Matt – the current account deficit should decrease, though the increase in financing for the bailout may swamp improvements from net exports.

Albert, TV – thanks. Some pieces flow… this one mostly did, though I fell asleep in the middle of writing it. I’ll try to get out a post on insurance stocks soon.

Set a higher required capital level and if they want to get it from the private sector I don’t see what the problem is? Surely the issue is that a) banks haven’t been admitting the problems and b) nobody in the private sector wants to put in serious amounts of capital.

Great piece! I have been discussing the SHOR THE LONG END OF THE CURVE trade on urbandigs.com for about 4-5 months now.

I devoted an entire discussion to it yesterday at NOON, and only today found your article:

http://www.urbandigs.com/2008/10/a_new_age_depression.html

3 reasons why the long end could see higher yields in coming years, poppiong the 20 yr secular bull market in treasuries:

1) MASSIVE MASSIVE issuance
2) If credit quality/worthiness of USA gets put into question by the world; forget a downgrade of our AAA rating, I refer to the tradable markets questioning the credit quality..Similar to how the markets downgraded the bond insurers in late 2007, about 6 months before the rating agencies ever officially downgraded them.
3) If our foreign funders decide not to play ball or decide to sell, stop buying our treasuries!

This story is not over!

Had the government asked for Warren Buffett-like terms, only the banks that really needed the capital would have taken it from the government; that would have defeated the purpose of the government’s plan, which was to recapitalize key banks without stigmatizing the ones that really need it.

My understanding (by way of FT Alphaville) is that banks were told to get their capital up to the lower of 9%, and an amount that with stress-test derived impairments would still be above a 7%.
For example, it looks like the RBS stress test showed a far greater potential for impairments, so have had to raise more capital than Barclays.

What they weren’t told is that it must come from the government. They were told they could do it any way they wanted, but that the government was willing to purchase preference shares and under-write equity placements if they couldn’t get it from the private sector.

This appears to me to be a far better solution than we’ve seen in the US. I still don’t understand why (apart from Paulson being ex-GS) the US government are getting a far lower rate of interest on their preference shares than Warren Buffett.

Yesterday was one fo the best days ever for the stock markets:

What does it mean? I think it ultimately depends on factors unrelated to the move itself. Econompic provides us with some context:

Obviously large one day moves in and of themselves tell…

I am under the impression that the current account deficit is expected to contract over the next 12 months. Doesn’t a large part of America’s financing come from surplus countries who are trying to control their currencies. What happens when their surpluses diminish? Will there be less demand for treasuries at a time when record amounts are being issued? Will the Federal Reserve have to fill in the blanks?

Thanks,
Matt

I suspect this is the single most important point. There’s no reason to suspect public hands will be any less tempted by the (temporarily) virtuous cycle of credit and asset prices than private, and lots of reasons to suspect public hands will be even more so. Bubble 3.0?