Flying Pink Unicorns

The latest on the financial crisis.


I have so much to say I don't really know where to start. I suppose I'll just start at the beginning.


This crisis is hugely much worse than you think. Hugely. Its way way worse than I thought only a week ago. I really should have thought about it more. Credit markets of all kinds are frozen solid. Companies can't easily float commercial paper (short term loans) in order to borrow money needed for cash flow purposes-- to pay workers, etc. So the government has stepped in and offered to buy it. This is a spectacularly good idea. I am not being sarcastic. People are having getting car and home loans, even if well qualified, because banks aren't lending nearly as much as before the crisis. Companies and municipalities can't borrow money on Wall St.


All of this credit freezing up is really really really bad, as I keep saying. Its difficult to overstate just how terrible this is. Now we've been borrowing way too much as a people for way too long, so some retrenchment was welcome, even though painful. But this much retrenchment is like giving a dehydrated person water by the gallon. A real good idea, but easy to overdo.


Banks and other financial institutions are in iffy shape, with some surely teetering. But cash infusions have begun, happily. There is talk of much bigger cash infusions, as I discuss herein. Anyhow, the financial crisis is, imo, vastly worse than I thought before. The response of Washington Policymakers surely would not lead you to the opposite conclusion. The amount of money, creativity involved, and the sheer number of plans, rescues and dramatic speeches and votes is the clearest possible evidence of just how seriously the key policymakers on the Hill and in the administration are taking this mega-crisis.

There is a lot of talk as I write this about a coordinated global effort to inject massive amounts of capital into banks so that they're balance sheet (and thus solvency) concerns are allayed and they can begin lending again. This is a wonderfully good idea. I really hope this happens and fast. If it does, we could begin to see the credit markets unfreeze in a matter of days to a few short weeks. This would mitigate the economic disaster that we are in.

This crisis is now global in nature, having engulfed Europe. Iceland (of all places) is facing what its Prime Minister called possible "National Bankruptcy." Iceland has put in an urgent request to Russia for a $6 billion loan. I can't make this stuff up.


http://en.rian.ru/world/20081007/117536360.html



When Iceland, a rich (but small) country and NATO member is begging Czar Vladimir Putin for a lifeline loan to prevent national catastrophe, the crisis has officially spread. The UK has announced a massive $100 billion government infusion into its banks. Offering big banks up to 50 billion pounds ($88 billion) to shore up their capital in exchange for preferred shares. The Bank of England is also doubling the amount it lends to banks to 200 billion pounds. Its an absolutely massive and dramatic plan.


Many other countries have also taken fairly radical steps to shore up their banking systems, and a huge inter-EU fight has broken out within the EU on how far countries there should go. There will be (figurative) blood on conferences tables through Europe before all is said and done.


The scope of proposed solutions by Washington continues to astound me in their originality in terms of American history, in the sheer breadth in dollars, in their scope. And they may not be anywhere near sufficient. Which is why the truly radical (for America) idea of the US investing huge amounts of money in individual banks in exchange for stock ownership (we did it on a big scale during the Great Depression, but it sure isn't normal!) is now being discussed, as I mentioned earlier. Treasury officials have said they already have this authority. However, a new law passed by the Congress and signed by the President would be a very helpful step before such a dramatic and radical intervention. I would strongly urge Pelosi and Reid to come back into session and pass such a law forthwith, if it would be at all helpful.


http://www.nytimes.com/2008/10/09/business/economy/10fed.html?_r=1&hp&oref=slogin


I can't improve upon what the NYT said about this plan: "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."


This is precisely correct.


Now to back up a few steps. I've been calling for a long time for really significant action by the fed and the treasury to deal with then burgeoning subprime mortgage crisis. In my post on December 1, 2007, I called on the fed to cut rates again. I massively underestimated the problems, like everyone else. I was worried about the scope of the problem early this year, but was again badly underestimating the problems faced by American financial institutions (like everyone else).

In my post of June 6, 2008, I tore the European Central Bank (ECB) a new one for being stupid enough to raise interest rates b/c of worries about inflation. I note that my worries were not about the stability of the European or American financial system, although it was in the back of my mind. Still, I was hugely right. The fact that just 4 months later the ECB joined the federal reserve and other central banks in the recently coordinated interest rate cuts, I think I can safely take my bows here. I'd bask in the glory of being so obviously and powerfully right about the ECB's rate hike if it wasn't so obvious at the time that I was right and the ECB brain-dead. Happily, I think the ECB's rate hike had zero to do with the troubles we are all in now.

Anyway, I, along with everyone else was worried about the impact of the spreading crisis on Financial Institutions, but not anywhere near enough. I'm in full blown panic about now. The only thing stopping me from predicting total disaster is the timing and strength of the massive actions already announced (and surely yet to come) from Washington. From 1929-FDR's inauguration in 1933, the government by and large stood by, as did the Japanese as their banking system went to hell in the early 1990s. Japan passed huge construction stimulus packages, but did very little to get their banking system back in order. We sure as heck aren't bystanders now. Instead, Paulson, Bernanke & Co are doing damn near everything in their power to get more money into financial institutions and more confidence into the system as a whole, and all of the participants in the system. They will continue to act very very aggressively and will, in my opinion, succeed. I just can't tell you when/how.