my heart's not in it today

[solarbird]

Good morning.

First things first: here's a breakdown of the Lehman Brothers CDS auction tomorrow. We should know how it went by 11am Pacific. Possibly in anticipating, banks are hoarding cash harder than ever - the TED spread, a measure of interbank lending costs, bounced off 4.13 this morning, tho' it's currently down to 4.01.

Interest rates (not just spreads) continue to worry me. Note the Fed overnight rates - they cut rates half a percent and miss to the upside by 74 basis points. I suppose that's within their newtype definition of "in range" if you're within 75, but c'mon. Much worse is that we're currently in our third straight day of selloffs in both stocks and treasuries. Christopher Grey at TheStreet says to run, not walk, from Treasuries. There're worries about capital flight, but also speculation that investors are moving to newly-insured Corporate bonds which offer higher interest rates. Either way, it means higher borrowing costs for the US government. Checking Karl at Market Ticker, I see he's worried too.

Mish Shedlock offers critical commentary on the proposed partial nationalisation of assorted US banks. Bloomberg talks about the LIBOR crisis and how it's affecting business across the world. Brad Setser suspects the US trade deficit will decline very sharply in September - unexpectedly so.

Incidentally, Congress is reportedly talking about screwing around with 401(k)s:

“With respect to the 401(k), it appears to be a plan that is not really well-devised for the changes in the market,” Rep. George Miller, D-Calif., said.

“We’ve invested $80 billion into subsidizing this activity,” he said, referring to tax breaks allowed for 401(k) contributions and savings.

With savings rates going down, “what do we have to start to think about in Congress of whether or not we want to continue and invest that $80 billion for a policy that is not generating what we … say it should?” Mr. Miller said.

And General Motors fell below $6/share for the first time since 1951. But market theorists say we're nearing the end of Wave 3 of 5 (Down) and should be entering Wave 4 (Up) in this 5-move decline, so.

Comments

[peakoilchaplain.livejournal.com]

From the Bloomberg article:

Former Bank of England policy maker Willem Buiter said one way to stimulate lending may be for governments to guarantee interbank lending or act as the universal counterparty between banks borrowing for longer than overnight.

"It's quite possible, indeed likely, that unsecured lending will not return on any significant scale -- ever,"

omg ... talk about the world shifting under our feet ... does anybody even know what the world this guy is describing looks like?

[solarbird]

Sure; they said the same thing the last time. It's called 1938, which was is in the beginnings of a slow recovery period. Lending pretty much stopped outright by 1933, which was the unemployment peak; stayed frozen for a while; crawled back up afterwards.

(Then World War II hit and everything got jumbled and kicked into a wartime economy, mostly by a restart of large-scale borrowing by the government.)

[king-chiron.livejournal.com]

How long before the Republicans pick up that theme. "That's what we need to fix the economy, a war, a really big war, like with Iran!"

[peakoilchaplain.livejournal.com]

Are there any historical examples of a credit market freeze like this besides the 1930s? Any examples of something like this that resolves by some other means than a depression?

[solarbird]

Are there any historical examples of a credit market freeze like this besides the 1930s?
Sure. Lots of 'em. Roughly every 60-70 years, really. They're generational events; look up the Minsky Credit Cycle.

Any examples of something like this that resolves by some other means than a depression?
A Great Depression-style Great Depression? Um... yes. But as a rule there aren't particularly good outcomes of which I'm aware. You always get deflation or printing; pick one. If you get printing or something akin to it (c.f. France, 1720) you get hyperinflation and the currency fails. If you get deflation, you get Lost Decades or lost half-decades or, well, it varies, depending upon response and other things.

The current response, by the way, is looking a bit like France in 1720, combined with circumstances akin both to France 1720 and Europe 1873. ("Panic of 1873," which also punched the US in the face, but the US did better.)

[peakoilchaplain.livejournal.com]

Also from Bloomberg:

"Whatever answer you give is by definition wrong," said Meyrick Chapman, a strategist at UBS in London. "There is no interbank lending, so the only proper answer to where could you fund yourself is `I don't know' or `I can't.'"

Ah, so the quoted LIBOR rates are ...... actually too low?

Equities don't seem to be getting pounded too badly today, but that doesn't really matter as thawing in the credit market doesn't even seem to be in the forecasts, as far as I can tell.

[silussa.livejournal.com]

If I'm not mistaken, the LIBOR rates are based on asked. No bid.

Which means borrowers are willing to PAY that...but nobody is lending at it.

[peakoilchaplain.livejournal.com]

Oh, and about the equity stakes in banks that the Treasury is proposing to take: that won't unfreeze the credit markets, either, since it seems that the Treasury doesn't actually want to take control of any banks and force a restart of lending, they just want to inject cash and persuade everybody that this measure restores confidence in the system ... just like everything else to date has restored confidence ... or not. Short of government orders to restart lending, I don't think banks are likely to do it on their own anytime soon.

Things have gotten to the point where I think that complete nationalization of the banking system may be the only remedy that actually does much ... of course, that solution might just turn us into Iceland writ large, so maybe there is truly no way out.

[king-chiron.livejournal.com]

At some point if the banks are just way way overcapitalized they're going to lend money. But yeah, if the government owns 50% of a bank there's no reason why they couldn't tell the bank management to "loan or you're gone." Recapitalization is a pretty shocking turn of events, but I actually think it's far superior to the toxic assets swap, which they're still planning to do.

[llachglin.livejournal.com]

Mish's problem is that he's a Rondroid who's against government intervention in the markets at all, which is why I take his pronouncements with a huge grain of salt. Nouriel Roubini has a more favorable take on the partial nationalization. He favors it, though he's uncomfortable that the legislation passed by Congress didn't explicitly allow for it.

I always read the language of the bill to allow for capitalization, though it certainly was written to imply that the Treasury was just going to buy up bad assets. That's one reason I thought it was a necessarily acceptable bill despite being really poorly written. I think the fact that the wording is ambiguous was deliberate, because clear capitalization language would never have gotten the support of Republicans.

The way out of this mess is nationalization until banks start lending money again, with the government acting as lender of last resort until they do. I don't mean that the government should lend to banks. It should lend directly, bypassing the banks completely. It should focus on keeping commercial lending going, but also direct capital to states and local governments for infrastructure projects. The way we got out of the Depression was the massive military Keynesianism of WWII. We need investment on that scale, but non-military. It's a cliche, but this crisis is an opportunity to address our nation's and the world's greatest problems, while also building the foundation of our economy on something other than speculation and debt.

[king-chiron.livejournal.com]

Surprise! Now GM is below $5. At some point there have to be good buys, there are a lot of good companies that are getting clobbered, but I don't think US automakers are on my list.