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peterbirksWell, the consensus on this blog a year ago was (brief cliff notes follow):
1) The crisis was systemic, not one of liquidity and not one of confidence,
2) The shit would really hit the fan in August this year.
In both areas this blog was at odds with most of the writers in the FT and everyone that I read in the other business pages. We were one month out on the shit hit prediction, and although Butler got the dollar call totally wrong (although in the medium term he is likely to be proved right, before in the long term being proved wrong again), in general, we've been more on the money than the mainline press.
Letting Lehman Bros fail was the right thing to do, even though it takes us into uncharted waters. One plus is that the transparency associated with bankruptcy will let us know a lot more of what was going on. A second plus is that we can see how close to meltdown it might bring us. If Lehmabn Bros had been bailed out, another problem would have appeared within weeks.
Or, indeed, within hours, what with AIG looking to be on the edge. It's all very well muttering that AIG has some sound businesses and, if it unloads those, it will be okay. But, well, why pay a few hundred million for a sound business today if you can pick it up for less than $100m next week after AIG has gone bust? That plan only goes wrong if someone else moves in to buy the business this week and AIG survives. But, then, hell, you are no worse off than you were before, and there aren't that many buyers out there.
The question will continually reappear "where did all the money go"? And the simple answer is that people in the US (and here) consumed more than they produced. As I said before, this "risky lending" was sliced and diced and split up and moved around, but the risk didn't disappear. And, more importantly, it wasn't really "diversified", as our honorary member for the banking community (Woodhouse, M) claimed.
On the plus side, that wealth hasn't disappeared. While the people in the US (and here) were consuming more than they were producing, the people in the Far East were producing more than they were consuming. Now it's payback time. The question is, will we pay back our debt?
And the answer here can go one of two ways. If it's "yes" (i.e., the 'honorable' thing) then we enter a deflationary spiral of protectionism and depression (see Japan, 1990s). However, if the answer is 'no', then we enter an inflationary spiral that effectively reduces the debt in real terms (because the US owes the Chinese in dollars, not yuan) and gives the borrowers a get-out-of-jail-not-very-expensively card. It's a bit like a poker debt that you pay off ten years late, at which point $10K isn't what it used to be.
Everyone knows that I've punted on the inflationary scenario, but the press still seems to be seeing the former as a more likely result. I don't know why. If the Fed cuts rates sooner rather than later, that just makes the inflationary likelihood even higher. Occam's razor comes into play here. A deflationary batttle against consumption excesses of the past would be harsh, while an inflationary battle would hit savers in China.
Pretty much of a no-brainer, I would have thought.
_______
1) The crisis was systemic, not one of liquidity and not one of confidence,
2) The shit would really hit the fan in August this year.
In both areas this blog was at odds with most of the writers in the FT and everyone that I read in the other business pages. We were one month out on the shit hit prediction, and although Butler got the dollar call totally wrong (although in the medium term he is likely to be proved right, before in the long term being proved wrong again), in general, we've been more on the money than the mainline press.
Letting Lehman Bros fail was the right thing to do, even though it takes us into uncharted waters. One plus is that the transparency associated with bankruptcy will let us know a lot more of what was going on. A second plus is that we can see how close to meltdown it might bring us. If Lehmabn Bros had been bailed out, another problem would have appeared within weeks.
Or, indeed, within hours, what with AIG looking to be on the edge. It's all very well muttering that AIG has some sound businesses and, if it unloads those, it will be okay. But, well, why pay a few hundred million for a sound business today if you can pick it up for less than $100m next week after AIG has gone bust? That plan only goes wrong if someone else moves in to buy the business this week and AIG survives. But, then, hell, you are no worse off than you were before, and there aren't that many buyers out there.
The question will continually reappear "where did all the money go"? And the simple answer is that people in the US (and here) consumed more than they produced. As I said before, this "risky lending" was sliced and diced and split up and moved around, but the risk didn't disappear. And, more importantly, it wasn't really "diversified", as our honorary member for the banking community (Woodhouse, M) claimed.
On the plus side, that wealth hasn't disappeared. While the people in the US (and here) were consuming more than they were producing, the people in the Far East were producing more than they were consuming. Now it's payback time. The question is, will we pay back our debt?
And the answer here can go one of two ways. If it's "yes" (i.e., the 'honorable' thing) then we enter a deflationary spiral of protectionism and depression (see Japan, 1990s). However, if the answer is 'no', then we enter an inflationary spiral that effectively reduces the debt in real terms (because the US owes the Chinese in dollars, not yuan) and gives the borrowers a get-out-of-jail-not-very-expensively card. It's a bit like a poker debt that you pay off ten years late, at which point $10K isn't what it used to be.
Everyone knows that I've punted on the inflationary scenario, but the press still seems to be seeing the former as a more likely result. I don't know why. If the Fed cuts rates sooner rather than later, that just makes the inflationary likelihood even higher. Occam's razor comes into play here. A deflationary batttle against consumption excesses of the past would be harsh, while an inflationary battle would hit savers in China.
Pretty much of a no-brainer, I would have thought.
_______
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Totally off the topic
Date: 2008-09-16 01:49 pm (UTC)What I wanted to pass on to you is an extended interview that was on this afternoon with David Simon discussing The Wire and sundry other stuff with Simon Mayo on R5. Interesting stuff. There's a 'Daily Mayo' podcast split into hours and you want the 2-3pm slice, which will presumably be up by later on today.
Re: Totally off the topic
Date: 2008-09-17 12:57 pm (UTC)PJ
no subject
Date: 2008-09-16 07:51 pm (UTC)Being a multi-verse proponent, you struck it lucky in this universe.
The dollar is stronger than mid-summer. However, there has only been a slight recovery in the dollar index. It's merely a 30% recovery in the recent decline and the dollar is starting to head south again. It's the alternative of buying Sterling or Euro that is forcing people to hold dollars.
Where is the value in the US economy backing the dollar? All I can see are interest rate cuts to force people to piss their hard-earned rather than keeping it in the bank. Dollars are still IOUs for sovereign wealth funds to buy up the west with.
All the US is doing is creating the perception that the Fed is doing a slightly better job of handling the credit crunch than the BOE and ECB. So people buy dollars and we get a slight recovery in the dollar index.
The printing press is still in overdrive and normal service will soon be resumed.
I'm buying up lots of cheap gold, swing trading Sterling and Euro. Oil will start going up again when winter comes and the worst of the credit crunch gets the Chinese factories up and running again. Then we can all start weeing our fiat currencies into mid and far east sovereign wealth funds again.
no subject
Date: 2008-09-17 01:01 pm (UTC)But, then again, nor have the solid production fundamentals.
One thing that could work against the dollar would be a weakening in commodities -- in particular, 'softs'. Although the dollar would strengthen against even more commodity-dependent currencies (CAD, Aussie Dollar, New Zealand dollar) it would probably weaken against currencies where high commodity prices are even worse news.
The weakening of the dollar in a period when commodity prices were high is misleading ion that the collapse of the dollar actually took place during the tail-end of the commodity boom.
PJ
no subject
Date: 2008-09-16 09:24 pm (UTC)Financial Services in complete meltdown. My (recent) employer - looked very strong when I joined in April - now fighting to avoid joining the death spiral. Everyone is shell-shocked - staring up at Bloomberg TV - where everything is in red - as if it will help.
Never seen anything like this in my 20 year career. Apparently Morgan Stanley is now looking shaky.
Pete N.
no subject
Date: 2008-09-17 01:03 pm (UTC)I do fear rampant protectionism though (a possibility in the deflationary scenario), solely on the grounds that it is so moronically inefficient.
PJ