from the elite Jewish east coast. If you can have a big concentration of armed Chinese in the West Coast, like around Seattle, then you will have a chance.

You may say, “But I have an American passport, I am an American! They will treat me like an American!” If you say this, then you are too simple, too naive. See what happens to the Japanese during WW2 in America.

September 30, 2008 @ 3:34 am | Comment

Matt, hope you saw the headlines today. Market down nearly 800 points, gold up 3 percent. Sorry, but what has to happen before you acknowledge there is reason to be deeply worried about the fundamentals of the US economy? What could possibly be worse than what we’ve seen in the past three weeks?

September 30, 2008 @ 8:17 am | Comment

“A seizure now would probably lead to the bankruptcy of General Motors”

That would be a good thing. GM has been insolvent for many years.

September 30, 2008 @ 8:38 am | Comment

But seriously, should I accept the job offer from a hedge fund based in NY?

Seriously

September 30, 2008 @ 8:41 am | Comment

Michael Moore finally broke with Obama on the Wall Street bailout.

http://www.michaelmoore.com/words/message/index.php?id=235

September 30, 2008 @ 8:55 am | Comment

No doubt we’re in for trouble Richard. Gold or gold ETFs are a smart move at some level in this economy for protection of capital (as long as you know when to get out — do you?). But the stock market isn’t the real economy, as so many people think.

Richard — I can think of millions of things worse than today. Loss of my life. Worse, loss of my wife or daughter’s. Or less significant to me than that — 25% unemployment, 40% of home mortgages in deliquency. That’s what it was during the early 1930′s. Today’s US unemployment rate is 6%, and we are at .4% delinquency, according to this week’s The Economist. It will get worse, certainly, but we’re a long way from depression.

The US and the rest of the world is in trouble. But at least in the west we have some level of transparency. Heaven knows what’s on the books (or not on the books) in developing countries (PRC included).

September 30, 2008 @ 9:03 am | Comment

Matt, we are talking about the economy, not personal woes. Everything is fine as long as we have our health and our loved ones. But I think most of us would prefer not to see our savings wiped out or at least greatly reduced and our dreams shattered. My own parents’ dreams have been shattered, at least in the short term, and they are in the comfortable middle class.

I don’t think we will see a depression. I sure hope not. More likely continued pounding of the dollar, possibly hyperinflation and a torturous years-long recession.

I urged readers to buy gold last December, when I got in at 60.91 a share (of GLD). Look at where it is now. I know I’m hysterical and alarmist, but no one can say I called this wrong.

September 30, 2008 @ 9:27 am | Comment

“Even Treasury Secretary Paulson admitted he doesn’t know the exact amount that is needed (he just picked the $700 billion number out of his head!)”

Where does he get this information ? You don’t just create a plan of this scale by pulling out numbers out of you a**.

I don’t like Michael Moore a lot, but I have to agree mostly with his article. This whole thing is clearly a last call staged operation for the richest to take back their marbles before the whole thing collapse.

This money will be useless to solve anything in the crisis, it’ just a way for them to recoup their loss before the crash. It’s incredible what’s going there, again, like a very bad B movie, all the elements are there.

Everyday I was hoping that something would prove me wrong, but it’s all unfolding in an almost satirical way. In this era of information, it’s very easy to see the global picture, as oppose to the old days, where very few would have access to detailed analysis.

September 30, 2008 @ 9:28 am | Comment

The problem is that the US political system is broken. Why should we believe anything that our “leaders” they’re saying?!

I’d like to see one of the presidential candidates level with the American people as say: “I’m sorry to report that generally speaking your national-level elected leaders don’t represent you. You’re screwed under this system. A better approach would be to transfer the US$1 trillion bail out package (twice the amount of the total cost of FDR’s New Deal in today’s dollars) to the states and local communities and ask them to construct systems to meet your needs in light of the challenges that we face. Under this approach, you’ll have jobs, housing, affordable health care, education, energy, etc.”

http://www.youtube.com/watch?v=0u6lCBnRoHQ

September 30, 2008 @ 9:47 am | Comment

I have no idea whether it was right or wrong for over half of Congress to reject the bailout today (and it was bipartisan, kids — 40% of Dems and over 60% of GOP voted against). They felt the heat from their constituents, who are in large majority against the bill.

My opinion is that don’t worry, a bailout is coming. These politicians know they have to do something, and most wanted to say — yeah, I voted against it… but then I had to vote for it to save the economy… and so forth.

September 30, 2008 @ 10:31 am | Comment

There’s a lot of talk today on the financial channels that say if the “mark to market” accounting rules were rescinded, and if “notes of equity” were created, it would go a long way to reducing pressure on the financial system. Some say that between 50 and 75% of this mess is created by the relatively new mark to market rules. Anyone know anything about that?

September 30, 2008 @ 10:33 am | Comment

Dr. Doom

“Roubini’s work was distinguished not only by his conclusions but also by his approach. By making extensive use of transnational comparisons and historical analogies, he was employing a subjective, nontechnical framework, the sort embraced by popular economists like the Times Op-Ed columnist Paul Krugman and Joseph Stiglitz in order to reach a nonacademic audience.”

Very interesting article about Nouriel Roubini. I reiterate my statement that people need to get out of the normal thinking frame. What is happening right here right now could be foreseen for a while. Look into the past and everything is there. It’s a recipe. The key is really to see the big picture, just not locally focus on what is happening in the US. I think that now in 2008, we are past this point of national concerns. The game is now on a global scale.

http://www.nytimes.com/2008/08/17/magazine/17pessimist-t.html

September 30, 2008 @ 11:05 am | Comment

Bao,

That’s a great article by Dr. Doom.

I think that “the end of the U.S. empire” is actually a good “ting” (as they say in Jamaica) since it has largely corrupted the U.S.

So where should we put our money? What about oil stocks?

September 30, 2008 @ 11:38 am | Comment

Well, yes, you could do like all the major failed sub prime investors and join the rank of the now very popular commodities market (oil, rice, corn, etc).

But to be honest, it’s too late now to go this way. As Richard said: Buy foreign currencies, get rid of your dollars, etc. Or go to third world countries and invest locally (not China), you can’t lose much if you do so, it’s already very low (Vietnam, India). I think a good approach is generally to hide into the lowest markets and wait until the storm is over.

September 30, 2008 @ 12:15 pm | Comment

The commodities market is like a refugee camp. When it starts to be too crowded, it loses its primary use. People starve, resources get sparse and eventually it becomes as worse as being in the war zone. So people come back. The yo-yo situation is endless until the conflict comes to an end.

September 30, 2008 @ 12:25 pm | Comment

“NYU’s Nouriel Roubini, the visionary who had been predicting this meltdown, says “The Treasury plan (even in its current version agreed with Congress) is very poorly conceived and does not contain many of the key elements of a sound and efficient and fair rescue plan.”

http://www.commondreams.org/view/2008/09/29

September 30, 2008 @ 1:01 pm | Comment

Again… I really hope people stop analyzing what is currently going on and start envisioning what all these puzzle pieces really mean… I think it’s useless to be reactive, we will only live in the past all the time. It’s always easy to point at issues relating to a finish project / problem. But it’s much harder to extrapolate and cleverly contribute to the next steps by finding solutions.

How about discussing about what the future could shape to ?

;)

September 30, 2008 @ 1:53 pm | Comment

Richard, ultimately gold will go the same way as everything else. Its not really a safe option. What can you actually do with gold?

Yes, this is the unthinkable. I believe that this is a truly historic moment, the end the era of free market, unregulated capitalism. And, it just washes over people, in this sad world of indifference.

Hopefully this is an opportunity to change things.

September 30, 2008 @ 2:14 pm | Comment

buck – thanks for the mmoore link.

to be honest, i totally agree with him. this whole bailout, from day 1, has sounded like a tremendous alarmist power and money grab.

richard, did you listen to jon stewart recently? it’s interesting to note the similarities between the speech bush gave before invading iraq and the one he gave on asking congress for the bailout. see Clusterf#@k to the Poor House – Dive of Death.

September 30, 2008 @ 3:44 pm | Comment

also check out Awkward Loan Interview from stewart.

in some ways it’s actually mindboggling that we’re giving money to these people.

September 30, 2008 @ 3:46 pm | Comment

Gold is not the only answer, but it will probably go above 1,600 over the next 12 months. It always goes up at times of uncertainty, and this is the ultimate uncertain time. Extremely volatile and risky, as I’ve said before, and you never want to be in 100 percent, and never on margin. As soon as somebailout is approved, gold will plunge again, but over the long-term it’s your safest bet, buying on the dips and selling on the surges.

September 30, 2008 @ 4:53 pm | Comment

So where should we put our money? What about oil stocks?

I think oil has peaked and will fall further – even if the immediate US financial crisis is resolved there will be lower growth globally.

September 30, 2008 @ 8:25 pm | Comment

The rejection of the bailout plan may be a good thing in the long run. Buying worthless mortgage backed securities does not make sense to me. If the government wants to buy, why doesn’t it buy something more valuable, like corporate bonds or even their stocks. They can even buy entire banks at low price and sell them back to private interest when markets improve. During the Asian financial crisis, the Hong Kong government bought a lot of stocks when they were beaten down by the currency speculators, like George Soros. Quickly the speculators retreated, stocks rose and the government got their money back with a big profit. The current bailout plan is doomed to failure and it will go down with the reputation of the US government and the worthiness of its treasury bills.

October 1, 2008 @ 3:08 am | Comment

Suspect most of the congressmen voting against are among the 50% up for re-election this november and needed to be able to vote no publically.

despite “winning” by getting measure killed the howling electorate will still be unhappy with the financial news in the coming days.

authorizing paulson to go forward with his reverse auction plan to purchase the financial “instruments” in question sounds like it is is necessary.

i am having troubling visually connecting the housing market crash with the failure of wamu. it just does not seem like there could be that many foreclosures and mortgage defaults out there. must be the miracle of “leverage”.

i believe paulson’s “bailout” plan was intended to figure out who is holding the bad hands and what they have in the leveraged house of cards.

i was happy to see most restrictions put in place. maybe the next version will be an improvement. it is in everyone’s interest to see the bank failures like the wamu collapse managed such the minimal pain is felt by the fleeing depositors.

believe paulson is trying to do this, but his first plan needed some modifications.

we maybe seeing what little economic growth occurred the last 8 years disappear as the the housing collapse causes the foundation of the highly leveraged debt instruments to lose their fulcrum.

October 1, 2008 @ 5:12 am | Comment

OK Richard. Perhaps you’re right, we all should be very alarmed.

October 1, 2008 @ 8:08 am | Comment

“The current bailout plan is doomed to failure and it will go down with the reputation of the US government and the worthiness of its treasury bills.”

The current bailout, will pass. They just need to put a bit more of “magical blinding powder” on it. But it will pass.

And if it fails, then you can bet that they will bring something even worse to the table.

October 3, 2008 @ 12:49 pm | Comment

http://www.youtube.com/watch?v=TogCfmeJTvg

This is what we call an analogy: The armpit is the bailout, and the man pic is the global picture. I really just hope people start thinking out of the box.

October 6, 2008 @ 1:11 am | Comment

Oh, and the bailout passed btw… Welcome to the man pic!

October 6, 2008 @ 1:12 am | Comment

But sadly, 50% + of the earth population would have voted and wished for the Arm Pit option… :( So sad…

October 6, 2008 @ 1:14 am | Comment

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