Wednesday, May 19, 2010
What next? Will they burn down the Reichstag and announce that they found a Goldman Sachs executive fleeing the burning building, gasoline in hand? This "kill the messenger" stuff is pretty devastating to investor confidence.
The strangest part is that by the logic so helpfully laid out in the last Bundesbank report, it is wildly obvious that Greece will default. So on the one hand we have the spectacle of politicians and top regulatory officials denouncing "speculation", and on the the other hand we have the sober, thorough functionaries of the Bundesbank documenting why Greece must default, even if they never mentioned Greece. Surreal, but financial surreality is a very unpleasant thing.
Most of this really isn't speculative trading at all - it is an attempt first to cope with busted USD carry trades, and second, an attempt to cope with some inexorable financial realities in certain (not all) European countries.
I had thought the reasonable bottom for the Euro in the near-term was about $1.15 US, but now I don't know. Are the Germans panicking because they know something we don't know about banking positions? Are they panicking because they are just panicking? If they keep panicking, obviously all private investors are going to feel some collateral panic and evacuate to higher ground in the USD or yen.
In any case OPEC is probably now very worried, because they want oil around $75 USD. After oil products held in price pretty well, it appears the latest attempt at stepping up the beating schedule until morale improves (Euro-style) has knocked out the support for gas and diesel products, which of course will tend to work crude down again. There hasn't been enough supply constraint to shore up pricing when you look at pricing critically.
Of course, the German economy is probably going to be helped by this; a lower Euro makes their manufacturers much more competitive in some active markets, like China. And the Bunds are not going to be "infected", because right now Germany's deficits are nothing that would cause any banker to flinch and flee.
So alternatively, one could postulate that the Germans are doing this deliberately - but that doesn't make one want to hang out in the Reichstag or the Euro, does it?
PS: Italy and France now have to get their financial houses in order. The constant harping on current deficits kind of obscurs the reality that overall debt levels count just as much.
Glad you're back!
This "kill the messenger" stuff is pretty devastating to investor confidence.
It's the debt, stupid! (that's just an expression I'm using to make a larger point, it's not aimed at you).
Why do so many keep attributing all our eCONomic problems to daily annoucements or events? The damage was done over the last 3 decades (thanks Ronnie Raygun!). The global financial system is thoroughly polluted with un-sustainable debt. Lower interest rates help, but they will not be enough.
Eventually, tough decisions will have to be made. Those decisions will get the blame, but the blame lies with the creation of trillions and trillions in non-eCONomic debt!
I suspect the tough decisions will make matters worse too.
Bailing out creditors is NOT the solution. Debt restructuring and creditor haircuts are in order. Unfortunately, it looks like the haircuts will be to public benefits like public works, social security and medicare.
Wall St. swindled people out of their savings, private pensions and home equity. As an encore, TPTB will gut their public benefits.
What a system.
Judging by recent discussions, I'd say that people here don't understand the role that banks play. Yes, banks make profits, but they do a vital job. A bank failure doesn't just mean suffering for the bank, any mor than heart failure means the death of a single organ. If a government has to "make whole" depositors, the taxpayers are hurt; if the ability of businesses to raise capital is hurt, the economy's productive capacity is reduced.
The place to begin, I think, is an understanding of what money is and what is necessary for it to work. Without that, there is no understanding of causes and consequences. From there we could progress to the banking system and government expenditures of various kinds.
MoM, you are clearly more qualified than I am to write about this. And while the topic has occupied many great minds (some of them discredited) if we don't remain anchored in the core principles, we do stupid things like electing socialists and shooting the bankers who did what the politicians told them to do.
So how about it?
I don't think so. Under-priced risk is part of the problem, it is not a solution. Interest rates are a price, manipulating them is just another way to avoid price discovery.
Central Banks are the lender of last resort, but lending to the largest subprime borrowers of all (governments) is just going to be a government-scale repeat of commercial banks lending at too-low rates to residential and commercial borrowers. All that is being done in Europe is another flavor of extend and pretend. HOPE, HAMP, et al have done little to prevent borrower defaults, they have merely delayed the defaults.
You'll have your purchasing power eaten away by either inflation of the money supply or inflation of tax rates. Most likely a little bit of both. I find the notion that were are in a "deflationary period" somewhat misleading - with total credit contracting say 15%, overall prices should be falling proportionately. Instead prices are falling only 2 or 3%. There has to be new cash being put into the market to prevent overall prices from falling very much. I don't know what the exact numbers are, but I don't see prices falling nearly as much as credit is extracting.
Best to follow Ben Franklin's advice: Neither a borrower nor a lender be.
House prices are down over 30% in the past two years! Deflation is indeed upon us. CPI is but one measure.
Also, I disagree that low interest rates don't help. My adjustable rate mortgage is a smidge over 3% now. It's an enormous help even though I'm not a subprime borrower. The mortgage is over 15 years old and I only owe ~ 15% of the value of the house. And in case you are wondering, my house price has deflated too, I'd guess around 20 to 30% but can't say for sure as I'm not selling.
CPI has numerous flaws, but it is still more encompassing of the overall economy than house prices. And I think we both would agree that house prices would be down much more without government interference.
You are correct that low mortgage interest rates help borrowers with income. But what position does that put lenders in? Do they have to be extra-leveraged in order to support those low interest rates? And credit card interest rates are much higher.
We have price supports in one sector and price caps in another - this is what makes me skeptical of calls of both inflation and deflation; it's really stagflation because the measured prices aren't natural prices.
Consider further that oil prices have dropped about 20% in the last 2 weeks and none of that is reflected in April's somewhat deflationary report.
The whiff of deflation is back in the air. TIPS prices fell fairly hard. Nominal treasuries went the other way.
My word verification is "drypil".
That better not be a baltic dry pill omen, because that would be hard to swallow.
*sounds of crickets*
Thank you. Thank you very much. I'll be performing here all month. ;)
Charles, Shakespeare not Franklin. Polonius' soliloquy in Hamlet, Act I, scene III:
Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
Supposed to be the voice of an old fool, but it sounds pretty reasonable to me.
"EU und Bundesregierung kündigen einen großangelegten Angriff auf die Finanzindustrie an. Mit der Aktion verfolgen Merkel und Co. vor allem ein Ziel: Die Wähler sollen endlich das Gefühl bekommen, dass sie nicht alleine für die Krise zahlen."
The EU and German government announce a broad-based attack on the financial industry. In doing this, they have one goal in particular in mind: Voters must finally get the feeling that they are not the only ones paying for the crisis.
Charles - the attempt to break the pricing function is what concerns me most about both US measures and the Euro flap. I think the pro/con regulation people miss the obvious. Banking systems need regulation, or they are inherently unstable. The evil of regulation comes in when prices are regulated - always for political purposes - and that introduces instability into the financial system.
Well, the attempt to do that is like political crack. Politicos just can't stay away from it, and they never learn no matter how many times it produces disaster.
These bans typically are the last act in the drama aren't they?
When all else fails.....etc.
Thanks. Literature and Royalty are my worst subjects on Jeopardy.
I don't take the advice anyway, I have deposits at banks and own stocks and bonds. Polonius' advice is similar to Stagflationary Mark's anyway: if you aren't borrowing or lending, then you're 100% in commodities.
I've been thinking that a better way to express government's proper role in commerce is that government should set standards for the terms of trade, rather than actually regulating commerce. In other words, make sure that everyone lives up to their contracts, express or implied, with no funny business about what is or isn't in the contract. Maybe this power can be said to flow directly from the power to set "weights and measures"--wouldn't it be funny if NIST replaced the ICC? I realize this isn't exactly revolutionary thinking, but I regard that as a positive.
The difference between regulating trade and setting standards is subtle, but that subtlety would give Washington something to argue about, it ought to keep them distracted for 80 years or so.
This is the smartest thing anyone has ever said about banking regulation.
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