Baseball91's Weblog

October 6, 2008

Thirty-one Percent of Economist Still Don’t Think There is a Recession

 

When there is too much credit in the system, something had to give.  The market has no faith in the government which has been carpet bombing liquidity.  The market is saying, no matter what the government does, there is going to be another at least 25% to 30% correction in the valuations of homes, the credit markets that financed these homes, and the equity markets that are tied into the world-wide economy.  No one was differentiating one business from another. That was what happened in giant pyramid selling schemes.  Banks don’t trust banks.  And this morning people not only do not trust banks but any company’s stock. 

 

In other news today, 31% of economists do not think there is a recession.  Are these people reading counterfeit tea leaves?    

Some snippets off the web, in blue:  

“We are in the middle of a crisis.  It is not over.  It is to be taken seriously, but it is centrally an American crisis.” – German Finance Ministry spokesman Torsten Albig on September 15, 2008.

 

“At this stage, we’re quite confident.” – A spokesman for the French Finance Ministry, who said that French banks and French government debt agency, Agence France-Tresor, are not in danger from the market turmoil in the U.S. on September 15, 2008

 

July 2008……UK mortgage lending fell by 32 per cent in the year to June and will worsen further if the Bank of England raises interest rates in a bid to combat. 

 “So why is reduced mortgage lending always reported as a ‘shortage of finance for struggling buyers’?”                                            –Victor M, Cricklewood, London

 

NEVER ever try and mess with the markets.  You (government) are doomed to failure. History proves that. You put in place uncontrollable regulation and forgot to control the regulators -the fraudsters got you as they always will.  The last bastion of capitalism being run by neo-commies what a state we are all in. If someone had told me this 40 odd years ago when I first met people in the American financial world they would have though me ‘raving’.  –Victor M, Cricklewood, London

 

From thetimes.co.uk……a little history.  “We now know that the sub-prime securitized-mortgage market was little more than a giant pyramid selling scheme in which simple transactions, loans to buy homes, were packaged, bundled, sold, refinanced and the credit risk insured by myriad institutions. None of the bankers who grabbed the passing parcels had any means of ascertaining the solvency of the ultimate borrowers, nor any idea of the true value of the bricks and mortar that underpinned the loans.   

 

“If we want to know why some bankers behave like bison racing to the cliff-edge, we need to remember where they came from. The guts of an investment bank is the broker-dealer model, the merging of two types of business: brokers – people who act as agents for investors, buying and selling securities on their behalf – and dealers – who act as principal, trading securities for their own account.  Three decades ago, brokers and dealers (the latter were known as stock jobbers in Britain) were separate partnerships, owned by the management whose personal wealth was on the line every day, in every trade. I remember visiting a jobber’s pitch in 1985 on the floor of the London Stock Exchange, where a lad barely out of school scribbled entries into a large, black ledger. He could mentally tot up his long or short position at feverish speed from a page of buy and sell orders.  Today, the books are electronic and the positions algorithmic, but the point is not a sentimental one. Today’s broker-dealers have no skin in the game – they are staff and the bosses are staff. Their rewards in shares are a bonus, never a liability.  The Big Bang in London in the mid-Eighties and the earlier deregulation in New York transformed a business made up of ruthless individuals joined together by a merchant’s compact into a tower of corporate ego. Merchant banks, such as SG Warburg and Morgan Stanley, bought brokers and jobbers and the culture of personal ownership and personal risk quietly vanished.  It’s difficult to imagine the boy on the exchange floor behaving like Jérôme Kerviel, the Société Générale trader who set fire to his bank’s balance sheet, and it is not just a question of scale or computers. It is about the corporate mindset that makes risk political, a struggle between managerial egos rather than a simple balance of good bets versus dangerous gambles. It is the difference between directors’ service agreements – with generous severance terms – and joint and several liability.

Partnerships are run by people who know that their home is at risk if they get it wrong, but for Dick Fuld, the chief executive of Lehman, no such danger threatened. His greatest fear was losing face. Ego, not greed was what drove Lehman off the cliff and ego will put paid to Wall Street, too.        -carl.mortished@ thetimes.co.uk

Paulson built up a personal net worth of over $700 million in his career at Goldman Sachs according to estimates.  He was compensated to the tune of $30 million in 2004 and $37 million in 2005.  Henry Paulson put one of these 5 investment houses as well as all Americans into this mess.  According to the International Herald Tribune, Paulson “was one of the first Wall Street leaders to recognize how drastically investment banks could enhance their profitability by betting with their own capital instead of acting as mere intermediaries.” In a Business Week article in 2006, Paulson was “one of the key architects of a more daring Wall Street, where securities firms are taking greater and greater chances in their pursuit of profits.” “Mr. Risk Goes to Washington,” reported that under Paulson, derivatives meant “taking on more debt: $100 billion in long-term debt in 2005, compared with about $20 billion in 1999. It means placing big bets on all sorts of exotic derivatives and other securities.”

 

From Dave Smith’s Economics website…” Bill White is a Canadian economic adviser to the Bank for International Settlements (BIS), the Basel-based central bankers’ bank.   Alan Greenspan appeared to be aware of the danger. He watched with alarm as each time the debt bubble threatened to burst.  However, Greenspan and his fellow central bankers around the world, rather than accepting a temporary downturn in their economies, pumped up the bubble even more by cutting interest rates. “What amazed me was how each time they managed to rejuvenate the system by reducing interest rates,” Bill White said last week. “But in the end, if the fundamental position is that there is too much credit in the system, something has to give.”  In June 2007, two months before the present global financial crisis broke into the open with devastating effect, White warned in the Bank for International Settlements’ annual report that, just as “no one foresaw the Great Depression of the 1930s”, so it was possible that mainstream economic opinion was understating the dangers from toxic debt.  It was a common view that “busts” could be swiftly tackled by central banks cutting interest rates, White noted. But just because that had worked in the recent past did not mean it would in the future.

 

Japan had cut interest rates when its bubble burst, as did America in 1930, but with limited effect. Sometimes the downward forces are just so big that even ultra-low interest rates – zero in Japan’s case – will not do the trick.

 

Warburton says the credit system has “atrophied” and also believes the deep downside risks he has been warning of for some time are now in plain view.  (See http 

://www.economicsuk.com/blog/cat_david_smiths_other_articles.html.)   

 

And to start the day, on October 5, 2008 the one-month dollar Libor has fallen to 4.0925% from 4.11% Friday, well above the Federal Reserve’s 2% Fed funds target, with the three-month dollar Libor slipping to 4.28875% from 4.33375% on Friday. 

 

There was a battle of ideology going on between the credit markets and the equity markets. In the current envirnment, no matter the moves put on by Henry Paulson, a son of Wall Street, banks were not buying in.  That was why credit markets froze. Bankers have always been conservatives.  They were not buying into the social engineering on capitalism.  They neither trusted another bank’s balance sheet nor the government. 

 

Oh the cost of doing business between banks.  In my view, it was only a matter of time before one side would win.  Ultimately, either hyperinflation or deflation would be the result? 

 

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2 Comments »

  1. Comment by baseball91 — October 16, 2011 @ 5:45 AM | Reply

  2. Comment by paperlessworld — October 16, 2011 @ 9:43 PM | Reply


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