They've Certainly Fixed THAT

by rifek Fri Oct 24th, 2008 at 10:02:43 AM EST

This whole bubble deflation/market contraction thing is just a liquidity problem, right? So if the central banks pump a trillion (pick your currency) of taxpayers' money into the system, it will right itself, right? Right?

So why did the European and Asian exchanges drop 10% overnight? Why the US stock futures markets close before they opened today because they'd already hit their limit down? The answer lies within an article from Reuters this morning, quoting Citi Index's Tom Hougaard, "There will be more margin calls today, and something sinister is brewing."

Margin calls mean credit is continuing to contract. Which means that liquidity continues to dry up, in spite of the injection from the central banks. Which means, as I have been saying elsewhere, that the problem is not liquidity but solvency. Assets bootstrapped themselves up for years, supporting the debt that supported their inflated prices. When debt started destabilizing with the ARM resets in the US in late 2006, lenders suddenly realized, "Oh poop, we aren't going to get repaid, and the assets securing the debt don't really cover us." Then it began to unwind. And while the debt was still there, the assets began sinking from their debt-inflated heights to a level that a real market could sustain (No, they haven't bottomed yet.). So the assets in the system are now worth far less than the debt in the system.

That isn't illiquidity, folks. That's insolvency. And the "something sinister" that's brewing is the realization that no amount of paper can patch this over.

They've Certainly Fixed THAT | 34 comments (34 topical, 0 editorial, 0 hidden)

Re: They've Certainly Fixed THAT (none / 1)

European Tribune - Comments - They've Certainly Fixed THAT

That isn't illiquidity, folks. That's insolvency. And the "something sinister" that's brewing is the realization that no amount of paper can patch this over.

Yup. The system is terminally fucked.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Oct 24th, 2008 at 11:04:11 AM EST

Re: I am LOL! (none / 0)

What does it mean when one of the "in the know guys" here at ET decides that a reasonable statement is "Yup. The system is terminally fucked."?

Are we actually on the cusp of "Something New"? My trademark on that.

They tried to assimilate me. They failed.

by THE Twank (yatta blah blah @ blah.com) on Fri Oct 24th, 2008 at 11:21:18 AM EST
[ Parent ]

Re: I am LOL! (4.00 / 2)

Perhaps we're on the cusp of something old. 21st Century, meet the 14th Century.

by rifek on Fri Oct 24th, 2008 at 12:35:16 PM EST
[ Parent ]

Re: I am LOL! (none / 0)

probably the age of Aquarius.

Any idiot can face a crisis - it's day to day living that wears you out.

by ceebs (ceebs (at) eurotrib (dot) com) on Fri Oct 24th, 2008 at 12:37:47 PM EST
[ Parent ]

Re: I am LOL! (none / 1)

Not far off, I think.

My view is that it is the ways of working that pre-date capitalism that give an insight into the legal and financial structures that are necessary for "Peer to Peer" credit and investment.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Oct 24th, 2008 at 12:42:12 PM EST
[ Parent ]

Re: I am LOL! (4.00 / 2)

I was thinking more along the lines of trade collapse, plague, and religious zealotry, but in my more optimistic moments, I simply think we will be compelled to adopt many pre-industrial elements in order to build a sustainable economy and society.

by rifek on Fri Oct 24th, 2008 at 01:04:06 PM EST
[ Parent ]

Re: I am LOL! (4.00 / 2)

I don't see it - not for a few decades, anyway, and for other reasons. There is too much unified interest from those in power to keep this going to let it collapse. All that needs to be done to keep capitalism going for another five decades is to reenact the regulatory structures that were removed over the past few decades along with a few new ones (ban derivatives, etc).

you are the media you consume.

by MillMan (millguy at gmail) on Fri Oct 24th, 2008 at 01:29:02 PM EST
[ Parent ]

Re: I am LOL! (4.00 / 2)

I don't doubt the unified interest of those in power.

But they can't hold back the tide any more than Canute could.

The system is absolutely, magnificently, mathematically fucked.

It doesn't matter who you are, you can't beat the mathematics of compound interest on a money supply created as debt.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Oct 24th, 2008 at 02:26:42 PM EST
[ Parent ]

Re: I am LOL! (none / 0)

ChrisCook:

But they can't hold back the tide any more than Canute could.
The system is absolutely, magnificently, mathematically fucked.

oh man, that's tellin' it like it is...carved in stone.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Fri Oct 24th, 2008 at 04:23:39 PM EST
[ Parent ]

Re: I am LOL! (none / 0)

It doesn't matter who you are, you can't beat the mathematics of compound interest on a money supply created as debt.

You and I will soon go through that mathematical inevitability in some detail...

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Carrie (migeru at eurotrib dot com) on Sun Oct 26th, 2008 at 05:05:51 PM EST
[ Parent ]

Re: I am LOL! (none / 1)

You mean it's time to re-read Fernand Braudel's "Civilization and Capitalism" to see how they were doing it in the 14th and 15th century?

by Bernard (bernard) on Sat Oct 25th, 2008 at 04:23:46 AM EST
[ Parent ]

Re: This is SUCH a wondeful thread! (none / 0)

Somebody should bronze this thread. I am the proud PaPa. I started it.

They tried to assimilate me. They failed.

by THE Twank (yatta blah blah @ blah.com) on Sat Oct 25th, 2008 at 03:15:57 PM EST
[ Parent ]

Re: They've Certainly Fixed THAT (4.00 / 2)

Someone was going on this a.m. on the tv while I was making coffee. He sounded pretty reasonable, and ended with "Well, this could be fixed by injecting more cash, but it would take around $35 trillion."

Time for household budget tips?

To save on coffee, mix your favorite beans with an equal portion of ground roasted barley. If you can buy barley in bulk, it is a simple matter to roast it in the oven.
When you are using the oven anyway that is, and on cold days.
It doesn't taste all that bad, not really.

Experience keeps a dear school, but fools will learn in no other. -- Dr Johnson

by melvin (melvingladys at or near yahoo.com) on Fri Oct 24th, 2008 at 01:47:08 PM EST

Re: They've Certainly Fixed THAT (none / 1)

The problem is that money is just a governmental IOU backed by taxes. It isn't an asset as far as the government is concerned, it's a liability. In a functioning system, people are willing to accept those IOUs because the government is good for them, but the amount of debt involved now is beyond the ability to issue money to cover (i.e. there is no way to raise enough taxes to back that much money). Pumping more money into the market is just pumping more bad paper into the market. It may devalue existing debt by devaluing the means of paying the debt (money), but it can't devalue the debt as much as the assets that supposedly backed the debt have devalued, so it won't fix anything, and lenders will continue to insist that more hard assets be put on the table to balance the bottom line.

by rifek on Fri Oct 24th, 2008 at 04:54:07 PM EST
[ Parent ]

Re: They've Certainly Fixed THAT (4.00 / 2)

As long as the debt is denominated in their own currency, there's nothing in principle to prevent them from printing enough money to cover it. They can, after all, issue the currency by fiat.

But there's the pesky little detail that it'll shoot their credit-worthiness to shreds.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Oct 24th, 2008 at 05:00:55 PM EST
[ Parent ]

More than 'because the government is good ... (none / 0)

... for them', because they have to pay tax liabilities.

That is, the backing is not the tax receipts collected, which determine how much of the money created by spending is then immediately destroyed versus how much is added to the supply of fiat currency ...

... but the tax liabilities that give households and businesses an urgent need to be able to make payments in fiat currency.

But as we see in countries where monetary systems melt down into hyperinflation, that is just the kernel of demand for fiat currency ... when a currency loses its ability to function as a store of value, and becomes a means of exchange and nothing more, it no longer functions as a full fledged money.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Oct 26th, 2008 at 03:54:10 PM EST
[ Parent ]

Re: More than 'because the government is good ... (none / 1)

Right, a government can force the adoption of a currency by making it the only accepted means of payment for taxes.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Carrie (migeru at eurotrib dot com) on Sun Oct 26th, 2008 at 04:56:33 PM EST
[ Parent ]

Re: More than 'because the government is good ... (none / 0)

However, they cannot force people to hold balances in the currency if people are confident that the currency can always be obtained at better terms by holding an asset denominated in another money and cashing it in when needed ... which is the hyperinflation scenario.

In the face of hyperinflation, tax liabilities are always easier to meet if they are deferred, unless the tax liabilities are indexed, but then that turns into a disincentive to hold balances in the fiat currency, since the direct way to gain the returns in the currency to meet the obligations are to hold a more stable money.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Oct 26th, 2008 at 05:33:30 PM EST
[ Parent ]

Re: They've Certainly Fixed THAT (none / 1)

it would take around $35 trillion.

Thank you melvin! Earlier I asked how many multiples of the current money supply it would take to pay off all of the bad bets and debt. It was not a rhetorical question.

Given how CDSs and the other derivatives are structured, is there any estimate of the total amount of debt that is being guaranteed by these instruments? Put another way, the way things are currently structured, how many different parties will have to pay for the same defaulted debt, (the entire debt, not portions of it,) and why can we not devise a way to only pay once?

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Oct 24th, 2008 at 10:49:55 PM EST
[ Parent ]

Re: They've Certainly Fixed THAT (none / 1)

ARGeezer:

it would take around $35 trillion.
Thank you melvin!

well, i heard there are 32 trillion parked offshore in tax hideaways, that should cover it nicely..i'm sure we could rustle up the other 3 t. somehow, maybe taxing forex, funnelling it all through one UN-mandated portal, and skimming a cent on every dollar to be slated for micro lending and aid. the 'players' wouldn't miss it, and we'd solve the credit crunch pronto.

oh, and legalise and tax hemp too. it's a lot cheaper to get the peeps happy than to keep them tased into submission, and the authoritarians'll be able to use the cloth for all those nice uniforms they're so kinky for...

win-win, now shurrup and watch the telly like a good consumer!

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Sat Oct 25th, 2008 at 08:30:56 PM EST
[ Parent ]

Re: They've Certainly Fixed THAT (none / 1)

There isn't $32 trillion parked anywhere, not even King Fahd's mattress. No, cash can not fix this problem. Only hard assets can.

by rifek on Sat Oct 25th, 2008 at 09:06:18 PM EST
[ Parent ]

Don't forget the role of leverage, however ... (4.00 / 2)

... A owes B, which is a credit for B which was collateral for borrowing from C, so B owes C, which is a credit for C which was collateral for borrowing from D, and so on ... the total exposure can easily be many multiples of annual income, while at the same time the net payments to service the debt is only a fraction of annual income.

Of course, late in the Clinton administration, the Democratic administration and Republican Congress set up a system where a wide range of activities were immune from regulation. And competition among for-profit financial firms will always push them to scrimp on prudential reserves "under competitive pressure" if other firms are doing the same, which is why Panics, like the Panic of 2008, are regular events in non-regulated financial systems ... cf. the Panic of 1792, 1797, 1819, 1825, 1837, 1847, 1857, 1866, and etcera.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Oct 26th, 2008 at 04:04:08 PM EST
[ Parent ]

Re: Don't forget the role of leverage, however ... (none / 0)

Panics, like the Panic of 2008, are regular events in non-regulated financial systems

A fact which is conveniently forgotten too soon after the previous panic...

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Carrie (migeru at eurotrib dot com) on Sun Oct 26th, 2008 at 05:06:53 PM EST
[ Parent ]

Seems like the Panic of 1929, ... (4.00 / 2)

... followed as it was by an industrial "Depression" of nearly a decade, imprinted the risk on that generation. However, by the 1960's, those who experienced the Great Depression as adults were giving way to those who had not, and the process of ripping out the regulations imposed in the aftermath of the Panic of 1929 could begin.

Until in the US we could have a purportedly Democratic administration that was willing to trade away financial system regulation in order to pursue some small bore political successes that sounded good in speeches.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Oct 26th, 2008 at 05:10:59 PM EST
[ Parent ]

Re: They've Certainly Fixed THAT (none / 1)

goes well with haitian mudpies...

actually, i drink orzo (barley coffee) all the time. made in an espresso machine it has all the black ink factor of cawfee, without the adrenal slash'n'burn.

acorns, on the other hand are going to take more getting used to...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Sat Oct 25th, 2008 at 08:20:36 PM EST
[ Parent ]

$35 trillion (none / 0)

Are we talking about rescuing just the US banks?

$35 trillion is about 3 times the US GDP and between 1/2 and 2/3 of world GDP depending on the estimates.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Carrie (migeru at eurotrib dot com) on Sun Oct 26th, 2008 at 05:02:29 PM EST
[ Parent ]

Re: They've Certainly Fixed THAT (4.00 / 3)

An interesting post with good grphs in FT Alphaville: Losing control:

http://ftalphaville.ft.com/blog/2008/10/23/17369/losing-control/

It seem they lost control, far from fixing things!

by kukute on Sat Oct 25th, 2008 at 08:26:38 AM EST

Re: They've Certainly Fixed THAT (none / 1)

great link and great <gulp> charts. I understand things better when I can see them like this. Very scary. Good sources, thanks!

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia

by whataboutbob on Sat Oct 25th, 2008 at 10:38:16 AM EST
[ Parent ]

Re: They've Certainly Fixed THAT (4.00 / 2)

That isn't illiquidity, folks. That's insolvency. And the "something sinister" that's brewing is the realization that no amount of paper can patch this over.

Right, using paper to patch it over is trying to fend of bankruptcy in the interests of the creditors.

At some point, bankruptcy and orderly reorganization/liquidation will be required, and the government and the legal system will have to work to ensure that this happens as smoothly as possible.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Carrie (migeru at eurotrib dot com) on Sun Oct 26th, 2008 at 04:59:33 PM EST

Of course, early in the present decade ... (none / 1)

... they thought they had fixed the "problem" of bankruptcy in the US by making it difficult for small creditors to get out from under their obligations through bankruptcy. That's why major illnesses were accepted as an "ordinary" cause of foreclosure ... for large numbers of households, mortgage debt was the only debt they could escape paying.

The idea that an exposure by Credit Default Swap issuers to "credit events" exceeding the annual global GDP might cause problems if some of those credit events occurred ... that was a point that was left to individual observers to comment on.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Oct 26th, 2008 at 05:21:36 PM EST
[ Parent ]

Re: Of course, early in the present decade ... (none / 1)

Don't get me started on the bankruptcy reform bill...

It's just another example of goverment policy for the benefit of creditors - without the flip side of putting higher pressure on them in their earlier role as lenders.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Carrie (migeru at eurotrib dot com) on Mon Oct 27th, 2008 at 06:45:33 AM EST
[ Parent ]

Re: They've Certainly Fixed THAT (none / 0)

As you know, I think that the conversion of debt to equity (ie removing the obligation to repay, but maintaining a return on capital so that the resulting equity has a value in exchange) is a new answer, rather than the time honoured (time worn) route of bankruptcy, foreclosure etc etc.

But not Equity as we know it, Jim...

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Oct 27th, 2008 at 06:10:55 AM EST
[ Parent ]

Re: They've Certainly Fixed THAT (none / 0)

Well, a debt-equity swap is a way to restructure debt, something that is unlikely to happen without an intervening bankruptcy or the threat of it.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Carrie (migeru at eurotrib dot com) on Mon Oct 27th, 2008 at 06:44:15 AM EST
[ Parent ]

Re: They've Certainly Fixed THAT (none / 0)

...or the threat of repossessions/foreclosures...

Repossessions up by 71%

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Oct 28th, 2008 at 03:02:23 PM EST
[ Parent ]

They've Certainly Fixed THAT | 34 comments (34 topical, 0 editorial, 0 hidden)

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They've Certainly Fixed THAT

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