A future case for impeachment?

The threats:

htp: Karl Denninger

The result:

At least $125bn is to go to nine of America's largest banks, including Citigroup, JPMorgan Chase and Bank of America, in exchange for capital under the rescue plan.

The power:

(9) TROUBLED ASSETS-

The term `troubled assets' means--

(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and

(B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.

...not "prior approval", you'll note. For those that think they understand law, here is the full text of the genetically-modified bill as enacted on 3rd October 2008.

And here's an intriguing clause in Section 119:

(2) LIMITATIONS ON EQUITABLE RELIEF.—

(A) INJUNCTION.—No injunction or other form of equitable relief shall be issued against the Secretary for actions pursuant to section 101, 102, 106, and 109, other than to remedy a violation of the Constitution.

Excuse my ignorance, but is this a watered-down version of the infamous "non-reviewable" Paulosn proposal ("Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.")?

A lesson from 1721

The South Sea Bubble ended in the imprisonment of the Chancellor of the Exchequer, John Aislabie:

The South Sea Company had been built on high expectations which it could never fulfil, and it collapsed in August 1720. An investigation by Parliament found that Aislabie had been given £20,000 of company stock in exchange for his promotion of the scheme. He resigned the Exchequer in January 1721, and in March was found guilty by the Commons of the "most notorious, dangerous and infamous corruption". He was expelled from the House, removed from the Privy Council, and imprisoned in the Tower of London.

Aislabie was replaced by Robert Walpole, who became in effect Britain's first modern-style Prime Minister - who earlier had spent six months in the Tower in 1712, as a result of unjust impeachment by his political enemies.

Now, who will be properly prosecuted and properly punished for a man-made disaster that has undermined the world's banking system?

More dire warnings

Karl Denninger is predicting a bond and currency crash in the US if banks aren't forced to disclose exactly what they do and don't have, so we can let the insolvent go down and release the liquidity into the right channels.

I hope the right path is taken, because my brother lives there.

By the way, in body language terms I read Hank Paulson as a hell of a bully. He looks like a totalitarian danger to me.

Rally? The smart money's been moving out for a long time

Read Michael Panzner here. Reminds me of when Jimmy Goldsmith sold all his holdings on the Paris Bourse in the Summer of 1987, and recently how Warren Buffett was reported to be holding massive amounts of cash.

Now Buffett has bought $5 billion of Goldman - but as preferred stock with a 10% dividend (and with warrants representing an instant capital gain from day one); and Philip Green is buying £2 billion of Baugur's debt. Note that these wise men are NOT buying stock market ordinary shares: they are betting on a sure thing, pretty much.

I think bear market rallies are when the pros sell to the amateurs. When the amateurs realise the pros have gone, and there are no more bigger fools, the panic proper starts. And then the pros are there, waiting for the bottom prices. I think this is what is behind legs 4 and 5 of the Elliott Wave.

A note on gold

Some commentators on the gold market predicted that the price would come down, or at least be restrained, because leveraged speculators would have to sell assets to raise money to clear some of their borrowing.

As the credit market continues to remain tight and the prospects of quick killings made on the back of increasingly-expensive borrowed money become less plausible, watch for the gold price to bottom-out (I read one claim yesterday that this has already happened). Then when continued liquidity injections from governments start to work their way into prices, my guess is that gold will make a steeper and steadier rise, as it becomes not a find-a-bigger-fool speculation but a flight to security, away from devaluing currency.

I may soon get back in myself, with some of my small savings.

And yes, I did indeed start drawing my "cash stash" yesterday, and plan to take more out today. Can anyone believe the blanket guarantees for deposits at banks, especially under the present economic and monetary conditions? You think disasters can't happen, but as a young woman my mother suddenly found herself fleeing the country alone, with two horses. Hope for the best, plan for the worst.

Cassandra couldn't run Troy

Thanks to Michael Panzner at Financial Armageddon, we can read for free an interview with 70-year-old money manager Jeremy Grantham. Grantham points out that business is run by managers, not by Old Testament prophets, and so he philosophises that crises will recur.

He also believes that this one isn't over yet:

The terrible thing -- after all this pain -- is that the U.S. equity market is not even cheap... it started from such a high level in 2000 that it still has not yet worked its way down to trend, although it is getting close. But the really bad news is that great bubbles in history always overcorrected. So although the fair value of the S&P today may be about 1025, typically bubbles overcorrect by quite a bit, possibly by 20%. That is very discouraging.

My 26 June guess at the trend for the Dow was c. 7,000 - 10,000:

If that means a midpoint of 8,500 and the overcorrection is 20%, then the momentary low point could be around 6,800, which at least suggests that the gap between my two red lines is approximately correct.

Friday's lowest point during the day was 7,773.71, still 10% away from the theorised minimum; and the Dow closed at 8,451.19. Yesterday it remained above the latter figure throughout, and rose to 9,387.61.

In short, Grantham must be reading this as a bear market rally, and it's not very silly to think that the Dow could come back to 7,000 at some point.

Good luck to the day traders, I haven't the nerve and speed to try to make a fortune on the bucking-bronco stage of the market.

All clear

Dow up 936, FTSE up 324: so it's all okay again. Isn't it?

Except here in the UK, the Prime Minister wants banks to carry on lending like they did last year. Is there a touch of madness in this?

Surreal. That's the feeling.

I see Mish has the same feeling.

Dow falls are only at interim stage

Jesse relays a couple of charts from Steve Williams at CyclePro, and adds one of his own. As I read it, the implication of the CyclePro charting is that the end-point for the Dow at the bottom of the bear market could be around half its present value, in a process that might take 8-10 years.

Jesse's chart relates the Dow to the price of gold, and the implication of his is a drop of some 60% - but that could be achieved by a rise in gold, as well as a fall in the Dow.

Perhaps it is time for us to be making quiet, regular withdrawals from the cashpoint and building up a stash of truly instant-access cash. I shall start today.

And when inflation hits?

Derivatives blowup may hit insurance and car makers

This blog looks at the implications of failed investment bank Lehman's call on their "insurance" in the form of derivatives contracts. If everyone can handle the the cash call when it comes, good; if not, maybe a domino effect - one failure unbalancing another in a chain reaction. In particular, will hedge funds , who tend to play with borrowed money, be able to honour their contracts, or will they be the weak link in the chain?

Next up, says "George Washington", are the insurance and auto companies. It seems Standard & Poor's fear these could be the last days for GM and Ford.

I'm given to understand that players in derivatives usually balance their position with bets both ways; but they tend to be big bets. It's like a seesaw with an elephant at each end: if one elephant steps off, or turns out to be a baby compared to the other... What's the chances of $55 trillion of derivatives being well-balanced at all points?

So there are good reasons to think that next week is going to be more exciting than most of us would wish. Friday's Dow volatility may be repeated.

Banking crisis part of a deep strategy?

On Financial Sense, F. William Engdahl speculates that asset-backed securities ("toxic waste" mortgage packages) were sold to European banks in order to poison their wells and leave the world banking system dependent on the USA - and an elite group of American bankers.

One startling fact cited in this conspiracy theory, is that the office responsible for overseeing Credit Default Swaps had its staffing reduced from 100 to... ONE person. Giving evidence to Congress, the Chief Accountant of the Securities & Exchange Commission said "... there has been a systematic gutting, or whatever you want to call it, of the agency and its capability through cutting back of staff."

Oh dear, I thought conspiracy theories were for nutcases. Maybe I'm wrong.

Every picture tells a story

This is a measure of monetary inflation. Increases here will eventually work their way into prices and wages. An explanation is offered here. Note that there has been nothing close to the highlighted "spike" in the last 25 years.

"An inflationary holocaust" - Jim Rogers

TBRRob posts a very useful YouTube interview with big investor Jim Rogers (the best analyses come from people who back their own judgments with their own money).

Despite the recent strengthening of the dollar, he is buying Japanese yen and Swiss francs; and commodities (especially agriculture), because they lead the way out of recession and their fundamentals are (he says) sound.

In the interview, he is challenged on his inflationary hypothesis: surely we are seeing "deleveraging" (reduction in borrowing) and don't we need more money in the system to deal with the liquidity crisis? Rogers cites past history and sticks to his guns

I think it was Marc Faber's comments that first helped me understand why all this public-money-throwing isn't going to help. It's NOT a liquidity crisis: liquidity is what has caused the problems (and anticipating the movement of the money tides is what has helped Faber grow his funds!).

It's a SOLVENCY crisis. If all your possessions are worth less than your total debts, borrowing more money will not help. So when the government creates massive extra funds for you to use, you will not wish to use them. And if your fellows are in the same position, you certainly won't wish to lend them any money you still have.

When you are insolvent, there are two ways out. One is to declare bankruptcy, in which case the money invested in you is lost and so excess liquidity goes down the drain. Good, though it's also painful (personal fortunes lost, people laid off).

The other way is to be unbelievably lucky, and have someone else pay-off your debts. When the government chooses to do the latter for the banks, it has to get the funds from somewhere, and ultimately that is the citizen/loyal subject. In this case, the liquidity is still in the system, and there is no drain to take it away. Sooner or later, it leaks out into the general economy and prices rise, because there is more cash to bid for the usual limited amount of goods and services.

(Or the government increases taxes, and uses the extra to pay-off debt. Nice idea, but increasing taxes slows the economy and creates more benefit dependants, which requires more taxes even as less revenue is coming in because business is suffering because people now have less spending money because taxes are higher, and...)

So there are two problems created: inflation, and moral hazard - the people who have been bought out in this undeserved way have no incentive to change their habits.

You may think that it's only a temporary problem and the government will recoup its investment when things get back to normal. The trouble is, "normal" means house prices dropping to about half what they were worth last year, because they doubled for no good reason in the five-year period before that. In the long term, I understand, houses are priced at 3 times income, not 6 times as during the recent period of monetary inflation.

So either the value of the excess credit is destroyed by bankuptcy, or by inflating away the money saved by more prudent people. Either the guilty (or foolish) suffer, or the innocent.

And here's another either/or: either we go this process again and again, or banks are prevented in future from increasing the money supply in the way they just did.

And the guilty must be punished.

A message to Peter Hitchens

Peter Hitchens seems to me one of the few independently-minded journalists in the mainstream media. One of the pieces in the MoS (and his blog) today reflects on the damage caused by BBC blabbermouth financial commentator Robert Peston and whether the credit crunch could have been anticipated. Hitchens says, in passing, that although he himself had bad feelings about our Roaring-Twenties-type economy, no-one really knew what would happen.

Rarely for me, I completely disagree with him, and think that if he turned his mind to this subject he might be influential enough to help some greatly-needed changes happen. So I comment:

Re your Peston piece and "The truth is, nobody really knew":

Sadly, this state of affairs was in fact VERY well-anticipated. As an independent financial adviser, I repeatedly relayed warnings via my newsletters to clients about the increasing debt in the USA, starting a decade ago. On 20 October 1999 I attended a breakfast meeting given by an investment company to drum up business, and a rep stated that the Dow was 50% overvalued. This confirmed me in the intuitive feeling I had long had, that a collapse was imminent. I feared the consequences so much that I put my business on the back burner and returned to teaching, which is something not lightly to be done, you will understand.

The stockmarket collapse began on the first trading day in 2000. Jerkily, the FTSE went down to less that half its 1999 peak by March 2003, at which point I thought lessons might have been learned and we could start to invest with confidence; but then (and you can see the BoE statistics online) the rate of increase of the money supply was allowed to soar by an extra 5% per annum. The investment bubble had turned into a banking bubble, which led to the horrendous property price instability that now threatens the financial system itself. The government is deeply implicated, since its regulators allowed banking reserves to be pared back (this is part of how you increase the money supply) so that when a crisis occurred, the lifeboats weren't there.

I repeat, very clear warnings have been sounded for a very long time by respected investment experts, mostly from the USA as the average Brit has very little understanding of money since we are rarely allowed to make or keep much of it. So I began a blog, in May last year, to learn more myself and to sound Cassandra-type warnings to any who would listen.

Bankers, politicians and economists knew very well, or ought to have known, the consequences, and the worst result of the present debacle is that it is likely that none of them will face Enron-style prosecution and punishment. They and/or their successors will therefore do it all over again, to their enormous gain and our near-ruin, as they have done periodically for centuries. Unless the perpetrators are punished in a way that will be remembered for generations, this moral hazard will continue to be a profound threat to our financial security and social stability.

You have written an excellent book on the mutilation of the British police, and I can promise you that the basics of finance are nothing like as complex as the professional fraudsters of the investment and banking community would like you to believe. I do really wish and hope that you will turn your investigative and communication skills to an analysis of what really went wrong with our Western economies.

NEWS: Gold CAN back all the world's money

... says Mike Hewitt in this article. Looking at gold in all its forms and relating it to the world's money that actually circulates (as opposed to all the money on the account books), he arrives at an estimated price of $738 per ounce.

That's not so far off the long-term median price of gold, adjusted for inflation - see below for some attempts to describe that relationship.

Maybe it could work.

Refuge, flight, battle rejoined, victory, retribution

Brad Setser looks at a flood of demand for US Treasuries and suspects that it's central banks shifting into the securest dollar asset they can find; and away from other dollar-denominated assets.

The first comment on the same post says that the next stage is a run on the dollar.

Continuing the Tolkien fantasy theme, one recalls the flight to Helm's Deep, and the eventual breach. Ultimately, though at a cost, the good side wins, of course (Denninger explains today how we can face the mess and clean it up).

Time to revisit Michael Panzner's "Financial Armageddon" - reviewed here in May of last year.

If he's right - and he's been right so far - it's first cash, then out of cash. But there's not enough gold to act as the world's currency (unless a horrific amount of wealth is permanently destroyed), and if we start up a new fiat currency, the moral criminals of the banking class will play the game all over again.

I note that Max Hastings in the Daily Mail calls for bankers to be "named and shamed"; this is milksop stuff. Yet they're still going to get billions in bonuses this year! Why does the Proceeds of Crime Bill not apply? Heavy, heavy fines, so that generations of bankers and traders will remember and hesitate. How about the last 5 years' bonuses, as a benchmark? Punitur quia peccatum est ("punishment is to be inflicted, because a crime has been committed").

But even that's not enough. What about the political class that opened the financial sluices to alleviate the discomfort of 2002-2003? And did it several times before, too? (See Jesse today on Greenspan's bubbles.) How do we mete out condign punishment to those greedy for power, as well as those for money?

I repeat, this is a crisis of democracy.

Guessing the low points

I looked at trends in the Dow earlier this year and guessed that the Dow's low might be 7,000. Now, Mish reports that Nouriel Roubini is saying the same.

The FTSE is currently hovering around 4,000, which is lower than the line I drew in June. But then, the line passed through, not under, the lowest negative spike in 2003. I seem to recall Wolfie predicting 4,000 in one of his comments here recently; well done, old chap.

It's not about money; it's about democracy

It's the interconnectedness that's pulling us all down: the centralisation of money and power has made us vulnerable. As I said in December:

I think the themes of diversity, dispersion and disconnection will grow in importance over the coming years, in politics and economics. As with some mutually dependent Amazonian flowers and insects, efficiency and specialisation will have to be balanced against flexibility and long-term survival.

Life on Earth has survived because it is not like a clock. Mechanistic systems must fail sometime, and the larger they are, the greater the damage they will cause.

After all this is over, we will need to refresh democracy and its controls on those who seek power, in whatever form. Bertrand Russell's book "Power" suggested that it comes in three forms - political, financial and religious, if I recall - and the American Constitution was devised to bell these cats; except, it seems, insufficient attention was given to the potential of money to destroy the community.

Still air in the balloon

The FTSE ended 2007 at 6,456.90. Back in August, I constructed a rough RPI-related graph from 1984 onwards, and to get back to the equivalent of 1984 in real terms, the index would have to drop to around 3,000: at the end of that year the FTSE closed at 1,181.10. We forget how far we've come.

More falls

Elliot Wave again

Like Robert McHugh, "Mish" also follows the Elliot Wave theory:

In Elliott Wave terms the index is in an impulsive wave 3 down. At some point there will be a corrective wave 4 up, with still more down to follow in wave 5. A lower low can be expected.

Back to Kondratieff

Some people are now revisiting Kondratieff''s theory of economic cycles. Seems to fit winter, at the moment. The above image is modified from this source: smart fellows.

A question

What would have happened if the UK had not followed suit with monetary inflation over the past 5 or 6 years?

Would prudence have been rewarded, or would a Protestant adherence to the right course of action have been punished by falling exports and unemployment? In a global trading system, when one major player makes a mess of their money, must others do the same or be sorry?

Can the world be run on the principles of the efficient-market purists, or is there an advantage to the first to break ranks? Are monetarists doomed to merely understand what is going on, incapable of preventing it?

Hope

Brad Setser sees hope in the correction:

I increasingly suspect that one consequence of United States and Europe’s recent financial crisis will be a smaller deficit in both regions, and a smaller surplus in the emerging world.

Robert McHugh was right!

15 months ago, Robert McHugh predicted this:

[The Dow] can be expected to drop to about the start of the pattern, at a minimum, meaning into the 9,000s over the intermediate-term... It is looking increasing likely to us that world central banks will choose hyperinflation rather than nominal decline in stock indices, which will force precious metals prices to rise sharply.

In gold-price terms, McHugh's Dow prediction came true on January 22 this year. Now it's come true in nominal terms, too (9,153.22 at 13:04 ET today) (UPDATE: 8.731.87 at 15:41).

It seems McHugh is an adherent of the Elliot Wave principle. Wikipedia gives a criticism of the theory:

The premise that markets unfold in recognizable patterns contradicts the efficient market hypothesis, which says that prices cannot be predicted from market data such as moving averages and volume. By this reasoning, if successful market forecasts were possible, investors would buy (or sell) when the method predicted a price increase (or decrease), to the point that prices would rise (or fall) immediately, thus destroying the profitability and predictive power of the method. In efficient markets, knowledge of the Elliott wave principle among investors would lead to the disappearance of the very patterns they tried to anticipate, rendering the method, and all forms of technical analysis, useless.

I think one could riposte that events have demonstrated that the efficient market does not exist.

A big figure

Hard on the heels of the $700 billion US bailout bill comes the UK's £400 billion rescue plan.

Oddly, this latter figure, in dollar terms, is very similar to the one approved by Congress - a little over $692 billion at today's retail conversion rates (and even closer in wholesale terms).

But the really interesting thing is the difference is in its relationship to the size of the population of the country, and the GDP:

Marc Faber recently said that the US needed $5 trillion to resolve the crisis, i.e. 7 times more than the amount approved by Congress. Britain's bailout fund is proportionately 7 times greater, and so, crippling cost to the taxpayer aside, maybe it could work.

And it has political implications. The average Brit is so innumerate that he doesn't know how to calculate 75% of 100, so don't expect him to understand that it wasn't simply "the banks" to blame, but the relaxation of Government monetary controls. Don't discount the possibility that, however undeservedly, Gordon Brown may win the next election.

End of the dollar as the world's reserve currency?

See the comment in Brad Setser's blog - Brazil and Argentina are already finding other ways to pay each other, Russia may deal in euros... if no-one wants the dollar after Jesse's predicted devaluation, it may go from devalued to almost worthless.

But what will countries do, that export to the USA? Devalue their own currencies? Or demand payment in euros? Or oil contracts? Even Setser admits to struggling to understand what's going on.

Jesse also comments on a report that the Gulf States may diversify into gold.

Dow: 6th anniversary of its 2002 low

Currency devaluation time?

Jesse reckons there's going to be a massive (30 - 40%) devaluation of the US dollar, in order to swindle foreign creditors.

Are there any currency experts out there who can tell me whether the UK won't race to do the same? Will the Yen and the Renminbi be forced upwards, relatively speaking? Should we be buying dried food etc instead of holding cash?

FTSE prediction: poll results

Thanks to all those who took part in the poll for the forecast value of the FTSE by the end of December. The median line is on 4,500.

This is what I guessed in June and repeated on Monday. Below that at the moment, but I'm still hoping that it'll settle back to the simplified trend I suggested. I prefer to be a sun bear, not a grizzly.

Are we there yet, Dad?

Stop blaming the Americans

The political formula here in the UK is "We'll do anything that's necessary" and "the sub-prime problem started in the USA." Misleading nonsense.

The Americans may have sold packaged mortgages, but our institutions here didn't have to buy stuff they didn't have the competence to analyze.

And we didn't have to have 6x earnings, LTV100%+, self-certification or a rush into buy-to-let.

This disaster is home-grown.

Crisis

Karl Denninger is sounding absolutely dire warnings about the market (Dow 4,000) and the economy; recently Jim from San Marcos said Dow 2,000 (and I do so hope he's completely wrong). This getting well into the worst fantasies of the Cassandras and we must hope that our apparently ignorant political class wises up fast.

Just a thought...

Who would now take financial advice from bancassurers?

Gold set to leap?

Jesse repeats the theory that the gold price is being held down at a time when we would expect it to soar. Presumably the stratagems will fail at some point. (Update: he's now tipping a spike, maybe doubling the current price.)

But as I said to clients long ago, whatever you treat as an investment will behave like one. We did it to houses, and see the result now; so investing in gold in the hope that you'll be able to sell on the spike, is a risky strategy. Buying in at a reasonable price, hoping simply to preserve your wealth; that's a different story.

CLARIFICATION

As I said quite a while ago, if you try to draw a line to get a notion of an "average" gold price, adjusted for inflation, where would you draw it? The current price, if you look at the graph above, would already seem to be above the median, presumably factoring-in concerns about the economy and currencies. My best guess, the last time, was about $650/ounce. Now there may be some opportunity for fast-handed speculators, but at the present price level I'm not that tempted, because I'm no Marc Faber.

UPDATE

iTulip quotes the FT to show that the rich are piling-in to physical gold, a Faber recommendation, presumably to preserve wealth - the analysis is that governments will enter into competitive currency depreciation.

Nice to have so much wealth left after buying all you need.

FTSE and Dow predictions revisited

The FTSE is standing (if that's the right word) at 4,732 (13:50 BST, 08:50 ET). It seems to be edging towards the region I guessed at on 26 June this year. It had closed the day before at 5,666.10 and I said this:

I suggested on Wednesday that the market may already have lost much of its bubble, considered in real terms, and here below is my simple attempt at chartism.

What I've done is to draw two purple lines, one connecting the lows in the mid-80s/early 90s, and the other the highs in the same period. I've chosen that time-frame because it's before the silliness of the late 90s, and it does also include a period when the UK economy was in the doldrums.

Using these parameters, the late 90s and early 00s were well above trend, whereas last year's highs only just peeped above the upper line and the current value is hovering a little above the centre of the hi-lo wedge.

The implications are that the next low, if it comes soon, shouldn't be worse than around 4,500, and by 2010 (when I'm guessing the tide will turn) the bracket would be in the 4,700 - 7,000 bracket, with a midpoint of c. 5,850.

Taking the market at close yesterday and extrapolating to that 5,850 midpoint, would imply a future return (ignoring dividends) over the next 16 months, of c. 2.5% p.a. - not nearly as good as cash, especially in an ISA. On the same assumptions, to achieve an ex-dividend return of 6% p.a. would require entry into the market at c. 5,400.

On this tentative line of reasoning, we should be looking for a re-entry opportunity somewhere in the 4,500 - 5,400 level, say 5,000. Shall we wait for the next shoe to drop?

How bearish are you? Too much so? See the poll in the sidebar.

By the way, I did a similar exercise for the Dow the next day and it suggested to me that the range should be 7,000 - 10,000.

UPDATE

I'm in good company:

Mr Lenhoff [chief strategist at Brewin Dolphin] predicted that the FTSE 100 could settle between 4,500 and 4,600: "In this bearish phase the market has given up more than 50pc of the bull market gain, we are back where we were in early 2004. One of the key retraceable levels is thought to be two-thirds of a bull-market gain, which would be between 4,500 and 4,600. The market looks like it wants to give up the gain."

Utter stupidity

A silly gloat here, about China being dragged down when the overspending stops.

When will the experts understand that Chindia will have the tools and skilled workers to rebuild their fortune, AFTER the Crash? Why on Earth has the East been subsidising the improvident West for so long, if not as part of a plan to extract all the means of production it could?

Do the experts not realize we have been in a state of economic warfare for years?

How to force the UK Government to give 100% guarantee on your deposits

... Transfer all your money to National Savings and Investments.

Their guarantee:

"Backed by HM Treasury
100% secure

National Savings and Investments is backed by HM Treasury, so any money you invest with us is 100% secure."

The Easy Access Savings Account can take up to £2 million per person. In all, depending on your age, NS&I could take more than £6 million per head.

If enough people know about this, and act on it, only Northern Rock will be run-proof. HMG will have to provide an "Irish guarantee". Unless, of course, the Chancellor suddenly welches on government credit, and that really would be the end; or closes the door to new NS&I deposits.

Total retail deposits in the UK are now around £1.17 trillion, of which nearly half is not covered even by the £50,000 deposit protection limit that came into force on October 3rd. So if everybody takes appropriate action, NS&I (and/or Northern Rock) should expect an influx of about £468 billion pounds.

Funds invested in NS&I stood at £84.8bn in 2007/08. A full-scale "flight to safety" would entail an abrupt 550% increase in their deposits.

Get in while you can?

But not into Ireland:


However, experts are already raising questions over the Irish scheme, and asking how much protection it really affords. Adrian Coles, the director general of the Building Societies Association, said savers should write to the Irish Embassy to ask them how they intended to guarantee UK savings, and how they would obtain enough sterling in the event of a bank failing.

"Has the Irish government quantified the potentially huge liabilities it is taking on by guaranteeing sterling deposits in Britain, where household cash savings amount to £1.1 trillion?" he said.

"Savers should beware that, if they switch accounts to take up this guarantee, they are effectively betting on the Irish government's ability to buy sufficient sterling in the foreign exchange markets.

The Chinese and US mortgage-backed securities

... and while we're discussing the potential in backing the horses that China bought into:

New York Times, 4 September 2008:

China’s central bank is in a bind.

It has been on a buying binge in the United States over the last seven years, snapping up roughly $1 trillion worth of Treasury bonds and mortgage-backed debt issued by Fannie Mae and Freddie Mac.

The $1.7 Billion Payday: How Bill Gross Made a Killing on the Bailout - Seeking Alpha (14 September 2008)

... The upshot is, Treasury Secretary Paulson was happy to make an example out of equity investors like Miller, who knew they were taking a big risk in pursuit of a big return.
But no way, no how was Paulson about to blow out the holdings of one of America’s top creditors (China).

By some estimates, China has now amassed as much as $1.6 trillion in foreign reserves, with more than two-thirds of that parked in U.S. debt instruments (agency debt, treasury bonds and so on). Burn those guys in a bailout plan? You’ve got to be kidding. Fiscally speaking, that would be like shooting ourselves in the foot with a machine gun.

So Gross had a pretty good lock on the situation. He knew it was sharp to align his interests with China’s. And to further ensure a positive outcome, the Bond King took every opportunity by ranting and raving from his soapbox -- a mighty big soap box -- about how government should be on the lookout for mortgage holders, and how letting mortgage owners suffer would be a travesty.

When news came out that the Fannie and Freddie debt holders would indeed be kept whole (as China demanded and Gross knew would happen), the value of those debt holdings soared, giving Gross a $1.7 billion pop in the value of his fund.

Business Week, 27 Sept 2008 (via Fox44 website)

"Perfect" Bond Asset Class?

Bill Larkin, portfolio manager for fixed income at Cabot Money Management in Salem, Mass., advises people to stay away from Fannie and Freddie debt except for shorter-dated maturities, since the agencies' fate remains to be seen. If they become part of the government, investors will win, whereas if they are broken into pieces, investors will lose because the debt will be much less liquid. He recommends other government agency debt such as that issued by the Federal Home Loan Bank or Ginnie Mae. He also suggests people buy these bonds to hold until maturity instead of buying them to trade them.

Aha!

I said in the previous post that I remembered some US official flying to China last year to flog mortgage-backed securities to them. Found it (13 July 2007) on Bloomberg:

... U.S. Department of Housing and Urban Development Secretary Alphonso Jackson is in Beijing to persuade the Chinese central bank to buy more securities from Ginnie Mae, a corporation under HUD that guarantees $417 billion in federally insured, fixed-rate mortgages.

... Ginnie Mae is ``in a better position than most'' to offer mortgage products because, unlike Fannie Mae and Freddie Mac, it provides the full backing of the U.S. government, Jackson said. Mortgage securities offer China's central bank better returns than U.S. Treasury bonds at the same level of credit risk, he said.

Now the chickens are flying back to roost.

Snap! And crackle...

On Thursday, I noted that, in the last 12 months, America has paid over $400 billion in interest payments on "the debt", AND increased the debt outstanding by around $1 trillion, making a total of $1.45 trillion. (I know I'm adding apples and oranges, but both elements are burdensome obligations.)

Now, noting the drop on the Dow and the cost of rider-bribes to the bailout bill, Karl Denninger is at the fruit-summing game:

Bailout Bill $700 billion
Additional Pork $150 billion
Dow (-484) in 3 hours $600 billion
Total carnage to you, The Taxpayer $1.45 trillion

The government is feeding the woodworms. Mish is convinced that deflation is inevitable ("There has never been hyperinflation in history with falling home prices.")

So you'd be forgiven for thinking, "What's the point in destroying even more money on this bonfire? Cut out and burn the rotten wood first, then rebuild the house."

Not so easy. The situation is especially bad because it's spilling over into international relations. Some American official (I forget who) flew over to China last year to get the Chinese to buy into mortgage-backed securities. Did the US really think a powerful partner would allow itself to be cheated when the package turned out to be rotten? (And didn't the Chinese know that, anyway? Isn't it possible they bought the rubbish because they were confident they could force the US Government to make good on it?)

I would almost say, buy into the packages the Chinese bought; but I expect there are ways to make the Chinese the preferred creditors and stiff everybody else.

Remember that Denninger has been saying recently, buy a good home safe and get your cash out of the bank? Let's see how unreasonable his doomster position turns out to be.

Well, you got what they wanted

The Saviour Bill is passed, and with a sigh of relief, the Dow... DROPS 157 points, as the dealers begin to realize that 200m American taxpayers have shelled-out $3,500 each for nothing at all. Look at the "panic" on Monday when the Bill was thrown out, and the "joy" now.

Financial white-water dead ahead

Jesse reports on an FT article from Wednesday, which suggests that the "hurry-up-and-give-us-$700bn" is to do with the need to renew credit default insurances on Fannie, Freddie and Lehman this month - the first two immediately after this weekend.

Maybe I was right, then, when I thought I saw panic in Hank Paulson's demeanour the other night, as he responded to Congress' rejection of the bailout proposals.

Oh, and London Banker reflects bleakly: "The crash in equities will still happen."

US debt-to-GDP, 1940 - onwards

Belatedly, it occurred to me that it could be more useful to see the progress of the debt burden in terms of national earnings. This is from Steve McGourty and is updated as of 21st September.

I'm not sure how much comfort we can take from the fact that the blue line was slightly higher in the mid-1990s, and far higher in the '40s. I suppose it depends on what you think may happen to the GDP part.

US debt outstanding, Fiscal Years 1950 - 2008

Figures are in billions of US dollars.

US debts vs. other expenditure - 2006

Here's the importance of debt, compared to other Federal and local State expenditure.

I've taken the interest on the debt for the fiscal year 2006, plus the amount by which total debt increased in the 12 months ending Dec 29, 2006. That's because the outstanding debt is increasing even faster than the amount of interest being paid.

(Figures are in billions of US dollars.)

By way of comparison, I also give below two figures - the increase in debt plus interest paid for 2006, and then for 2008. In the latter case, the increase in debt is that from 30 Sep 2007 to 12 months later, and the interest is the latest available as per here.

In other words, if America had no such debts, she would have $1.45 trillion more per year to spend on other things.

Interest, plus rolling-up more debt, now equates to some 30% of all non-debt-servicing costs of the States and Federal Government.

Existing debts and the Bailout Bill

Treasury debt information

$431,270,863,309.37

That's America's "Interest on the debt outstanding" for the fiscal year 2008 - not ended.

20 years ago, it was $214,145,028,847.73.

Zgirl's "Better than nothing" blog explains why deflation would cripple the American government, so money has to keep pouring in and we have to hope that foreign creditors (including the equally busted Brits, it seems) continue to buy-in US Treasury securities.

How to come down from this perilous height?

If this is the pitch, the answer is "No".

I've just watched Democrat Senator Harry Reid try to sell the revised bailout bill, live on BBC News 24. He may have unfortunate body language, and until this minute I knew nothing about him; but I wouldn't buy a certified gold bar from him for an obviously forged red cent.

He refers to a major insurance company allegedly under threat, and a hypothetical example of a local Nevada bank safeguarded by increased deposit insurance. And as I've been typing this, I've been hearing Senator Hillary Clinton enunciating, in her hectoring, braying, bored voice, all the good reasons why "I" want this, that and the other and so should you.

Maybe they're just the world's worst salespeople, but I don't buy. Sorry.

Your prediction?

Experts and interested amateurs: please give us your best guess at the value by end 2008 - see sidebar.

So you think the USA has problems?

"European banks are generally more levered than their U.S. counterparts."

Paul Kedrosky (htp: Jesse)

UPDATE: the Daily Telegraph concurs.

The $700 billion is to appease foreign investors?

I said in August that I thought powerful foreign creditors would refuse to be cheated, and now Karl Denninger tells us that the $700 billion bailout is to compensate these parties.

And that probably doesn't mean us Brits, either.

More from iTulip

Eric Janszen gives us his take on the brouhaha:

This iTulip post describes the process whereby the current deflation may suddenly turn into inflation.

This one warns against Bill-bashing for its own sake, which may be cutting off your nose to spite your face - something must be done, he says, because the market does NOT self-correct. I would suggest that it might, if the government and banks hadn't "intervened" long ago to create a fiat currency. Once that's happened, we're playing the game for the benefit of bankers and politicians, and by their rules.

And the solution?

Anyone who saw Brian Cox as Titus Andronicus at the Swan in Stratford in 1987, can never forget it. I remember seeing a girl in the audience with her mouth hanging open, paralysed, as Titus stunned us with his almost gloating description of his suffering. And what a master Shakespeare was, understanding that when emotion is heightened, it is also complex.

TITUS Ha, ha, ha!

MARCUS Why dost thou laugh? It fits not with this hour.

TITUS Why, I have not another tear to shed.

Humour can also unblock the mind to work creatively in a disaster. But there is also the "We're doomed, I tell ye!" John Laurie type who only cheers up when it's as bad as he always said it would be. Watch out for them, because unconsciously, they may steer events to match their temper.

iTulip explains succinctly, below, the problem caused by the house price crash. For me, though, it's a reminder of how wonderful the old cartoons are.

Boing!

Dow and FTSE back up again. Thought so. But unlike 1987, I don't think this will be over by Christmas. Bear market rally, don'tcha know?

Super post by Denninger today, too. He points out, among other things, that the Dow started falling yesterday when everyone (himself included) expected the Bill to pass. And as he says, Bernanke upped the money in the system by vast amounts anyway, and it still hasn't fixed the problem. Just how much petrol do you need to throw onto a fire to put it out?

The BBC perspective

After yesterday's "No!" in Congress, BBC "business editor" Robert Peston refers to a "breakdown in the US political system."

To me, it's the very opposite: it's a prewar Lagonda that has spent years with its axles on bricks, and it's just had a new set of tyres put on; after long disuse, the engine has finally turned over. Maybe it will seize up again, but for now there is a hint of democratic accountability.

For example, is it not interesting that more Democrats voted against the Bill, than Republicans for (both as a percentage and in absolute numbers)?

I watched Peston on TV last night and said to my wife, "I should be in front of that microphone." I heard him on the radio this morning and still want his job.

The MSM: one despairs.

Horton heard a Who

Congress just heard from the voters. Let's hope Horton listens closely.

Now what?

Maybe I'm not that good at body language, though I've spent years with unstable children; and maybe it's having to speak to a semicircular audience of journalists outside the White House, and he hasn't learned the actor's trick of seeming to direct his attention steadily to one indeterminable member of the audience; but Hank Paulson's statement made just now (c. 21.45 British Summer Time), with the left-middle-right upanddown movement of his head, and the earnestness of his mouth and lips, makes him look panicky.

But maybe the worst players in the banking market should be allowed to burn out anyway, as Marc Faber has said for a long time.

How many of the crucial 10 swing votes in the House were down to the polemical fax-fomenting of Mish, Denninger at al?

And will the Establishment force them to vote again and again until they get it right? Nancy Pelosi and her "bipartisan" mantra (3 or 4 times in one statement) seemed to hint at this.

Under New Management

If I understand him, Nouriel Roubini (htp: City Unslicker) is saying don't buy the rotten apples, become the greengrocer's senior partner.

My plan: a $15 trillion dollar bailout.

US nonfinancial debt (second quarter 2008) is $32.4 trillion dollars. This pie chart gives a breakdown of the debt by type. US GDP in 2006 (est.) was $13.13 trillion - let's guess it's $14 trillion now. Thus debt as a proportion of GDP is about 230%.

This graph shows that the 50-year mean ratio of such debt to GDP is 120.1%. So to get back to a long-term average, DEBT MUST HALVE. As I said in a reply to a comment today, it's like a game of musical chairs, but taking away half the chairs in one go.

In fact, an almost perfect fit would be to cancel all the mortgage debt in the USA - just to get back to the level of debt averaged over the last 50 years.

And Marc Faber is saying the bailout will need 5 trillion, not $700 billion.

Hmmm....

Why don't we get really bold: $32.4 tn debt x 46% in the form of mortgages = $14.9 trillion. Give everybody their houses free of debt, make future loans on domestic property illegal. Yes, there'll be inflation, but the liberated houseowners will be able to afford it.

Will the banks be ruined? They're ruined now. Will the government have to nationalise them? They're doing it now.

These are revolutionary times. We may not be able to scourge the moneylenders from the temple, but at least we can chase them out of our houses.

Yes, the result's a house price crash, if you can't pump up the price with phoney-baloney money. But no debt, so so what?

The banker has inflated everything so you have to borrow to have anything. He's made himself indispensable, like a pusher of addictive drugs standing outside the school gates, giving away samples to get you hooked. He's your "friend", your "main man", who'll make you "well".

Bankers and their pet traders have become insanely rich by making you poor. Your assets are big on the outside and hollowed-out by debt on the inside; it's why they call it a bubble.

Do you know your enemy?

Bank lending - can somebody please help?

In the edited-out part of my recent letter to the Spectator, I pointed out that since 1963, average RPI has been c. 6.5% and the long-term real growth of GDP is said to be 2.5% p.a., so let's say nominal GDP growth has increased by 9% - my maths is up to that.

But over the same period, Bank of England stats show an annualised average increase in M4 bank lending of c. 13.5%, which suggests that lending grows at 4.5% p.a. above GDP. If that's right, UK bank lending as a proportion of GDP doubles every 16 years.

Can that be right? And what about the ratio of credit to the total of all national assets? Is that increasing, too? Because it looks as though eventually, the banks must own everything.

I reproduce below a graph from a mid-August post on Marc Fleury's blog. This shows the long-term ratio of total credit to GDP in the United States, and the current level of indebtedness seems to be way, way above the Great Crash situation in 1929.

Somebody please put me right and/or direct me to authorities and information sources.

My mind keeps saying, "This cannot be right, surely everything is sort of normal, really, we'll muddle through." I find myself discounting even McCain's Churchill quotation ("This isn't the beginning of the end of this crisis. This is the end of the beginning") and the politicians' use of the word "meltdown" to bounce Congress into accepting the bailout package proposals. I have spent years warning about a possible crash, but I've never, I think, allowed myself to get apocalyptic. I prefer my disaster movies to stay safely in the cinema.

So, how bad is it really, and does the banking system really have a tendency to acquire everything?

Faber says $5 trillion, not $700 bn

Dr Faber thinks the real cost will be seven times greater than the proposed bailout.

... and here are his thoughts on where to be invested - and the current advantages and future perils of holding cash:

The revolution is personal

"Financial Crisis: The next decade could be our very own Great Depression" says the economics editor of the Daily Telegraph.

Towards the end of the 90s, I was expecting a major crash. Then, I was in a laughable and condescended-to minority, it seems. And I'm certainly not important enough for anyone in the City of London to give me a minute of their heavily-overremunerated time. Even last year, warning on Cafe Hayek that America could become dirt-poor financially, I was mocked for my ignorance of "purchasing power parity".

I was unfamiliar with the phrase at that time, but I still think my instincts were right. I don't know what ordinary people are going to live on, in the US and the UK, when everything we used to make can be made cheaper elsewhere and the world's average income (in Purchasing Power Parity terms) is $5,000 a year.

Being right is no use at all, except on a personal level: I re-entered the despised public sector at the end of 1999 so that I would have something to live on when the financial world unravelled. Now, you need to make your own survival plans - it shouldn't (I earnestly hope) be guns and dried food, but what line of work will you be doing and how much can you sell to get rid of debt?

It's not too late. The Equitable Life mess took a long time to reach its endpoint, and there was quite a window of opportunity to get out of their with-profits fund with a reasonable amount of your savings intact. Similarly, houses have dipped in price, but (in my view) nowhere near hit bottom; nor do I expect them to return to current levels for a generation (in real terms; if the government permits hyperinflation, they may return in nominal terms, but that'll be no comfort when a loaf of bread costs £10).

When the government runs nearly everything, as it seems determined to do, maybe "if you can't beat them, join them". Here in the UK, the next administration will have very limited freedom of action, as the present one expects (perhaps wrongly) to lose the coming General Election and so has adopted a "Götterdämmerung" strategy - selling our nuclear power firm to the French, undermining the Monarchy, and generally assaulting anything that will hold us together politically, culturally and financially. In a way, I hope Labour wins again; but then again, it would be no punishment - they'd continue to eat and drink well while perfecting our destruction.

My newsagent told me this morning that he works 90 hours a week. He referred to a Daily Express front page story from yesterday, which said that it was indeed better to live on benefits. I'm not surprised. In ancient times, it was understood that if you wanted a good job doing, you employed a freedman, since slaves were complacent and lazy. Democracy has become a process whereby slaves appoint masters who will feed, clothe and house them.

In case you imagine I am politically biased, please note that I hold no brief for the pack of smoothies that is the current Tory Party, any more than for the Fifth Columnists who have spent 11 years destroying the country from the top. Both seem to see their future as part of the Euro-elite and think the common people depend on their bull****, as koalas depend on eucalyptus leaves.

Abandon all belief in these charlatans and concentrate on your personal life plan.

$700 billion: cui bono?

Hunter in the Daily Kos (HTP: my brother) says that the $700 billion rescue plan has no relation to the (much smaller) likely amount of mortgage defaults; instead, it's designed to prop up the derivatives scam that banks have been running for years.

I've thought recently that the bankers and traders are, in effect, being offered absolution without confession (1), restitution (2), doing penance (3) or a "firm purpose of amendment" (4).

1. Full disclosure of all liabilities and "assets"; admission of each person's part in the debacle. This should be Watergate Plus: there's a lot more than four burglars and the damage to third parties is incalculable.
2. Preferably, repayment of past bonuses awarded at a time when the recipient knew, or ought to have known, that the game was destabilising his own firm and the national economy.
3. Ideally, jail time, for some; at least, loss of office for those responsible.
4. Adoption of regulations designed to maintain the value of the currency and prevent future speculative bubbles.

From time to time we hear the defence that the consumer was at fault, too. Perhaps, if you're thinking about home equity withdrawals; but even the boll weevil is "just looking for a home" as Leadbelly sang, and when banks opened the money sluices house prices doubled. The buyer had no option to purchase a home at 2002 prices in 2007 (and I'm not sure what happened to the cost of rent in that time). The lenders should have known what they were doing; the poorest borrowers were not their equals in expertise. There was a duty of care.

What would houses cost, if it had always been illegal to use them as collateral for debt? What would the US and UK economies look like, if the vast sums sunk into housing had gone into small business enterprises? How much wealthier would we be?

Have Britons become slaves?

Lilith's daughter has been charged for demonstrating back in June. I was disturbed about it then, and am again now.

As in the early nineteenth century, the people are effectively disenfranchised and have little other way to express their dissatisfaction than by demonstrations - in this case, holding up a placard. Do American police arrest placard-holders outside the White House, or is America still a democracy?

It's not as though we're putting the windows through in Whitehall, as in 1831 (Reform Bill), 1855 (against closing pubs on Sundays) and on other occasions.

When did the police turn from being a people's Watch to fight crime as normally understood, to a standing army whose purpose is to suppress the people?

Spectator letter is published

The Spectator magazine has published my recent letter; heavily edited, but at least it was the first in the list, so that's some sort of recognition:

"Storing up more trouble

Sir:

Your leading article (20 September) calls for a ‘kick up the backside’ to the banking industry. That kick should be aimed elsewhere. The British and American governments have not merely permitted this crisis to happen, but positively created it by a deliberate relaxation of monetary controls. Worse still, they have now decided that instead of destroying excess credit by asset deflation, bankruptcies and share collapses, the monetary inflation is to be consolidated by absorption of bad debt into the public finances.

I don’t see how this can end well. Some commentators are already saying that, if passed unaltered, the proposed American financial legislation could, once properly understood, trigger a major crash in US financial shares, possibly before this letter is published.

I think The Spectator and its economically savvy readers should put on fresh pairs of winkle-pickers, and gather in Whitehall and Washington for some kicking practice."

A crisis of democracy, not of capitalism

One of the features of the present crisis is that it is not so much financial as political. Vast bailouts of greedy and destructive banks lead Americans to ask, who is running the country, and for whose benefit? Mish and others are turning from financial commentators to pro-democracy activists.

Shall "Government of the people, by the people and for the people" perish from the earth? The lazy, defeatist cynics of the UK fail to understand how Lincoln's words still burn brightly in many Americans' hearts. It's why they are so quick to attack their politicians as liars and shysters, wheras we merely expect them to be that anyway. Their idealism shames us.

A Marmite Backwater

Dark Matter, Dark Energy, now Dark Flow... my brother directs me to a new discovery/theory.

It seems that a great cluster of galaxies that is halfway towards the edge of the observable universe, is moving in a different direction from the general stretching of space-time. It's like a little boat caught in an eddy.

Cosmologists theorise that there may be massive, unobservable structures hundreds of billions of light years away, pulling these galaxies in their direction. They imagine that the universe beyond what we can see (c. 17 billion light-years) may be very different from ours.

And some of us laugh at mediaeval theological speculation. How foolish those people were, building elaborate worlds of internally-consistent ideas, applying nothing but logic to extend their understanding beyond the few things they were certain that they did know, attempting to move from the seen to the unseen.

And now we lift our gaze from the CERN to the unCERN.

I wonder what Ben Jonson would have made of it all?

May I prevail on you all for charitable contributions to fund a new chair of Marmite Studies?

Sell your house now?

If Karl Denninger is right and the long-term trend for house prices is 3 times income, instead of 5 or 6 as it seems to be now, then houses remain overpriced in real terms.

So even though house sales are seizing up and prices dropping, shouldn't we go ahead and sell anyway?

Diary of a mayfly day trader

Wait! I was wrong! The Dow is up 32 points (09:42 EST)! Buy, buy! We've turned the corner! I am renaming this blog Bullwatch!

Oh no, only 14 points now (09:44 EST). Hold. Or maybe sell - over 50% of gains lost in only TWO MINUTES, goodness knows what could happen in a whole hour. Yes, sell! Sell!

Gosh, this is hard. Think I'll watch the TV news, they know what's going on.

UPDATE

OMG, down 32.42 (10:13 EST)!! In only 43 minutes! Over a 7-hour day that means 633.32 off the Dow!!

No, make that "!!!"

And there's another two days to go!!! !!! !!!

However could Mouton de Rothschild stand the tension?!!??

A note to newsreaders from the Pronunciation Unit

Say "new". Say "clear". Now, say "nuclear".

Just wondering

Why does having a ladder on your roof make you drive badly?

Paulson gets super-rich on short-selling

It's an ill wind... No relation to Hank, I suppose.

Komedy Korner

Harry Hutton points us to a sarcastic site that invites you to add your own bad assets to the proposed $700 billion bankers' buyout. Currently they're up to $415 billion. It's amazing what you've got in your attic and garage.

Bear market rally blues

Dow 18 Sept: 11,019.69
Dow 19 Sept: 11,388.44
Dow 22 Sept: 11,015.69
Dow 23 Sept: 10,854.17

Inspired by Nick Drew's bardic effusions, I offer a pastiche of Lonnie Donegan:

Does your equity lose its value
On the market overnight?
If your broker says don’t do it
Do you buy loads more in spite?
Can you hedge it with short selling?
Can you get the timing right?
Does your equity lose its value
On the market overnight?

Wall Street is waking up

The Dow has just dropped to 4 points below where it closed last Thursday; the 368-point sigh of relief it gave on Friday has been replaced by slightly sharper take of breath. It seems the equity traders are beginning to understand the details of the toxic buyout "solution". The rest of this week should be interesting.

Derivatives: the "pub with no beer"

You could be forgiven for thinking that financial bloggers are hysterical and fantasy-ridden, far more so than the middlebrow newspapers that have only just caught on to the crisis.

Until you learn the facts.

The money system is so enormous and complex that nobody knows all the details, but it is estimated that in 2007, the entire world's GDP was equivalent to $54.35 trillion.

Derivatives - mutual insurance without the requirement on anybody to hold any assets - have recently been estimated by the Bank for International Settlements at over $1,000 trillion.

To put it visually (figures are in trillions of dollars):

And now a quotation on default rates - the percentage of bonds (promises to repay) that fail:

NEW YORK, Aug 1 (Reuters) - The U.S. junk bond default rate rose to 2.25 percent in July from 1.92 percent in June, as a credit crisis and sluggish economy pushed more companies into bankruptcy protection, according to data from Standard & Poor's released on Friday.

The default rate is likely to rise to 4.9 percent over the next year and could reach 8.5 percent if economic conditions are worse than expected, S&P said in its report.

Note that in the case of derivatives contracts, a default rate of less than 5.5% would equate to a wipeout of a whole year of the entire world's earnings.

No wonder that governments are absolutely determined that confidence in the system must be maintained, at whatever cost. It may take a long time to blow up a balloon, but it doesn't burst slowly.

And how do we get out of this threatening situation? How on earth, to use a different analogy, will the cat ever climb back down from so high a tree?

Lehman and that $8 billion

Lehman administrators have filed a court order for the return of $8bn that was transferred from the UK to the US just before the firm's failure. The radio news this weekend said (my phrasing) that it was Lehman's practice to park the money in the US overnight to earn interest.

Reuters says "Administrators for Lehman's European operations have questioned why $8 billion was transferred to New York from London just before the bank collapsed."

Was this really standard practice? Couldn't the money have been earning (possibly higher) interest overnight here? Do other firms do the same?

Or was it part of a Lehman plan to draw assets back onto US soil in preparation for its bankruptcy, in order to favour American creditors over foreign ones, as London Banker mooted on 12 September?

Another prophet foresees market panic

Thus Jim in San Marcos:

This week, look for a serious drop in the DJIA of 4,000 to 6,000 points and the close of the stock market for a week or two. [...] Most people have sensed something is seriously wrong with the markets and are heading for the exits (even the President said so). With the automated computer trading system in place, this could be very fast and furious,--sleep late and wake up broke.

Monday morning at the brokerage houses you’ll hear; “Sell everything; I didn’t sleep a wink the whole weekend.” It will be a group effort.

Carte Blanche; take cover!

We're back in the days of Dumas' Cardinal Richelieu (*), as London Banker points out. He quotes Section 8 of the proposed new US financial legislation:

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

How is this to be subjected to democratic accountability?

I essayed a paranoid spoof on Friday, only to find it exceeded by reality. See Karl Denninger for more details of the amazing, autocratic powers proposed in the new US financial legislation.

This is not a sweary blog, but if that becomes law, head for the bl**dy hills.

Denninger also explains how the $700 billion limit can be manipulated to absorb infinite amounts of bad debt, by discounting on resale and then taking on more fresh garbage. He says:

I predict that if this passes it will precipitate the mother and father of all financial panics, although exactly when the "short bus" riders who inhabit the equity market will figure it out remains to be seen.

_____________________________

(*) see Wikipedia:

"Dec. 3, 1627

It is by my order and for the good of the state that the bearer of this has done what he has done.

Richelieu"

Another letter to the Spectator

Let's see if they bin this one: (n.b. I've made a few alterations in the hour since posting)

Sir;

Your leader (“Long live capitalism”, 20 September) calls for a “kick up the backside” to the banking industry. That kick should be aimed elsewhere.

Light regulation and free markets, which the Spectator advocates, depend on the self-regulating properties of a sound money system. But like many others, the British government has long used the fiat nature of its currency-cum-credit to solve temporary problems and create permanent ones. The long-term real growth of GDP is said to average 2.5% annually, yet since 1963 the Bank of England’s own statistics show that the M4 money supply has grown by about 13.5% p.a. Over the same period, RPI has averaged about 6.5% p.a. At this rate, the banks will ultimately own everything.

For the first 5 years of the New Labour administration, M4 growth was, not exactly prudently, but less recklessly, restricted to around 8.25% p.a. However, by 2003 the FTSE had halved from its 2000 peak, and there was gloomy talk of recession; and over the next five years M4 suddenly averaged nearly 14%. Then house prices doubled; hinc illae lachrymae.

How did this happen? The system of fractional reserve lending means that banks can loan out a multiple of what they retain in their vaults. State regulators set the rules for the required marginal reserves, and when reserve requirements are halved, lending can double, and usually will; like Labradors, bankers will have whatever is put on their plate.

Knowing this tendency, the British and American governments have not merely permitted this crisis to happen, but positively created it by a deliberate relaxation of monetary controls. Worse still, they have now decided that instead of destroying excess credit by asset deflation, bankruptcies and share collapses, the monetary inflation is to be consolidated by absorption of bad debt into the public finances.

I don’t see how this can end well. Some commentators are already saying that, if passed unaltered, the proposed American financial legislation could, once properly understood, trigger a major crash in US financial shares, possibly before this letter is published.

I think the Spectator and its economically savvy readers should put on fresh pairs of winkle-pickers, and gather in Whitehall and Washington for some kicking practice.

Yours faithfully