In the last ten years we’ve had three bubbles: the stock market bubble; the housing bubble and the commodities and oil bubble. The next bubble is on its way, and it’s the Treasuries bubble. As Bloomberg noted, the bill for the financial crisis is now up to 7.7 trillion. Most of that hasn’t actually been paid for yet, and paying for it means issuing treasuries to expand the Fed’s balance sheet to meet the size of its obligations, as well as money for Treasury, the FDIC and so on.
It won’t be the full 7.7 trillion, but it’s in excess of 5 trillion still to be issued. That’s one hell of a lot of treasuries. The influx of money into the US to buy treasuries has been the cause of the dollar soaring. Money will have to continue to flood into the United States to fund this, and will likewise need to gush over to Europe, Japan, Korea and other countries who are throwing money at the financial crisis.
This is going to be a very Darwinian period, and it’s going to cause a lot of countries on the periphery, including most of Africa, South America and good chunks of Asia, to shake apart. All that money coming into the 1st world will mean no money for them. Combine that with a complete crash in commodities prices and they will be starved for hard currency. Since most of these nations are not able to feed themselves, this will mean famines, starvation, food riots and fallen governments. Of immediate concern to the US, barring massive US help, I would expect that Mexico will slip into indisputable anarchy in large areas of the country within a year or so.
Now when you’re talking trillions of dollars you’re talking real money. In a normal financial crisis after money repatriates and causes a spike, the value of the currency usually depreciates. But the US isn’t a normal country and the dollar is still the world’s reserve currency. Moreover the US economy is in play. Dollars may yet be able to be used to buy up real assets for multi-generational low prices. On the other hand, America keeps making it clear that the real gems aren’t on the table for foreigners to scoop up (say the Chinese buying GM or Arabs picking up a major bank.)
The fear, then, is that at some point during this giant buying spree, the rest of the world decides to stop buying treasuries. The Fed is aware of this risk, and one of the things they’ve done is start paying interest on treasuries. Oh, they don’t call it that, but when you pay interest on reserves and when treasuries count as reserves, that’s what it amounts to. So the real return on treasuries, if you’re a bank, is rather higher than ordinary people get. And most foreign banks have US subsidiaries where they can park the treasuries to get the return. (This isn’t the only reason they did this, there are other advantages to the Fed, more on that a later date.)
Assuming the rest of the world doesn’t blink, the end result is a huge treasuries bubble consisting of primarily short term treasuries and large reserves for banks earning interest rather higher than they would otherwise. Most of the money is being used for loans to banks, at lower interest rates than they will be earning on treasuries held in reserves, leading to a further outflow of money to the banks. This is, as they say, a feature, not a bug, since banks still need more money.
In principle, because treasuries count as capital and reserves, this then becomes money the banks can lend. Whether they do so will depend on whether they feel the need to horde cash against further possible losses; whether they think they need to keep cash in order to buy up competitors and what the inflation rate is at. If it’s deflationary, then making a couple percent will actually be acceptable, and in a high risk environment, they may just decide to sit on the treasuries, which is hardly what the government would like them to do.
And meanwhile countries from Pakistan to Morocco to Venezuela will be shaking apart.
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If oil prices keep dropping, we might have a gas bubble…
We have always been at war with Eastasia.
A global meltdown is what these idiots are playing with.
there are some bargains out there right now. carlos slim is building a stake in citi. hope the economy comes back or we are screwed a second time.
Well, the interest on the treasuries will be paid by the american taxpayer, so having a negative affect on the US government’s cash flow.
The interest is paid by the treasury to the banks?
Nice if you are a bank, fuck up, and be forced to receive interest.
What about those assets the treasury is “buying”, is there a clash flow, to the treasury, associated with them?
What do the numbers look like, cash flow numbers?
What about the dot com bubble?
Treasury and the Fed have done all of these loony multi-trillion dollar programs to shore up a house of cards and re-initiate lending. None of this stuff has worked. I doubt that the treasuries scheme will either. Until we address the underlying problems, we might as well be burning these trillions in bonfires in the street.
Somewhat off topic: There was this in the NYT. Britain sold Tibet down the drain to suck up to China in the current crisis. Signs of things to come?
http://www.nytimes.com/2008/11……html?_r=1
simple solution.. a debt-to-equity swap with China. ‘cept they take Alaska and its governor as the equity component. ;-P
sorry. couldn’t resist. unfortunately, Alaska may not be worth enough.
due to the lack of jobs here many long term illegals are being forced to return to mx. there are no jobs there for them either. we are in for a lot of trouble on the border in the next couple of years.
this is even scarier when you consider that Mexico is itself coming apart the seams, with the narco-wars getting to the point where some very mainstream people are starting to question the country’s capacity to maintain longterm political stability. I live in San Diego so naturally this is of some concern to me.
OT – Per Glenn Greenwald:
wonder what the us will do to suck up to china. we need their money.
taiwan.
Here’s a choice bit of conspiracy theory for you: Paulson spends half of the $700 billion; he stops spending and makes some kind of feeble excuse; CITI is drowning again; arab sheiks and SWFs own large chunks of CITI; new and huge CITI bail-out is promulgated (mostly on the installment plan); one day later, Paulson is going to spend $800 billion. My guess is that the oil sheiks and SWFs threatened (and temporarily implemented) a boycott of Treasuries, until CITI got this massive gift.
As to your take, I think that you’re on the correct path. The price inflation of last year might have been the original game-plan to loot the consumers of the world, but the CDS/CDO pyramid scheme collapsed, so now it’s go liquid (Treasuries are essentially liquid, as you point out) and use asset deflation to steal the actual wealth (as opposed to debt-based currency).
You’re a good analyst, but I can’t recall your program of solutions. What might it entail?
They need to legalize. They tried a while back and the US told them not to. But it’s reaching the point where they should probably tell the US to go take a leap off a short pier and do it anyway.
that would be just like the us. turn our back on em. perfect.
the US and China are at the moment engaged in kind of an embrace-of-death and that gives us some leverage. China’s export dependence and our debt dependence equate to a perfect suicide pact. However, China may be weaning themselves away from export dependence at a faster rate than we are ourselves away from our debt dependence… so we’d better use that leverage sooner rather than later. Their banks are surprisingly well capitalized, and they seem to be throwing stimulus measures at precisely the right sectors of their own economy, moving forward as much as a trillion dollars US in planned infrastructure and social spending into a 1-3 year window (as opposed to a multi-trillion dollar fatcat bailout). ‘course we still have the 200x more WMD and very soon, we’ll have the bigger army.. that might count for something ;-P.
Also the fact that the Chinese are the largest holders of those treasuries…!
the US Dollar may also be in a “bubble”
up over 25% since July, down 3% in the past 36 hours
perhaps the FOREX traders can count in twelve zeros?
no selling Taiwan! I like the Taiwanese.
i’m in sd also. mx is about to implode. heck, you think our economy is bad.
don’t know what i’m talking about here… but i’ll throw this out anyway.
could the next bubble be the one we’re living in right now – a dollar bubble? the so-called flight to safety? and what’s happening with treasuries is just a symptom?
certainly it seems to me that the “value” of the dollar is completely unmoored from the fundamentals of our economy, from our fiscal, trade and monetary policies.
I would put a floor under the real estate market by buying up and resetting mortgages at a discount. I would use banks taken over by the FDIC to start lending again at the rates the government wants money loaned at, including interbank loans and consumer loans. I would reprice paper either based on cash flow, or if it has no cash flow on return/risk, taking the risk from publicly traded items (which would discounted most CDS’s massively since their returns are very high which means their risk would be very high). After discounting that way, I would guarantee them in return for actual real premiums. I would do a large stimulus, intended to break the oil supply bottleneck. I would put a transactions tax on all securities of 1% or .5% or some such, get the other major countries to agree to it, and would then slap currency controls on anything trying to settle from outside the area.
This would put a real price on crisis, get lending going again, and so on. It might still lead to a massive dollar drought outside the core regions, if that was the case I would arrange a clearing corporation though the IMF with price supports, in which food and other first world goods are exchanged with the third world for commodities at price supported levels. It would cost some money, but compared to the rest of the money involved, would be essentially trivial. In the longer term other solutions would be better, but this could do it for the short run, I think.)
Thanks for the look ahead.
What really seems one of the major problems to me is too much consolidation. Too many companies are getting “too big to fail.” We can’t afford that.
I think maybe what we need is a revival of the Sherman Antitrust Act. If too many big businesses get “too big to fail,” we will be locked in and will eventually get wiped out by a full-scale financial collapse. The more “too big to fail” companies there are, the less flexibility our system has, and the more pressure there will be to rig the system in favor of the status quo. That is when we lose adaptability, and systemic ossification and rigidity set us up for a fall.
Bob in HI
OT: It’s official, Obama is keeping Gates as Def Sec.
please let this be for about a week….
Brennan has withdrawn his name from consideration for CIA chief, blames liberal blogs…
Mexico should’ve done that a long time ago. It really pains me when president after president takes US handout packages in exchange for accepting carte-blance our dictates on how they should be running their internal affairs. Our drug policies are positively colonialist (not even neo-colonialist) and they’re killing that country.
Yes, I agree. Most of these firms need to be broken up. What’s going to happen instead is that we’re going to be left with three or so major money center banks.
well, one bright side of the weak dollar is that it would help the balance of trade situation if anyone has money outside the us.
the people in China believe that the election of Obama will allow a reuniting of Taiwan with the mainland.
just saying what I heard.
How can that be,?
I heard we don’t have any clout….
where’s my handkerchief?
Foreign owners of US Treasury Securities in billions of dollars (Sept 2008)
Mainland China 585.0
Japan 573.2
United Kingdom 338.4
Caribbean banking centers 185.3
Oil exporters 182.2
Brazil 141.9
Luxembourg 91.8
Russia 69.7
Hong Kong 60.9
Norway 52.2
Switzerland 49.0
Germany 41.4
from wiki
what’s he talkin about? we haven’t touched the guy. there is somethin else goin on.
the broader issue is we need to encourage entrepreneurship for a new generation of transformative industries somehow. American industry needs an infrastructure of agility and one that’s supportive of (or exploitive of) disruptive change. This is precisely why I’m so apprehensive about another Detroit bailout (yes, I want to save the factories and the unionized workers, but I just don’t think Big 2.5 management is salvageable). In many respects, the US economy has recently started taking on attributes of the Chinese one of ten years ago or the Korean one pre-IMF-crisis – a dynamically booming entrepreneurial sector being strangled by dying state-owned (or, in our case, neo-fascist-plutocrat-owned) buckets of rust and state-sanctioned corruption.
Change we can believe . . .oh, never mind.
i would say they would be cashin them in about now and not buyin any more. we in deep doodoo.
In this case I think the blogs are DSG (designated scapegoat).
perhaps then, Japan, China and Engliand could agree to share Alaska. We can split Palin three ways too…
No kidding. What the hell is Obama thinking? It’s like Mick Jagger hiring Hells Angels for security at Altamont, only much much worse.
These would be the banks, right?
The Reptiles have used massive fraud to ship $Trillions out of the USA.
Our capital base is shot.
The world may shake apart by bits and pieces, but eventually we go too.
I’m not sure the real estate market needs a floor. It was certainly overpriced in some places, but the real estate market has limited elasticity: there is a true supply-demand interaction, and the demand side is strong enough that its not just going to go away.
What people seem to be saying is that the primary issue now is confidence and trust: People don’t want to loan their money unless there is reasonable expectation of a good return. I should think the market for low-risk real estate contracts should come back soon, and this should be the wedge that opens up the rest of it– although the high risk loans (the “toxic” ones) may have to default. Some of those high risk loans were to home owners that were over-sold by loan sharks eager for profit and unmindful of default. The laws of home loan insurance may have to be re-written. But other high-risk loans were speculator-driven, and some of those, especially those whose loan was not for primary residence or place of business, should shoulder their own risk.
Bob in HI
actually, the whole shebang. Our money-center banks and the wretched part of the fortune-500 whose excesses they subsidize. And, yes, Mr. Wagoner of GM, you’re in with that lot.
“Caribbean banking centers 185.3″
??? Drug money laundering centers?
Bob in HI
if “civil war” were defined as “the central government unable to exercise authority (police, courts, administration, tax-collecting, etc.) over large sections of it’s sovereign territory…
then, would not Mexico, Afghanistan, and Pakistan already meet that definition?
I think Dick Cheney probably keeps in money or more of those.. as do the rest of our CEO kleptocracy. So, yeah, money laundering centers, not necessarily restricted to narcotic consumables.
with that scenario the ones at the top will lose the most first. it’s a long way to the bottom but they will scratch and claw anything/anyone near them to same themselves. keep yo distance.
I would nationalize them, since their management is incompetent and then I would reorg them.
Mexico not yet, I think, but headed that way rapidly, thanks to our interference in their internal affairs (by dictating on them a bloody, purely military, and utterly futile “War on Drugs”). Come to think of it, we kind of made Pakistan and Afghanistan too, so maybe there’s a pattern here…
Yes. Although there’s a line between insurgency, anarchy and civil war. Afghanistan is in a civil war. Pakistan has an insurgency. Mexico has large parts of the country in anarchy (well, arguably, not sure how good a job the narcos do running things.)
People need to know where the bottom is, so they can start pricing losses properly and we can know how bad it is. I would put the floor pretty low, myself, but I think US housing is still overpriced and that cheap housing is good.
Ollie North called HUD, “The candy store of covert revenues.”
The Reptiles have a death grip on massive fraud and illegal drug profits.
Going legal is out of the question.
when ian says a country will “shake apart,” does he mean the government will topple?
if so, wouldn’t the latin american countries like brazil, venezuela, bolivia, cuba and argentina be better insulated because of their foundation of being less and less involved with us, (as well as their mutual aid?)
excellent observation blub “made by America”
when you put it that way Ian (#50) the distinctions are almost visible. where would Iraq re: Kurdistan fall in that scale ? (also “made by America”… yes, a most discernable pattern)
Venezuela has been living beyond its means. It will have a great deal of difficulty in a cheap oil world. A lot of those countries got populist because of commodity prices, and they are going to have a lot of problems now.
The real estate floor is governed by 31% Debt-to-income ratios on FHA loans, average incomes & interest rates.
AKA the oh shit bubble or perhaps Fiat Majora
yep. Then recap the assets and sell ‘em to (or give ‘em to) people that’ll use their skilled workers, plants and other capital stock to make something that somebody actually wants. ‘course you’d somehow have to get around all the plutocrats’ fully-owned-members-of-congress to pull this off. You’d also have to break the back of their connection to their favorite state-bailout-subisized banks, that keep them in their utter incomponence by providing them with unrestricted working capital.
New post—>
Venezuela’s coming ‘difficulties’ (plus Russia’s) could also be charged as “Made in America” if the OIL bubble’s rising & bursting can be tracked back to US’ futures traders?
iirc, 5 major oil spikes since ‘73 have been followed 4 times by ‘recessions’ of varying degrees of pain/duration (exception was ‘98 i think)
I’m not sure the real estate market needs a floor. It was certainly overpriced in some places, but the real estate market has limited elasticity: there is a true supply-demand interaction, and the demand side is strong enough that its not just going to go away.
I agree with this, to a a degree.
This is because the mortgage problem has been highly regionalized. The states that have non-recourse mortgages, i,e., California, Florida, Nevada and Arizona are the biggest problems because people can walk away from their mortgages and especially their “investment property” without any future obligations, it is much more difficult in many other states. Also, if you look on the Case Schiller table by market, these are the markets where you had the biggest real estate bubbles or overinflated real estate prices, it appears that prices are back to 2004 levels, which are still too high, but a much better reflection of value.
In other words, the mortgage issue somehow needs to get delegated down to the state level; the carrot and stick approach here would be get make non-recourse against the law, as well as the Homestead Bankruptcy exemption in Florida. A federal approach by just putting a national floor is not going to work, frankly because it is just not necessary in certain markets.
very good point DBaker re: regionalization
it is most curious that the combination of speculation/over-building in a few states, combined with the overzealous ’securitization’ of the financial community could cripple the whole when it fails?
Brazil’s doing fairly well from what I understand. I think it’s really ironic that the neocon view of the world as the US-as-anti-chaos-savior and then all the falling-int-chaos fringe that we need to save is actually a giant circle: we create the chaos fringe thanks to our neocon policies, and then neocons have us invade to attempt to halt the spread of the chaos. Dear Mr. Kagan: eat me.
The floor is particular to each region, probably by zip code.
I am not a fan of tightening bankruptcy laws further, or not allowing people to walk away. Banks didn’t do their due diligence.
sorry.. I meant Robert Kaplan, not Kagan. The eat me part stands.
yep, I agree. Let the banks eat it. A lot of the stuff that’s getting cleaned-out is in neighborhoods that should never have been built, far away from transit, sustainable water and energy supply, services, etc, etc. From a policy perspective, I have no problems letting these areas go back to the desert from whence they emerged. They’re not sustainable and arguably cannot be made sustainable.
Good list. Jerome a Paris recommended your articles on European Tribune, so I’ve been reading your material recently. You also have a piece from earlier today, similar to Glenn Greenwald’s take, on ideology. Would you care to apply a label like, say, mixed socialist/capitalist economy on your solutions? Or would you prefer to avoid ideological labels?
Harvey Milk post two threads up
Ian a different perspective
Actually we don’t need China’s money. Yhey need someone to buy their junk. We owe them $500,000 billion or more — all in T-bills. If they don’t want them anymore (the yield is pitifully low) they csn only sell or let them mature, aned US will pay them off in UWS dollar deposits in any bank they wish. So they will have traded interest bearing notes for demand deposits which don’t pay interest. Of course, they can always buys goods and services and investments from us, we are required to accept US dollars, but we can flood the world with Treasury bills and dollars with no danger and very little iterest cost. Once world confidence and profitability is restored, interest rates on T-bills will go up (and LIBOR and prime rates will go down. I lay in bed at night and worry about how we have cheated the Chinese and Japanese by selling them T-bills, but it does no good. Japan never did figure out the “yen carry trade” now alas ended for the nonce.
I agree, but letting the total mistakes go will still leave plenty of good housing that should be occupied if it does not decay first. An example of possible useless development around here is the something-or-other called Mountain House. An isolated would-be future bed-room community far away from anyplace to commute to (and now no jobs to commute to even far away).
Driving by it from the Central Valley side is funny: you see vast acreage with nothign but very regularly placed stop-signs and conduit coming out the chopped up ground.
I don’t want to think what the vacancy and foreclsure rate is in the finished sections. Can’t turn it back into farms and grazing right away, probably scarpped too much topsoil off, but maybe windmills would be good.
Problem is that even if you find a away to unbuild those, I think the majority of the problem surplus housing is potentially very useful, and inside, or right next door to viable communities, and transit corridors. At least, that is what I have seen in California. No reason people should not be living in them.
Economists can explain anything that has already happened. The theory is flexible enough to do that without breaking any of the usual economic assuptions about how things work. Economists of a certain kind see that as a feature. Economic statisticians (econometricians) and others see it as a bug.
But, this time is different. I do not see how Washington consensus economic theory can explain huge chunks of financial and credit markets just plan old freezing in their tracks and disappearing. Akerlof and Stiglitz sure can explain that (hence their Nobel prizes).
I also do not see how anyone but a crazy person can say that building too many houses to sell them at a breakeven price for the builders and financers, and then kicking people out ’cause they can’t pay and letting them stand empty and rot is not a huge misallocation of real capital on an epic scale. But that is the basis for this crisis.
And apparently potentially very useful houses are starting to rot. I heard a news report from someplace in PA that said a mortgage rescue plan someplace there was running into trouble because of decay of now long vacant houses. “they aren’t in good shape anymore” was the quoe I remember the local guy in charge using.
A small note: the Swedish (or Scandinavian, or Nordic) plan from their financial panic in the 90s was a way to let financial firms that should ‘eat it’ in fact ‘eat it’ in a quick way with minimal disruption to the rest of the economy.
The current administration is willy-nilly going the Japan route (supporting a bloated financial sector whether we need it so big or not), and have found creative ways to keep dong that as their intiial schemes have flamed out.
Japan settled for zombie banks, Paulson seems to be going for zombie financial firms of every imaginable kind. And they had a much better national finance situation that we do now. The cost of dithering over for the last six months of the Bush administration will be big.
Is it past time to move from gold (or other commodities) to dollars?
I’ve been assuming that the day Obama takes over would be ideal, but maybe we’re getting close enough that people feel it’s safe enough to go $$$$ now.
Supply side Keynesian liberalism, I guess. In the sense that we need to recognize that demand side policies work best when there’s no supply bottlenecks.
Heh. Comparing Gates to Hells Angels? Pretty good.
Hmmm, which is potentially the more dangerous? If
you can name a couple of Dems or Libs who would be
better for Defense then why haven’t I been hearing
their names the last week or two?
What do you mean “eventually”? We’re Leaders! We’ll go first and be proud of it. heh
Good article.
And so, what happens if jobs disappear (which tanks income)? Does that push housing prices further down? How far?
I am talking about the bankruptcy rules on the high end, not the low end of the asset scale. The current bankruptcy rules punish the poor in favor of the rich. High net worth individuals should not be able to walk away from beach houses and rental properties as they can right now.
Mortgage floors should not be available for investment property or homes that are not the primary residence.
It is too simplistic to state that ALL banks bear equal responsibility for this entire mess. While the banks and brokers that handed out Alt-A, interest only and other junk mortgages are to blame, many other banks did maintain proper standards and have not needed any TARP money.
Treasuries are what I’ve called The Last Bubble™.
When the vast majority locks their capital in them
the private market is crowded out of borrowing, a
very distinct possibility and one I’m betting on.
This is already happening.
At some point, they crash.
Neo pushes the reset button…
…new game, new players.