Chronicles Of Depression 2.0: #218

I had a short day yesterday and so had to pass up most of my daily Internet reading and blogging.

Today, financial events are changing literally each minute, so posting about that would be futile.

However, Ambrose Evans-Pritchard over at Telegraph.co.uk has his usual insightful — and enlightening — column that’s worth blogging:

Federal Reserve needs to rediscover power to shock and awe to ease crisis

The world’s central banks no longer seem able to shock and awe the markets with a blast of liquidity.

Yesterday’s move by the US Federal Reserve, the European banks and the Bank of Japan to douse the global banking system with $184bn (£101bn) may get us through the week without another catastrophic failure, but it does nothing to halt the downward spiral into debt deflation.

“The central bank action treats a symptom of the disease, not the disease itself,” said Stephen Lewis, chief economist at Insinger de Beaufort. “It is a palliative. At root, there is no way of imbuing worthless financial claims with value.”

The yield on three-month Treasury notes remains near zero – a level last seen after Pearl Harbour – reflecting a near total loss of confidence in all financial instruments. The five-year CDS credit default swaps on a great clutch of America’s biggest companies are flashing imminent bankruptcy signals: Washington Mutual (2638), General Motors (2284), MBIA Insurance (2187), Advanced Micro (1773), Ford Motor (1718).

We are dangerously close to a $3.5 trillion collapse of America’s money market fund industry. “It’s an incredibly serious issue. A tipping point in this crisis would be when you have a run on money markets, and we are right on the cusp of that,” said Paul McCulley, PIMCO’s portfolio chief.

Emphasis added by me.

Some interesting news there!

Imminent bankruptcy of General Motors, MBIA Insurance, Advanced Micro, and Ford Motor?

And a new multi-trillion-dollar figure: $3.5 trillion!

Former Fed chief Paul Volcker is now calling for a vast sink – underwritten by the US taxpayer, and modelled on the Resolution Trust Corporation (RTC) – to soak up trillions of dollars of toxic debt and asset-backed securities once and for all.

Emphasis added by me.

I’d really, really like to know how Volcker developed that idea. Did it spring from his experience or by talking to the banksters? Volcker was chairman of the Fed during part of Reagan’s Dollar Uber Alles presidency. Wikipedia documents:

Volcker’s Fed is widely credited with ending the United States’ stagflation crisis of the 1970s by limiting the growth of the money supply, abandoning the previous policy of targeting interest rates. Inflation, which peaked at 13.5% in 1981, was successfully lowered to 3.2% by 1983.

However, the change in policy contributed to the significant recession the U.S. economy experienced in the early 1980s, which included the highest unemployment levels since the Great Depression[.]

Emphasis added by me.

Oh, that was a terrible time. That created the first big wave of homelessness during my lifetime.

Ambrose continues:

Such a Super-Sewer would put a floor under the collapsing value of CDOs, CLOs, HELOCs and all the myriad instruments of leveraged excess that lie at the root of this crisis. By doing so it would at last allow banks to lick their wounds and compute losses. Above all, it would mitigate the US housing crash, changing the whole profile of projected defaults now haunting the banking system.

How much would it cost? Prof Kenneth Rogoff, former chief economist at the IMF, says the bill would run to at least $1 trillion. This would increase the US government debt from 48pc to 55pc of GDP (under IMF measures) – still lower than that of Germany, France, Italy or Japan.

Emphasis added by me.

“At least $1 trillion.” At least.

I’ve had CNBC on in the background today and one of the key questions has been, “How will the government value these assets?” That’s a critical question. Because what’s not being asked is, “Will the government then use the spread between current and projected future value as leverage?” In other words, will the government wind up being a crack whore with these assets just as Wall Street was? Will Dubya, for instance, see it as new funding for his foolish war? Will any possible profits be spent before they’ve been made, evaporating the entire point of this exercise?

More from Ambrose:

The Fed’s Tuesday statement suggesting that the risks of inflation and slowing growth are roughly matched is so tone-deaf, and so implausible after the $50 collapse in oil prices, that it should be framed for posterity. The central banks were too loose during the credit bubble. They are too tight now.

This crisis will not begin to abate until monetary gods at the Fed and the ECB make it clear at long last that they grasp the full extent of the crisis by slashing interest rates in a single concerted action. That will shock and awe.

Hours after Ambrose wrote this, things changed. The Super-Sewer is being crafted.

Too bad tomorrow is Saturday. I’ll have to wait until next week to get Ambrose’s opinion in his next column.

I don’t think this Super-Sewer is going to work. Because it’s not going to stop the behavior that created this mess. That behavior is going to continue!

All prior Chronicles of Depression 2.0 posts. Read them before you must.

Explore posts in the same categories: C.O.A.T. - Belief, C.O.A.T. - Money, C.O.A.T. - Politics, C.O.A.T. - Scams, C.O.A.T. - Self-Defense, Depression 2.0

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