solidly in wave 4 now

[solarbird]

Good afternoon.

The TED spread has popped below 3.00, on sharp falls in LIBOR rates. This is a highly significant move at this point. Markets are up, I would think on the news, but more apparently on rumours of another bribe "fiscal stimulus package," and Ben Bernanke's endorsement thereof. Treasury Secretary Paulson is also telling banks outright to lend out their new government capital, and now. That's... one way to go about it, I suppose. If you're fond of command economies, anyway.

GM wants to merge with/buy out Chrysler, but can't get the credit or investor support necessary to do so. They're looking for government support.

Meanwhile, the New York Times reports on a political concensus to let the budget deficit just keep growing:

...the extra spending, a sore point in normal times, has been widely accepted on both sides of the political aisle as necessary to salvage the banking system and avert another Great Depression.

“Right now would not be the time to balance the budget,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a bipartisan Washington group that normally pushes the opposite message.

...

There are also assumptions that help to make America’s deficits tolerable, even logical.

One is that people all over the world are willing, even eager, to lend to the United States, confident that the world’s most powerful nation will always repay on time, whatever its current difficulties.

...

Another assumption, also based on 60 years of post-World War II experience, is that although the economy is sliding into recession, in a year or two that recession will end and the national income (also known as the gross domestic product) will expand once again.

When that happens, the national debt — the accumulated borrowing to finance all the annual deficits — will shrink in relation to the income available to pay off the debt.

That's certainly optimistic. Let's hope they're right this time.

Frugality has become the new keyword. Kevin Depew has a rambling but interesting post here about liquidity traps; Minyanville's Todd Harrison worries about geopolitical action, pointing at articles like this one. Kevin Depew talks about the dollar rally as a function of debt payoff. Brad Setzer at the CFR talks about the renewed importance of the G7, and I think there are some dollar lessons to be learned there as well. In a separate post, he discusses central bank policy divergence, with the US Federal Reserve taking on essentially as much risk as possible as other central banks seek safety. He does not consider this stabilising.

Eric Janszen talks in Harpers about a target of 5,000 on the DOW, and, more interestingly, about the CDO market and the actual payoff value, which could be quite high, and notes:

As the economy contracts, the inexorable logic of the American political economy is to increase protectionist and unilateral measures, as if the United States were still a net creditor as in the late 1970s. If such policies are pursued (which caused the world trade negotiations to collapse earlier this year) the results will be disastrous for America: the current orderly diversification from the dollar may become disorderly.

I'm noticing more protectionist talk on economic fora, particularly in ones where people should know better. It's a bad idea. Brad Setzer thinks the US deficit will fall as demand for consumer goods dries up, which makes sense to me, so tariffs would be ridiculously counterproductive.

Daebo Shipping warns of "serial counterparty defaults." "He added that the bulk market was also being affected by what he thought was a collapse in forward freight agreements and other derivatives."

Far Eastern Economic Review's article "The Great Crash of China" is a little breathless, but does point out the transition China is going through right now as an instability point as it tries to transition from low-grade manufacturing jobs to higher-grade manufacturing jobs. A reverse migration back to the smaller villages - and a wave of resulting unrest - is not at all unlikely.

Comments

[silussa.livejournal.com]

This isn't exactly appropriate, but it seems worth mentioning.

American Public Radio's Marketplace reported tonight that the small "Main Street" banks, which do local banking (as opposed to dealing with big companies) are doing well; deposits are up, and they still have plenty of money to lend. Indeed, they're growing stronger as money being yanked from elsewhere is deposited in them.

[solarbird]

No, no, this is entirely relevant. One of the big questions has been how will small and regional banks do? Most people I've been reading are expecting regional banks to have trickle-down problems, but nobody seem to have a good handle on local-bank function. So if they're actively benefiting from the small but higly numerous withdrawals that have been happening over the last few months from the large banks, that's good news.

[silussa.livejournal.com]

I know I provided an example, in that I brought some money which had been in a credit union on the other side of the state to deposit in a local bank with 4 branches. Said bank also has a four start rating for strength from bankrate.com.

[llachglin.livejournal.com]

OK, my response has been eaten twice now, but I'll try again.

It's not a command economy when banks have an option not to take government funding. If they DO take funding, they sure as hell should be obligated to accept conditions on what they do with that money. Right now, the economy needs lending.

Not all fiscal stimulus is created equal. When monetary policy is shaky, fiscal stimulus is a good bet to get the economy going again. What's important is that we spend money not on the same things that got us into our current mess, but into things that will get us out of the mess and create a more solid economic foundation in the future. Bad fiscal policy is across-the board tax rebates that just get spent on Chinese goods. Good fiscal policy spends money on our domestic infrastructure (rails, repaired roads and bridges, broadband services on par with the rest of the developed world), new technologies (particularly alternative energy, which is likely to see declining private investment as long as oil prices are relatively low again), universal health care, and education. It's unclear if the package Bernanke is supporting is good or bad fiscal policy at this point.

As far as deficits go, they're not a problem so long as the spending that creates them creates net economic growth over time. That goes back to the definition of good fiscal policy. The problem with our current debt is that it's based on decades of tax breaks for people who don't need it, unnecessary military spending, unsustainable consumer spending, and growing medical costs from our current worst-of-all-worlds health care system.

The solution?

1. Tax the rich. Tax million-dollar incomes, capital gains, dividends, stock transactions, and large estates. That means a complete rollback of the Bush tax cuts, plus a couple of new taxes. Hopefully, Obama's aversion to new taxes will change once he is president and doesn't have to pander so much.
2. End the Iraq War *and* the Afghanistan War, and begin drawing back from our military commitments overseas.
3. Bring back usury laws and properly regulate consumer and mortgate lending.
4. Single-payer health care. Right now, Medicare is forced to take the sickest Americans and isn't allowed to control costs on drugs and other expensive procedures. The private market has created spiraling premiums and millions of uninsured. Single-payer creates one big pool of risk and one system of administration. It will be cheaper and it will cover everybody, with positive economic repercussions throughout our economy.
5. Take the savings from 1-4 and invest:
-$187 in mass transit subsidies, which matches the national backlog for such projects in all 50 states.
-On top of local mass transit, begin building high-speed long-distance rail, starting in key regions (see California's ballot measure this year, and upgrade the Acela corridor to true high-speed) and planning toward a nationwide network.
-Conversion of the passenger fleet to plug-in hybrids.
-Investment in wind, solar, hydro in environmentally sensitive ways. German researchers have developed a plan for complete energy independence that involves 100% renewables (no nukes) and uses a distribution network that stores excess power at low-use times for peak periods (mostly pumping water in and out of reservoirs as the energy storage medium.) We could do the same thing here, but actually start building it.
-Green building requirements, focusing on government subsidies for upgrading existing housing stock.
-Bicycle infrastructure

That's a start. These things have to happen anyway, so let's do them as quickly as possible to help us out of our current dilemma.

[mojave-wolf.livejournal.com]

I find myself having some (not entire) overlap w/llachglin's thoughts, esp on the energy/green infrastructure issues (have gone into this in more detail on corrente in the past, no time now), but also some other areas.

Shorter version, tho: Real wages haven't been keeping up with real costs for quite a while now (GDP isn't always a great indicator of this for most people, and especially hasn't been the last few years), the hell w/most official counts to the contrary. To maintain their now-expected standard of living (and/or deal w/health care costs, and/or send their kids to school/go to school themselves), people spend their savings and run up debt. This allowed the problem w/wages vs. cost to be put off for a while, but instead of doing anything to fix it w/the extra time, it just festered and now it's a lot worse, because wages still aren't able to cover what people expect them to, plus they now have extra costs in the form of interest payments.

People at the higher end can insulate themselves from this to some degree (and insulate their net worth entirely; iirc Mexico, for example, has more billionaires per capita than the US). So the financial crisis in the markets and with the banks is just a symptom of the underlying problem; even if the market goes back up and bank ownership stabilizes, problems are still going to abound for some time to come.

At least since the current problems are affecting people higher up the scale, it increases the chances someone will take steps to fix things. Whether they will take good steps or not, and whether the lifestyle most people have enjoyed the past few decades is going to be sustainable regardless, I remain skeptical (tho hopeful, esp w/regard to the second if the former works out) about.