But if the vaults are empty, what will Scrooge McDuck swim in?

January 29, 2008 8:58 PM

According to the latest biweekly numbers released last Thursday by the Federal Reserve, for the two weeks that ended January 16th American banks had negative $1.3 billion in non-borrowed reserves. This is, historically, extremely unusual; just two months ago they had $30 billion (positive, of course) in non-borrowed reserves. The only reason some banks haven't been shut due to insufficient -- negative! -- reserve requirements is that the Federal Reserve is currently loaning them enough money through the brand new TAF (Term Auction Facility) program (also running in Canada and Europe) to make up their shortfalls. Today's TAF press release says that 52 American banks or institutions are currently receiving loans totaling ~$40 billion -- but the Fed refuses to name who they are.

The banks' collateral for these TAF loans are those same yucky hard-to-price CDO's that caused the banks' liquidity problems in the first place -- and the Fed is purposely using outdated prices for the collateral to prevent their being marked-to-market and thus collapsing CDO prices and freezing matters even further. Not surprisingly, some economists see the creation of the TAF as a backdoor bailout of banks in trouble. But how much longer can this go on? [via]

Coincidentally (one hopes), the banking system in the virtual online world Second Life has just collapsed following a run on their banks due to inappropriate valuations and bad counterparty risk, wiping out many players' real-world investments...

posted by Asparagirl (162 comments total)

Asparagirl, I understand about 10% of that fpp, but it sounds scary and I think you blew my mind. I'm going to go to sleep now.
posted by vrakatar at 9:13 PM on January 29 [2 favorites]

*starts stuffing cash in mattresses*

Wait. I'm a grad student. I have no cash. All right, we're cool!
posted by papakwanz at 9:22 PM on January 29 [4 favorites]

Does this post have something to do with money and stuff?
posted by zardoz at 9:23 PM on January 29 [3 favorites]

Someone please tell me at the beginning of the bank run so I can be one of the guys who actually get their money out. I wonder what percentage of the general population is even aware of the fractional reserve system - the fact that the bank doesn't actually have all their money.

LOL to Second Life. Buying computer game money with real money and thinking you now "own" anything besides computer game money is pretty funny, although, what with these negative reserves and so on, it does call into question how "real" our real money is.

I'm glad to read that the BCX computer game bank is "in compliance with the new LL policy effecting in world banks" and simply shocked to hear of an "extreme surplus of withdraws."
posted by TheOnlyCoolTim at 9:26 PM on January 29 [1 favorite]

If the words in the post don't make too much sense to you, just check out the picture instead. It's bad, and worth a thousand words -- or perhaps three or four thousand words after the coming devaluation...
posted by Asparagirl at 9:32 PM on January 29 [6 favorites]

Short version, from the last sentence of the "via" link:

Banks in aggregate have now burnt through all of their capital and are forced to borrow reserves from the Fed in order to keep lending.

Thanks for this, Asparagirl. I'm with vrakatar in not being currently up to speed on much of this, but I'm about halfway through your links and think I have at least a partial grip on why this is unusual, and think it's interesting there hasn't been much coverage since the TAF program started in December. If any financial world MeFites wanted to take time with a "non-borrowed reserves for dummies," I'm sure it would be much appreciated.
posted by mediareport at 9:34 PM on January 29

Buying computer game money with real money and thinking you now "own" anything besides computer game money is pretty funny, although, what with these negative reserves and so on, it does call into question how "real" our real money is.

Computer game money *is* real money if you can convert between the two easily. The divide between virtual stuff and real stuff is getting blurrier and blurrier.
posted by Justinian at 9:37 PM on January 29

I'm gonna sleep on this one and hope I can make more sense of it in the morning. But by and large it looks like the economy is really screwed and the Federal Reserve isn't doing a great job.
posted by thebigdeadwaltz at 9:39 PM on January 29

Rates will be cut and money printed until the problem is resolved.
posted by humanfont at 9:46 PM on January 29 [3 favorites]

If you get a blog, Asparagirl, I'll read it.
posted by blacklite at 9:47 PM on January 29 [1 favorite]

So, let me see if I understand this ... someone *please* correct me if I am wrong.

1) Banks in general made a whole bunch of bad investments, from what I understand mostly loans to people with poor credit (subprime loans) or secondary investments based on income from such loans.

2) As a result, banks are now out of money, and are scrambling to build up capital so they don't have to tell people, "Sorry, you can't actually take out money today, we don't have it." They are using tactics such as not issuing new loans even to people with good credit, raising ATM fees(!), and offering high-interest accounts to attract high investment. The last two, especially the last one, could bite them in the ass long-term.

3) In response to this, the government has essentially lent them $40 billion dollars at very low interest rates. This is unusual since banks are usually reluctant to borrow from the government because it's taken as a sign of desperation. The government has not released the names of the 52 banks it's lending to because of this.

4) Second Life is having the same problem only 10 times worse because the Second Life banks were being run by whatever nutjob said, "Hey! I'll start a bank!", and offered ridiculous interest rates and now their banking system has collapsed, and people had invested real money in it.

As far as I can tell, this means that ...

A) Any bank freezing loans, raising their ATM fees, or offering surprisingly cushy interest rates (like, er, mine just did) is probably in trouble.

B) The government is trying to keep banks in trouble from completely collapsing. If they do completely collapse anyway, that will be a Very Bad Thing.

C) If they don't completely collapse, this could long-term cause runaway inflation or other Very Bad Things.

Is that accurate? And if so, could someone weigh in on ... exactly what any of us should do?
posted by kyrademon at 9:48 PM on January 29

"This won't affect us long term. It's just a short-term difficulty," said Mr. Smith, 40 years old, who also has significant land and real-estate interests in Second Life. He said he retired from the real-life mortgage business to devote his time exclusively to his Second Life enterprises.

LOL. _{('retired' sure...)}
posted by delmoi at 9:52 PM on January 29

Wait in the second link the value is shown as negative 13 billion? Is it negative 1.3 or 13?
posted by ofthestrait at 9:53 PM on January 29

Not surprisingly, some economists see the creation of the TAF as a backdoor bailout of banks in trouble.

Backdoor?

"Mom, I owe my credit card company $1000."

"Don't you have $1000 in the bank, honey?"

"Yeah, but I lent it all to Crazy Lenny. He spent it all on hookers and blow."

"Oh dear, thats terrible, hon. Here sweetums, here's $1000. Now you can pay off those nasty credit card companies!"

"Gosh, thanks mom, you're swell!"

Of course, what Mom didn't tell her Son is that she got her $1000 from a cash advance on her credit card...
posted by Avenger at 10:01 PM on January 29

So, banter aside, can anyone spell out implications? Does this mean the dollar is going to crash? Inflation is coming? Deep depression?
posted by msalt at 10:01 PM on January 29

Wasn't the Fed begging banks to borrow money from them a couple of months ago?
posted by smackfu at 10:03 PM on January 29

The last link describes how money goes in much more effectively than it comes out. There is also a very real divide between virtual stuff and real stuff, in that there is no real scarcity of the former. Buying crap in Second Life is like paying money for MP3s, something a lot of people have already decided against, but even worse because you then expect to be able to sell those MP3s for money. And also worse because you're not buying MP3s, you're buying virtual penises.

(There are, I guess, a few "real" things you could base a Second Life economy on - processing power, storage space, Linden's bandwidth, and human labor. I understand there's some connection through the "rent" that the bosses charge, but it seems rather tenuous to me, and the first three are cheap enough that most of the internet manages to give them away for free.)

This artificial scarcity of bits and phat lewt is all good for fun in World of Warcraft and so on - unabashed games that don't pretend to be for real.

On the other hand, fiat money is only scarce because the government says so, but they do have guns and I can use fiat money to eat.
posted by TheOnlyCoolTim at 10:06 PM on January 29 [1 favorite]

Somehow I think the bankers, speculators, and conmen behind the whole real estate cult won't be the ones in the street or watching their savings devalue. I keep watching the market news, seething and muttering "burn wall street burn" but the rich won't feel it.
posted by vrakatar at 10:07 PM on January 29 [3 favorites]

So, how will this play out with a Fed that is lowering interest rates sharply, while the rate that consumers pay for credit and mortgages are going up?

Isn't that likely to increase bank profitability?

In other words, are we seeing the Fed create the equivalent of "counterfeit money", which banks can borrow from and loan out at high rates, which in turn comes back to the banks as real money?
posted by markkraft at 10:09 PM on January 29

Snark away, folks, we just hit an iceberg named Bad Mother Fucker.
posted by dbiedny at 10:10 PM on January 29 [7 favorites]

Probably there is no risk of bank collapses as most deposits (at least of ordinary schmoes) are federally guaranteed.
With the US Fed cutting rates there is a significant risk of inflation, and I believe Bernanke has said he will risk inflation rather than recession. Figure also a lower US$ and consequent higher import and energy prices.
When the liquidity problems hit it was friction in the financial system, as institutions were reluctant to provide each other loans for settlement. That implied that some banks would have excess holdings, while other would run short. The trouble here seems to be that the whole has now dropped into negative, which is troubling.
posted by bystander at 10:17 PM on January 29

That's pretty close, kyrademon, only I would add the following items to your list:

Some banks made bad loans outright (as you said). But some banks didn't make bad loans at all. But they happened to buy bad CDO's (collateralized debt obligations) that turned out to be made up of bad loans -- mortgages or even other kinds of debts like credit card debts -- that they thought were safe* and thought would pay out a decent rate over time. Except that the mortgages started going bad, so the "paper" that the many mortgages had been turned into (like how you make a sausage out of many kinds of meat) was actually bad stuff. The banks want to sell this stuff to get rid of it, but no one wants to buy it, and it's worth way less than the bank thought it was. So suddenly the banks have a shortfall.

Normally, banks lend money to other banks all the time. But since the banks know that other banks might be holding bad stuff on their books -- but don't know who is hlding the bad stuff, since no one wants to fess up -- all of a sudden no one wants to lend money to anyone else because no one trusts anybody else. This part started blowing up in August of last year. It's called a liquidity crisis, because suddenly the money the banks have isn't liquid or flowing. So the cost of loaning money to other banks has gone up, because it's perceived (rightly) as being riskier.**

So if it starts getting too expensive for banks to lend money to one another, then the Fed steps in and offers something called "the discount window" where the banks can get loans from the Fed at a lower rate than banks would get from one another. But that's like admitting you're on food stamps or something and need a handout, so the banks are scared to go to the discount window because it carries a stigma -- the names of the bank who get money that way are made public. So the Fed, in December, suddenly started this brand new program called the TAF so that the banks can get lower-rate loans from the Fed without anybody knowing who the recipient banks are.

* Why did the banks think the CDO's they got were safe? Why didn't they realize they were made out of bad mortgages? Because these companies called rating agencies -- like Moody's and S&P and Fitch -- told the banks they were safe. Those companies turned out to be idiots, are now getting sued, and some may go under soon. The banks also thought the CDO's were safe because these other companies called monoline insurers -- like MBIA and Ambac -- promised to pay up if the highly-rated CDO's turned out to be bad. Only now the monolines are going broke and may get downgraded themselves really soon. Fitch's downgrading of Ambac two Fridays ago may have started the mini-crash around the world last Monday. So all the good ratings and all the good insurance the banks thought they had may have turned out to be an illusion.

** A rate called LIBOR is one way to measure at what rate banks will loan money to each other just for overnight. It's gone way up since August. Sadly and coincidentally, this is having a bad secondary effect on the mortgages inside the CDO's. When an adjustable rate mortgage resets, it doesn't usually reset to the regular bank interest rate, the one that Fed likes cutting all the time. It actually very often gets reset to whatever LIBOR is! So LIBOR -- the loan rate -- is going up because banks trust each other less and less, because banks are holding paper that is made of bad mortgages that they can't get rid of, but LIBOR going up also makes more of those mortgages go bad. It's a vicious positive feedback cycle.
posted by Asparagirl at 10:20 PM on January 29 [28 favorites]

"But how much longer can this go on?"

Well, assuming that the Fed can encourage other banks around the world to create funny money too, so as to keep the world's currencies balanced... how about forever?!
posted by markkraft at 10:25 PM on January 29

I'll be at the big asset securitization conference in Vegas next week. I'm thinking it'll either be the lamest, most depressing party Vegas has ever seen, or it'll be a fuckin' crazy escapist, hedonistic meltdown.

In any case, I'm sure Huey Lewis & the News will kick ass at the Deutsche Bank reception.
posted by mullacc at 10:30 PM on January 29 [1 favorite]

A rate called LIBOR is one way to measure at what rate banks will loan money to each other just for overnight. It's gone way up since August. Sadly and coincidentally, this is having a bad secondary effect on the mortgages inside the CDO's.

You have this backwards, Asparagirl. One-month LIBOR has been in a freefall--it averaged 5.50% in August and it hit 3.27% today with all sorts of volatility in between.

And LIBOR isn't overnight. The most popular base rate for asset-back facilities is one-month LIBOR, but it comes in 3-, 6- and 12-month flavors as well.
posted by mullacc at 10:37 PM on January 29 [1 favorite]

Asparagirl: So LIBOR -- the loan rate -- is going up

Come again?

Overnight LIBOR is dropping, compared to 06-07 rates. It spiked in mid-07, and is now well below the spike and prior baseline. Longer-term LIBORs are doing the same thing.

(Uh, on preview -- ditto mullacc.)
posted by theoddball at 10:41 PM on January 29

Somehow I'm not inspired by the fact that the securitization conference is being held in America's capital of gambling and hookers. (Does Vegas have hookers and blow or just hookers?)

In other words, mullacc, regarding it'll be a fuckin' crazy escapist, hedonistic meltdown: Pics or it didn't happen.
posted by TheOnlyCoolTim at 10:43 PM on January 29

(Libor rate charts)
All I see is bad programming:

An internal Visual Basic error has occurred in D:\00Economagician-com\cgi-win\daychart.exe.
0 CGI_QueryString
Function:main - call CGI_Main
Error info:
# Function: main - call CGI_Main
# Error: 13 - Type mismatch Please note what you were doing when this problem occurred, so we can identify and correct it. Write down the Web page you were using, any data you may have entered into a form or search box, and anything else that may help us duplicate the problem. Then contact the administrator of this service.

posted by boo_radley at 10:47 PM on January 29 [1 favorite]

People ask what to do.
My best advice is to try and smarten up your financial situation so any negatives will impact you less.
For example, if you have borrowed money to invest (margin lending) it might be wise to get out of that arrangement. If you have little savings, it would be a good idea to put some money aside, ideally enough to cover your unavoidable expenses for a month or two.
If you have this in a bank account, you should be OK, but I would keep an extra $100 under the mattress in case the shit hit the fan and the banks halted withdrawals for a week or two (pretty drastic, but it came close with Northern Rock in the UK).
The hard bit is knowing what would happen if there was a run on the banks these days.
In 1929 there was no Internet banking, automatic payments, credit cards, auto deposit of wages etc. When a bank closed its doors then it was conceivable that life could still function. If there was a run on Citibank today, would they switch off my Visa card?
One thing that is weird with the current financial problems is that it is the finance sector spilling over into the real economy. Usually, it is the other way around.
Disclosure: I have no bearish investments, a thimble full of superannuation in shares and more mortgage than I like, and I find this news quite disconcerting.
posted by bystander at 10:47 PM on January 29 [4 favorites]

And LIBOR isn't overnight

Actually, I was wrong about this (see theoddball's chart); there is an overnight LIBOR rate. It doesn't come up on the Bloomberg terminal's money market rates summary page, so I'm not sure how widely used it is (versus the one-month rate, which is used all over the place). Anyway, sorry for the unwarranted nitpick there, Asparagirl.
posted by mullacc at 10:51 PM on January 29

D:\00Economagician-com\cgi-win\daychart.exe

More like cgi-lose, amirite

(Sorry, sorry. The failblog thread today seems to have ruined my ability to censor these urges.)
posted by blacklite at 10:56 PM on January 29 [11 favorites]

A) Any bank freezing loans, raising their ATM fees, or offering surprisingly cushy interest rates (like, er, mine just did) is probably in trouble.

Oh yes. Check out this comment I made last August -- of course, that was before Citibank, too, ended up in big trouble!

And really, I don't know what to do either, I'm kind of freaked out by all this economics shit. The only things I can say are:

- Get out of debt as much as possible and as fast as possible, especially credit card debt, which will eat you alive
- Don't be over FDIC limits at any one bank -- or open up accounts at two different banks just in case. I just opened up my infant son's first savings account yesterday, and I purposely picked a different bank than the ones my husband or I use for our own banking, a smaller and more local bank that got a good rating at Bankrate.com.
- Put some money into short-term United States Treasuries and savings bonds; the interest rate is pretty sucky, but the only way that money would go away is if the US government itself folded, which is highly unlikely and in which case you would probably have far worse things to think about than money. You can use TreasuryDirect.gov to open and manage an account there for free. Their website isn't the most intuitive thing in the world, but it works.
- Always have some cash on hand, stashed somewhere safe. Not $100 bills, either -- smaller bills that you wouldn't have to break. Just in case.

Beyond that, I just don't know what peons like us can do. We can insist on stricter accountability for ratings agencies, tougher banking and mortgage origination laws, and jailtime for a lot of people, I guess, but that's all gonna be after-the-fact.
posted by Asparagirl at 10:56 PM on January 29 [10 favorites]

Mea culpa on the LIBOR!

And on a selfish note, I'm especially worried because I live in California, and this place probably more than any other place in the WORLD, is about to get FUCKED by this whole mortgage mess.
posted by Asparagirl at 11:08 PM on January 29

"The hard bit is knowing what would happen if there was a run on the banks these days."

You seem to think that the Fed (and the government in general) would actually allow that. I don't see why they would, as there is always more funny money that can be made.

In other words, they'd devalue your savings and put the financial burden on you, while trying to persuade other countries to do similar acts to maintain some degree of parity.

Sure, stocks will fall, some jobs will be lost, prices will go up in good ol' fashioned stagflation... but the banks will constantly be bailed out, as needed. Even the so-called subprime bailout is really just a bank bailout. Even most of the real estate "flippers" are going to get off easy, as will the banks, who will avoid foreclosures and still collect their 6.25% blood money every year.

Ultimately though, exports will increase, deficits will be paid for with funny money, and investor sentiment will gradually change as people become a bit less bearish. ... largely because the problem is partially psychological.

It's a bit like "Balance", only not quite as catastrophic.

...that said, everyone still wants to be the closest to the music box.
posted by markkraft at 11:28 PM on January 29

Boy the way Glenn Miller played
Songs that made the hit parade.
Guys like us we had it made,
Those were the days.

And you knew who you were then,
Girls were girls and men were men,
Mister we could use a man
Like Herbert Hoover again.

Didn't need no welfare state,
Everybody pulled his weight.
Gee our old LaSalle ran great.
Those were the days.

Seriously -- that FRED graph was like a gutpunch. Combine that with the completely un-telegraphed 0.75-point rate cut and I have this sense of restrained panic erupting behind the scenes. I also wonder whether that graph represents some indirect Soc-Gen fallout.

WHAT.
THE.
FUCK.
BEN?
posted by dhartung at 11:28 PM on January 29 [2 favorites]

A movie or TV quote. A fella in a very correct English accent. "I don't care for this at all." That just popped into my head out of nowhere.

Claus von Bülow?

One of the best units I did in my BCom was a philosophy of money type unit in my final year. It was a mindfuck, and not what I was expecting from the very pro business Business School.

Pyramid schemes and cheq kiting are illegal in Australia. But as far as I can tell, the current financial landscape is mostly a giant pyramid kiting scheme, relying on the "bigger fool theory" and / or population growth.

I'll just stick with that personal observation and the quote. There are many GRATER Mefites here when it comes to talking about this stuff.
posted by uncanny hengeman at 11:34 PM on January 29

God bless the United States of Ponzi.
posted by scody at 11:39 PM on January 29 [3 favorites]

Fucking awesome post. Thanks.
posted by Samuel Farrow at 11:40 PM on January 29

How about more Federal Reserve transparency and accountability?

Televise Federal Open Market Committee Meetings.
An institution as powerful as the Federal Reserve deserves full public scrutiny.

Expand Transparency and Accountability at the Federal Reserve
Pass H.R. 2754 to require the Board of Governors of the Federal Reserve System to continue to make available to the public on a weekly basis information on the measure of the M3 monetary aggregate and its components.

You'd be surprised whose proposed economic package this comes from. Hint: It isn't Obama, Clinton, McCain, Huckabee, or Romney. If you do enough research on the issue and look at the business cycles over the past 95 years, you'll find the Federal Reserve actually does far more damage than good when it comes to keeping the economy in balance.
posted by vanadium at 11:42 PM on January 29 [1 favorite]

from what I understand mostly loans to people with poor credit (subprime loans)

The issue is a bit more metastized than that. The central problem is that lenders made loans into a bubble market, full stop.

Four Trillion Dollars of loans, 2003-2006. Here's a graph I made from the most recent Federal Flow of Funds Report.

This wasn't just subprime, or Alt-A, or Prime, though the former two categories had a lot to do with the appreciation spiral. [Alt-A lending is Prime with something goofy added, like stated income, no-doc, or NOO (non-owner occupied).]

How much of that four trillion dollars of lending 2003-2006 is going to end up as dead loss over the next 5-10 years? 10% is an absolute minimum. 30% doesn't seem impossible, given the self-feeding casualities involved with a tanking real estate market and the general unwinding of the debt-fueled Bush Economy we're going to experience.

or secondary investments based on income from such loans

yes, the infamous CDOs.

Anyhoo, I don't quite think this is FPP-worthy since nobody can know what all this TAFfy activity and increasing slosh really means right now.
posted by panamax at 11:47 PM on January 29

You'd be surprised whose proposed economic package this comes from

DO YOUR RESEARCH! ::eyeroll::
posted by panamax at 11:50 PM on January 29 [1 favorite]

Panamax, you may not think this is worthy of a FPP, but for a whole bunch of us who just nodded our heads and went "Subprime mortgages, huh? okay, sure, now what's Britney up to today?" it's a rather nasty reminder that the economy is in trouble and there are going to be repercussions that affect *us* in the near future.
posted by librarylis at 11:57 PM on January 29

But as far as I can tell, the current financial landscape is mostly a giant pyramid kiting scheme, relying on the "bigger fool theory" and / or population growth

and/or productivity -- the creation of new goods to buy -- in general. There's a trillion or two within our somewhat fictitious GDP here in the USA that is hard goods -- actual wealth like new cars, housing, road surfacing -- or intermediate goods (sheet metal, plastics, lumber, asphalt), that soak up this money creation. If money were based on something of fixed supply like seashells then we'd see deflation given the annual productivity of modern society.
posted by panamax at 11:59 PM on January 29

I talked about some of this in my earlier post here, about a week ago.

Ultimately, this comes down to the loose and easy money policy of the Fed. Originally the "Greenspan Put", it's become the "Bernanke Put"; the fact that the Fed will always try to bail out Wall Street whenever it gets in trouble. That means that Wall Street has gotten riskier and riskier and stupider and stupider over the last twenty years, gorging themselves on profits from high-risk/stupid investments. The Fed has been absolutely unwilling to allow even the tiniest hint of economic pain through, so we've built this gigantic structure of derivatives and risk. It's starting to fall apart now; it's gotten so incredibly risky and fragile that even the Fed's free-and-easy money supply isn't hiding it very well anymore.

The Fed's bailout attempt is incredibly irresponsible. Regular money is fake, just made up out of thin air at will; derivatives created from that fake money is, well, EXTRA fake, supersize fake. The debt structures they've built aren't sustainable. They will collapse under their own weight. The Fed is desperately trying to pump more air into the bubbles, trying to monetize the supersize fake money that the banks are lending against into regular fake money. To the Fed, the survival of their banking buddies is much more important than the survival of the dollar, or the survival of your savings. Any assets you hold in dollars are being stolen to line the pockets of Wall Street.

So. Either they succeed, or they fail. What happens?

If they fail, we go into a deflationary debt collapse, as the structures we've built fall apart and the system comes apart at the seams. The result would probably be called the Second Great Depression. This is the best possible outcome; depressions are horrible, but the core economy tends to survive.

If they succeed, they will set off a new round of frenzied speculation such as we've never seen before. Things may even seem okay for awhile again. But we will eventually go into hyperinflation, as the new supersize-fake money gets created and into circulation. If we go down this path, the destruction is likely to be near-total; this is the same thing that made us sick in the first place. It will be slower, but much more absolute. We're likely go through multiple cycles of inflation/partial deflation/even wilder inflation until the economy just breaks down completely and can't take it anymore.

Fundamentally, the reason we're in such trouble is because the Fed's fake money has disconnected the financial system from the real economy. We're not producing anywhere near enough goods to finance our gigantic consumption binge. Our government is over fifty trillion dollars in debt. (The nine trillion figure is a baldfaced lie.) We owe, we owe, so off to work we'd go.... but we don't have much productive work left. Because of the Fed's financial engineering, we've been anesthetized while all the factories moved to China. Production is still the fundamental key to wealth; real wealth is things, not little green pieces of paper that can handwaved into existence.

We are, at best, a second-world country, and if the Fed is allowed to continue down the path they're on, we're headed for third-world nation status... a ruling, hyper-rich junta, and an entire population of economic slaves.

If we really want to fix it and become prosperous again, we need a commodity money system that can't be gamed by the government for their own benefit, and we'll need to work like dogs for a generation or so to get everything fixed up. Yes, a whole generation, twenty to thirty years of hard work for very little visible payoff.

We are a nation of the people, by the people, and for the people, and We The People have completely abrogated our responsibility to govern ourselves well. We have ignored the problem while the government ran up impossible deficits, and the Fed built up bubble after bubble after bubble. Instead of watching and understanding and reining in our government, we sat around drinking beer and cheering on the Rams. This is our fault for not educating ourselves, and it's our fault for letting those in authority shout down the fiscal conservatives as fringe-case lunatics.

We didn't think for ourselves, we let other people think for us, and they have very thoroughly screwed us. We got the government we deserved, and now the bills they've run up are coming due.

There's no possible way we can pay them.
posted by Malor at 12:05 AM on January 30 [25 favorites]

reminder that the economy is in trouble

I don't consider the economy in "trouble" per se.

I see the period we're entering into, if we are smart, more akin to the 400lb guy being forced by events to put down the donut and start hitting the gym.

Think of the portion of your income that is going toward housing -- not the dwelling itself but the land it sits on. For most people it is the dominant monthly expense, generally outsizing the rest of our expenses combined.

It is my hope that recessionary pressures will force rents -- and associated land values back down, and people's buying power for the other necessities and luxuries of life will not be impaired.

I currently live in an area -- Sunnyvale, CA -- where 40 years ago a middle class wage earner could easily earn enough to make the ~$200/mo payment on a decent SFH.

But between then and now we've allowed rentiers and Chicago School frauds to corrupt our economics -- our economy is fine, it's our economics that suck.
posted by panamax at 12:10 AM on January 30

So i should sell my houses on Baltic Ave. and buy hotels on Park Place?
posted by vrakatar at 12:13 AM on January 30

we need a commodity money system that can't be gamed by the government for their own benefit

I vote for seashells, but I could possibly be won over to peacock feathers!

There's no possible way we can pay them

I disagree with this. Sure we need less Golgafrincham B Ark-type grifters like real estate agents, insurance salesentities, and landlords, but the mythical $50 Trillion infinite-horizon liability calculation, at the end of the day, is just the forward payment of the basic fundamentals of life -- food, housing, medical care.

By delivering these fundamentals wisely we can easily afford them as hand-outs, infinite horizon or no.
posted by panamax at 12:17 AM on January 30

If money were based on something of fixed supply like seashells then we'd see deflation given the annual productivity of modern society.

Yes, this is exactly right. The natural state of economies appears to be a very slow deflation, as we figure out new/cheaper/better ways to build things. Wages go up very slowly, prices come down very slowly, and gradually standards of living improve. (I say 'appears to be', because it's very hard to find a period in economic history where the economy wasn't being actively manipulated by a central authority of some kind. )

For the last twenty years, we should have been struggling and sweating and in very deep pain from the reality of global deflation; we're now competing, directly, with a billion Indians and 750 million Chinese. We should have been angry and upset about the deflation, about our dropping living standards. We should have been talking about 'the crisis', and absolutely convinced we were in a death spiral as a country.... while, quietly, our productivity improved and improved and improved, and our quality got better and better. We'd have HATED it, but like exercise, it would have made us much stronger.

Instead, we've been anesthetized to the whole process, drugged up on easy money, while the economy rotted away underneath. The Fed saw the deflation and kept increasing the money supply to offset it, creating multiple bubbles and wild economic instability. But because the bubbles and inflation were in areas we liked, stocks and real estate, people loved it and wanted more.

"Give us another hit, Mr. Greenspan!" we begged, and he was more than happy to oblige.
posted by Malor at 12:17 AM on January 30 [8 favorites]

vrakatar: everyone knows the best strategy in Monopoly is to Go To Jail, ie opt out of the economy and lay low, collecting rents from the poor slobs still stuck in the game.
posted by panamax at 12:19 AM on January 30 [1 favorite]

Malor: related to your last is the somewhat interesting term I discovered in Marx's corpus called "alienation of labor". While it's got the usual frou-frou Marxist baggage, I do like its implication and application to the millions of people who are apparently helpeless in our urbanized cores.

I don't understand why this nation can happily borrow a trillion dollars to establish a Shiite state in Iraq but is afraid to look for solutions for our own economic and social challenges.

and it's our fault for letting those in authority shout down the fiscal conservatives as fringe-case lunatics

I think the problem is fiscal conservatism consists of country club gated-community "Got Mine -- Fuck You" greedheads quite happily engaged in parasitical profiteering via rentierism.
posted by panamax at 12:28 AM on January 30 [7 favorites]

Hmmm. Interesting collection of links, but someone is going to have to link NFORBES to Tier 1 capital for me. In fact, link it to Tier 2 & Tier 3 as well.

These are the metrics we use to evaluate the strength - or weakness - of a financial institution. I've never looked at NFORBES myself, and I've been deep into Basel II reporting for several years now.

NFORBES may be a lower level contributor to some numbers I've looked at, aggregated up, I'm just not sure.
posted by Mutant at 12:38 AM on January 30

I don't understand why this nation can happily borrow a trillion dollars to establish a Shiite state in Iraq but is afraid to look for solutions for our own economic and social challenges.

For the win.
posted by From Bklyn at 12:40 AM on January 30

Looking at that FRED chart (and I don't pretend to understand it too well), it looks like what's happening now is the equal and opposite reaction to 2001, which I'm assuming was a wealth of capital being created due to all these new financial products and CDO schemes as well as the initense rate cuts after 911. What ever it is, it looks unprecedented uncharted territory for the whole history of those numbers going back to the 50s.

I don't understand why this nation can happily borrow a trillion dollars to establish a Shiite state in Iraq but is afraid to look for solutions for our own economic and social challenges.

I imagine maybe because a good chunk of the money goes to American companies anyway. i.e., The Military Industrial complex and it's stock holders. There's a lot of money to be given away in this country and it's a lot easier to give it to the rich if there's a nice fat war to pump money into. You know, as opposed to building schools, repairing and expanding infrastructure, investing in alternative energy technology and rebuilding New Orleans.

And it's sad to think the sub prime ponzi scheme slimeballs who put us in this mess are probably not going to learn any lessons. Hell...isn't the ex-CEO of Countrywide walking away with a half a billion dollar bonus?

Socialism for the rich. Capitalism for everyone else.
posted by Skygazer at 12:51 AM on January 30

God bless the United States of Ponzi.

I'm more of a fan of the United States of Fonzie
posted by matteo at 1:09 AM on January 30 [1 favorite]

Come on you frownie faces, let's look at the bright side of this.
posted by TwelveTwo at 1:20 AM on January 30 [2 favorites]

Isn't the ex-CEO of Countrywide walking away with a half a billion dollar bonus

~$100M bonus for running Countrywide into the ground and contributing to the destabilization of the economy. He's already cashed out $300M since 2003 of his CFC stock holdings.

ooh, look, American Idol is on now. Gotta go . ..
posted by panamax at 1:21 AM on January 30 [2 favorites]

"So. Either they succeed, or they fail. What happens?
If they fail, we go into a deflationary debt collapse"

Deflationary?! Only in some ways. Our currency is becoming worth less, so the price of foriegn energy, the price of imported goods, and the price of most everything we buy is actually going up. Real estate prices may go down somewhat, but given that we've come off of a decade of them going up about 10% per year, at about three times the rate of wages, real estate has a long way to fall.

Falling prices for real estate won't save most people money, because people aren't buying, and if they were, they'd have an increasingly hard time getting a reasonably priced mortgage. Real estate prices are only crashing hard in a few markets with lots of subprime loans, but outside of that, it's just a gradual correction that's being fought against by the government, tooth and nail.

People like Hillary are even talking about freezing mortgage rates on subprime loans, which will, inversely, increase rates for new loans, putting them further out of the reach of Americans.

To add insult to injury, there's not even much of a correlation between lower housing prices in any given marketplace and lower rent prices. Infact, in this case, we might even get an inverse correlation, due to rising mortgage rates, and a general need by landlords for more revenue to make due.

"If they succeed, they will set off a new round of frenzied speculation such as we've never seen before."

Perhaps, but it might change, assuming that we get a president who will strongly tax the wealthy, and get that money redistributed towards the poor.

The real reason for all these financial bubbles is closely related to too much global supply, too little global demand, because the wealthiest people in the world have been getting all of the financial advantages of increased productivity... and they've been doing it for decades. All this extra money gets invested to create more supply, but the investments get increasingly fewer returns, as most people simply can't afford to keep up with it.

The era of easy credit was essentially a way of artificially coping with this... but ultimately, it's not a solution. The solution is to tax the rich again, to redistribute wealth, and to start raising wages. When poor and middle-class people have more money, then demand can start to rise.

The difficult part, unfortunately, is that other countries also have this problem of increasing wealth disparity leading to increasing debt and lower demand, so it may be a difficult problem to address on a simply national level.

Giving people overseas their fair share of the economic pie is also arguably bad for the prospects of global warming, but that's another issue entirely.
posted by markkraft at 1:47 AM on January 30 [6 favorites]

Actually, I was wrong about this (see theoddball's chart); there is an overnight LIBOR rate. It doesn't come up on the Bloomberg terminal's money market rates summary page, so I'm not sure how widely used it is

Is this overnight LIBOR rate the one lenders peg private school loans to? You know...the ones being pushed hard on TV ads now? The ones that sing beautiful songs about students being able to pocket up to $40,000 (with their parents' co-sign)?
posted by Thorzdad at 3:31 AM on January 30

I see the period we're entering into, if we are smart, more akin to the 400lb guy being forced by events to put down the donut and start hitting the gym.

But, alas, we aren't smart (And, by "we", I'm primarily referring to the guys with their hands on the money) I think the more apt gym analogy will be one of the 400lb guy who gets to sit on the shoulders of the 97lb guy running on the treadmill. The only difference will be that the 400lb guy will have to switch to croissants in lieu of donuts.
posted by Thorzdad at 3:45 AM on January 30

Magnificent post Asparagirl. I too would gladly read your blog had you one.
posted by Skorgu at 3:56 AM on January 30

I'm of the opinion that this fleecing is all the result of Banking, Wall Street (Corporate) collusion via deregulation - i.e. things like the repeal of Glass-Steagall Act and that such repeals need to be reversed because they were there for good reason.

Here's my preferred economic "horror-scope" resource: Dollars and sense
(Especially enjoy the 'Ask Doctor Dollar' section)

A country rife with 'Enrons.'
posted by peppito at 4:39 AM on January 30 [1 favorite]

I was thinking of developing a theme song for DoomFilter. I inclined to use perhaps the jangly guitar theme to James Bond, or the more elborate theme song to "Goldfinger". What do you think?

This is an excellent post, however, that I have gotten my day off to a depressing start as a result. If the world were a just place, only incompetent, overpaid CEOs and hedge fund punks would be affected by the fallout from this.

I suspect, however, that the world is not a just place.
posted by psmealey at 5:02 AM on January 30

Bernanke to the Banks: "Your money's not here...it's in Bert's house and Ernie's house! It's in Mr. Martini's house. Your money went to build their homes and their money went to build yours. Now how much do you really need?"

Meanwhile George Bailey gets hauled off to Gitmo.
posted by gimonca at 5:12 AM on January 30 [1 favorite]

according to this article the economy will be just fine
The US economy is slowing down, but the long-term trends for the country are more favourable than many think. There has also been a sharp improvement in many of America's social pathologies, such as violent crime and drug abuse

posted by robbyrobs at 5:26 AM on January 30

sorry here is the link
http://www.prospect-magazine.co.uk/article_details.php?id=10022
posted by robbyrobs at 5:26 AM on January 30

Real estate prices are only crashing hard in a few markets with lots of subprime loans, but outside of that, it's just a gradual correction that's being fought against by the government, tooth and nail.

That's true for the moment, but it's likely to get a lot worse. The last six or eight years have seen the Fed providing currency at all-time historic lows; it's been cheaper to borrow money since 2000 than it ever has been in the US, and probably in history. There have been times with lower interest rates, but in times of near-zero inflation or deflation. We've been in an era of very strong inflation (regardless of government statistical skullduggery stating the contrary), and cheap money in that kind of environment is, as far as I know, entirely unprecedented.

So, yes, house prices have only been 'crashing hard' in a few places, but it's just the beginning of a long, long process. Real prices, that is, as measured against other goods, will probably continue to go down for at least a decade. Higher interest rates will make it harder to buy houses. Their prices tend to hold in place, stubbornly, because owners often won't sell if they can't get out with a dollar in their pockets, but it's very likely that everything else will inflate dramatically as the house prices hold still.

And that's assuming an inflationary scenario; if we deflate instead, god only knows what will happen. Price bottoms could be astonishingly low if we deflate.

Perhaps, but it might change, assuming that we get a president who will strongly tax the wealthy, and get that money redistributed towards the poor.


At best, that will have no effect, and at worst, that will make things much, much worse. If the government redistributes wealth, it should focus on taking money away from the speculators and getting it into the hands of the productive; we need to rebuild our manufacturing base. Giving money to poor people is a feel-good prescription, but in comparison with real investment, it's a very bad use of capital. We need to use that wealth to make more wealth. We need to teach ourselves to fish again, not just try to steal fish from the wealthy.

The real reason for all these financial bubbles is closely related to too much global supply, too little global demand, because the wealthiest people in the world have been getting all of the financial advantages of increased productivity

You're badly confusing wealth with currency. You've also been hoodooed by the productivity numbers, which are garbage.

Modern currency is just a claim on wealth. It doesn't have any inherent value. The first world countries have benefited disproportionately from the easy money flowing from the Fed, and the creation of the associated money-like derivatives, by being able to use that currency to extract wealth from the economy for their own purposes. Sadly, in most cases, it's been consumed and wasted. And, in exchange, we traded away notes that have no inherent value.

The problem is, now there's a lot of those notes in the hands of people who would like to get something with them. And they are going to get most upset if we keep trying to dilute their claims by constantly adding new ones. It's not a good idea to piss off your creditors when you're in such a weak position.

All this extra money gets invested to create more supply, but the investments get increasingly fewer returns, as most people simply can't afford to keep up with it.

I think it would be more accurate to say that a great deal of that money went into financial engineering to extract more goods from the unwary producers of the world. Those producers are going to be mightily pissed when they find out they've been rooked.
posted by Malor at 5:35 AM on January 30 [1 favorite]

One-month LIBOR has been in a freefall

If LIBOR is a measure of banks' trust for one another, why is it now going down?
posted by mediareport at 5:49 AM on January 30

So much BS, hysteria, and misinformation in this thread, I don't know where to start. But I am glad that y'all are potential counter-parties.
posted by sfts2 at 6:12 AM on January 30

That's a highly useful comment, sfts2. So glad you could contribute.
posted by Malor at 6:16 AM on January 30

I am someone who is certainly very worried about a systemic crisis in our financial markets and in our economy. I have dramatically reduced my exposure to stocks and hedged what I am still holding. I don't claim to understand how the fed works, but let me present another view on the NFORBRES chart and why it may not be as bad as it looks. Then people who do know what is going on can tear it apart and I can learn from it.

The Fed had a problem in that many banks would not borrow from them because such borrowing was public, and being seen borrowing from the Fed was a sign of weakness in the Darwinian financial market. To help solve this problem they took a page from the playbook of the European banking system, and started offering money through an auction facility. This was a new way of the Fed doing business. Banks could pledge assets and borrow against those assets. The assets themselves are not taken at face value, but are discounted to a degree that reflects the danger of holding those assets. Whether the degree of discount is correct or not is arguable, and it seems that some of the assets (especially those backed by mortgages) may be valued higher than the open market would suggest, but since that market is opaque, it is debatable to some degree. So you can't necessarily borrow against the full value of assets.

The interest rate of borrowing against the assets was (and is) determined by an auction process, in which banks compete by bidding up the interest rate they will pay. Participants in the auction process are anonymous; the Fed releases information on how much was auctioned off and at what rate, but not who bought them. This solves the perception problem of borrowing openly from the Fed. It also had the effect the Fed wants: getting money and liquidity into the system so that borrowing and lending and hence spending occurs. In fact, it works very well. As I understand it, the interest rates in the auction tend to be about 3.1% (3.123% yesterday) give or take a few tenths of a percent. This is awesome if you are a bank, even if you are not in trouble, because you can borrow anonymously at that rate and then lend at a higher rate, say the 5% or higher range. As long as you get paid back, you are essentially earning a couple of percent mostly risk free.

So the large downward spike in the graph, while representative of a financial crisis, might just reflect this very new auction facility and the fact that even healthy banks can make some money borrowing from it, rather than a systemic bank insolvency.
posted by procrastination at 6:47 AM on January 30 [1 favorite]

and being seen borrowing from the Fed was a sign of weakness in the Darwinian financial market.

That's because it IS a sign of weakness. Banks shouldn't need emergency funds, and the Fed providing anonymous money is entirely unprecedented, especially when taking the really lousy collateral they're accepting.

This is a way of injecting vast amounts of liquidity without letting the world know which banks are in trouble. And if healthy banks can use it too, well, that's a strong sign that it's too cheap, and it's a powerful inflationary impulse.

This is awesome if you are a bank, even if you are not in trouble, because you can borrow anonymously at that rate and then lend at a higher rate, say the 5% or higher range. As long as you get paid back, you are essentially earning a couple of percent mostly risk free.

Yep, this is throughly awesome if you are a bank. It's not so good if you're a holder of dollars.
posted by Malor at 7:03 AM on January 30

Grr. "thoroughly".
posted by Malor at 7:04 AM on January 30

VERY IMPORTANT QUESTION:

If my bank collapses, do I still have to pay them the negative balance in my checking account? Because, as it stands, my bank account is like the anti-matter equivalent of money and I'm afraid to drive by the place because I keep seeing little red laser dots appearing all over my car.
posted by Baby_Balrog at 7:26 AM on January 30

Everybody relax.

First, every crisis is an opportunity. So instead of saying "OH MY GOD EPIC FAIL!", maybe we should be asking how the smart money stays both smart and in money.

Second, the system will never collapse. You really think being $1.3 billion short is any problem? Microsoft is sitting on $40 billion in cash. Apple is sitting on $18b, and Google on $13b. That's just three companies that could recapitalize many of the banks on their own, if they were so inclined. There is more money sitting on the sidelines here in the US than you can imagine.

The reason we are only seeing capitalization coming in from foreign countries (oops, forgot the code word "sovereign wealth fund") under bizarre contractual arrangements is because no one wants to really come clean about their books, and no US acquirer will step in until that happens. If we had a national Air Your Dirty Linen Day, where these banks and mortgage companies would come clean about precisely what assets they have are worth how much, or whose value is unknown, we'd have a lot of near-term failures and bankruptcies, a lot of near term stock market bottoms, but then we'd start to see some M&A activity and Congress waking up and actually doing their job of regulating banking.

The Fed is wise to the fact that the problem is recession, not really inflation. You take out food (ethanol <> Corn Flakes) and energy, and there really isn't any inflation. Furthermore, with so much manufacturing shifting to lower cost producers in China and India, prices of many goods are still declining. But recession is a multivectored disasater. We are spending way to much money to have the economy slow and tax revenue decline.

So the Fed is on board. They cut rates and the system chugs along. Maybe your money is worth slightly less, but that's better than not making any money.

A lot of people in this thread are talking about their savings being eroded. Welcome to the tyranny of the majority, in which you get screwed for doing the right thing. Most Americans don't have savings, they have very negative net worth. They have massive credit card debt. Rate cuts help them. They keep their job. Rate cuts keep people at the margin in a house for another six months, maybe.

Is it a shell game? Sure. But so is everything. You think a car is real value? Then why does that value decline by 40% the second you take delivery? Don't confuse pricing with value. Most things we buy have very little value despite their prices.

Keep the system moving along and everyone, all things considered, will be fine.
posted by Pastabagel at 7:32 AM on January 30 [6 favorites]

So Malor -- what should I do? I have a reasonable sum of money sitting in the bank. Not all of it is FDIC insured. I'm going to spread it around so it is, but should I just get it out of the country? (I've always been fond of the Korean market but...?)

This is going to suck for a lot of people, probably less for me than for others, but I want it to suck even less for me.
posted by lupus_yonderboy at 7:34 AM on January 30

Darwinian

you mean Spencerian. Darwin's was "natural selection," not "survival of the fittest."
posted by eustatic at 7:41 AM on January 30 [1 favorite]

It is my hope that recessionary pressures will force rents -- and associated land values back down, and people's buying power for the other necessities and luxuries of life will not be impaired.

All your doom and gloom and America Had It Coming and THIS is your hope?

Think about it. If people are walking away from their mortgages, what are they going to do, rent an apartment, or live in a cardboard box?

If people are going to sit out the market waiting for the bubble to finish popping, are they going to rent an apartment, or live at home with mom and dad?

Rents in Seattle are already rising. Three people I know have already seen increases in rent. Rentals are moving at the same rate as houses were a couple years ago -- on Craigslist at 9, rented by 5.

But it still looks smarter to rent over the next five years than it is to buy. Even if rent rises at 10%/year, it still beats the 10%/year deflation of owning. And eventually, the math of "owning is cheaper than buying" will return, and people will start buying again. 2012 is what I've seen a few economists offer as a target date for that.
posted by dw at 7:50 AM on January 30

you mean Spencerian. Darwin's was "natural selection," not "survival of the fittest."

See? I knew I would learn something. Thanks.
posted by procrastination at 7:52 AM on January 30

And while I'm at it, there are only two ways to deflate the bubble:

1. Fiddle with the value of the dollar. That means massive inflation or an actual devaluation. If we saw across the board 20% inflation (including wages) combined with a freezing of interest rates, then that should shift the values of these mortgages downward to a point that people could afford them. And the economy would probably implode in no time flat, especially because wage growth usually lags behind inflation.

2. Foreclosure city. Everyone who is losing too much value walks away. The foreclosure auction prices would plummet, and banks would take the money rather than holding that much real estate. Of course, this depends on there being a supply of capital to buy those houses, which there won't be any since everyone is walking away from their mortgages. And the economy would probably implode in no time flat.

So at this point, the Fed is panicking. At the same time, they're not. They're risking inflation to stave off a recession. But until the most recent rate cut, they've been fairly conservative about money policy, Jim Cramer be damned.

I really don't think we're staring at the Second Great Depression here. I think what we're looking at is a generation that will struggle with wealth creation. The good news is that the rest of the world is creating wealth. If the next president can return confidence to the dollar, then that should forestall the "Third World" think Malor is stuck on. Even if he/she can't, that should also mean those manufacturing and computing jobs we've lost overseas will start returning to the US. No doubt we're going looking at a long term readjustment to a leaner lifestyle with fewer nice things, and that will suck. But Second Great Depression? That would require something greater to happen, like Hu going on a bender, drunk-dialing Dubya, and deciding to pull the plug on all of China's T-notes as a result.

If China drops its T-notes... then the whole world is fucked.
posted by dw at 8:07 AM on January 30

For inflation, how does it make any sense to ignore the price of energy or food?

Those are the most impactful of price increases. Yes, they are volatile, but ignoring the fact that food prices are through the roof is akin to plugging your ears and shouting at the top of your lungs "INFLATION IS LOW".
posted by Lord_Pall at 8:23 AM on January 30 [1 favorite]

Core inflation has been historically useful because food and energy prices tend to be very volatile. However, you can make the argument that in recent years core inflation has consistently run below the consumer price index, and that because of that inflation has been understated. See this post at The Big Picture for a larger discussion.
posted by procrastination at 8:34 AM on January 30

Second, the system will never collapse. You really think being $1.3 billion short is any problem? Microsoft is sitting on $40 billion in cash. Apple is sitting on $18b, and Google on $13b. That's just three companies that could recapitalize many of the banks on their own, if they were so inclined.

Somehow, the thought of private-sector firms recapitalizing banks strikes me as something to be avoided. I mean...corporations are not going to commit their bankrolls without getting something back. It's just...I dunno. I can't quite come up with the words to describe the levels of dark machinations such a move might engender.

Not that I don't trust corporations, y'know...
posted by Thorzdad at 8:35 AM on January 30

Malor, and after rereading your comment, I think you know very well what useless commentary is. Your comments are the epitome of unsupported hyperbole and assertion. I've commented in other threads about the doomsayers, and its tiresome. No need to replay that. Think what you want.

Pastabagel has a pretty reasonable take on this whole situation. $13 billion related to the entire banking system in the US? Wow. Just wow.

Interest rates at close to historical lows, even if the double (which they won't) the economy will survive just fine and are less than when I bought my first house. Inflation? Low. Ecomomic growth? Over 6% last year, forward looking? Not robust but nowhere near a recession. Its a possibility, but it happens all the time. The future? Well, if y'all know so much, I expect you'll be rich in 1 year.

Some people that tried to make a quick buck on housing speculation, and some undercapitalized banks will fail. Some hedge funds will take a loss. My heart bleeds. Some well-meaning working middle class that do not have a good appreciation of financial risk will take a hit. Thats too bad, but they will survive and battle their way back, poorer and hopefully wiser. Were the lending practices of some banks too liberal? Why, yes they were. Are certain assets tough to price accurately? Why, yes they are. They have ALWAYS been. No news here. Has the falling dollar challenged those holding dollar denominated assets? And caused oil prices to rise? Why, yes. Surprise! Think its never happened before?

As far as the equity markets go...Guess what the approximate average annual return has been 24 months after a stock market has lost more than 10% of its value in a month for the 5 times in the last 30 years? Well over 10%, meaning that 1 year later people are close to whole in thier 401ks etc, and 1 year after that their assets have appreciated another 10% - for 5% annualized return - better than a savings account. Something north of financial collapse.

Its emotionally more satisfying to think doom and gloom and be wrong, than to think things are rosy and be proven wrong...its an attractive attitude. I've been there and done that, and invested through much worse economic times than these, and made and lost money in good times and bad. There is nothing new under the sun.

Bulls make money. Bears make money. Pigs get slaughtered.
posted by sfts2 at 8:52 AM on January 30 [5 favorites]

HAY GUYS I STUDY ECONOMICS ON THE INTERWEB AND I HAVE PREDICTIONS FOR YOU!! DOOOOOM!!!!! buy short buy short GOOOO
posted by cavalier at 9:09 AM on January 30

Ooops. Growth .6% last quarter, not 6% last year. ~2.4% annualized. Not great, not terrible.
posted by sfts2 at 9:23 AM on January 30

Since the Reagan days the American economy seems to be succeeding with smoke and mirrors.

In the US merchandise is made in other countries in such great quantities, there is tremendous outsourcing, whole chunks of America, like the prairies, have become ghost towns or are crumbling, like Detroit.

Honestly, I don't know how the economy here has held up so long and I do wonder what is going on now. It's mysterious to me. I don't understand economics, wish I did.

Did we go from greater economic stability in the Clinton days to a crash situation now or were we heading towards this anyway? Could anyone say anything about this in plain English? I'd so appreciate it. It does feel scary at this time. Those charts from the OP are almost comic in their their scariness.
posted by nickyskye at 9:30 AM on January 30

You take out food (ethanol <> Corn Flakes) and energy, and there really isn't any inflation.

What a pile of bullshit that is. First, food and energy are the only kinds of inflation that really hurt, because you can't delay their consumption. You need a certain amount of food to live. Capital goods going up is much less of an issue, because those purchases can be delayed.

The fact that you even quote the 'ex food and energy' number means you're buying into the statistical hoodoo. Use your own brain instead. The reason they want to 'exclude volatile food and energy' is because THAT'S WHAT'S GOING UP.

They also have very good ways of hiding house inflation. Look up Owner's Equivalent Rent sometime if you want to both laugh and cry at the same time.

The reason you're aren't seeing prices going up that much at retail is because of the powerful deflationary undertow of the cheap labor in China. Everything that's local to the US is going freaking ballistic. Look at college tuitions, and cable bills, and medical costs sometime.

No inflation my ass.

But recession is a multivectored disasater. We are spending way to much money to have the economy slow and tax revenue decline.

So we just make things sicker and sicker and sicker, and run up a higher and higher bill as we disconnect the financial system from the economy in new and exciting ways. To avoid today's pain, we'll take even more in a year.... but when a year comes around, well, we won't want to pay the bill then either.

So Malor -- what should I do? I have a reasonable sum of money sitting in the bank. Not all of it is FDIC insured. I'm going to spread it around so it is, but should I just get it out of the country? (I've always been fond of the Korean market but...?)

Boy, I wish I knew what to tell you. I don't know what's going to happen either. I'm personally betting on inflation, but I can't make intelligent predictions because the problems are so large and the Fed is willing to go to such extraordinary lengths to prop up bad business models.

I guess my strongest advice would be: learn more. Don't be afraid to come to different conclusions than I have.
posted by Malor at 9:38 AM on January 30 [1 favorite]

Did we go from greater economic stability in the Clinton days to a crash situation now or were we heading towards this anyway?

These problems have been building for the last two decades. If you'd like a broad overview, I posted this essay from Doug Noland in that other thread. In short, the Clinton years were full of smoke and mirrors too; we had a huge stock market bubble, and to prevent that pop and subsequent powerful recession, the Fed inflated two more, much larger bubbles... debt and real estate.

Unlimited liquidity on demand to support flawed business/financial models: that's the Fed's modus operandi. We don't have free markets, we have socialized ones... where we want only the creativity of capitalism without failures, ever. But the failures are important; it's called 'creative destruction'. We have, apparently, decided that we will not have bad outcomes ever, and so the government has become a gigantic welfare system for Wall Street. No matter how stupid they get, the Fed and Congress stand ready to bail them out. So, of course, they get stupider and greedier every year.

I'm amazed things have held together this long.
posted by Malor at 9:47 AM on January 30 [1 favorite]

Time to take a ride on the Reading Railroad. Choo! Choo!
posted by Horken Bazooka at 9:58 AM on January 30

I'm amazed things have held together this long.

They have because this is a resilient system. Even when there's no money, there's always money to be made somewhere. And the wealth creation of Wall Street drew a lot of middle-class investors in as 401(k)s replaced traditional defined benefits plans in the 1980s and 1990s.

The reason you're seeing so many interventions now isn't because the government is trying to save a few bad actors. It's because just about all of us have money diversified across multiple investments in stocks, bonds, real estate, mutual funds, metals....

The problem with this "burn Wall Street burn" attitude is that it's not Citi losing billions, it's hundreds of millions of us losing thousands. We all bought into the bubble, first in the NASDAQ, now in the real estate market. And we will all pay for it.

But again, this isn't the end. There's still wealth to be made elsewhere. Look at the speculation in the oil futures market the last few years. There's no way oil should be trading at $90/barrel right now; most of that is driven by futures traders pushing up the price. The only thing protecting it from "bubble" status is that everyone is buying into "peak oil" and the increasing needs of China and India. Eventually, though, either the speculators will be right and oil will be at $200/barrel come 2009, or the oil storage facilities will be filled with contact $100/barrel oil and the immediate delivery price will plummet since there will be nowhere to put it. And just like that, it's $2/gallon for gas again. And the economy goes another year without total collapse.

I think a lot of people are turning into dispensationalists sitting around waiting for Armageddon. It reminds me of the fundies who are always preaching that these are the end times. The problem is, people have been screaming that for eons now. And times never really end. They just change, slowly or radically, over the course of years. Then either Jesus comes back, or we just evolve into some new form of society.
posted by dw at 10:13 AM on January 30

In short, the Clinton years were full of smoke and mirrors too; we had a huge stock market bubble

I disagree with this thesis. The Clinton high-growth years featured 4 things:

1) The commodification of Macintosh-quality PC usability (Windows 95)
2) The arrival world wide web as a commercial New Frontier (Netscape, IE)
3) Cheap, CHEAP oil (thanks to significant non-OPEC sources coming online)
4) An increasing trade deficit with China bringing (borrowed) wealth

The stock bubble was a redistribution of wealth that prompted investment in arguably useful, wealth-producing commercial sectors that the US still leads the world in today.

I do agree, however, that the present system is entirely too reliant on equities returning 8.5% for all eternity. The stock market itself is one helluva crooked game and too much of the government tax code is designed to force people into it.
posted by panamax at 10:13 AM on January 30

You really think being $1.3 billion short is any problem? Microsoft is sitting on $40 billion in cash. Apple is sitting on $18b, and Google on $13b. That's just three companies that could recapitalize many of the banks on their own, if they were so inclined.

That's right. All Google has to do is withdraw some cash from the bank and...

Oh, wait, I think I see a problem.
posted by srt19170 at 10:21 AM on January 30 [3 favorites]

Did we go from greater economic stability in the Clinton days to a crash situation now or were we heading towards this anyway? Could anyone say anything about this in plain English?

Much like 9/11, every deleterious trend & event of the Bush economy -- except the federal deficit -- got its start in the 2nd term of the Clinton administration.

The trade deficit with China, outsourcing to Mexico, immigrants from there flooding here, rising energy prices, and the housing bubble.

The 2nd-term Clinton economy is what it looks like when several interesting long-wave secular trends line up nicely.

It would have taken more enlightened Central Planning to avoid a pullback. The raw market itself is by definition powerless to redirect itself to avoid pullbacks. It is too short-term and reactive to do that.
posted by panamax at 10:23 AM on January 30

sfts2, you're "Chill Dude everything will work out" counter-argument is ignorant of the financial stresses coursing through the system.

Eg.: Citibank paying 11% for short-term capital from Dubai.

Recession is some creative destruction and devil-take-the-hindmost. Depression is a grand mal seizure in capital flows.
posted by panamax at 10:30 AM on January 30

You think a car is real value? Then why does that value decline by 40% the second you take delivery?

because the secondary market is pricing in unknownable wear & tear & reliability factors.

If cars couldn't be abused, or have gremlins, then the price wouldn't fall so significantly.

The price drop is really a few thousand, ~10%, btw.
posted by panamax at 10:39 AM on January 30

There are a few things I'd like to see cited in the FPP. For example, I previously asked about capital adequacy ratios and the Non Borrowed Reserves. When I was working at Moody's we certainly didn't look solely at deposits to arrive at a quantitative measure of a financial institutions default probability. However the FPP implies a large number of banks are ill liquid. Upon looking at the Basel II documentation in a little more detail this afternoon, it seems Non Borrowed Reserves are aggregated into Tier2 capital. So they are a component not the definitive indicator of an institutions financial health.

I'm also rather puzzled by the conclusion in the FPP - "Today's TAF press release says that 52 American banks or institutions are currently receiving loans totaling ~$40 billion -- but the Fed refuses to name who they are.

The banks' collateral for these TAF loans are those same yucky hard-to-price CDO's that caused the banks' liquidity problems in the first place ..."

Wait a second - the Fed won't name who they are lending money to but somehow we know the collateral?

I'm not so sure. The TAF appears to be structured to accept a wide range of collateral. A CDO could be submitted as collateral. As could a AAA Corporate or even US Sovereign debt. And just as not all CDOs are created equal, all tranches in a CDO are not identical; there are very solid, very credit worthy tranches on CDOs being created and traded out there. How do we know these very senior tranches aren't being used as collateral for loans? But the FPP implies that CDOs and only CDOs are being submitted to The Fed. Please cite source.

I spent several years at Deutsche Bank as a quant on the Government Securities desk and I have a problem with statements from the linked blogs like "In practice, it never mattered what the discount window was, because it was so little used."

That's not true at all. Banks did indeed make use of the discount window. However The Fed themselves tried to discourage frequent and repeated use of this facility and in fact it was a relatively expensive source of capital (100 bps spread I believe). I can't agree with the statement that the discount window was little used. That's just not true. The discount window was indeed used, and especially so during times of systemic stress. 911, for example, saw The Fed aggressively utilise this mechanism - shortly before the attack borrowing from at the window ran a little under $200 million. And on September 12th the first day after the attack lending peaked at a record $45.6 billion.

TAF appears to be little different from the discount window, except for the range of collateral accepted (once again, more than just CDOs) and a lot less stigma for the borrowing institution.

And I've got problems with blogs linking to excel spreadsheets - even off The Feds own site - and claiming these are definitive haircuts (i.e., price deltas) applied to collateral. Has anyone priced a loan using The Feds own interbank pricing system? I suspect the haircuts this system applies - actual prices, by the way - would be a lot different than what we're seeing from a two year old excel spreadsheet found on the public internet.

Finally, keep in mind both TAF as well as the discount window before it operated as a lending facility. In other words, The Fed was functioning as a counterparty in a repo-like transaction, with collateral (of various quality) being offered in return for necessary funds. So The Fed is stepping up to the plate, injecting liquidity in to the system in another way, trying to re-lubricate the domestic economy? Yes, we all knew Bernanke was going to engage in non-traditional techniques. In some form, this seems to be the public face of one of his tactics. Well, I'd rather see something done that a Japan style "lost decade".

There is some really good commentary in this thread (as usual for MeTa finance topics), but I have to say I feel the FPP is rather inflammatory and a little light on citation.
posted by Mutant at 10:50 AM on January 30 [3 favorites]

But the FPP implies that CDOs and only CDOs are being submitted to The Fed. Please cite source.

The Fed lowered the standards of what it will take as collateral. Basic common sense would tell you banks visiting this new discount window will hand over the crappiest crap they have on their crappy crap-stained crap books of crap.
posted by panamax at 11:16 AM on January 30 [1 favorite]

That's right. All Google has to do is withdraw some cash from the bank and...

Oh, wait, I think I see a problem.
posted by srt19170 at 1:21 PM on January 30

"Cash" means short term assets, like t-bills, etc. held and managed by a myriad of banks and brokers. They don't operate out of a savings account at ING Direct.

And the Fed just cut another 0.5%, FYI.
posted by Pastabagel at 11:22 AM on January 30

"Basic common sense would tell you banks visiting this new discount window will hand over the crappiest crap they have on their crappy crap-stained crap books of crap."

But the fundamental question remains the same - at what price?

I'm not convinced The Fed will take an equity tranche at par, for example. Maybe The Fed would take some equity tranches for one cent on the dollar, and others at higher rates. I don't know, and apparnetly nobody posting on this thread knows. And I don't believe prices paid by The Fed would be homogenous, one price for any tranches or even class of tranches. So my point still remains, we don't know. But the FPP implies relatively high prices.
posted by Mutant at 11:25 AM on January 30

Stop, Mutant. you'll pull folks back from the window!

panamax,

"banks visiting this new discount window will hand over the crappiest crap they have on their crappy crap-stained crap books of crap."

Jeez, I wish I could craft such enlightened analysis of our financial system. By the way, son, I've been around this shit professionally for 25 years, what do you do for a living? I posit that you don't know your ass from your elbow - maybe I'm wrong and you're just inarticulate, but please tell me again how ignorant I am.
posted by sfts2 at 11:35 AM on January 30

what do you do for a living

I'm a professional adult video performer.

I posit that you don't know your ass from your elbow

I knew enough back in August to know that Ben Stein was full of shit when he was arguing the subprime issue was likely $35 billion in losses, tops.

please tell me again how ignorant I am

I prefer to let events do that.

My position is simply that $4 trillion of exceptionally risky lending at unsustainable asset valuations went into the US housing market 2003-2006.

Optimistically, I think we'll see $400B of losses from this lending orgy. Realistically, $800B. Quite possibly, $1.2T.

These numbers have . . . interesting . . . ramifications.
posted by