US is emulating Japan Style Policy
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Economy
US is emulating Japan style policy in solving the current crisis.
US economists have relentlessly harangued the Japanese for their supposed mismanagement of their post bubble era, which has lead to nearly 20 years of low growth, borderline deflation, with a not-much-discussed, robust export sector.
In the mid of the crisis we saw Fed/Treasury were taking one of the worst elements of the Japanese playbook, namely, trying to prop up the value of dud assets, rather than figuring out how to do more price discovery and ameliorate the attendant reaction (not damage, mind you, the damage was already done when the bad loans were made). Yes, the Treasury has made some capital injections into banks, but without cleaning up the balance sheets, the benefits are limited. Even with supposedly more aggressive action on realizing losses, our banks act a lot like their Japanese pre-writedown zombie counterparts.
Fed has copied the heretofore-seen-as-failed Japanese playbook.
Source New York Times:
The Bank of Japan kept rates near zero for most of the last decade in an effort to end a long economic stagnation, and raised them only two years ago. Many economists say they believe that the zero interest-rate policy finally worked in Japan after regulators took aggressive steps that succeeded in restoring faith in Japan’s financial system and Tokyo’s ability to oversee it.
Now, with the Fed and President-elect Barack Obama turning to the same sorts of unconventional policy tools to battle the worst global economic crisis since the Depression, economists and bankers say they hope that Japan’s lessons are not lost on Washington. They say the United States needs to take the same kinds of confidence-building steps, and much more quickly than Japan did....
Economists and former Bank of Japan officials say the biggest lesson they learned was that cutting rates alone has almost no effect when the financial system has fallen into a crisis as deep as the one Japan faced in the 1990s.
Japanese banks simply refused to lend in an environment where borrowers could suddenly go bankrupt, saddling lenders with huge, unforeseen losses. The Bank of Japan tried even more extreme measures, like using its powers to create money to essentially stuff cash into the nation’s commercial banks in hopes they would start lending again.
Exasperated central bankers found that commercial banks just let the money pile up instead of lending it out.
Economists say the United States faces a similar situation, after the sudden collapse in September of Lehman Brothers created fears of additional failures. Economists also fault Washington for its inconsistency in dealing with the financial crisis, leaving the impression that it does not have a clear strategy for dealing with ailing lenders.
In Japan’s case, economists and former bankers say, credit began to flow freely again only after 2003, when regulators adopted a tough new policy of auditing banks and forcing weaker ones to raise new capital or accept a government takeover. Economists said the audits finally removed paralysis in credit markets by convincing bankers and investors that sudden failures were no longer a risk, and that the true extent of problems at banks and other companies was finally being revealed.
Economists say Washington needs to do something similar to make banks and financial companies more transparent, and reassure investors that there were no more collapses like that of Lehman Brothers on the horizon.
US economists have relentlessly harangued the Japanese for their supposed mismanagement of their post bubble era, which has lead to nearly 20 years of low growth, borderline deflation, with a not-much-discussed, robust export sector.
In the mid of the crisis we saw Fed/Treasury were taking one of the worst elements of the Japanese playbook, namely, trying to prop up the value of dud assets, rather than figuring out how to do more price discovery and ameliorate the attendant reaction (not damage, mind you, the damage was already done when the bad loans were made). Yes, the Treasury has made some capital injections into banks, but without cleaning up the balance sheets, the benefits are limited. Even with supposedly more aggressive action on realizing losses, our banks act a lot like their Japanese pre-writedown zombie counterparts.
Fed has copied the heretofore-seen-as-failed Japanese playbook.
Source New York Times:
The Bank of Japan kept rates near zero for most of the last decade in an effort to end a long economic stagnation, and raised them only two years ago. Many economists say they believe that the zero interest-rate policy finally worked in Japan after regulators took aggressive steps that succeeded in restoring faith in Japan’s financial system and Tokyo’s ability to oversee it.
Now, with the Fed and President-elect Barack Obama turning to the same sorts of unconventional policy tools to battle the worst global economic crisis since the Depression, economists and bankers say they hope that Japan’s lessons are not lost on Washington. They say the United States needs to take the same kinds of confidence-building steps, and much more quickly than Japan did....
Economists and former Bank of Japan officials say the biggest lesson they learned was that cutting rates alone has almost no effect when the financial system has fallen into a crisis as deep as the one Japan faced in the 1990s.
Japanese banks simply refused to lend in an environment where borrowers could suddenly go bankrupt, saddling lenders with huge, unforeseen losses. The Bank of Japan tried even more extreme measures, like using its powers to create money to essentially stuff cash into the nation’s commercial banks in hopes they would start lending again.
Exasperated central bankers found that commercial banks just let the money pile up instead of lending it out.
Economists say the United States faces a similar situation, after the sudden collapse in September of Lehman Brothers created fears of additional failures. Economists also fault Washington for its inconsistency in dealing with the financial crisis, leaving the impression that it does not have a clear strategy for dealing with ailing lenders.
In Japan’s case, economists and former bankers say, credit began to flow freely again only after 2003, when regulators adopted a tough new policy of auditing banks and forcing weaker ones to raise new capital or accept a government takeover. Economists said the audits finally removed paralysis in credit markets by convincing bankers and investors that sudden failures were no longer a risk, and that the true extent of problems at banks and other companies was finally being revealed.
Economists say Washington needs to do something similar to make banks and financial companies more transparent, and reassure investors that there were no more collapses like that of Lehman Brothers on the horizon.
Goldman Sachs Outlines 2009 Financial & Credit Expectations
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Economy
Goldman Sachs has come out with a new financial sector outlook for 2009, and much of how you receive it will depend whether you see things as"half empty" or "half full." It is not a good outlook, but you can at least start to get an idea of what is left to come. Overall, Goldman Sachs expects that the fundamentals of the financial sector and economy will remain poor in 2009.
For starters, Goldman Sachs sees the total credit mess as a $1.8 trillion dollar problem. This implies that we are now roughly half way through the credit crisis without including the impact of a new de-leveraged financial world. Goldman Sachs also expects government intervention and government "assistance" to continue into 2009.
What is interesting here, albeit something we have expected for some time, is that the crisis will migrate away from residential mortgages. Goldman Sachs believes that the next waves of trouble spots will come from consumer loans and corporate loans.
Goldman's call also sees whole loans getting hurt further in the year with farther markdowns on the bank books.
Again, your take will revolve around whether you are a "half full" or "half empty" mindset. This does not at all argue that the worst is yet behind. But it also implies that the acceleration of bad news may be coming to a head despite more negative headlines.
That might not mark a bottom, but despite the massive numbers this scenario does not outline an Armageddon scenario.
For starters, Goldman Sachs sees the total credit mess as a $1.8 trillion dollar problem. This implies that we are now roughly half way through the credit crisis without including the impact of a new de-leveraged financial world. Goldman Sachs also expects government intervention and government "assistance" to continue into 2009.
What is interesting here, albeit something we have expected for some time, is that the crisis will migrate away from residential mortgages. Goldman Sachs believes that the next waves of trouble spots will come from consumer loans and corporate loans.
Goldman's call also sees whole loans getting hurt further in the year with farther markdowns on the bank books.
Again, your take will revolve around whether you are a "half full" or "half empty" mindset. This does not at all argue that the worst is yet behind. But it also implies that the acceleration of bad news may be coming to a head despite more negative headlines.
That might not mark a bottom, but despite the massive numbers this scenario does not outline an Armageddon scenario.
Text of Fed statement
The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.
Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.
Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.
The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.
In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent.
US Living Standards To Decline
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Economy
US non-farm payrolls plummeted 533,000 in November, the largest drop since December 1974, as the credit crunch's toll on businesses mounted. But downward revisions to jobs figures for September and October suggest fierce global cost competition is also a factor, and one that may
persist beyond a credit market recovery.
“Largest since 1974” in a negative economic number is much more profound than the usual “largest since 2001” -- there have been some good-sized recessions since 1974. The November figure results partly from the credit crunch, which has begun to cause more companies to hit the wall than would be the case in a crunch-less downturn. However the September-November job
loss of 1,257,000 is an even more impressive number, and suggests that factors beyond the credit crunch are also to blame.
Economically, the intensification of globalisation since 1995 should have had two effects. It should have increased global real incomes, as billions of new productive workers began to fully articipate in the global economy. It should also have compressed income differentials, as emerging market workers gained skills and experience that made them more competitive with their US counterparts. Its overall effect on US living standards would depend on whether global differentials were compressed more or less rapidly than global incomes improved.
The stock bubble of 1996-2000 and the housing bubble of 2002-07 masked globalisation’s pressure on US living standards, because they artificially increased the US capital stock and in housing’s case provided substantial employment directly in construction and mortgage-related businesses. With those bubbles now popped, the effect of intensified global competition on the US workforce should be easier to see.
In a friction-free economy, US wages would decline as necessary, without increasing unemployment. However as Keynes pointed out, wages are sticky on the downside. Thus in November, wage rates actually increased 0.4%, even though unemployment skyrocketed.
Employment increased only in education, healthcare and government, all sectors that are protected from foreign competition. Similar wage stickiness was a problem in the 1930s, when unionised and government workers won chunky improvements in living standards while unemployment topped 20%.
Cyclically, Great Depression II still seems highly unlikely. However, globalization may be causing a longer-term secular decline in US living standards.
AIG owes $10 billion on trades gone bad: report
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Labels:
Economy
Fallen US insurance giant American International Group owes financial firms some 10 billion dollars on speculative trades that turned sour, the Wall Street Journal reported on Wednesday.
The trades have not been explicitly revealed before and would not be covered by the US government's bailout package of more than 150 billion dollars for the troubled company, the Journal reported, citing unnamed sources.
Details of the trades mark the first indication that AIG may have been gambling with its own capital, the Journal wrote.
The government intervened to rescue AIG from collapse in September and has since dramatically expanded its rescue funds as the firm suffers from failed bets on complex financial instruments.
An AIG spokesman told the Journal that the trades were not speculative bets but "credit protection instruments."
He said the trades have been fully disclosed already and amount to less than 10 billion dollars of the firm's 71.6 billion dollars exposure to derivative contracts on debt pools, or collateralized debt obligations, as of September 30.
AIG was the world's largest insurer before the global credit crisis brought it down.
The trades have not been explicitly revealed before and would not be covered by the US government's bailout package of more than 150 billion dollars for the troubled company, the Journal reported, citing unnamed sources.
Details of the trades mark the first indication that AIG may have been gambling with its own capital, the Journal wrote.
The government intervened to rescue AIG from collapse in September and has since dramatically expanded its rescue funds as the firm suffers from failed bets on complex financial instruments.
An AIG spokesman told the Journal that the trades were not speculative bets but "credit protection instruments."
He said the trades have been fully disclosed already and amount to less than 10 billion dollars of the firm's 71.6 billion dollars exposure to derivative contracts on debt pools, or collateralized debt obligations, as of September 30.
AIG was the world's largest insurer before the global credit crisis brought it down.
The Third Phase – Hyperinflation
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Labels:
Economy
We are going to enter into the third phase of the crisis. Some economists worry about the way Fed is funding the bailout's. Fed officials could find it challenging to remove the cash from the system once markets stabilize and the economy improves. It's not a problem now, but if they're too slow to act later it can cause inflation.
From News Source:
Throughout the series of crises, politicians will attempt to interfere in the game, but the third stage of the crisis will nevertheless begin. Since banks were “saved” with large bailouts, politicians will also begin to lavish corporations with various aid packages. The recent charade of automakers begging for money is only the beginning. Thus, measures will be undertaken that, in the opinion of politicians, will help the economy and save jobs, something that will likely become known as Obama's “ New New Deal”. This will include a multitude of spending programs and, above all, the loaning of credit with astronomical increases in the money supply, together with the classifying of the corresponding numbers into the trillions. Just like now nobody talks any more in terms of millions, so in the not so distant future no one will be talking any more in terms of billions. Trillions will be the order of the day. Perhaps bank lending standards will be relaxed. Perhaps the government will lavish the banks with a lot more money than it does today, just to keep them lending. Perhaps the central bank will directly monetize private debt. Perhaps the government will guarantee many more corporate loans, just like it recently guaranteed the securities/loans of the GSEs. Perhaps GSEs will proliferate throughout the economy, transforming the U.S economy into the “GSE Economy”, transforming a former great capitalist economy into a modern-day nationalsozialistische economy. Perhaps the government will implement all of the above.
It will seem for awhile that peace has arrived, that the crisis has been overcome, as if the bankrupt companies have been “saved”, although this will only be the calm before the storm. If there is already more money in the financial system than actual goods, then after the subsequent injections of money, more like dropping money from helicopters or showering corporations with money, the economic ship will begin to heel.
In this stage, the third stage, the hyperinflation scenario will begin when people realize that the money in banks will buy them next month half as much as it did this month. Then panic will ensue. People will begin to buy essential and non-essential items, just as long as there is something of value that can be obtained in exchange for their colourful pieces of worthless paper. Manufacturing enterprises would no longer want to sell goods, because the money received in exchange for the sale of their goods is not sufficient to purchase the new raw materials. Everyone who sells an actual object or good for paper money is a loser, since the same money is no longer enough to purchase again the same goods. Money created out of thin air electronically has brought tremendous benefits to the initial users and issuers, but at the expense of the wider masses through the collapse in their standards of living in this stage.
The third phase will be chaotic and difficult. The details are difficult to predict, but if history is any judge, the politicians won't be asleep. They will likely pass a number of important laws, prices will be fixed, wages will be standardized, foreign currency accounts will be frozen; in general, everything that could be done, will be done, and this will only serve to extend the agony. Social upheaval and riots will be suppressed by brute force; many democratic freedoms and values will likely be lost. As of today, the hyperinflation spiral and Zimbabwe Syndrome have reached the point of no return.
From News Source:
Throughout the series of crises, politicians will attempt to interfere in the game, but the third stage of the crisis will nevertheless begin. Since banks were “saved” with large bailouts, politicians will also begin to lavish corporations with various aid packages. The recent charade of automakers begging for money is only the beginning. Thus, measures will be undertaken that, in the opinion of politicians, will help the economy and save jobs, something that will likely become known as Obama's “ New New Deal”. This will include a multitude of spending programs and, above all, the loaning of credit with astronomical increases in the money supply, together with the classifying of the corresponding numbers into the trillions. Just like now nobody talks any more in terms of millions, so in the not so distant future no one will be talking any more in terms of billions. Trillions will be the order of the day. Perhaps bank lending standards will be relaxed. Perhaps the government will lavish the banks with a lot more money than it does today, just to keep them lending. Perhaps the central bank will directly monetize private debt. Perhaps the government will guarantee many more corporate loans, just like it recently guaranteed the securities/loans of the GSEs. Perhaps GSEs will proliferate throughout the economy, transforming the U.S economy into the “GSE Economy”, transforming a former great capitalist economy into a modern-day nationalsozialistische economy. Perhaps the government will implement all of the above.
It will seem for awhile that peace has arrived, that the crisis has been overcome, as if the bankrupt companies have been “saved”, although this will only be the calm before the storm. If there is already more money in the financial system than actual goods, then after the subsequent injections of money, more like dropping money from helicopters or showering corporations with money, the economic ship will begin to heel.
In this stage, the third stage, the hyperinflation scenario will begin when people realize that the money in banks will buy them next month half as much as it did this month. Then panic will ensue. People will begin to buy essential and non-essential items, just as long as there is something of value that can be obtained in exchange for their colourful pieces of worthless paper. Manufacturing enterprises would no longer want to sell goods, because the money received in exchange for the sale of their goods is not sufficient to purchase the new raw materials. Everyone who sells an actual object or good for paper money is a loser, since the same money is no longer enough to purchase again the same goods. Money created out of thin air electronically has brought tremendous benefits to the initial users and issuers, but at the expense of the wider masses through the collapse in their standards of living in this stage.
The third phase will be chaotic and difficult. The details are difficult to predict, but if history is any judge, the politicians won't be asleep. They will likely pass a number of important laws, prices will be fixed, wages will be standardized, foreign currency accounts will be frozen; in general, everything that could be done, will be done, and this will only serve to extend the agony. Social upheaval and riots will be suppressed by brute force; many democratic freedoms and values will likely be lost. As of today, the hyperinflation spiral and Zimbabwe Syndrome have reached the point of no return.
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