The US-dominated world financial system may well be in much more trouble than most people think. Paul Krugman is blogging today about his concerns in the “spreads” between LIBOR rate– the rate that London banks actually charge each other for overnight loans– and the T-bill rate, and between the LIBOR and US Fed funds futures.
He concludes:
- All of this involves fear of defaults by banks — despite what look from here (central New Jersey) like utterly clear signals from the Fed that bank debts will be socialized if necessary. I’m puzzled, and worried.
George Soros is also still worried. Bloomberg’s Patricia Kuo and Bei Hu report that he said that the crisis in financial markets caused by the US subprime mortage collapse “will get worse before it gets better.”
He also said,
- This is a man-made crisis and it’s made by this false belief that markets correct their own excesses. It will take much longer for the full effect of the decline in the housing market to be felt.
That’s roughly the same thing he said in the conference call I participated in with him last week.
What we learn from the Krugman remarks cited above is that (a) what Krugman’s hearing is that the Masters of the Universe at the top of the world financial system are so worried about the present situation that they’re even prepared to go much further down the road of “socializing” (i.e., nationalizing) their favored cash cows, the banks; and (b) even that might not be enough to save the world financial system from further implosion.
Actually, the “a” there already seems like a clear sign of crisis. (And if these imploding banks do get socialized, guess who gets to pay all their debts and bills? And guess who gets off scot free, and padded by handy golden parachutes, great gobs of accumulated savings, etc??)
Krugman and Soros are two very savvy guys. Be worried. And maybe we should be planning a more humane and rational economic system, starting right now?
Re: ‘socializing’ Krugman isn’t claiming the US banking system will be nationalized (!), but that there’ll be some kind of a bail-out of bank sponsored debt -he’s written half a dozen editorials to this effect recently. eg:
http://www.nytimes.com/2008/03/17/opinion/17krugman.html?hp
“Gruk”. The financial statistics are over my head. But, Krugman was right about the Bush Team being Radicals. If he is worried, I’m scared.
From the American Airlines fiasco, through the Katrina failure, to the Global War and Terror, the constant theme of the Bush Administration is “government is evil, greed is good”; corporations are stakeholder number one; ignore rules and regulations; wear out the infrastructure; American citizens be damned; Lie and Spin; Kill Evil Doers.
The only way to bring fiscal sanity and save American Middle Class is to tax the rich, close offshore tax havens, and turn off the DOD money spigot. John McCain has guaranteed to do the exact opposite. Even Barack Obama will keep the money flushing for two more years. The Crash is guaranteed.
I’ve been reading, and agreeing with, Paul Krugman for many years. I haven’t read George Soros as much. I think George has identified the problem.
Many of the people we currently have in positions of authority have what could be called the religion of “Capitalism.” This is not to say that capitalism is bad. It is just that capitalism is not the only, and in some cases not even the best solution. Infrastructure maintenance comes readily to mind as sometimes working better with a socialist approach.
It is interesting that we regulate our sports much better than we regulate our businesses. In sports we understand that game boundaries need to be defined and certain behaviors, which could cause injuries, made illegal. In business we need to have the same approach. Injurious behaviors in business are responsible for much graver and far reaching harms than any sporting event.
And yet this disconnect may be related to an axiom I became accustomed to in my years of justifying capital expenditures. It was always easier to justify the high dollar items. Expenditures for lower cost support equipment; without which the major item would be useless; were questioned much closer. And sometimes rejected.
Infrastructure maintenance comes readily to mind as sometimes working better with a socialist approach.
like Chernobyl, deforestation of North Korea, air pollution in China, decaying sewage systems in Cuba?
Hummmm—according to one source, about 30% of U.S. jobs were in construction while the economy was going well. Those were housing bubble jobs that probably won’t come back. So, what will fuel the economy if we don’t have a source of employment?
Maybe I can get rich by growing food.
Bob Spencer
According to one source, about 30% of U.S. employment was in construction while the economy was going well. Those were housing bubble jobs and they probably won’t come back.
So, what will fuel the economy, now?
Consider this. Right now in Charlottesville, it is not unusual for seniors living off of Social Security to run out of money and food for about three days before they get their next check.
People in countries from Vietnam to Africa spend about an average of 70% of their incomes on food.
I wonder if food could help drive this feeble economy?
Bob Spencer
According to one source, about 30% of U.S. employment was in construction while the economy was going well.
Are you sure you didn’t misunderstand here? Sounds more logical that 30% may have been related to the housing industry, which is quite a different matter. I don’t think that that 30% were out there hanging sheetrock!
“Capitalism” didn’t cause the housing bubble. Demograhics did. The last housing bubble was in the late 1970s and early 1980s. (It was called a real estate boom then.) This occured when the “Baby Boom” generation peaked and started family formation (i.e. having kids). Now, 25 – 30 years later, those children are having children of their own, and they are no less impatient than we were 30 years ago.
The financial statistics are over my head.
VV, I really doubt that. Anyone can take a day or two to read about these risk measures that Krugman is flogging. Its a shame that waving around some numbers can intimidate a public that doesn’t trust itself to understand them, as if financial obscurantism wasnt itself on trial.
Banks and hedge funds owe a lot of money to each other due to some insurance-policy like bets they made some time ago, guaranteeing housing and credit stability. There’s now the risk that a lot of the hedge funds screwed up buying these things, and with them sovereign wealth and european pension funds. Indirectly the banks were hurt because they were exposed to the afflicted via trading (UBS, BS) and brokering (Goldman et al) . And Citigroup, hurt by both. So one set of speculators made money guessing that these lending practices were unsafe to bondholders, not the general public & and others absorbed capital losses… and of course the market for the dangerous policies evaporated overnight. A lot of bondholders all over the world lost money, though from now-uninsurable yield spreads not from defaults.
Robert Rubin (did I mention he sits on the board of Citigroup ?) thinks the US government should and will step in to help all of them and Krugman (as a savvy follower of other savvy hotshots like Soros and Rubin) agrees. But the bond market suspects the US taxpayers will refuse to do so — and this is where Krugmans numbers kick in. He’s cites 3 market indexes measuring different kinds of credit cost, some of whose prices are set by the very same banks and hedge funds currently in a bind, set in part by the instruments that are putting them in that bind (no-longer-cheap credit insurance).
These “terrifying” market measures say that capital markets -speculators and banks- are still discounting future as well as current credit quality. Not because companies are more likely to fail, but because there’s no one around anymore to offer these once-too-cheap credit insurance policies that (despite carrying high risk for meager reward) actually did offer these other markets confidence.
So why does the market’s view that the status quo will prevail scare him? I’m not sure. Because bond markets are correct to expect no “free lunch” from hedge fund suckers or the feds, and for the credit and housing markets to revert to more rigorous lending standards of pre-1994? in other words to kiss leveraged credit speculation goodbye? Or scared that bond traders are wrong & “socialization” might invade the banking system like a cancer, costing the taxpayer trillions in non-specific “bailouts”? And if the latter, why cite the “TED spread” at all?? Which scenario is causing him terror, and why should we share in his terror?
Personally I’m not sure which one he means. Part of me suspects he doesn’t either, but prefers ambiguous scaremongering to guessing wrong. Maybe he (like Soros, whose job it once was) just wants to see people jump at his pronouncements. (cf Krugman hyping the long awaited Iran showdown that continues to lose me money in WW III futures.)
he thinks the markets are chronically wrong, why is Krugman investing the same capital markets (TED spread and Fed Funds traders) with sudden predictive insight? Doesn’t he recognize the self-referentiality of these indexes? And if I misread him, he thinks they’re wrong, and Joe taxpayer gets soaked, how would it even play out? will the US treasury cut a check to the Chinese government, some offshore hedge funds, or Citigroup to cover their bad market call on yields spreads? As powerful a man as Robert Rubin might seem to some of his tennis pals and fawners in the press, I rather doubt that’s going to happen.
Poster “vadim” has it right: it’s the familiar maxim
“privatise profits, socialise losses” that is in ascendancy now, i.e., “too big to fail”, let’s have a public treasury rescue plan. Once again we see overwhelming evidence of the institutionalisation of MORAL HAZARD as the paradigm of globalised finance, all at the expense of working people, and for the gain of a powerful financial elite.