Time moves fast in a crisis.? It surprises me that it was only seven weeks ago that I wrote, What A Fine Mess You Have Gotten Us Into, where I commented:
- What the FDIC did with WaMu affects other banks like Wachovia.? Bidders will let the holding company fail, and bid for the operating bank subsidiary assets.? Holders of holding company securities get hit, as their likelihood of getting reasonable recoveries disappears.
- We are putting a lot of faith in the health of Citigroup, Bank of America, and JP Morgan.? If one of them fails, the game is over.? Given their complexity, and the recent takeovers, the odds of there being a significant mistake are high.? Consider further that they are counterparties for more than 50% of all derivative transactions, so the synthetic leverage is high as well.
What I meant by “the game is over” is that the idea that you can keep laying off risk on increasingly large and complex banks would be over as a strategy.? Also, the ability of the US Government to continue to bail out every decrepit entity would be tested, and possibly found wanting.
Or, as I noted on Friday, in my piece Broken?:
There are still more oddities to the current bond market, most of which involve parties that can?t take certain risks any more.? We can expand that to banks, and toss in Citi.? Citi is trading like it is going out of business.? Now, Citi is one of the ?too big to fail? [TBTF] banks, along with JP Morgan, Bank of America, and Wells Fargo.? If they are in trouble, I?m not sure who can buy them; they would probably be too much for even a coalition of the other TBTF banks to handle.? Is there a foreign bank that wants them?? I doubt it.? This would be another area where a new TBTF chapter of the bankruptcy code would be useful.
So now we have a bailout of Citi by the US Treasury and FDIC.? At present the rescue of Citi is a plus to the markets, because it takes a short-term problem off the table, leaving behind a more ill-defined long-term problem: how much can the US Government borrow/guarantee?? Also, what of their derivative exposures, and the state of the other TBTF banks?? It’s difficult to get that big in a credit boom without absorbing the seeds of the credit bust.
So, I am selling a little into the euphoria.? We will see where all of this leads, but my guess is that it is just one more step on the road to credit failure for the US Government.
Simply put:
I am not the sharpest tool in the shed, so will someone please explain to me how the US government bailing out Citigroup is a GOOD thing?
He didn’t say it was a good thing. He just said that it takes a short term problem off of the table. By short term problem, Mr. Merkel is probably referring to the risk Citi poses as a ubiquitous (and large) counterparty. It means that a lot of institutions/funds/lenders/wealthy individuals may breath a sigh of relief until the next domino falls.
” How much can the US Government borrow/guarantee? ”
When all is said and done, that really is THE question, isn’t it? The strategy being pursued is a)throw endless money at the problem, and b)deal with inflation if/when it comes.
If the US govt had an infinite supply of money, then reflation would certainly “work” – with the obvious consequences.
But it doesn’t have endless money. So I think your question is really what it all boils down to, or to put it another way, will this strategy succeed BEFORE the US maxes out it’s ability to throw more money at the problem?
Since the entire world depends on the USA’s economy, they have a vested interest in not rocking the boat, and allowing the Fed to print as much money as it wants without saying “boo”.
David, what would it take for China and other countries to stop lending to the USA? What are the circumstances that would lead that to happen? Wouldn’t they just ask for a higher rate of return rather than cut them off completely?
Shorting treasuries and/or the USD seems to be THE way to play all of this. No?
First it was the bailout. It gave rise to TARP. Tab – $700B. Next, Obama Stimulus. Tab – $700B. Mind that I, based on opinions of many, many learned economists do not oppose both of these deficit increasing acts. Bloomberg website is talking about $1 Trillion deficit in Sept 2009 and follow up of the same in 2010. Tony Crescenzi on Realmoney is noticing sharp drop in bond prices on Monday; meaning harbinger of higher interest Fed has to pay. Fareed Zakeria declares that America must keep China pleased; least it would pull the rug under Uncle Sam by not buying bonds. And on Bloomberg William Pesek says how ?Obama bonds? denominated in non-dollar currencies are inevitable while noting how perennial dollar basher Jim Rogers is going fully into non-dollar assets. I am not even talking about Bill Fleckenstein.
Point is, damn you do; damn you don?t. So what is the truth?
So let us say, the truth is as some other readers have pointed ? ?the game is whether USA Economy turns corner for good on the back of debt financed bailouts before America fails to get any more loan?.
Then the question is what else to be done to avoid such an Armageddon (as if the current one is not one)? Is the punishment of sever recession or even another Great Depression would avoid it? Those who advocate that such a punishment is essential (I assume that is what David is advocating); can with straight face tell us that ?yes, then there is the land of plenty after crossing the valley of pain?? And if they are not able to predict so; why undertake ?fear mongering? then?
Can we say that all this ?linear? analysis forgets fundamentally non-economic (say political or psychological or say simply ?following? of Obama) possibility of Americans changing their habits or adjust life style as needed without there being essentially economic incentive only? Say Americans start going after more ?savings? as needed; undertake rational changes in Health Care; throw away ?oil based lifestyle? and wind down costly wars. Will it not help? Is it impossible?
If not, then what works? Without telling that, this whole commentary does not become credible.
David,
reg: “the road to credit failure for the US Government.”
I can only see the road to inflation and hyperinflation. What do you exactly mean by “credit failure”? Long bonds not auctioning? Well, you always can have the Fed handing in a bid.
Did I miss an article of yours discussing this ?
Sry, i was speaking not to David’s piece, but to the market reaction to the news 🙂
Let me pose a different question:
How does a middle aged relatively well-to-do person protect himself and family against this scenario?
How does one establish assets overseas? Is leaving the country the only way?
I really don’t feel like pushing a wheelbarrow of dollars to the store trying to buy a loaf of bread. If there even is one to buy.
Hubert, I have discussed this several times, but not recently. Credit failure includes any combination of: High inflation, Internal Default, and External Default (including currency controls), but not large rise in taxation leading to deep depression.