Oct 09 2008
Crisis Update: A quick commentary with lots of article references
We’ve been quite busy the past few days, so here’s a quick summary with links of articles with more details.
The Fed and the world’s central banks are now well aware they’ve got a global credit crisis on their hands that is far nastier than they expected. So to work they go!
In the U.S. we are seeing what the authorities have in mind with their $700 billion package, which is the first of many to come — never mind the assurances that this is all it’ll take. It looks like we’ll be seeing a great deal of nationalization in banking. Paulson, no doubt, appears ready to use the full authority granted him as U.S. Treasury Secretary. We worry about the blank check Congress has just obligated taxpayers and dollar holders to. As we noted in a post a few days ago, the Monetary Base suggests the flood of freshly minted cash is to be hitting our shores soon.
- Fed, ECB, Central Banks Cut Rates in Coordinated Move
- White House considers ownership stakes in banks
- Fed eyes plan to fund short-term business loans
- Fed Considers Plan to Buy Companies’ Unsecured Debt
- More Treasury Bonds on Way to Ease Crisis
- Paulson Says U.S. to Use All `Authorities’ in Crisis
In the U.K. things have gone from bad to worse. Socialization has even less of a stigma in Europe, so as in the U.K. you’ve got all sorts of intervention falling in line to bail out the banking system. Meanwhile, Iceland is in such bad shape, it appears the small nation could be hit with insolvency fairly soon.
- Darling unveils bank rescue
- U.K. Banks Get Unprecedented Government Bailout; Stocks Fall
- In Flailing Iceland, Disbelief and Regret
- Icelandic Regulator Takes Control of Kaupthing Bank
- Barclays, RBS in Talks on U.K. Government Funding
- Russia Lends Iceland 4 Billion Euros to Save Banks
- Belgium, Luxembourg scramble to sell Fortis
Still, policy traction is a problem. It would seem the rush for the exits is more important to investors than any promise from a central bank or government authority. Likewise, while there’s plenty of cash out their to be loaned — just not at rates that will prevent the overextended financial sector form further collapse.
- Libor Dollar Rate Jumps to Highest in Year; Credit Stays Frozen
- U.S. Stocks Drop, Erasing Early Gains, as Banks Slump on Libor
Meanwhile, the problems are drifting now to the states and municipalities. This is a situation we warned would develop years ago, and now it is hitting the fan. Given that governments can never seem to cut a dime from their budgets, let alone the many millions, hundreds of millions or $ billions required to balance a budget, they’ve gone to the profligate credit markets to cover their shortfalls while appeasing the last bastion of unionism — their own workers. Well, that model is simply collapsing under itself since it is terribly inefficient and all consuming.
But never fear, governments will not go down gladly: they’ll saddle taxpayers with more of the costs so long as we keep voting to allow it to happen, and consequently we’ll further encumber ourselves with future tabs for free lunches — much like the ones that are coming due right now on Wall Street. Hence, the Governator is leading the way with hand out to the U.S. Government for a bailout.
- California Seeks $4 Billion Notes, Retail Demand, Lockyer Says
- California May Point Way for U.S.
- Massachusetts Leads States, Cities Looking to Revive Debt Sales
Just think… The economy is going into the tank, and we’ve not even discussed the implied insolvency of the U.S. Government. Don’t forget, we just crossed the $10 trillion mark by $200 billion in a matter of weeks in terms of Federal Debt. (As noted by our debt clock, top right of our website!)
Amid the hubub of bailouts on Wall Street, few noticed that key election state, Michigan, got its main industry bailed out last week. Compared to the $700 billion bailout that drew everyone’s attention, the Detroit $25 billion bailout was hardly a footnote or worth covering. Yet the mere idea of this bailout is far more egregious than even that of Wall Street.
While the powers that be argue that without saving banks and Wall Street our economic world comes to an end, what’s the justification for saving Detroit? Its not like the U.S. consumer is going to be without cars they are not very happy with considering how Honda and Toyota and other non-Detroit producers make cars that are far more appealing. Meanwhile, the auto unions sill have their insane fund paid for by the Big 3 that pays unneeded workers to come to work and watch TV or sit around for years.
But what’s the use of pointing out hypocrisy in D.C. when the word is synonymous with politics?
Meanwhile the economy is clearly slowing. As we warned again and again and again, debt and consumption don’t make an economy rich. They make an economy poor eventually as the seed-corn of the nation slowly dwindle away. We kept pointing out how the last recover from 2002 on was one entirely dependent on expanding credit, and that once the consumer hit his limits, and that once rates could go no lower, he’d run out of rope quickly. Insolvency has been at the epicenter of this crisis from the earliest days of the subprime slump, and it’s spreading fast. Expectations by some are that Christmas sales will be down 50% over last year!
- Retailers’ Sales Fall Sharply at Both High End and Low
- September Retail Sales Reflect the Slowdown
- Retailers’ sales set stage for a tough holiday
- Retailers Foresee Weak Holiday Sales
- Retailers foresee change in holiday shopping habits
Consumers are right to tuck in their horns and save, as are producers and anyone else with a dime’s worth of sense. This is what we’re seeing. This is what will bring an economy out of a slump — savings and a restoration of sanity. There’s nothing wrong with paying with cash, never mind what the profiteers of credit wish to tell you. But that flies in the face of every neo-Keynesian model of economic growth, and its that model that dominates policy. Expect them to further hamper the real economy by proping up the phony one with more easy credit, more money supply expansion — even if they have to print it and drop it from helicopters. For example:
That’s on top of the $80 billion already handed to them a few weeks back. Where’s that money coming from? It’s coming from YOU – the dollar holder and the taxpayer, and mostly via the dollar holder who will see his existing dollars joined by many more freshly minted copies in the coming years! Which leaves us with a grim reminder of why such policy in the end is stupidity, even if it is the lite version.
