Doom - Subprime and all that

Policymakers are desperate to unwind the “unconventional support”, to activate “exit strategies” and begin the long march back to normality.
But there is still little sign of the sustained private-sector recovery required to take up the slack.
Jeremy Warner Daily telegraph 5 Mar 2010

Rewind a year, and the world economy stood on the brink of outright catastrophe.

Everywhere in the West, and even in China, the “recovery” – such as it is – floats on a sea of public support, with the hoped-for rebound in underlying private-sector activity as elusive as ever.

China and Germany unite to impose global deflation
Germany is in a supposedly irrevocable currency union with some of its principal customers. It now wants them to deflate their way to prosperity in a world of chronically weak aggregate demand. I am beginning to wonder whether the open global economy is going to survive this crisis.
The eurozone may also be in some danger.
Martin Wolf, FT March 16 2010

Let me introduce you to Chermany, a composite of the world’s biggest net exporters:
China, with a forecast current account surplus of $291bn this year and
Germany, with a forecast surplus of $187bn

The core of Mr Schäuble’s argumentwas not about the mooted European Monetary Fund
Suddenly, the eurozone is not so irrevocable: Germany has said so.

I explained the first point last week. If Germany gets what it wants, the world’s second-largest economy would play an altogether negative role in the search for a way out from the global slump in aggregate demand.

Germany is in a supposedly irrevocable currency union with some of its principal customers. It now wants them to deflate their way to prosperity in a world of chronically weak aggregate demand.

If I understand China’s declared position correctly, it wants the US to deflate itself into competitiveness, instead, via fiscal and monetary contraction and, presumably, falling domestic prices. That would be dreadful for the US. But it would be dreadful for China and the rest of the world, too. It is also not going to happen. China surely knows that.

Anybody who looks carefully at the world economy will recognise that
a degree of monetary and fiscal stimulus
unprecedented in peacetime is all that is prodding it along
The conventional wisdom is that it will also be possible to manage a smooth exit.
Nothing seems less likely. So let us consider the endgame, instead.
Martin Wolf, FT February 23 2010

The doomsday cycle
Over the last 30 years, the US financial system has grown to proportions threatening the global economic order.
This column suggests a ‘doomsday cycle’ has infiltrated the economic system and could lead to disaster after the next financial crisis.
Peter Boone, Simon Johnson, 22 February 2010

Simon Johnson, Professor of Entrepreneurship, Sloan School of Management, MIT and CEPR Research Fellow

This column says the best route to creating a safer system is to have very large and robust capital requirements, which are legislated and difficult to circumvent or revise.

Given the inability of our political and social systems to handle the hardship that would follow economic collapse, we rely on our central banks to cut interest rates and direct credits to bail out the loss-makers. While the faces tend to change, each central bank and government operates similarly. This time, it was Mervyn King, Gordon Brown, Tim Geithner and Ben Bernanke who oversaw policy as the bubble was inflating – and are now designing our rescue.

When the bailout is done, we start all over again. This has been the pattern in many developed countries since the mid-1970s – a date that coincides with significant macroeconomic and regulatory change, including the end of the Bretton Woods fixed exchange rate systems, reduced capital controls in rich countries and the beginning of 20 years of regulatory easing.

Greece's drama has already metastasised into a wider systemic crisis.
For the third time in 18 months the global financial system risks spinning out of control
Flow data shows an abrupt withdrawal of German and Asian capital from Club Med debt markets.
Ambrose Evans-Pritchard, 07 Feb 2010

The world risks a replay of the Lehman collapseif this runs unchecked, this time involving sovereign dominoes.

The scale matches America's sub-prime/Alt-A adventure and assorted CDOs and SIVS of the Greenspan fling. The parallels are closer than Europe cares to admit.

Just as Benelux funds and German Landesbanken bought subprime debt for high yield with AAA gloss, they bought Spanish Cedulas because these too had a safe gloss – even though Spain's property boom broke world records.

They thought EMU had eliminated risk: it merely switched exchange risk into credit risk.

Writing in the NYT, Richard Thaler provides the disturbing potential conclusion on homeowners changing their viewpoint and strategically defaulting:
"An important implication is that we could be facing another wave of foreclosures, spurred less by spells of unemployment and more by strategic thinking. Research shows that bankruptcies and foreclosures are “contagious.” People are less likely to think it’s immoral to walk away from their home if they know others who have done so. And if enough people do it, the stigma begins to erode."
If enough people do it, the housing market collapses.
CNBC 25 Jan 2010

The Greek government has promised to slash its fiscal deficit
from an estimated 12.7 per cent of gross domestic product last year to 3 per cent in 2012.
Is it plausible that this will happen? Not very.
But Greece is merely the canary in the fiscal coal mine.
Other eurozone members are also under pressure to slash fiscal deficits.
What might such pressure do to vulnerable members, to the eurozone and to the world economy?
Martin Wolf, January 19 2010

Some, knowing of my opposition to UK membership of the eurozone, may suppose that I find some pleasure in these looming difficulties.
On the contrary, I fear the dangerous consequences.
Martin Wolf, January 19 2010

The curse of long-term unemployment
Only about 400,000 more Americans were employed in December 2009 than in December 1999,
while the population grew by nearly 30m.
The Economist print Jan 14th 2010

America slides deeper into depression
The home foreclosure guillotine usually drops a year or so after people lose their job, and exhaust their savings.
One million American families lost their homes in the fourth quarter.
Ambrose Evans-Pritchard 10 Jan 2010

The home siezures are occurring despite frantic efforts by the Obama administration to delay the process. This policy is entirely justified given the scale of the social crisis. But it also masks the continued rot in the housing market, allows lenders to hide losses, and stores up an ever larger overhang of unsold properties. It takes heroic naivety to think the US housing market has turned the corner

The fuse has yet to detonate on the next mortgage bomb, $134bn (£83bn) of "option ARM" contracts due to reset violently upwards this year and next.

The Bank for International Settlements will gather top central bankers and financiers for a meeting in Basel this weekend amid rising concern about a resurgence of the “excessive risk-taking” that sparked the financial crisis. “The concern here is that the prolonged assurance of very cheap and ample funding may encourage excessive risk-taking,” the BIS invitation note says.
FT January 6 2010

The cause of our crises has not gone away
We should listen to /Iceland/ before the same message is conveyed in much more violent form, in another place and at another time.
John Kay FT January 5 2010

The credit crunch of 2007-08 was the third phase of a larger and longer financial crisis. The first phase was the emerging market defaults of the 1990s. The second was the new economy boom and bust at the turn of the century. The third was the collapse of markets for structured debt products, which had grown so rapidly in the five years up to 2007.

Governments, and particularly the US government, reacted on each occasion by pumping money into the financial system in the hope of staving off wider collapse, with some degree of success.

The public support of markets provided on each occasion the fuel needed to stoke the next crisis. Each boom and bust is larger than the last. Since the alleviating action is also larger, the pattern is one of cycles of increasing amplitude.

The citizens of that most placid of countries, Iceland, now backed by their president, have found a characteristically polite and restrained way of disputing an obligation to stump up large sums of cash to pay for the arrogance and greed of other people. They are right.

We should listen to them before the same message is conveyed in much more violent form, in another place and at another time.

We made a mistake in the closing decades of the 20th century. We removed restrictions that had imposed functional separation on financial institutions.

Det var inte inflationen - det var Depressionen
Germany "the new democracy survived serious threats to its existence in the early postwar years and found a semblance of stability from 1924 to 1928,
only to be submerged by the collapse of the economy after the Wall Street crash of 1929."
Ian Kershaw, New York Times, February 3, 2008

In an article published in the FT this week, Arvind Subramanian of the Peterson Institute for International Economics, argues that economics has redeemed itself by rescuing the world economy from the crisis. I agree, but only up to a point.
These extraordinary interventions have not returned the patient to health. They have merely prevented him from dying.
We now must heal five chronic conditions, instead of survive last year’s brutal heart attack.
Martin Wolf, December 29 2009

First, we have the ongoing force of the balance-sheet recession
Second, we have, quite rightly, substituted public sector borrowing for private sector borrowing,
Third, the US, UK, Spain and other have large structural current account deficits
Fourth, the surplus countries show little or no interest in making the needed policy changes
Finally, the financial system remains damaged.

The headlines said that initial job-less claims dropped to 466,000
That is a lot of people losing their jobs
Second, the headline number was a seasonally adjusted number.
The actual number was 543,926.
John Mauldin 28/11 2009

At some point, American workers will rebel.
US unemployment is already 17.5pc under the broad "U6" gauge followed by Barack Obama.
Realty Track said that 332,000 properties were foreclosed in October alone.
More Americans have lost their homes this year than during the entire decade of the Great Depression.
A backlog of 7m homes is awaiting likely seizure by lenders.
If you are not paying attention to this political time-bomb, perhaps you should.
Ambrose Evans-Pritchard, 15 Nov 2009

The 'Real' Jobless Rate:
17.5% Of Workers Are Unemployed
CNBC.com 19 Nov 2009

As experts debate the potential speed of the US recovery, one figure looms large but is often overlooked: nearly 1 in 5 Americans is either out of work or under-employed.

According to the government's broadest measure of unemployment, some 17.5 percent are either without a job entirely or underemployed. The so-called U-6 number is at the highest rate since becoming an official labor statistic in 1994.

The number dwarfs the statistic most people pay attention to—the U-3 rate
— which most recently showed unemployment at 10.2 percent for March, the highest it has been since June 1983.

The difference is that what is traditionally referred to as the "unemployment rate" only measures those out of work who are still looking for jobs. Discouraged workers who have quit trying to find a job, as well as those working part-time but looking for full-time work or who are otherwise underemployed, count in the U-6 rate.

New figures coming out of the US economy confirms that in almost every respect it is doing significantly better than expected.
It is impressive.
Carl Bildt blog 6/12 2005

"tro inte att det värsta är över"
Tongångarna från männen som förutspådde finanskrisen,
Nouriel Roubini, Marc Faber och Peter Schiff,
har inte blivit muntrare.
E24 2009-09-30

Nouriel Roubini, även kallad ”Dr Doom”, varnade redan 2005 för ras på den amerikanska bostadsmarknaden.

I likhet med andra ”domedagsprofeter” är han bekymrad över dollarn, tror att dollarn kommer att försvagas och till och med riskerar att kraschlanda om amerikanska regeringen inte gör mer för att kontrollera underskottet och minska statsskulden.

Marc Faber, författare till det månatliga nyhetsbrevet The Gloom Boom & Doom Report.

Marc Faber menar att man inte lyckats göra någonting åt de svagheter i systemet som orsakade innevarande kris. Han spår ett totalt sammanbrott för de finansiella marknaderna och för regeringar på fem till tio års sikt när hela systemet kraschar.

Han tror inte heller att några G20-möten eller G7-möten kommer att mynna ut i lösningar som kan förhindra en framtida härdsmälta;
personerna som är tänkta att genomföra de nya åtgärderna är samma personer som misslyckades med att förutse den nuvarande krisen.

Peter Schiff är en av de domedagsprofeter som spår att dollarn kommer att kollapsa under den tunga bördan av massiva underskott och den ”besinningslösa” politik som Barack Obamas administration driver. Och han mycket kritisk till de gigantiska stimulanspaket som den sittande regeringen lanserat

- Vi är i sämre skick nu jämfört med före krisen. Vi är djupare skuldsatta. Vi skulle ha låtit fler finansiella institutioner falla, säger Peter Schiff.

Enligt honom liknar USA:s ekonomi ett belånat pyramidspel. När krisen kom vacklade pyramiden.
- Problemet är att politikerna försöker få pyramiden på fötter igen, säger han till Financial Post

You have been warned about “the mother of all carry trades.”
Emerging economies “might overheat and experience financial turmoil,”
Bank of Japan Governor Masaaki Shirakawa said
Low rates and the dollar’s depreciation present “new, real and insurmountable risks to the recovery of the global economy,”
Liu Mingkang, China’s top banking regulator, said
Bloomberg, Nov. 16 2009

“The continuous depreciation in the dollar, and the U.S. government’s indication that, in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” Liu, chairman of the China Banking Regulatory Commission, said in Beijing yesterday.

Low rates and the dollar’s tumble have “seriously affected global asset prices, fuelled speculation in stock and property markets, and created new, real and insurmountable risks to the recovery of the global economy, especially emerging-market economies,” Liu told reporters in Beijing at the International Finance Forum.
The debate over the Fed and asset prices comes years after some analysts criticized the U.S. central bank for holding down borrowing costs for too long in 2003 and 2004. Dallas Fed President Richard Fisher is among those who have said the Fed’s actions unwittingly contributing to the housing bubble.
“I’m scared and leaders should look out,” Donald Tsang, the chief executive of Hong Kong, said in Singapore Nov. 13. “America is doing exactly what Japan did last time,” he said, adding that Japan’s rates in Japan contributed to the 1997 Asian financial crisis and U.S. mortgage meltdown.

Dangerous asset bubbles are developing in emerging Asia and in China in particular.
Barry Eichengreen, Eurointelligence 13.11.2009

And it is not only independent critics: the World Bank, in its recent semi-annual report on East Asia, warned darkly of unsustainable asset-market conditions. Asset prices are frothy. Property prices are booming, especially in the big cities. All this is alarmingly reminiscent of the United States in 2006.

The mechanism inflating these bubbles is exceptionally accommodating monetary policies. Low interest rates in the advanced countries provide an incentive to borrow there and invest in higher-yielding assets in emerging markets.

Everyone realizes that the dollar will have to fall to enable the U.S. to export more, since American households will be consuming less. But this means that the expected cost of borrowing dollars is effectively negative for investors concerned with non-dollar returns.

It creates an irresistible temptation to invest in anything Asian that promises even remotely positive returns. Nouriel Roubini, always one with a phrase, calls this “the mother of all carry trades.”

Uppenbarligen krävs det mycket mera underlag än vad Roubini hittills har kommit med för att vi skall sätta någon tilltro till hans varningar /om dollarn/ .
Danne Nordling 29/11 2009

Det är en skillnad mot den tidigare uppseglande bolånekrisen, som kunde påvisas i flera olika statistiska serier. Men att denna skulle leda till en världsomspännande finanskris kunde inte visas med statistik. Det berodde främst på att den var psykologiskt betingad och krävde sådana missgrepp som konkursen i Lehman Brothers för att blomma ut.

Vi är på väg mot en monsterbubbla på finansmarknaden
Det handlar framförallt om spekulation i en allt billigare dollar.
Nouriel Roubini, Ekonomiekot 27/11 2009

Roubini säger att han är oroad av att den amerikanska centralbanken gör pengar så lättillängliga och tvingar andra länder att följa efter. Men att stötta systemet nu med höjda räntor är inte lösningen, säger Roubini.

Barry Eichengreen, a prominent American economic historian, says the crisis has “cast into doubt much of what we thought we knew about economics.”
The Economist print July 16th 2009

Is this the death of the dollar?
Edmund Conway, Daily Telegraph 20 June 2009

For US Treasury Secretary Tim Geithner, who has inherited his predecessors' role as dollar wallah-in-chief, the currency's travails have made it all the more difficult for him to repeat the mantra that he "believes in a strong dollar" while keeping a straight face. Indeed, when he tried to insist at a university lecture in Beijing earlier this month that "Chinese financial assets are very safe," it drew floods of laughter from the audience.

He wasn't playing for laughs, but the irony of the situation is plain to see. If there were a textbook list of actions one could take to weaken a currency, the US (alongside most other developed nations) would be following it to the letter. It has cut interest rates to a whisker above zero; it has engaged in quantitative easing, pumping cash directly into the economy; it has committed to spending trillions of dollars on a fiscal stimulus package designed to pull the country out of recession; it has pledged tacitly to support its stricken banks so that no major institution is allowed to collapse. In any normal circumstances, actions like these would hammer a currency.

Like everything else, the currency's fate depends on how well the US authorities manage the crisis. The US is balanced on a knife-edge between possible Japan-style deflation as the weight of all its debts bear down on it and potential inflation as the force of all its powerful stimulus measures take root. No one knows for sure which way it will fall, but neither would be particularly good for the currency, and by extension for those who hold much in the way of dollar assets.

Indeed, as Mervyn King said in a speech earlier this year: "At the heart of the crisis was the problem identified but not solved at Bretton Woods – the need to impose symmetric obligations on countries that run persistent current account surpluses and not just on countries that run deficits. From that failure stemmed a chain of events, no one of which alone appeared to threaten stability, but which taken together led to the worst financial crisis any of us can recall."

Sustained recovery requires decreased domestic US spending and
increased domestic spending in China and much of the rest of the world,
together with adjustments in exchange rates.
unsustainable US debt dynamics probably means mayhem in financial markets
Olivier Blanchard, Financial Times, June 18 2009
The writer is chief economist of the IMF

Consider what would happen if the UK or US were to attempt Hungarian or Estonian style cuts.
There would be a huge outcry.
So rather than taking the axe to public spending, the British and American governments are borrowing madly,
with no sign of any credible long-term plan to balance the books.
Gideon Rachman, Financial Times, May 25 2009

There are three key flaws to panglossian hopes for a bull market and a V-shaped economic recovery.
David Roche, Financial Times, May 19 2009

The first flaw can be simply put. If excess leverage in the US household sector lies at the core of the credit crisis and global imbalances, little has been done to address the problem.
Since the start of the credit crisis, US household debt has risen. Indeed, as US net household wealth has fallen nearly 20 per cent, leverage has risen sharply in relative terms.

The second flaw follows. If excess consumption lies at the core of the credit crisis, the problem has been made worse by government adding leverage to help households sustain their own unsustainable levels of debt.
The credit bubble financed excessive US consumption by hefting asset prices and creating fictive wealth gains.
Household savings collapsed because nobody needed to save from income when soaring asset prices were doing the job for them.

The third flaw reminds us of the original problem. If excess credit creation and financial sector leverage caused the crisis, the problem has not been dealt with by the authorities.
The authorities believe the crisis is due to a lack of liquidity that has driven down asset prices below their “true” value and not due to the insolvency of the assets themselves.

The conclusions of recent stress tests concluded that the US banking system was solvent and needed little extra capital, which it could raise under its own steam.
But the tests were based on very sanguine assumptions about the economic future: namely that the housing market, economic growth and employment would all recover sharply in 2010.

A potentially more serious issue concerns bank liabilities and funding. Though there has been some thawing, the private sector wholesale funding market is still mostly closed.
But the 22 largest global banks monitored by the IMF have to finance more than 50 per cent of their balance sheets from the money markets and longer-term debt.
The funding gap is currently over $20,000bn and will rise above $25,000bn by 2011.

This unforeseen crisis is surely a disaster for monetary policy.
Most of us – I was one – thought we had at last found the holy grail.
Now we know it was a mirage. This may be the last chance for fiat money.
Martin Wolf, Financial Times, May 5 2009

There are four deflationary spirals presently at work in the world economy, i.e.
the Keynesian savings paradox, Fisher’s debt deflation,
the cost cutting deflation, and the bank credit deflation.
Each of these deflationary spirals can be dealt with when they occur in isolation.
They become lethal when they interact with each other.
Paul de Grauwe 6/4 2009

The four deflationary spirals we identified, although similar in structure, are different in one particular dimension.
The savings paradox and the cost deflation can be called “flow deflations”. They arise because consumers and firms want to change a flow (savings and profits).
The other two involve the adjustment of stocks (the debt levels and the levels of credit). We call them “stock deflations”.
Problems arise when the flow and stock deflations interact with each other.

The period prior to the crisis was one of excessive buildups of private debt and banks’ assets.
The result of these excessive buildups of private debt and balance sheets is that the stock deflation processes described in the previous section operate with full force.
As a result, the equilibrating mechanism that exists in normal recessions does not function.

The forthcoming Group of 20 summit is going to be a disaster.
So it looks like it is going to be an L – not a V or a U.
I mean an L-shaped recession, one that starts with a steep decline, followed by very low growth for many years.
Wolfgang Munchau, Eurointelligence 09.03.2009

Dow below 7,000
BREAKING NEWS - Dow extends decline, down 200 points to below 6,900
on AIG loss and the revised government bailout. More soon.
CNN March 2, 2009 10:47

Can't pay or won't pay?
The write-downs, whether voluntary or court-ordered, could destroy the lenders’ capital.
Aggregate negative housing equity is thought to top $500 billion.
The Economist print Feb 19th 2009

European stocks tumbling to a six-year low
"We're near the cliff's edge, very close to capitulation, the mood is very gloomy," said Jean-Claude Petit, head of equities at Barclays Wealth Managers France.
"I'm not sure that governments and central banks are realizing what's really going on.
The gaffes made by West-European banks in East Europe revealed recently are having a devastating effect"
CNBC 20/2 2009

The U.S. housing market lost $3.3 trillion in value last year and
almost one in six owners with mortgages owed more than their homes were worth
Feb. 3 2009 (Bloomberg)

The U.S. Financial System Is Effectively Insolvent
There is a grave risk of a global L-shaped depression.
Nouriel Roubini, March 5 2009

Why the bank bailouts are doomed
The entire system is simply insolvent
Jon Markman, 1/29/2009

Some say that manufacturing is special, because the rest of the economy depends on it.
In fact, the economy is more like a network in which everything is connected to everything else, and in which every producer is also a consumer

They have nothing to lose but their web cameras
Rioters of the world unite
The Economist print, Dec 18th 2008

The famous final phrase of the Manifesto, "Working Men of All Countries, Unite!",
in the original German is: "Proletarier aller Länder, vereinigt euch!"
Thus, a more correct translation would be "Proletarians of all countries, Unite!"

"Workers of the World, Unite. You have nothing to lose but your chains!" is a popularisation of the last three sentences, and is not found in any official translation. Since this English translation was approved by Engels, we have kept the original intact.

Protectionist dominoes are beginning to tumble across the world
The riots have begun.
Dominique Strauss-Kahn, the head of the International Monetary Fund, is worried enough to ditch a half-century of IMF orthodoxy, calling for a fiscal boost worth 2pc of world GDP to "prevent global depression".
Ambrose Evans-Pritchard, 20 Dec 2008

This is a foretaste of what the world may face as the "crisis of capitalism" - another Marxist phase making a comeback - starts to turn two hundred million lives upside down.

"If we are not able to do that, then social unrest may happen in many countries, including advanced economies. We are facing an unprecedented decline in output. All around the planet, the people have reacted with feelings going from surprise to anger, and from anger to fear," Dominique Strauss-Kahn said.

President-elect Barack Obama: "China must change its currency practices. Because it pegs its currency at an artificially low rate, China is running massive current account surpluses. This is not good for American firms and workers, not good for the world," he said in October.

This crisis has already brought us a monetary revolution as interest rates approach zero across the G10. It may overturn the "New World Order" as well, unless we move with great care in grim months ahead. This is where events turn dangerous.

The last great era of globalisation peaked just before 1914. You know the rest of the story.

"The question of having social unrest has been highlighted by journalists and I can understand that, but it's only part of the problem," he said.
"The problem is that all the whole society is going to suffer."
Dominique Strauss-Kahn, BBC 21/12 2008

Dominique Strauss-Kahn, Managing Director of the International Monetary Fund
Speech at the Banco de España, Madrid, Spain
December 15, 2008

G7 försäkrade att deras centralbanker ska fortsätta att samordna åtgärder för att lindra kreditkrisen. Penningpolitiken måste vara den första försvarslinjen, enligt IMF.
Samtidigt har IMF-chefen Dominique Strauss-Kahn efterlyst en plan för samordnade finanspolitiska stimulanser världen över.
Sådana megakeynesianska övningar bör man vara försiktig med.
DN-ledare 14/4 2008

Roubini's Latest "Why Things Are Hopeless" List Hits New Record, 20 Items! Be sure to read down to his last point, where he draws his bottom line,
a peak to trough fall in GDP of 10%.
Naked capitalism 16/11 2008

The big difference in diagnosis is between those who still think in terms of a conventional business cycle with output fluctuating in familiar snakelike fashion around a stable trend given by “supply side” factors, and those who believe that something more apocalyptic has happened.
Samuel Brittan, Financial Times, November 6 2008

For this first group it is important to worry about the size of the current budget deficit, re-establishing fiscal guidelines in the medium term and the maintenance of an arm’s length relationship between governments and central banks. The obvious exponent of this view has been the European Central Bank, with its insistence that its economic task is just to maintain the stability of a consumer price index.

Critics say that Alan Greenspan’s reduction of the Fed funds rate to 1 per cent in 2003 sparked off the recent credit bubble and its subsequent collapse. They do not say what else should have been done to prevent Asian savings surpluses from generating a world depression. But even if it is conceded that Mr Greenspan went down too far for too long, Mr Bernanke now faces a radically different situation in which the very existence of the US and world monetary systems has been threatened.

Many analysts fear that central banks will soon have “run out of ammunition” because official interest rates cannot fall below zero. This is the famous “zero interest rate bound” known as ZIRB to its friends

central banks can expand the range of securities in which they deal, as they are to some extent now doing. But the ultimate weapon would be a fiscal stimulus financed by money creation – the equivalent of the famous helicopter drop.

The best recipe for avoiding a global recession
Before our political leaders get too fancy remaking capitalism
they should co-ordinate macroeconomic policies to stop a steep global downturn
Jeffrey Sachs, Financial Times, October 27 2008

The world's financial firms have now lost $2.8 trillion
the Bank of England has estimated
1.2 million homeowners in the UK now face going into negative equity
BBC 28 October 2008

It's like an avalanche.
A snowball of tumbling share prices began in Europe yesterday afternoon, picked up momentum on Wall Street - where the important S&P 500 index suffered its biggest loss in 21 years - and has been battering Asia overnight.
And that in spite of the £2 trillion pounds of taxpayers' precious money committed by governments to bank rescue plans all over the world.
What's more - and probably more worrying for the authorities - is that interest rates charged by banks for lending to each other for three months remain at disturbingly high levels
BBC's Robert Peston 16 Oct 08, 08:24 AM

The world financial system is teetering on the "brink of systemic meltdown",
the head of the International Monetary Fund (IMF)Dominique Strauss-Kahn has warned
BBC 12 October 2008

It is not too late.
If the world now pulls together, we can avoid the Armageddon endgame.
Stephen Roach, Financial Times October 9 2008

Notwithstanding my long-standing bearishness on the global economy and world financial markets, I am now actually hopeful that the world is at a critical turning point. We have gone to the edge of an abyss that few thought was ever possible. Having stared into the darkness, the authorities hopefully have a better appreciation of what is truly at stake. It is not too late. If the world now pulls together, we can avoid the Armageddon endgame.

Stefan Ingves:
– När det här är över skulle det inte förvåna mig om krisen som Sverige upplevde i början av 1990-talet, visar sig vara värre än det som vi idag ser i USA.
I det svenska fallet krympte ekonomin under tre år i rad och det var den största krisen som vi hade haft sedan 1930-talet.
Ekot 16/9 2008

Let me explain now in more detail why we are now back to the risk of
a total systemic financial meltdown…
This is not just a US financial crisis; it is a global financial crisis hitting institutions in the US, UK, Eurozone and other advanced economies (Iceland, Australia, New Zealand, Canada etc.).
Nouriel Roubini Sep 29, 2008

It is obvious that the current financial crisis is becoming more severe in spite of the Treasury rescue plan (or maybe because of it as this plan it totally flawed). The severe strains in financial markets (money markets, credit markets, stock markets, CDS and derivative markets) are becoming more severe rather than less severe in spite of the nuclear option (after the Fannie and Freddie $200 billion bazooka bailout failed to restore confidence) of a $700 billion package: interbank spreads are widening (TED spread, swap spreads, Libo-OIS spread) and are at level never seen before; credit spreads (such as junk bond yield spreads relative to Treasuries are widening to new peaks; short-term Treasury yields are going back to near zero levels as there is flight to safety; CDS spread for financial institutions are rising to extreme levels (Morgan Stanley ones at 1200 last week) as the ban on shorting of financial stock has moved the pressures on financial firms to the CDS market; and stock markets around the world have reacted very negatively to this rescue package (US market are down about 3% this morning at their opening).

In a solvency crisis and credit crisis that goes well beyond illiquidity no one is lending to counterparties as no one trusts any counterparty (even the safest ones) and everyone is hoarding the liquidity that is injected by central banks. And since this liquidity goes only to banks and major broker dealers the rest of the shadow banking system has not access to this liquidity as the credit transmission mechanisms is blocked.

The next step of this panic could become the mother of all bank runs, i.e. a run on the trillion dollar plus of the cross border short-term interbank liabilities of the US banking and financial system as foreign banks as starting to worry about the safety of their liquid exposures to US financial institutions;

For most readers, the commercial paper market is something you don't think about.
But it is the lifeblood of business.
We have seen this market drop by almost 30% in a year and by 10% in just the last three weeks!
I simply cannot overstate how serious this is.
John Mauldin, The Curve in the Road, 3/10 2008

There is something called the TED spread,
which is the difference between three-month LIBOR (the London Inter Bank Offered Rate which is in euro dollars, also called The Euro Dollar Spread, thus TED)
and three-month US Treasury bills. Three-month LIBOR is basically what banks charge each other to borrow money.
Many mortgages and investments are based on various periods of LIBOR. Look at the chart below. Typically the TED spread is 50 basis points (0.50%) or less. When it spikes up, it is evidence of distress in the financial markets. The last time the TED spread was as high as it is now was right before the market crash of 1987. This is a weekly chart, which does not capture tonight's (Friday) change, which would make it look even worse.
Quite literally, the TED spread is screaming panic.
John Mauldin, Sep 27 2008

The Bank of England moved on Friday to inject longer term cash into money markets,
with the US Federal Reserve, the European Central Bank and the Swiss National Bank.
The intervention follows the breakdown late on Thursday of talks over a $700bn bailout for the US financial system
Money market traders said that interbank lending for terms longer than a day had come to a near standstill
as counterparties feared that they may be lending to a bank that could suddenly become insolvent.
Financial Times September 26 2008 08:09

The money markets on the verge of a nervous breakdown
The money market, not the stock market, is where this financial crisis is playing out first and foremost. On this market, banks lend each others funds for short periods of time with no collateral. A favourite way to measure distress in the way money is the difference between the interest rate on 3-month Treasury – which are considered safe – and 3-month Libor. This is known as the TED spread. If you consider your counterparty bank safe, you would expect to receive only a slightly higher interest rate on 3 Libor than you would on 3 month treasuries. But if you expect to receive more than 300 basis points, as banks do now, then you doubt the financial viability of your counterparty.
Yesterday, the spread briefly peaked at 333bp, which must be an all-time record.
eurointelligence 26.09.2008

It’s 3 a.m., a few months into 2009, and the phone in the White House rings.
Several big hedge funds are about to fail, says the voice on the line,
and there’s likely to be chaos when the market opens.
Whom do you trust to take that call?
Paul Krugman, September 28, 2008

I’m not being melodramatic. The bailout plan released yesterday is a lot better than the proposal Henry Paulson first put out — sufficiently so to be worth passing. But it’s not what you’d actually call a good plan, and it won’t end the crisis. The odds are that the next president will have to deal with some major financial emergencies.

Maybe we can let Wall Street implode and Main Street would escape largely unscathed.
But that’s not a chance we want to take.
Paul Krugman New York Times September 25, 2008

Many people on both the right and the left are outraged at the idea of using taxpayer money to bail out America’s financial system. They’re right to be outraged, but doing nothing isn’t a serious option.

Right now, players throughout the system are refusing to lend and hoarding cash — and this collapse of credit reminds many economists of the run on the banks that brought on the Great Depression.

It’s true that we don’t know for sure that the parallel is a fair one. Maybe we can let Wall Street implode and Main Street would escape largely unscathed. But that’s not a chance we want to take.

Mr. Paulson never offered a convincing explanation of how his plan was supposed to work — and the judgment of many economists was, in fact, that it wouldn’t work unless it amounted to a huge welfare program for the financial industry.

the bipartisan “agreement on principles” released on Thursday looks a lot better than the original Paulson plan. it “requires that any transaction include equity sharing.”

Why is that so important? The fundamental problem with our financial system is that the fallout from the housing bust has left financial institutions with too little capital. When he finally deigned to offer an explanation of his plan, Mr. Paulson argued that he could solve this problem through “price discovery” — that once taxpayer funds had created a market for mortgage-related toxic waste, everyone would realize that the toxic waste is actually worth much more than it currently sells for, solving the capital problem. Never say never, I guess — but you don’t want to bet $700 billion on wishful thinking.

Over the past few weeks three experiences have helped clear my mind on this crisis.
First, I reread Hyman Minsky’s masterpiece, Stabilizing an Unstable Economy.
Martin Wolf, Financial Times, September 16 2008

Money market funds in the US suffered an estimated $197bn of net outflows last week as confidence in their safe-haven status weakened after one fund “broke the buck” and others closed.
The outflows mark a new and potentially dangerous phase for the $3,400bn money market fund industry as continued redemptions could result in forced selling of their securities into illiquid bond markets.
Financil Times September 22 2008

"Modern history’s greatest regulatory failure"
These are companies that refinance themselves in the capital markets every day. They depend on the confidence of lenders.
But, if that disappears, their solvency is threatened. This is where we are now.
This has put the Fed and the US Treasury into a nearly impossible position
Roger Altman, Financial Times, September 17 2008 18:52
The writer is chairman and chief executive of Evercore Partners and was deputy US Treasury secretary under President Bill Clinton.
He was a co-head of investment banking and a board member at Lehman Brothers in the 1980s

As Paul Volcker, former Fed chairman, has suggested, an enormous Resolution Trust Corporation-style approach for the banking and securities system may be required.

Extraordinary emergency actions by the Federal Reserve and the Treasury to date, while necessary, are insufficient to resolve the crisis. We should move decisively to create a new, temporary resolution mechanism. There are precedents -- such as the Resolution Trust Corporation of the late 1980s and early 1990s, as well as the Home Owners Loan Corporation of the 1930s.
Brady, U.S. Treasury secretary from 1988-1993, Mr. Ludwig U.S. comptroller of the currency from 1993 to 1998, Volcker chairman of the Federal Reserve from 1979-1987
Wall Street Journal SEPTEMBER 17, 2008

- Vi hade inte någon glaskula att titta i. Och vi hade blivit utskrattade.
- Det är svårt att vara olyckskorp när allt går som smort, sade en av hans högre medarbetare Stig Danielsson.
Rolf Englund tar sig för pannan: Det var ju inspektionens uppgift att varna i tid!
Om Hans Löwbeer, chef för Bankinspektionen

The U.S. financial system was badly shaken Sunday by the failure of Lehman Brothers , the surprise takeover of Merrill Lynch and big asset sales by major insurer American International Group.
"The U.S. financial system is finding the tectonic plates underneath its foundation are shifting like they have never shifted before," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.
"It's a new financial world on the verge of a complete reorganization."
CNBC 14 Sep 2008

Sept. 14 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the financial crisis that began with the collapse of the subprime-mortgage market last year ``is probably a once in a century event'' that will lead to the failure of more firms.
``There's no question that this is in the process of outstripping anything I've seen, and it is still not resolved,'' Greenspan said in an interview today on ABC's ``This Week with George Stephanopoulos.'' Greenspan, 82, retired from the Fed in January 2006 after serving for 18 years as chairman.
http://www.bloomberg.com/apps/news?pid=20601068&sid=amVkrOCQNBQs&refer=economy

Lehman Brothers
One Wall Street executive involved in the meetings put it this way:
"I'm thinking logically; if they do nothing it's Armageddon. That means they do a deal.
It will be announced at 6 p.m. (ET) Sunday."
CNBC 13/9 2008

What is a bundle of mortgages worth when nobody is willing to bid on them at auction?
With American banks already in trouble,
an Australian bank made matters worse—by telling the truth!
Robert Morley, theTrumpet.com, August 12, 2008

The risk of a downward spiral of house prices is the primary danger facing the American economy.
Because of the structure of securitised mortgage finance, this risk has the potential to cause a global financial crisis.
Both of these problems will remain until a new policy brings stability to house prices.
Martin Feldstein, Financial Times, August 26, 2008
Very Important Article

“The topic du jour is Fannie and Freddie.
Clearly, the market is looking for a solution that is permanent, clear and definitive. That dwarfs everything.”
Financial Times, August 24 2008

"Sedan i fjol har vår syn på världsekonomin förändrats markant.
Det är tydligt att vi inte har sett slutet på historien om kreditkrisen", säger Jacob Wallenberg.
DI 2008-08-22

"Jag är på den mörkare sidan av svart den här morgonen. Situationen är mycket värre än 2001", säger Thomas von Koch, som håller i investeringarna för EQT.

America's house price time bomb
Some American home-owners are taking radical action;
they are choosing to walk away from homes and their mortgages.
Roubini: "You could have most of the US banking system wiped out, so this is a total disaster."
BBC, 29 July 2008
Highly Recommended

Only luck can save America’s economy
What more can be done? The short answer is nothing.
The policy options have narrowed almost to zero.
Clive Crook, Financial Times August 3 2008

"We interrupt regular programming to announce that the United States of America has defaulted …"
Part 1
Satyajit Das Eurointelligence 23.07.2008

Lenders to the United States government have suffered significant losses .The losses have not been from non-payment but because repayments have been in a constantly debased currency – the dollar.

"We interrupt regular programming to announce that the United States of America has defaulted …" Part 2
reductions in US real wages and living standards on a scale that those who have not experienced it first hand cannot understand
Satyajit Das Eurointelligence 24.07.2008

Ultimately, the US may be forced to finance itself in foreign currency. This would expose the US to currency risk but most importantly it would not be able to service its debt by printing money.
The US, like all borrowers, would become subject to the discipline of creditors.

For the moment, the US$ is hanging on – just. This reflects structural weakness in the Euro and Yen based on deep-seated problems in the respective economies.
The artificial nature of the Euro is also problematic.

In 1989, John Williamson described certain economic prescriptions - the Washington Consensus – that became a "standard" reform package promoted for crisis-wracked countries by the IMF.

The dry measured economic prose of the Washington Consensus does not capture its human elements. It will require reductions in US real wages and living standards on a scale that those who have not experienced it first hand cannot understand.

Warren Buffett in his 2006 annual letter
I believe that at some point in the future, U.S. workers and voters will find this annual 'tribute' (of interest payment on the debt) so onerous that there will be a severe political backlash … How that will play out in markets is impossible to predict – but to expect a 'soft landing' seems like wishful thinking.

1. Paulson appears on Face The Nation and says "Our banking system is a safe and a sound one." If the banking system was safe and sound, everyone would know it (or at least think it). There would be no need to say it.

7. Paulson says Fannie Mae and Freddie Mac are "essential" because they represent the only "functioning" part of the home loan market. The firms own or guarantee about half of the $12 trillion in U.S. mortgages. Is it possible to have a sound banking system when the only "functioning" part of the mortgage market is insolvent?

Merrill Lynch has warned that the United States could face a foreign "financing crisis"
within months as the full consequences of the Fannie Mae and Freddie Mac mortgage debacle spread through the world
Ambrose Evans-Pritchard, Daily Telegraph 16/07 2008

The country depends on Asian, Russian and Middle Eastern investors to fund much of its $700bn (£350bn) current account deficit, leaving it far more vulnerable to a collapse of confidence than Japan in the early 1990s after the Nikkei bubble burst. Britain and other Anglo-Saxon deficit states could face a similar retreat by foreign investors.
"Japan was able to cut its interest rates to zero," said Alex Patelis, Merrill's head of international economics.
"It would be very difficult for the US to do this. Foreigners will not be willing to supply the capital. Nobody knows where the limit lies."

Nouriel Roubini predicts the worst financial crisis since the Great Depression and
the worst U.S. Recession in the last few decades.
July 15, 2008

Dozens of large regional/national banks (a’ la IndyMac) are also bankrupt given their extreme exposure to real estate and will also go bust
Some major money center banks are also semi-insolvent and while they are deemed too big to fail their rescue with FDIC money will be extremely costly

In a few years time there will be no major independent broker dealers as their business model (securitization, slice & dice and transfer of toxic credit risk and piling fees upon fees rather than earning income from holding credit risk) is bust and the risk of a bank-like run on their very short term liquid liabilities is a fundamental flaw in their structure

Fannie and Freddie are insolvent and the Treasury bailout plan (the mother of all moral hazard bailout) is socialism for the rich, the well connected and Wall Street; it is the continuation of a corrupt system where profits are privatized and losses are socialized. Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.
This financial crisis will imply credit losses of at least $1 trillion and more likely $2 trillion.

SEC Panic - Shorting Curbs Placed on GSE Stocks /government sponsored enterprises/
The panic at the Fed, the SEC, and the Treasury department continues. In an emergency action the SEC Curbs Shorting of GSE Stocks, Considers Limits for Wider Market.
Ackman Shorts Fannie, Freddie
Mish 15/7 2008

Treasury Acts to Save Mortgage Giants
The Bush administration on Sunday asked Congress to approve a sweeping rescue package that would give officials the power to inject billions of federal dollars into the beleaguered companies through investments and loans.
New York Times 14 July 2008

The California-based IndyMac Bank, has collapsed
Federal regulators seized the bank's assets
It is the second-largest financial institution to fail in US history
BBC, July 12 2008

The government officials said that the administration had also considered calling for legislation that would offer an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies. But that is a far less attractive option, they said, because it would effectively double the size of the public debt.
The officials also said that such a step would be ineffective because the markets already widely accept that the government stands behind the companies.
The officials involved in the discussions stressed that no action by the administration was imminent, and that Fannie and Freddie are not considered to be in a crisis situation. But in recent days, enough concern has built among senior government officials over the health of the giant mortgage finance companies for them to hold a series of meetings and conference calls to discuss contingency plans.

It is unclear if current shareholders would see their holdings wiped out - leading to the pre-market sell-off.
Immediately after the market open shares of Fannie and Freddie were both off more 45% from their already battered close on Thursday.
In the first four trading days of the week, the shares of Fannie have lost 30% of their value, while Freddie shares have tumbled 45%.
For the year, Fannie is down 67% and Freddie 77% through Thursday's close.
CNNMoney July 11, 2008

Lehman Brothers shares tumbled 18% at the start of the session.
So far this year, Lehman shares are down 73%.
Late Thursday, the nation's fourth-largest investment bank provided greater details about the stunning $2.8 billion loss it suffered in the second quarter.
CNNMoney July 11, 2008

The word began spreading across Wall Street trading desks on Monday morning:
Fannie Mae and Freddie Mac, the giant companies at the heart of the nation's housing market, might be in trouble.
New York Times, July 11, 2008

Just as with mortgage debt, credit card debt is put into pools that are then resold to investment houses, other banks and institutional investors.
About 45 percent of the nation's $900-plus billion in credit card debt has been packaged into these pools, and so many companies, not just a few, are at risk of being forced out of business by credit card debt write-offs.
Allen L Roland's Radio Weblog June 30, 2008
"My ongoing theme is always the truth , as I see it , and the exposure of lies, deception and manipulation wherever they exist."

That sound you hear is the popping of a financial bubble in housing,
the economy and the market.
And you can trace it all to Alan Greenspan's Federal Reserve.
Bill Fleckenstein, 30/6 2008

It is now almost a year since the US subprime crisis went global.
It has, in all likelihood, not even passed the end of its beginning.
The creditworthiness of the US government cannot be taken for granted.
Martin Wolf, Financial Times, July 15 2008

Spreads between rates of interest on inter-bank lending in dollars, euros and sterling and expected official rates over three and six months are now wider than they were in March.

It is hard to see any outcome other than a sustained slowdown in the world economy. It is even quite likely that the trend growth of the world economy is considerably slower than was hoped a few years ago.

The creditworthiness of the US government cannot be taken for granted. If the ongoing deleveraging of the US economy weakened US consumption, the economy might go into a deep recession. US fiscal deficits would then soar and long-term US interest rates might jump. This could make the debt dynamics of the US government look very unpleasant. A flight from the dollar and dollar bonds might even ensue.

Bank for International Settlements annual report
"How" asks the report, "could a huge shadow banking system emerge without provoking clear statements of official concern?"
How, indeed?
How big are the risks now? The answer is: very large.
As I argued in a speech at a BIS conference last week...
Martin Wolf, Financial Times, July 1 2008

It needs to be recognised that in the months ahead there is the real possibility that significant financial institutions will encounter not just liquidity but solvency problems as the economy deteriorates and further writedowns prove necessary.
It is quite possible that we are now at the most dangerous moment since the American financial crisis began last August.
Lawrence Summers, FT, June 29 2008

It is quite possible that we are now at the most dangerous moment since the American financial crisis began last August. Staggering increases in the prices of oil and other commodities have brought American consumer confidence to new lows and raised serious concerns about inflation, thereby limiting the capacity of monetary policy to respond to a financial sector which Â– judging by equity values Â– is at its weakest point since the crisis began. With housing values still falling and growing evidence that problems are spreading to the construction and consumer credit sectors, there is a possibility that a faltering economy damages the financial system, which weakens the economy further.

Unfortunately we are in an economic environment where we have more to fear than fear itself. But this is no excuse for fatalism.

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.
Ambrose Evans-Pritchard, Daily Telegraph 19/6 2008

A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.
Such a slide on world bourses would amount to one of the worst bear markets over the last century.

Under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks - call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot.
What really concerns me is that there seems to be so little willingness or capacity to do much about it.
Paul A. Volcker, Washington Post, April 10, 2005

Ben Bernanke: "We have a problem"
'We have a problem, which is that the spreads between the Treasury rates and lending rates are widening, and our policy is essentially, in some cases just offsetting the widening of the spreads, which are associated with signs of illiquidity."
Eurointelligence/calculatedrisk blog 29/2 2008

The International Monetary Fund (IMF) has warned that potential losses from the credit crunch will reach $945bn and could be even higher.
BBC 8/4 2008

The IMF says that losses are spreading from sub-prime mortgage assets to other sectors, such as commercial property, consumer credit, and company debt.

It says that there was a "collective failure" to appreciate the risky borrowing by financial institutions.

För dem som har haft en övertro på marknadens självreglerande krafter är förstås den internationella kreditkrisen en allvarlig missräkning.
Ragnar Roos, DNs ledarsida, 30/3 2008

The day $2 billion walked out the door
Inside a bank panic: Customers deserting, investors fleeing, billions in losses.
Survivors of a run at E*Trade tell how they fought to hang on.
CNN 4/4 2008

It was early in the morning on Jan. 8, and the company's newly minted chairman - soon to be CEO - was meeting with a contractor to fix up his weekend house in New York's Westchester County. He'd expected it to be a quiet day. Then the calls started coming in.

One way of measuring how perilously close the U.S. financial system came to melting down in mid-March 2008
is to look at how low the rate on one-month Treasury bills fell at the depths of the crisis.
That number is 12 basis points. 0.12%.
Michael Lewitt, at John Mauldin, 2008-03-31

The three-month Treasury bill rate, which our friend Jim Bianco of the highly respected Bianco Research points out is the "risk-free" rate for many models such as the capital asset pricing model, the arbitrage risk pricing model and the Black-Scholes pricing model, fell to a 50-year low of 56 basis points on Tuesday, March 25

The bailout of Bear was an obnoxious /odiously or disgustingly objectionable : highly offensive/ necessity in view of the fact that the firm was too interconnected as a Wall Street counterparty and prime broker to be permitted to fail. Its collapse would have placed many hedge funds and other financial firms at risk

The time to ask about moral hazard is not when the system is about the implode
- the appropriate time for such questions is much earlier, when the seeds of destruction that lead to the necessity to bail out players that act in ways that threaten long-term systemic stability are being sown.

If the current crisis, and the recurring crises of the last twenty years, tell us anything, it is that market solutions are insufficient to protect the system from the greed and fear that drive markets.

Two weeks ago, the world financial system hung by a thread as a battle raged among corporate leaders, government officials, portfolio managers and independent traders to control its destiny.
Half wanted to pull it down and spill the globe into economic Armageddon for personal profit, while the other half fought to stave them off.
Jon Markman, CNBC 27/3 2008

Stage I of dealing with a financial crisis is to provide liquidity to the banking system at high interest rates in order to keep commerce and finance liquid while punishing feckless overleveraged financiers. We passed out of Stage I at the end of last year.

Stage II is forgetting about punishing feckless financiers and focusing on lowering interest rates in order to raise asset prices to keep finance solvent. We are now in Stage II.

Now Alan Blinder says that it is time to--in a limited way--move on to Stage III: nationalization.

Brad DeLong's Weblog February 24, 2008

With link to ALAN S. BLINDER, NYT: What about the operation's scale? Based on current estimates, such an institution might be asked to consider refinancing one million to two million mortgages... as much as $200 billion to $400 billion. The midpoint, $300 billion, is one-seventh the size of Citigroup and would rank the new institution as the sixth-largest bank in the United States....

Like a 1930s bank run
There are now plans to split up the companies
that insure bonds and derivatives based on mortgages and buyout loans.
Jim Jubak 22/2 2008

America's economy risks mother of all meltdowns
The connection between the bursting of the housing bubble and the fragility of the financial system
has created huge dangers, for the US and the rest of the world.
Martin Wolf, Financial Times, February 19 2008

how bad might this downturn get? To answer this question we should ask a true bear.
My favourite one is Nouriel Roubini of New York University's Stern School of Business, founder of RGE monitor

His thinking deserves to be taken seriously. He first predicted a US recession in July 2006.
At that time, his view was extremely controversial.
It is so no longer.
Now he states that there is "a rising probability of a Â‘catastrophic' financial and economic outcome"

The risks are indeed high and the ability of the authorities to deal with them more limited than most people hope.

Speaking after the meeting of Group of Seven finance leaders, Peer SteinbrÃ¼ck, German finance minister,
said the G7 now feared that write-offs of losses on securities linked to US subprime mortgages could reach $400bn.
FT February 10 2008

The Rising Risk of a Systemic Financial Meltdown:
The Twelve Steps to Financial Disaster
by Nouriel Roubini, February 11, 2008
at John Mauldin

Why did the Fed ease the Fed Funds rate by a whopping 125bps in eight days this past January?

To understand the Fed actions one has to realize that there is now a rising probability of a "catastrophic" financial and economic outcome, i.e. a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe.

The Fed is seriously worried about this vicious circle and about the risks of a systemic financial meltdown.

To understand the risks that the financial system is facing today I present the "nightmare" or "catastrophic" scenario that the Fed and financial officials around the world are now worried about.

First, this is the worst housing recession in US history and there is no sign it will bottom out any time soon.

Second, losses for the financial system from the subprime disaster are now estimated to be as high as $250 to $300 billion. But the financial losses will not be only in subprime mortgages and the related RMBS and CDOs. They are now spreading to near prime and prime mortgages

Third, the recession will lead - as it is already doing - to a sharp increase in defaults on other forms of unsecured consumer debt: credit cards, auto loans, student loans.

Fourth, while there is serious uncertainty about the losses that monolines will undertake on their insurance of RMBS, CDO and other toxic ABS products, it is now clear that such losses are much higher than the $10-15 billion rescue package that regulators are trying to patch up
Any business that required an AAA rating to stay in business is a business that does not deserve such a rating in the first place.

Next, the downgrade of the monolines will lead to another $150 of writedowns on ABS portfolios for financial institutions that have already massive losses.

Fifth, the commercial real estate loan market will soon enter into a meltdown similar to the subprime one. Lending practices in commercial real estate were as reckless as those in residential real estate.

Sixth, it is possible that some large regional or even national bank that is very exposed to mortgages, residential and commercial, will go bankrupt. Thus some big banks may join the 200 plus subprime lenders that have gone bankrupt.

Already Countrywide - an institution that was more likely insolvent than illiquid - has been bailed out with public money via a $55 billion loan from the FHLB system, a semi-public system of funding of mortgage lenders.

hundreds of billions of dollars of leveraged loans are now stuck on the balance sheet of financial institutions at values well below par (currently about 90 cents on the dollar but soon much lower).

Eighth, once a severe recession is underway a massive wave of corporate defaults will take place

Ninth, the "shadow banking system" (as defined by the PIMCO folks) or more precisely the "shadow financial system" (as it is composed by non-bank financial institutions) will soon get into serious trouble. This shadow financial system is composed of financial institutions that - like banks - borrow short and in liquid forms and lend or invest long in more illiquid assets. This system includes: SIVs, conduits, money market funds, monolines, investment banks, hedge funds and other non-bank financial institutions

Tenth, stock markets in the US and abroad will start pricing a severe US recession - rather than a mild recession

Eleventh, the worsening credit crunch that is affecting most credit markets and credit derivative markets will lead to a dry-up of liquidity in a variety of financial markets

Twelfth, a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue leading to a cascading and mounting cycle of losses and further credit contraction.

Total losses in the financial system will add up to more than $1 trillion and the economic recession will become deeper, more protracted and severe.

In this meltdown scenario US and global financial markets will experience their most severe crisis in the last quarter of a century.

Can the Fed and other financial officials avoid this nightmare scenario that keeps them awake at night?

I will argue - in my next article - that one should be pessimistic about the ability of policy and financial authorities to manage and contain a crisis of this magnitude; thus, one should be prepared for the worst, i.e. a systemic financial crisis.

On Friday I was in Davos in a panel on the "Ups and Downs of EMU" where ECB head Trichet, Italian Economy Minister Tremont,
a few other EU officials and myself were supposed to discuss the following questions:
Will EMU collapse in the future?
Unlike the other panelist that ignored the topic and spoke instead about all the good things allegedly associated with EMU, I took the questions seriously by considering some of the problems and risks faced by EMU and the risks of a break-up, especially for the case of Italy.
My remarks caused a stir with Minister Tremonti who interrupted me in the middle of my remarks, went into a temper tantrum and shouted - to the consternation of all participants - to me: "Go Back to Turkey!!".
Nouriel Roubini, 28/1 2006

The Credit Crisis is Simply Getting Worse
John Mauldin's Weekly E-Letter February 8, 2008
Highly Recommended
RE: Probably the monst frightening I have read so far

Goldman Sachs CFO David Viniar warned yesterday that some key mortgage bond insurers could collapse. Viniar, speaking at a CSFB conference, said credit markets are trading as if we are in a "worst recession"; and there is a "total disconnect between the equities market and the credit market." (The Bill King Report)

The credit markets have gone from bad to worse. There's almost no trading being done in the $2 trillion Collateralized Debt Obligation (CDO) markets. Perfectly good bank loans are trading at discounts of between 10-20% to par,

Let's take a look at a few graphs from www.markit.com.
This first one is an index of asset-backed paper, mostly mortgage-backed. This is the BBB-rated paper issued last year. It is trading at an 86% discount.

The "spread" is the difference you pay, typically over LIBOR (or the London InterBank Offered Rate). LIBOR is the most important interest rate in the world, as massive amounts of debt are set according to it. Let's say you are an AAA-rated borrower. Last summer you might have been paying as little as 3.84 basis points over LIBOR. If LIBOR was at 5%, you would be paying 5.0384%. There was very little premium for what was considered risk-free money.

Today you are paying as much as 1.89% more. Granted, 3-month LIBOR is now at 3.10, down 2.16% over the last six months, due to aggressive Fed, Bank of England, and ECB (European Central Bank) action. Thus your net cost of funding is the same, but only if you are AAA.
There are actually very few AAA borrowers in the world. Let's look at how your costs may have risen if you are still barely investment-grade at BBB.

There are hundreds of billions of dollars of Leveraged Buy Outs (LBOs) that were done last year that are still on the various lending banks books, which they thought they were going to be able to sell to investors. However, the price of risk has risen and no one is willing to take the loans at anywhere close to the original rates the banks committed to. I talked with one major investment banking executive this week, and they are having to cut back on the loans they are currently making, and tighten credit standards, as they now have to carry those old loans at very low rates on their books.

Goldman Sachs now estimates that the total loss in the mortgage security world will total $400 billion (this includes more than just subprime mortgages),
up from an estimated $200 billion only a few quarters ago.
And that is if home prices only fall about 20% on average.

2007 in USA: 95,000 new jobs per month, down from 175,000 in 2006.
Remember, it takes 150,000 jobs per month (or so) simply to maintain the employment rate, due to growth in the population.

The trigger for the Fed action was the move on Friday by Fitch to strip the US monoline insurer AMBAC of its `AAA' rating,
with the mounting risk that the rating agencies would soon downgrade its bigger peer, MBIA.
Why does it matter?
Because they have guaranteed a large part of that $2.4 trillion bond market.
Ambrose Evans-Pritchard

"I'm not predicting the collapse of the financial system."
"This is not a normal crisis," - "It is the end of an era."
the "era of superleverage,"
George Soros, Davos, New York Times, January 24, 2008

han varnar för att EMU är en rigid struktur som kommer att skapa olösliga spänningar.
EMU riskerar att "rasera den europeiska unionen", menar Soros.
Johan Hakelius i SvD 1997-11-11

... the fate of global bond insurers and the $2,400bn of debt they guarantee. Ambac, one of the biggest bond insurers, or so-called monolines, was downgraded
FT January 21 2008

George Soros säger i en intervju att världen står inför den värsta finansiella krisen sedan andra världskriget och att USA hotas av en recession.
DN 22/1 2008

Enligt anmälan i The Economist (10/10 1987) är
"Mr Soro's views of the world economy coloured by the experience of the debt crisis. Since 1982, he says, the international fincancial system has been near to the brink. Several times it has gone to it, only to be dragged back by governments.
Källa: Rolf Englund 1987-10-26 För Svensk Tidskrift nr 9/1987

The next banking crisis on the way
Write-downs for high-risk, high-yield corporate debt, known as 'junk,' could dwarf losses in the mortgage mess.
Jim Jubak January 18 2008

Doom
Although nearly 70% of the Americans do fear a recession, the possibility of a major crisis is not considered.
Sharon-Brigitte Kayser, January 16, 2008
RE: Highly recommended

The story of the upcoming world crash is hidden in plain sight. Even mayor Bloomberg has jumped in the gloom and doom bandwagon: a global economic downturn was looming, triggered by the "lunacy" of public debt, he declared last month. Meanwhile denial continues. Although nearly 70% of the Americans do fear a recession, the possibility of a major crisis is not considered.

We have 600 trillion in world liabilities plus more than a 400 trillion-derivatives neutron bomb, all of which will go off when the Westerners (from EU and US) will no longer be able to borrow. The credit crisis could be just beginning according to, the Calcutta-born Australian Satyajit Das , a derivatives specialist who speaks of nearly $500tn.

The Next Dominos: Junk Bond And Counterparty Risk
one of the more important editions of Outside the Box this year. This is a must read. You absolutely need to understand the nature of the systemic risk we are facing, and Ted does a great job of explaining in very clear terms the nature of the risks that we have created in our modern markets.
Ted Seides at John Mauldin 26/11 2007

A perfect economic environment allowed the alchemists in structured finance to apply massive amounts of leverage on low quality, securitized mortgages

Over the past decade, the exponential growth of credit derivatives has created unprecedented amounts of financial leverage on corporate credit.

The amount of outstanding corporate credit and leverage applied to it dwarfs the market for subprime mortgages. As such, the consequences of a problem in this arena may be far more severe than what happened in subprime. If we are going to experience the downside of another economic cycle, we may be in for a painful ride.

One way of thinking about the CDS market is that of a huge, new insurance industry whose providers reserve nothing for future losses. Imagine what would happen if $45 trillion worth of insurance policies experienced an actuarial average of 5% losses and no one had $2.25 trillion sitting around to foot the bill!

The anatomy of the high-yield bubble started with a virtuous cycle. When both the markets and the economy were strong, investors paid little attention to risk. The more investors assumed risk, the more they received rewards. Companies seized the opportunity to obtain inexpensive financing and issued paper to the market on attractive terms. As leverage increased, private equity buyers drove up asset values. Higher asset values enhanced collateral and allowed companies to borrow more or refinance their way out of trouble. Without defaults, creditors were willing to lend on ever more egregious terms. As the cycle grew stronger, buyers received less compensation for the risks they assumed.