News What is wrong with the US economy? Part 2

[turbo]

Bernanke is now talking a rate cut. The market seems to have ignored the action to buy commercial paper. It seems that any intervention is taken as a sign that the situation is worse than it it - and the situation does become worse for the stock markets.

Great! Another rate cut to ensure that our savings and money-market accounts continue to pay less and less interest.

The bailout could have been accomplished far more effectively by sending every adult in the US $100,000 with the stipulation that it be deposited in an account with a local bank, and that the principal could not be touched until the recipient had paid down as much debt as possible. That would result in an instant money-infusion for banks, rapid resolution of previously "bad" debt, leading to upgrading of at least some of the trash "bundled" investments backed by sub-prime mortgages, etc. At least we would have been addressing the problem from the end that is easiest to understand and treat. Most individuals, after paying down debt, would have money left over to spend (stimulate the economy), save (re-capitalize banks), or invest (give stocks and/or bonds a boost). I don't see how the Goldman-Sachs gang are going to manage to accomplish any of that - just throw good money after bad and reward managers who made poor investments.

 

[jal]

- Morgan Stanley shares plummet with doubts over Mitsubishi deal cited

Why?
Is their money no good?

 

[Astronuc]

Why?
Is their money no good?

The only reason the Morgan Stanley could be in trouble is if their debt is bad, i.e. they owe (i.e. their obligations) more than the capital/cash they have on hand. The Mitsubishi deal would add new capital to MS.

http://news.yahoo.com/s/ap/20081007/ap_on_bi_go_ec_fi/meltdown_retirement

WASHINGTON - Americans' retirement plans have lost as much as $2 trillion in the past 15 months, Congress' top budget analyst estimated Tuesday.

The upheaval that has engulfed the financial industry and sent the stock market plummeting is devastating workers' savings, forcing people to hold off on major purchases and consider delaying their retirement, said Peter Orszag, the head of the Congressional Budget Office.

As Congress investigates the causes and effects of the financial meltdown, the House Education and Labor Committee was hearing from retirement savings and budget analysts on how the housing, credit and other financial troubles have battered pensions and other retirement funds, which are among the most common forms of savings in the United States.

Bernanke: Crisis could prolong economic pain
http://news.yahoo.com/s/ap/20081007/ap_on_bi_ge/bernanke_economy

WASHINGTON - Federal Reserve Chairman Ben Bernanke warned Tuesday that the financial crisis has not only darkened the country's current economic performance but also could prolong the pain.

The Fed chief's more gloomy assessment appeared to open the door wider to an interest rate cut on or before Oct. 28-29, the central bank's next meeting, to brace the wobbly economy.

Bernanke said the Fed will "need to consider" whether its current stance of holding rates steady "remains appropriate" given the fallout from the worst financial crisis in decades.

If the Fed does lower its key rate from 2 percent it would mark an about-face. The Fed in June had halted an aggressive rate-cutting campaign to revive the economy out of fear those low rates would aggravate inflation. Since then, financial and economic conditions have deteriorated, while record-high energy prices have calmed, giving the Fed more leeway to again cut rates.

Many believe the country is on the brink of, or already in, its first recession since 2001.

"The outlook for economic growth has worsened," Bernanke said told the annual meeting here of the National Association for Business Economics.
. . . .
Consumers — major shapers of economic activity — have buckled under the weight of rising joblessness, shrinking paychecks, hard-to-get credit, declining net wealth and tanking home and stock values. All the strains are "now showing through more clearly to consumer spending," Bernanke said.
. . . .

 

[Ivan Seeking]

Wow! The Dow closed down another 508 and now sits at 9447.

All of the gains since 1999 are gone. 401k statements are due out today.

 

[Ivan Seeking]

The market must be close to the bottom because even I am inclined to buy at this point; and I don't even play the market!

 

[Astronuc]

The market must be close to the bottom because even I am inclined to buy at this point; and I don't even play the market!

Maybe. But there might be another 5% drop based on a prediction of a further 10% drop yesterday.

Parts of EU could be in trouble.

Iceland teeters on the brink of bankruptcy!
http://news.yahoo.com/s/ap/20081007/ap_on_re_eu/eu_iceland_meltdown

REYKJAVIK, Iceland - This volcanic island near the Arctic Circle is on the brink of becoming the first "national bankruptcy" of the global financial meltdown.

Home to just 320,000 people on a territory the size of Kentucky, Iceland has formidable international reach because of an outsized banking sector that set out with Viking confidence to conquer swaths of the British economy — from fashion retailers to top soccer teams.

The strategy gave Icelanders one of the world's highest per capita incomes. But now they are watching helplessly as their economy implodes — their currency losing almost half its value, and their heavily exposed banks collapsing under the weight of debts incurred by lending in the boom times.

"Everything is closed. We couldn't sell our stock or take money from the bank," said Johann Sigurdsson as he left a branch of Landsbanki in downtown Reykjavik.

The government had earlier announced it had nationalized the bank under emergency laws enacted to deal with the crisis.

"We have been forced to take decisive action to save the country," Prime Minister Geir H. Haarde said of those sweeping new powers that allow the government to take over companies, limit the authority of boards, and call shareholder meetings.

A full-blown collapse of Iceland's financial system would send shock waves across Europe, given the heavy investment by Icelandic banks and companies across the continent.

One of Iceland's biggest companies, retailing investment group Baugur, owns or has stakes in dozens of major European retailers — including enough to make it the largest private company in Britain, where it owns a handful of stores such as the famous toy store Hamley's.

Kaupthing, Iceland's largest bank and one of those whose share trading was suspended last week to stop a huge sell-off, has also invested in European retail groups.

Thousands of Britons have accounts with Icesave, the online arm of Landsbanki that regulators said was likely to file for bankruptcy after it stopped permitting customers to withdraw money from their accounts Tuesday.
. . . .

That will have a ripple effect in the UK and EU. Forget an increase in exports which was supposed to improve the balance of trade for the US.

But the whole system was built on a shaky foundation of foreign debt.

Sounds like the US economy.

I've also heard unemployment expected to reach 8% in the US - probably by first quarter next year.

 

[Count Iblis]

Banks are offering higher interest rates for saving accounts now.

 

[Art]

Originally posted by Astronuc

Thousands of Britons have accounts with Icesave, the online arm of Landsbanki that regulators said was likely to file for bankruptcy after it stopped permitting customers to withdraw money from their accounts Tuesday.

I heard on the news tonight 300,000 Brits have savings accounts with Icesave.

They can no longer access their accounts and will now have to lodge a claim with the Icelandic gov't who only guarantee deposits up to 16,500 Euro.

Nobody has a clue yet how long this process will take but it is going to hurt a lot of people in the short term and if the UK gov't don't make up the shortfall on compensation then some folk are going to take a serious hit.

Following more pressure on the share price of some of the big UK banks (HBOS down 42%, RBS down 39% today) the British gov't met this evening with the financial regulators, a major announcement on the gov'ts plan to stabilise the UK financial market is expected before the markets open in the morning.

 

[mgb_phys]

if the UK gov't don't make up the shortfall on compensation then some folk are going to take a serious hit.

Difficult to see how the UK government is going to get away with underwriting losses from a
bank that isn't even in the EU.

It is ironic that the biggest losers in the UK seem to have been concientous savers not the reckless people getting 10x salary mortgages and taking out secured loans to buy SUVs.

 

[Jimmy Snyder]

Hopes that we are in a recession were dealt a tough call today as the head of the nber panel that decides on this matter gave little room for hope.
http://www.bloomberg.com/apps/news?pid=20601087&sid=asliq7pPbVr0&refer=home"
But then, how much room do you really need? Don't give up hope.

 

[nuby]

How long till grocery prices come down? Is it really a crisis when the value of the dollar increases?

 

[Astronuc]

How long till grocery prices come down? Is it really a crisis when the value of the dollar increases?

Well, grocery prices should be coming down with the drop in oil/fuel prices, but at the same there's an upward pressue due to the cost of commercial paper. An increase in the value of the dollar is good for bringing down oil prices, but it's not good for exports. However, even with the dollar down, US exports have not surged and the trade imbalance is still strongly negative, i.e. the US continues to import far more than it exports.

 

[Astronuc]

Downward pressure on stock markets. Asian/Pacific Markets got hammered again.

At about 0600 EDT (US)

European Stock Indexes

DJ Euro STOXX50  2,714.17    -165.28  -5.74%  
FTSE Eurotop     2,053.12    -112.62  -5.20%  
FTSE-100         4,418.28    -186.94  -4.06% down as much as 8% 
FTSE-Techmark    1,247.78     -48.19  -3.72%  
FTSE-All Shares  2,244.52     -88.76  -3.80%  
 
DAX              5,006.45    -320.18  -6.01% down as much as 11%
MDAX             5,705.76    -284.87  -4.76%  
CAC40            3,543.08    -189.14  -5.07% down as much as 10%
SBF 80           3,774.54    -185.69  -4.69%  
 
Asia Pacific Stock Indexes

NIKKEI 225       9,203.32    -952.58  -9.38%   
NIKKEI 300         184.59     -16.20  -8.07%   
NIKKEI OTC       1,127.83     -51.77  -4.39%  
               
HANG SENG       15,431.73  -1,372.03  -8.17% 

ASX ALL Ordin    4,369.80    -228.10  -4.96%  
ASX MIDCAP 50    4,176.70    -237.80  -5.39%  
ASX 100          3,594.10    -188.40  -4.98%

U.S. stock futures point to more losses Wednesday as the march lower in worldwide stock markets looks set to continue.

European shares slump as global recession fears continue to rock markets. British banks mixed after a 50 billion pound government plan is announced.
• London tumbles to near 5-year low
• Darling unveils 50 bln U.K. bank plan

Costco sees 7% profit rise
The largest U.S. warehouse club operator sees a fourth-quarter profit rise as it aims to lure shoppers stung by the downturn.

 

[Astronuc]

Top News from Forbes/AP
Fed Orders Emergency Rate Cut To 1.5% (AP)

http://www.forbes.com/topstories/feeds/ap/2008/10/08/ap5523508.html

A commentator mentioned last night that if Bernanke was planning to reduce the Fed interest rate, then he out to do it 'now' and not wait for the upcoming Fed meeting. Looks like Bernanke did that just that.

The European stock indexes rally on the Fed action and coordinated action among central banks. I wonder if Benanke and Paulson slept last night.

At about 0800 EDT (US).

London     4,642.39   37.17 
Paris      3,723.41   -8.81 
Frankfurt  5,275.06  -51.57 
DJ Stoxx     238.98   -1.74

 

[mgb_phys]

This has me slightly confused, you have a problem caused by too many cheap mortgages and easy credit, savers are nervous about keeping their money in banks.
So the solution is to lower interest rates!
Is the idea that everybody will now take out loans to buy SUVs and spend the country out of a recession?

 

[OmCheeto]

This has me slightly confused, you have a problem caused by too many cheap mortgages and easy credit, savers are nervous about keeping their money in banks.
So the solution is to lower interest rates!
Is the idea that everybody will now take out loans to buy SUVs and spend the country out of a recession?

Could be. Perhaps this thread should be merged with the "Ask a stupid question" thread, based on the fact that the solutions to the problem so far are only eliciting sarcastic rhetorical questions:

WAMU is still sending me "pre-approved" credit applications. "0% fixed APR on Purchases until April 1, 2010. When I Transfer a Balance NOW!". And a choice of 6 card designs. Wooo!

Why is a failed bank trying to take on more debt? Is the collapsing banking industry just a scheme to eliminate all of the banks except for one? Such that they don't have to spend $3 billion a year on postage trying to get us to switch lenders?

$0.25 presort standard postal rate(estimated)
3 credit card junk mail per week(based on me)
52 weeks/yr
80,000,000 households
$3,120,000,000 cost for a year of credit card junk mailings

 

[mgb_phys]

It wasn't (that) sarcastic.
Traditionally you cut interest rates to allow companies to borrow money to invest and expand. At the moment you can't borrow money anywhere for anything.
The downside of low interest rates is inflation since lower mortgage payments and cheap credit allows people to buy more stuff.

It also weakens you currency, although not presumably if everybody does it at once.

 

[Astronuc]

$0.25 presort standard postal rate(estimated)
3 credit card junk mail per week(based on me)
52 weeks/yr
80,000,000 households
$3,120,000,000 cost for a year of credit card junk mailings

That's about right. I get solicitations for home equity loans, credit cards, investment accounts, insurance - and that's 2-3/day - blecchhhhh!

I junk mail, and those stupid phone calls - even though we're on a do not call list.

 

[Astronuc]

This has me slightly confused, you have a problem caused by too many cheap mortgages and easy credit, savers are nervous about keeping their money in banks.
So the solution is to lower interest rates!
Is the idea that everybody will now take out loans to buy SUVs and spend the country out of a recession?

The banks borrow at 1.5-2% and loan out 6-14%, so it's the spread on what they borrow and what they loan that counts, and that doesn't include points (fees) up front.

 

[mgb_phys]

The banks borrow at 1.5-2% and loan out 6-14%,

But the problem for the banks at the moment is that they can't borrow anythign at all - that's the liquidity crisis. The only people they can borrow from is savers, and savers who are already nervous about having their money in banks aren't going to be rushing to put it back if interest rates are cut.

 

[Art]

The banks borrow at 1.5-2% and loan out 6-14%, so it's the spread on what they borrow and what they loan that counts, and that doesn't include points (fees) up front.

That's the crux of the problem. Very few banks will lend any money to other banks and the little that is lent is at an historically high interbank rate of >6%. It is hard to see how a drop in the Fed rate will translate into cheaper loans for existing customers much less new ones.

 

[Count Iblis]

Yesterday it was announced that the FED will give loans to companies themselves.

Also, if you nationalize the banks, the government can set the interest rate themselves.

 

[Astronuc]

Yesterday it was announced that the FED will give loans to companies themselves.

Also, if you nationalize the banks, the government can set the interest rate themselves.

The Fed is looking at buying commercial paper, which are effectively direct loans to businesses. The entity, Office of Financial Stability, established by the Treasury/Fed will buy some bad debt (including mortgages).

http://www.federalreserve.gov/newsevents/press/monetary/20081007c.htm

October 7, 2008, 9:00 a.m. EDT

The Federal Reserve Board on Tuesday announced the creation of the Commercial Paper Funding Facility (CPFF), a facility that will complement the Federal Reserve's existing credit facilities to help provide liquidity to term funding markets. The CPFF will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers. The Federal Reserve will provide financing to the SPV under the CPFF and will be secured by all of the assets of the SPV and, in the case of commercial paper that is not asset-backed commercial paper, by the retention of up-front fees paid by the issuers or by other forms of security acceptable to the Federal Reserve in consultation with market participants. The Treasury believes this facility is necessary to prevent substantial disruptions to the financial markets and the economy and will make a special deposit at the Federal Reserve Bank of New York in support of this facility.

This is 'shock economics'.

See - http://en.wikipedia.org/wiki/Emergency_Economic_Stabilization_Act_of_2008 - the details are still evolving.

http://en.wikipedia.org/wiki/Troubled_Assets_Relief_Program
http://en.wikipedia.org/wiki/Office_of_Financial_Stability

In the Wikipedia article - Investor Jim Rogers called the plan "astonishing, devastating, and very harmful for America". Anyone who knows Rogers, knows he's a contrarian.


The guy to watch now is Neel Kashkari - besides Paulson and Bernanke.
http://en.wikipedia.org/wiki/Neel_Kashkari


BTW - Remain Calm. Don't Panic. The economy may be on its knees, but it and we are not down and out.

Keep a towel nearby.

 

[mgb_phys]

The Fed is looking at buying commercial paper, which are effectively direct loans to businesses

But presumably only big businesses issue them so it's just a bailout of GM, GE and the usual suspects - it does nothing for a small business that has had it's overdraft called in or can't get a loan to fund expansion.

 

[Astronuc]

But presumably only big businesses issue them so it's just a bailout of GM, GE and the usual suspects - it does nothing for a small business that has had it's overdraft called in or can't get a loan to fund expansion.

GE has done a lot on its own to bolster its capital. Warren Buffett has taken a $5 billion position in GE and GE is issue stock. GM is another story - they are getting a lot of help - but I believe so is Ford and Crysler. I'm not sure about the others in the auto industry.

Meanwhile -

NEW YORK -- The number of Americans joining the unemployment line has risen to levels we haven't seen since the last time the U.S. was in a recession, in 2001. And with the landscape of the Wall Street banking system rapidly shifting under the weight of the subprime mortgage crisis and resulting credit crunch, it's no surprise many Americans are concerned about job stability.

They should be. Employers announced plans to cut 95,094 jobs last month and that doesn't include many that are expected to shake out from all the consolidation happening among major financial institutions.

And about another $1 trillion evaporated from retirement accounts for a total of nearly $3 trillion lost in the past two weeks. In theory, it could return if and when stocks recover.

I think the unemployment numbers need scrutiny, because I believe they are under-reported in order to keep the number artifically low. This is one the many problems with respect to gauging the health of the economy that I've seen over the last 20+ years.

 

[Astronuc]

What is wrong with the US economy?

Congress?

Pelosi says $150B economic stimulus plan needed
http://news.yahoo.com/s/ap/20081008/ap_on_go_co/meltdown_pelosi

DENVER - House Speaker Nancy Pelosi said Wednesday that a $150 billion economic stimulus plan is needed now because of the faltering economy and she may call the House into session after the election to pass it.

Pelosi told reporters that the stock market meltdown, which has caused an estimated $2 trillion loss from pension funds, was a factor in her recommendation for a second stimulus bill. The first relief plan sent out $600-$1,200 tax rebate checks to most individuals and couples this year.

The House did pass a $61 billion economic aid proposal last month before lawmakers left Capitol Hill ahead of the Nov. 4 election. But a similar plan failed to pass the Senate. President Bush had promised a veto anyway.

 

[Astronuc]

U.S. May Take Ownership Stake in Banks!
http://www.nytimes.com/2008/10/09/business/economy/09econ.html

WASHINGTON — Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials.

Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.

The Treasury plan was still preliminary and it was unclear how the process would work, but it appeared that it would be voluntary for banks.

The proposal resembles one announced on Wednesday in Britain. Under that plan, the British government would offer banks like the Royal Bank of Scotland, Barclays and HSBC Holdings up to $87 billion to shore up their capital in exchange for preference shares. It also would provide a guarantee of about $430 billion to help banks refinance debt.

The American recapitalization plan, officials say, has emerged as one of the most favored new options being discussed in Washington and on Wall Street. The appeal is that it would directly address the worries that banks have about lending to one another and to other customers.

. . . .

Hmmmm. Is socialism creeping into the American capital markets? I have to wonder then about limits on executive and managment compensation.

http://dealbook.blogs.nytimes.com/2008/10/09/us-may-take-ownership-stake-in-banks/

 

[mgb_phys]

Hmmmm. Is socialism creeping into the American capital markets?

No the government is using debt to buy-up companies at rock bottom prices when they are forced to sell - it's pure 80s corporate raider. Gordon Gecko for president?

 

[Astronuc]

No the government is using debt to buy-up companies at rock bottom prices when they are forced to sell - it's pure 80s corporate raider. Gordon Gecko for president?

Speaking of corporate raiders - where are they? I don't hear much about Carl Icahn, Kohlberg-Kravis-Roberts, or any of the raiding parties in all this mess. Why are they out there rescuing/raiding banks and other financial institutions.

Interestingly Warren Buffett (one of America's most successful investors) is advising Obama - not John McCain.

 

[Astronuc]

Speaking of executive compensation - If This (Financial Crisis/Bailout) Won’t Kill the Bonus, What Will?
http://dealbook.blogs.nytimes.com/2008/10/07/if-this-wont-kill-the-bonus-what-will/

By ANDREW ROSS SORKIN

RIGHT away, Henry A. Waxman lit into Richard S. Fuld Jr. on the one issue that most inspires a passionate debate: executive compensation.

Mr. Waxman, chairman of House Committee on Oversight and Government Reform, was running a hearing on Capitol Hill on Monday about the latest series of bank failures. He started his questioning of Mr. Fuld, Lehman Brothers’ chairman, not by asking about what led to the firm’s bankruptcy, but by pointing at a chart showing that Mr. Fuld had made some $480 million between 2000 and now.

“That’s difficult to comprehend for a lot of people,” said Mr. Waxman, a Democrat from California. “I have a very basic question, ‘Is this fair?’ ”
. . . .

Base salaries for senior managing directors are often no more than $200,000. The eye-popping money is supposed to come at year’s end, after the profits have been tallied.

At its peak, in 2006, Goldman Sachs gave away $16.5 billion in compensation, an average of $623,418 for each employee.

Of course, the opposite is also supposed to be true: when profits come down — or are nonexistent — bonuses are supposed to plunge, too. There has been an unusual understanding between investment banks and their shareholders that most firms will spend 40 to 50 percent of their revenues on compensation, perhaps the only industry in the word with such a high ratio.

With Wall Street in the doldrums, bonuses for 2008 could drop 50 percent from the previous year, rivaling the fall in 2003, Thomas P. DiNapoli, the New York State comptroller, predicted last week. He said he expected 40,000 employees on Wall Street to get pink slips. You can extrapolate those numbers across the nation’s finance industry and start to understand why the stock market keeps falling. (To make matters worse, for every person in finance who loses a job, Mr. DiNapoli said, three other people are laid off.)
. . . .

Take a look at what happened to banks in 2007: Citigroup, for example, reported a profit of $3.6 billion, down 83 percent from the previous year. Many other firms saw similar declines. Yet bonuses across Wall Street declined only 4.7 percent from the year before. The payout was $33.2 billion, according to Mr. DiNapoli.
. . . .

And these guys now need help?

Bonfire of the Vanities Redux