A clear summary of the current financial situation

[jyl]

Here is a clearly written piece on the current financial situation.

http://www.safehaven.com/article-11458.htm

This writer, John Maudlin, is worth reading, I like browsing around his site. Sometimes I see pieces by other writers there, which I don't necessarily find as good.

[Aurel]

I have an even clearer and shorter summary: we`re screwed ! I came up with that summary through my own astute analysis of the situation, and I believe it to be a fair assessment of the current state of affairs, despite my limited experience as a financial analyst. Thank you for reading my analysis.

Aurel

[competentone]

Hardly what I would describe as "a clear summary" of the world's financial situation.

Most people need some prerequisite study before they can understand the current financial situation.

If one has a few minutes and wants to gain some of the prerequisite knowledge, I would suggest reading this piece (actually an excerpt from a book) titled, Money: Its Importance, Origins, and Operations. It is written in a language most will have no difficulty understanding:

http://mises.org/story/3122

Excerpt from the article:

If government sets itself up as the guardian of the international meter or the standard yard or pound, there is no economic incentive for it to betray its trust and change the definition. For the Bureau of Standards to announce suddenly that 1 pound is now equal to 14 instead of 16 ounces would make no sense whatever. There is, however, all too much of an economic incentive for governments to change, especially to lighten, the definition of the currency unit; say, to change the definition of the pound sterling from 16 to 14 ounces of silver. This profitable process of the government's repeatedly lightening the number of ounces or grams in the same monetary unit is called debasement.

How debasement profits the State can be seen from a hypothetical case: Say the rur, the currency of the mythical kingdom of Ruritania, is worth 20 grams of gold. A new king now ascends the throne, and, being chronically short of money, decides to take the debasement route to the acquisition of wealth. He announces a mammoth call-in of all the old gold coins of the realm, each now dirty with wear and with the picture of the previous king stamped on its face. In return he will supply brand new coins with his face stamped on them, and will return the same number of rurs paid in. Someone presenting 100 rurs in old coins will receive 100 rurs in the new.

Seemingly a bargain! Except for a slight hitch: During the course of this recoinage, the king changes the definition of the rur from 20 to 16 grams. He then pockets the extra 20 percent of gold, minting the gold for his own use and pouring the coins into circulation for his own expenses. In short, the number of grams of gold in the society remains the same, but since people are now accustomed to use the name rather than the weight in their money accounts and prices, the number of rurs will have increased by 20 percent. The money supply in rurs, therefore, has gone up by 20 percent, and, as we shall see later on, this will drive up prices in the economy in terms of rurs. Debasement, then, is the arbitrary redefining and lightening of the currency so as to add to the coffers of the State.

[HardDrive]

I think Aurel covered it pretty well.

There is a reason my wife and I are looking at real estate options in India and Australia at the moment.....

[kstar]

Thanks for posting that John.

It is clearly stated and makes a lot of sense. The cost of money AAA rated companies (see GE, Golddman > Buffet) are paying is amazing. His statement that B rated companies as well as small and medium sized either can't get credit or have to pay near usurious rates is startling.

Best,

[sammyg2]

I remember when I was a teenager talknig to my father about random stuff and I asked him something about the economy and he went into a rant.
The part I remember really well was when he started blasting economists.
he said something like "those damed socialistic economists are going to be the end of us all. they are so arrogant they think they can control the natural market swings by manipulation. The worst part so they don't know when to stop until it's too late and they've over-corrected until it's so bad it can't be fixed".
I know my dad's a genious but I had no idea he could tell the future when it came to Alan Greenspan.

Greenspan will go down in history as the biggest jackhole ever. His name will be worse than Benedict arnold.

[jyl]

I talked to a company today, 10X EBITDA/interest, 3.3X debt/EBITDA, BB rated, $1.6BN annual sales, appx $350MM FCF/yr vs $1.2BN debt - they are looking for a bank loan to do an acquisition, last month they were being quoted 8% to 10%.yr interest, now they are being told no loan is available at anything like that rate.

Interesting, in an environment where residential mortgages are around 6%. Consumers are getting better rates than businesses, yet it is consumer default rates that are soaring. That doesn't really make sense to me. Feels like either interest rates for businesses should come down, or interest rates for consumers should go up. The latter would crush consumer spending even more.

[dennis in se pa]

Macro and micro economic theory. Just that - theory. No one knows what goes on or why or how. It's like being at the mercy of the changing winds.

[widebody911]

The Economist summed it up nicely:

[jyl]

A modern economy with its financial markets is far more complex than any physical system that man works with. Mass and individual psychology plays a huge role. Many of the relationships are non-linear. And economists cannot do controlled experiments.

So no wonder that economists cannot forecast economies the way physicists/engineers can design spaceships, etc.

I think the science of economics is, at best, roughly where the physical sciences were in the 1500s, before Newton, Carnot, Joule, Faraday, etc. Doesn't mean it is nowhere - after all, large buildings and other structures were built pre-1500. But it was as much art/guesswork/gut feel as it was engineering/sciences, and sometimes those great buildings fell down.

[t951]

1) Have a fiscal policy that creates immense deficits in good times and bad, burdening America's posterity with staggering burdens of repaying the debt.
2) Eliminate regulation of Wall Street and/or fail to enforce the regulations that already exist, instead trusting Wall Street and other money managers and speculators to manage other people's money with few or no regulations and little oversight.

3) Have an energy policy that disallows producing our own energy and instead requires that we buy energy from abroad, thus making our oil prices highly volatile and creating large balance of payments deficits, lowering the value of the dollar and thus making the problem get progressively worse.

4) Have Congress mandate that banks and other financial entities lend money to persons they know in advance to have poor credit ratings or none at all.

5) Allow investment banks, insurers, and banks to bet their entire net worth and then some on the premise that borrowers known to be improvident will in fact repay those loans.

6) Allow the creation of large betting pools called "hedge funds" that can move markets and control the outcome of trading, thus taking a forum for savings and retirement for families and making it into a rigged casino game that exists primarily to fleece suckers like ordinary working men and women.

7) Have laws that protect corporate officers from being sued for misconduct but at the same time punish lawyers in the private sector who ferret out such misconduct and try to make accountable the people responsible for shareholder and investor losses. If one of those lawyers gets particularly aggressive in protecting stockholders, put him in prison.

8) Appoint as head of the United States Treasury Department a man whose whole life was spent on Wall Street, who became fantastically rich through his peddling of junk bonds at his firm while the firm later sold short those same sorts of bonds.

9) Scare Americans into putting up $750 billion of their hard earned money to bail out the billionaires and their friends who created the market for loans to poor credit risks (The "subprime" market) and the unbelievably large side bets on those loans, promising that such a bailout would save the retirement savings of Americans, then allow the immense hedge funds to make the market crater immediately afterwards.

10) Propose to save the situation by surtaxing the oil industry, which is owned by our fellow Americans, mostly in their retirement plans, thus penalizing Americans for investing in companies that efficiently and legally produce an indispensable product.

11) Insist that the free market requires that banks and insurers with friends of the Secretary of the Treasury be saved but allow other entities not so fortunate to fail, thus creating total uncertainty and terror among financial institutions, and demolishing all of the confidence built up in financial circles since the days of FDR.

12) Then have the Republican candidate say he would keep on the job the Treasury Secretary who facilitated the crisis, failed to protect the nation from the crisis, got the taxpayers to pony up to save his Wall Street buddies, and have the Democratic candidate, as noted, say he would save the day by taxing the stockholders of energy companies.

There, that should do it.

[MichiganMat]

"This American Life" covered things as well, go listen:

http://www.thisamericanlife.org/Radio_Episode.aspx?episode=365

Act One. The Day the Market Died.

Alex Blumberg and Adam Davidson recount the 36-hour period, two weeks ago, when the credit markets froze. Plus, what it’s like now for businesses to get short-term loans, and how the hardship is spreading to every sector of the economy. (16 minutes)

Act Two. Out of the Hedges and Into the Woods.

One more confusing financial product that’s bringing down the global economy. And one of way to think about this product is this: If bad mortgages got the financial system sick, this next thing you’re about to hear about, helped spread the sickness into an epidemic. These are "credit default swaps." Alex explains. (19 minutes)

Act Three. Swap Cops.

Ira talks with Michael Greenberger, a former commodities regulator, who tells the story of when it was decided not to regulate credit default swaps. And how that decision was emblematic of the way we didn’t regulate a lot of the toxic financial products we’re hearing about now. (8 minutes)

[the]

Originally Posted by jyl

A modern economy with its financial markets is far more complex than any physical system that man works with. Mass and individual psychology plays a huge role. Many of the relationships are non-linear. And economists cannot do controlled experiments.

So no wonder that economists cannot forecast economies the way physicists/engineers can design spaceships, etc.

I think the science of economics is, at best, roughly where the physical sciences were in the 1500s, before Newton, Carnot, Joule, Faraday, etc. Doesn't mean it is nowhere - after all, large buildings and other structures were built pre-1500. But it was as much art/guesswork/gut feel as it was engineering/sciences, and sometimes those great buildings fell down.

Was this really that complicated or difficult to predict? A scheme built on the premise that housing would continue to appreciate 10% to 20% per year, forever? A belief that housing, which historically increases at roughly the rate of inflation, can double in 3-4 years, and that's ok, normal or could be relied on?

[pwd72s]

Originally Posted by the

Was this really that complicated or difficult to predict? A scheme built on the premise that housing would continue to appreciate 10% to 20% per year, forever? A belief that housing, which historically increases at roughly the rate of inflation, can double in 3-4 years, and that's ok, normal or could be relied on?

+1. Alas, those who were saying just that were considered fools for not jumping on the flipping houses bandwagon.

[jyl]

Originally Posted by the

Was this really that complicated or difficult to predict? A scheme built on the premise that housing would continue to appreciate 10% to 20% per year, forever? A belief that housing, which historically increases at roughly the rate of inflation, can double in 3-4 years, and that's ok, normal or could be relied on?

Not referring to that specifically - just to the general complaint about economists' predictive failures.

[jyl]

UK is going to pump USD $88BN into its big banks, via partial nationalization. Lloyds, RBS, Barclays and others urgently asked for USD $15BN each. Their shares have been fallng, RBS almost -50%.

Spain is going to spend USD $50-70BN buying troubled bank assets.

Iceland has had to nationalize its #2 and #3 banks. Iceland itself, the country, is said to be near bankruptcy and asking Russia for a loan.

Ireland, Denmark, Germany, Austria, Sweden have all been forced to guarantee all bank deposits. The original rescues of Fortis and Hypo failed and new rescues have been put together.

So European and US banking industries are in crisis. US at least has a strong central government and a Fed that has extraordinarily sweeping powers, even including stepping in to buy commercial paper, and is acting very aggressively. Europe lacks a central banking regulator and the European Central Bank has been slow to recognize the seriousness of the crisis. No wonder everyone is seeking US dollars and US Treasuries.

Is Asia next? China's banks are dodgy, everyone knows that.

[David]

Jack and Suzie Welch's weekly opinion article in Businessweek blames publicly traded investment banks. They say in the old days, bank owners/partners had some stake in their investments and choose them accordingly. Once the banks had an IPO, the people making the investments had less concern about a bad investment and more concern about their 5, 10, or $20 million annual bonus.

I think it's time these guys face trial, civil and criminal.

[jyl]

That is much, much too simplistic.

For every loan, someone borrowed the money, someone arranged the loan, and someone loaned the money.

This applies to securitized mortgages. Take a mortgage-backed security. Many people borrowed the monies to buy the houses, many people arranged the loans (homebuilders, mortgage brokers, appraisers) and arranged the sales (real estate brokers), many people initially loaned the money (banks, third-party lenders), and because it is a security, there are the people who packaged the security (investment banks, credit ratings agencies) and all the people who bought the security (investors of all sorts). Finally, because banking and financial markets are supposed to be regulated, you have to include the people who failed to regulate (politicians, regulators, and ultimately voters).

Notice that investment banks are just one of the many people (companies and the people who work there) who had a part in creating this mess.

Might as well set up trials for the homebuyers, the appraisers, the homebuilders, the real estate and mortgage brokers, the mortgage lenders, the investment bankers, the investors, the regulators, the politicians, and so on - even the voters? You'll end up with a pretty big swath of the country.

This sort of simplistic finger-pointing is silly and pointless. There will be major changes in the applicable laws, and many new regulations. Many people will lose their money and their jobs, many companies will go out of business. We, as an economy, will not permit or take this sort of risk again for generations.

Right now, the main thing has to be, to keep the US from spiraling into an extremely serious recession or depression. And the rest of the world will have the same problem - partly due to the US housing bubble, but partly from their own doing.

[tabs]

My stomach hurts!

Ya know back in 94 I bailed out of my Stock Mutual funds during a big downturn in the market. The very day I did it was the bottom of the market. Monday was the day I felt like throwin in the towel.

So maybe it is darkest right before the bottom.

[JeremyD]

Just remember one key point: Economists were placed on this earth to make weatherman look good.