The dollar’s Tinkerbell moment
(James Saft is a Reuters columnist. The opinions expressed are his own.)
Repeat after me: “I believe in a strong dollar as the primary global reserve currency, I believe in a strong dollar as the primary global reserve currency.”
Better hope it works, because the current debate over a far-in-the-future new monetary system may bring on a here-and-now dollar selloff and a whole new leg of the crisis.
Sadly, what worked when the children espoused their faith in Tinkerbell may not for a currency backed by the full faith and credit of a debtor nation which has socialised its banking system’s risk and needs to sell trillions in further debt to pay that and other bills.
Russia, India and, most significantly, China have all questioned the U.S. dollar’s central role in global trade and currency reserve management in the run-up to this week’s meeting of the Group of Eight industrialized nations in Italy. The future, it seems, is not greenback.
Russian President Dmitry Medvedev termed the system based on the dollar “flawed.” Suresh Tendulkar, a top Indian economic advisor said he was telling India to reduce the dollar’s weighting in setting the value of the rupee, comparing the situation to the classic “prisoner’s dilemma.”
It’s a good comparison, and as such makes his advice, and his choosing to make it public, puzzling. In the prisoner’s dilemma, two people are held for a crime and, being held apart, must decide whether to rat the other out. If both remain silent, they each get six months’ jail time, if one implicates the other he goes free and the other gets ten years, if both turn on one another they both get five years.
Stress test the consumer
– Christopher Swann is a Reuters columnist. The views expressed are his own –
People can be divided into three classes, it has been said: the haves, the have-nots and the have-not-paid-for-what-they-haves. The prevalence of the third category may be the biggest single source of vulnerability for the U.S. recovery.
A stress test of the consumer could reveal more distressing results than the one conducted on the banking system.
Debt is at high levels — 130 percent of disposable income, or more than twice its peak in the late 1980s. A slide in net wealth has reduced the collateral Americans can draw upon for emergency loans. Finally, it is now harder to borrow money for new consumption or to roll over existing debt.
Like a compromised immune system, this weakness makes consumers extremely susceptible to further shocks. Traumatic as the recent bout of retail restraint may have felt, worse may be in store. After all, consumption rose by 18.5 percent in the seven years to 2008. So far it has only fallen back by less than 2 percent.
There are several potential mishaps that could swiftly undermine consumer spending and set the recovery back to square one.
Among the most likely problems would be a continued slide in house prices. Even on the conservative measures used by the Federal Reserve, the value of residential real estate has fallen 18 percent since 2006.
Unfortunately, today we face the effects. Jobs are being lost. What was once a two income household is now a one or no income household? Granted many of us have borrowed against future income and now it is difficult or impossible to repay that loan. Many will make mortgage and car payment while buying food and what clothing is necessary and the rest will go by the wayside. The rest will just hope they don’t take home and car to soon. It is sad.
Now for anyone to state that Gas prices didn’t contribute to the collapse get off you bicycle and try driving to work. I would love to get off of gas and onto a better more economical and efficient mode of transportation but the auto industry has done nothing since the last oil crisis in the 70s to bring the internal combustion engine to its fullest potential or put out a viable alternative to the gas guzzlers. What do they give us but toy cars like the Volt and crap like the hybrid? No we should not have bailed out the auto industry. They have brought this debacle unto themselves. I would have loved to see new blood come out and take over our auto industry.
The consumer is always the ultimate payer. We pay while our voice is silent in Congress. We pay while CEOs are paid 100 times their worth. We pay as our retirement funds are slashed in half and our government does absolutely nothing to bail us out. You could run a consumer stress test but, we would fail.
Writing history – the Panic of 2008
– John Kemp is a Reuters columnist. The views expressed are his own –
Economic history is the only field of human endeavor where the past changes as much if not more than the present and the future. Policymakers and practitioners struggle to define and write a “narrative” of the past as a means to control how policy responds to current and future problems.
The debate now over financial reform is a case in point. Even though the banking system has only just emerged from the most severe shock since the 1930s, the battle over how to define the events of the last 18 months, and what they should mean for investors and regulators in future, is already well underway.
Contrasting speeches last week by Federal Reserve Governor Kevin Warsh and Bank of England Governor Mervyn King illustrate the two extremes around which the debate is polarizing:
The financial sector will exploit these differences to derail any fundamental overhaul of regulation.
Hey Dan, I feel ya! I’m glad I won’t be around should such a mess come to pass.
from The Great Debate UK:
The EU and Hedge Funds: silencing the dog that didn’t bark
- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of "Verdict on the Crash" published by the Institute of Economic Affairs. The opinions expressed are his own. -
We could see it coming, couldn't we? Those gigantic over-leveraged hedge funds were bound to come crashing down, as their massive bets turned sour, forcing them to default on their bank loans and bringing the banking system to its knees.
Except that it never happened. Instead, the system was destroyed by the greed and incompetence of the insiders, including some of the most blue-blooded investment and commercial banks in the world. Highly regulated as they were said to be, they were allowed in every country except Spain simply to move their riskiest investments off balance sheet, where they were free to bet the bank on investments in the notoriously toxic mortgage-backed securities.
Note the absence of hedge funds and private equity - Alternative Investment Funds or AIF’s - from this story.
Nonetheless, with proposals to impose new reporting requirements and controls on management, the EU is concentrating its regulatory fire on the dog that didn’t bark, with the clear intention of reducing the competitiveness of AIF’s and tying the hands of their managers (with a side swipe at the offshore financial centres where many are legally domiciled).
Since the only investors in this type of fund are high net worth individuals and institutions like pension funds, insurance companies and mutual funds who ought to be capable of looking after their own interests, official concern can only be justified if there is a potential threat to the banking system – something which you might have thought would have been best left to the banks to monitor. The fact that the EU feels the need to make these proposals amounts to a vote of no confidence in bank managements.
Bond markets give stress test thumbs down
– James Saft is a Reuters columnist. The opinions expressed are his own –
The most revealing verdict on the results of the U.S. banking stress test was delivered not by shareholders but by the vigilantes of the bond market, who shunned an auction of 30-year government debt.
This makes sense: if the U.S. is letting banks off too lightly it will be taxpayers and the people who lend the U.S. money who will have to pick up the bill.
The stress test, which showed that 10 large banks will need to raise about $75 billion in capital, was greeted with euphoria by bank shareholders, despite being heavily leaked.
That’s no surprise, the stress test is useful not so much as a set of forecasts about the economy or bank losses, those being arguably too optimistic, but as a signal from government to capital about the rules of the game. It matters not because it is true but because of who is saying it.
Think of it as a term sheet in which the U.S. seeks junior minority investors to take some of its exposure to its banking system. The message is we will give you enough rope to try to earn your way out of your hole; if it works the rewards will be huge.
The U.S. has already said that none of the 19 banks would be allowed to fail, and if the past year has taught us anything it is that banks are creatures of government, the corollary being that that government has to pick up the pieces if banks fail.
David,
I too love a good melodrama, but IIRC, Germany and Japan were bombed into oblivion, yet did not require a generation to re-build. How is it that a country with less national debt per head of GDP than the average OECD country will have a worse fate.
As depressing as this decade will turn out to be, and yes the dollar will eventually decline, but much slower than dollar cynics would have us beleive. For one, the Dollar is a global store of wealth and a key medium of exchange for trade. Therefore, the same sort of counter-reality dynamics we see by Governments with regards to tackling the financial system, will also be applied to dollar decline denial. I sense plenty of schadenfreud from Europeans on these comment sections.
The issue is the extent to which the government will kick this can down the road, and socialise the problem wider and deeper, but over a longer period of time.
A chink of light for the euro zone
– James Saft is a Reuters columnist. The opinions expressed are his own –
Even without a huge fiscal boost or a hell-for-leather central bank, Europe could have a recovery, albeit a tepid one, on the cards by the end of the year.
Recent forward looking economic data is still grim, but hides within it the seeds of a rebound, as the absolutely brutal fall in manufacturing over the past six months burns itself out.
The euro zone’s economic situation is still dire and it still faces outsized risks; its banking system must deleverage and has the potential for disastrous losses while it remains unclear who in the world exactly is going to be buying enough goods to stoke a sustained recovery.
But nothing goes in the same direction forever, and absent a health or banking disaster it is reasonable to expect positive surprises from demand as the year wears on.
As those who are betting on a recovery are generally backing U.S. growth, that surprise when it comes could give a nice boost to European markets.
“There is good convincing evidence that the inventory cycle in the euro area is turning favorably,” said Aurelio Maccario, chief euro zone economist at UniCredit Group.
“their banks bigger?” “Asian competition for what is less?!” “their was generally less of a bubble!?” Demographic forces given the same weight as fleeting consumer/investor sentiment measures? Sounds like someone and his bottle of bourbon tried to meet a last-minute deadline.
An emerging opportunity in U.S. housing
– James Saft is a Reuters columnist. The opinions expressed are his own –
Deep breath. Ok, here goes: For the first time in a very long time U.S. housing might actually be a reasonable buy on a five-year view.
As a long-time housing bear and someone who believes there is still considerable pain to come in the U.S. economy and banking system that is quite a hard thing to say.
Well James, you’re right about not calling a bottom. Even those adverse to market-timing knows one cannot time the bottom this year. Therefore why buy now? Knowing full well the money will be locked up for 5 years without income, subject to further downside risks. It cannot even be used to store value. Surely there are other asset class that will perform better than buying US housing now. Unless, of course, one buys on emotion – that most beautiful dream house now on the market for a killer price. 
Summers’ compensation intensifies reform doubt
The weekend revelation National Economic Council chief Lawrence Summers received almost $5.2 million in salary and other compensation last year from hedge fund DE Shaw and Co, and hundreds of thousands more in speaking fees from other banks, has dealt another blow to the administration’s fast-waning credibility on financial reform.
Summers and protege Treasury Secretary Timothy Geithner have already attracted criticism for a strategy many commentators believe is unduly favorable to Wall Street.
For all the talk of beefed up supervision and stringent capital requirements in future, financial assistance to the banking system has come with few conditions. Anxious not to offend powerful Wall Street interests, Treasury staff have consistently pushed back against attempts to impose compensation restrictions or other penalties on recipients of public funds.
It all stands in marked contrast to the tough line being taken with General Motors and Chrysler. Bank chiefs were invited to discuss the industry’s future at the White House; GM CEO Richard Wagoner was summarily dismissed.
Wall Street’s special treatment is justified by citing the industry’s pivotal credit-creating role. But there is a widespread suspicion financial interests have captured the government agencies, legislators and senior officials meant to regulate them. It is the type of rent-seeking behavior common in emerging markets and associated in the past with militant industrial unions and President Dwight Eisenhower’s military-industrial complex.
In a thoughtful article in the latest edition of The Atlantic magazine, former IMF chief economist Simon Johnson argues U.S. policy has been controlled for the past two decades by a “financial oligarchy” which exercises influence through campaign contributions and the regular exchange of top personnel between Wall Street firms and the White House, Treasury and other institutions meant to regulate them. It promotes an identity of views between the regulators and the regulated.
The disclosure of Summers’ earnings simply fuels that impression, and the administration’s decision to publish the disclosure forms on a Friday afternoon shows awareness of the embarrassing appearance of business as usual for an administration that came to power promising “change we can believe in.”
Maizie, you are correct. What the Fed does is a responsibility the U.S. Constitution requires the congress to fulfill. That power was given away in 1913. The Congress is good about giving away their powers; War Powers Act, FISA, Patriot Act, Homeland Security Act….
The fact of the matter is Executive Branch administrations are all beholding to some large corporate interests. This particular administration appears to be in the pocket of Wall Street and High Finance. Summers, Geitner and Emmanuel should all be replaced. They are to closely tied to Wall Street.
A private entity of powerful bankers and bureaucrats controls the money with no government oversight. The definition of a Fascist State is a form of government generally, though not always, headed by a dictator who serves the interests of large industries. I think the U.S. banking system qualifies as a large industry.
The state-sponsored shadow banking system
– James Saft is a Reuters columnist. The opinions expressed are his own –
The shadow banking system in Europe isn’t so much dead as being kept on life support by banks and central banks in what amounts to a desperate but risky attempt to avoid the reckoning.
You might be forgiven for thinking that the biggest single month ever for securitization in Europe and Britain was sometime before we all realized that we were in a credit bubble, sometime like the sunny days of 2006.
In fact, the biggest month ever, by some margin, was December 2008, when more than 212 billion euros of securitizations were issued in Europe.
One small problem however is that there was almost no demand for them, with only about 8 billion euros in public deals intended to be bought by actual investors wanting to take on actual risk.
The rest were “retained” deals, almost always structured so they were eligible for financing by central banks under repo arrangements.
The numbers involved are staggering, with more than 750 billion euros of these retained deals having been created in 2008, according to Unicredit Group data. Retained securitizations in Spain total about 144 billion euros, according to UBS, or the equivalent of 14 percent of annual GDP. Before the deluge, banks in Europe and Britain pursued risky strategies of either originating and distributing — making loans and then selling them on via securitization to some bigger chump — or relying on wholesale funding so they could grow their balance sheets beyond their ability to gather actual deposits from bona fide savers.
Thank you for another very enlightening article. Does it mean that the various governments are propping up companies which have been trading while insolvent?
Is there any way I can get my taxes spent on things other than insolvent companies, e.g. health, public services etc. and not insolvent banks?
Here comes another set of dodgy U.S. loans
– James Saft is a Reuters columnist. The opinions expressed are his own –
Banks in the U.S. face a new source of write-downs and failures in the coming year as loans made to developers to finance residential and commercial property development rapidly go bad.
And as these loans are old-fashioned and concentrated in smaller banks, their fate is particularly interesting as it indicates that issues with the banking system go far deeper than the so-called “toxic assets” belonging to the largest lenders that have thus far gotten most of the attention and government aid.
They are also a great illustration of the difficulties of stopping a housing and deleveraging crash.
Called Acquisition, Construction and Development (ADC) loans, they total 8.4 percent of all bank loans, just below a 30 year peak, and are used by developers to buy land, put in infrastructure and construct housing or commercial and office space.
And because they are dependent on a reasonably healthy real estate market — someone who is willing to buy or rent the properties — when projects are completed, they are now in deep trouble.
“Everyone in the media is focused on consumer foreclosures. What they’re not focused on is the builder developer foreclosures which are only in the early innings and which will continue to wreck havoc as these assets are liquidated at depressed prices. Until they are cleared there can’t be a stabilization in home prices,” said Ivy Zelman, a longtime housing analyst at Zelman & Associates, who thinks the pressure will cause “hundreds of banks” to be closed and liquidated.
The Federal Reserve is a private company, not federal nor a reserve just a good name to fool everyone. Printing money by fiat without reserves allows for profound abuse. Bring the gold standard back and allow the markets to set prices not banks. It is through the manipulations of money and credit by these bankers that is responsible for this ridiculous bubble and now all they are trying to do is maintain market prices. It won’t work no matter what they do. The charade is over.
The value of the economy is the quality of jobs and industry. Let’s debunk the “trickle down” Reagan voodoo economics. It is the wages of labor that pay for interest the lifeblood of banks, these wages “trickles up” through investment instruments which are then trade on the market. To pump the markets fiat money was created and then pumped into the economy through garbage loans. Now the banks are reaping what they have sowed and we the taxpayers are bailing them out. In fact I don’t even see it a bailout, I see it as a con job. These banks will not survive. Our government is the biggest joke of all without our consent they back these crooks.
Have you been on holiday Mr Saft? some may call you a doomsday sayer, but the truth is that you are quite correct in most of your articles. The world economic system is unravelling, years of cheap credit and now the ballon has bust. Unfortunately all government can do is to paper over the leek and keep us afloat. The dollar like the market should be left to fall or rise naturally, no gain without pain.