Monday, November 26, 2007

Grace is a slippin' and a slidin'

"Fed easing will not prevent millions of US households from defaulting on their mortgages and will not prevent home prices falling 20% or more given the biggest housing recession in US history; it did not and will not prevent dozens of mortgage lenders and home builders from going bankrupt; it will not prevent a surge in corporate defaults once the economy experiences a hard landing. Monetary policy can lead with pure liquidity runs; but when such liquidity runs are related to the risk of insolvency monetary policy is mostly impotent. And most of the current problems in the real economy and in the financial markets have to do with insolvency, not just illiquidity." Nouriel Roubini

"As the country that benefits most from global economic integration, we have the responsibility of making sure that this new system is sustainable.. The hidden hand of the market will never work without a hidden fist - McDonald's cannot flourish without McDonnell-Douglas, the designer of the F-15. And the hidden fist that keeps the world safe for Silicon Valley's technologies is called the US Army, Air Force, Navy and Marine Corps....The global system cannot hold together without an activist and generous American foreign and defense policy. Without America on duty, there will be no America Online... " Thomas Friedman, New York Times Magazine, March 28, 1999

"Everything is subject to change. The big decadent forces will give way to the small new-born forces. The small forces will change into big forces because the majority of the people demand this change." Mao Tse-Tung
David Seaton's News Links
The bigger they come the harder they fall. The United States has a systemic problem: America's loss of power is the major story of our era. What is happening, what has happened, what will happen? Don't look at me, your guess is as good as mine.

When a system gets clogged up, all the king's horses and all the kings men have difficulty getting to the root of it. The complexity of the situation is so overwhelming and there is such an accumulation of factors that even with historical perspective it is difficult to get a sure answer. They say that the lead pipes that wealthy people had in their homes brought down the Roman Empire by making the women of the senatorial caste infertile... but even after centuries to think about it, that is just speculation. Was it a meteorite that caused the extinction of dinosaurs? Go figure. Once upon a time there were hundreds of Howard Johnson's restaurants all over the USA, now there are only three left. Sic transit gloria mundi.

Some will call me a prophet of doom, but I consider myself an optimist. America will bounce back. The United States is a great country, filled with hard working and inventive people and you can't keep a great people down for very long. Ten years ago nobody would have ever predicted that Russia would be in as good shape as it is today. That should be some consolation in times to come.

When the USSR went down, most observers read it ideologically, that we in the west had "won". Our merit had cause it all to happen. This was probably a big mistake. Perhaps that collapse did little more than reveal that a huge, powerful, system, one that had industrialized an enormous, backward country and made it a scientific, political and military superpower that had defeated Nazi Germany almost singlehandedly in WWII, could just simply collapse mysteriously. Just up and die. Just like that.

The United States, instead of taking a victory lap, might have been more prudent to murmur then, "there but for the grace of God go I" and gotten busy looking to its own vulnerabilities instead of crowing and preening, because it appears that ol' Grace is seeing somebody else these days. DS

Lawrence Summers: Wake up to the dangers of a deepening crisis - Financial Times
Abstract: Three months ago it was reasonable to expect that the subprime credit crisis would be a financially significant event but not one that would threaten the overall pattern of economic growth. This is still a possible outcome but no longer the preponderant probability.(...) Several streams of data indicate how much more serious the situation is than was clear a few months ago. First, forward-looking indicators suggest that the housing sector may be in free-fall from what felt like the basement levels of a few months ago. Single family home construction may be down over the next year by as much as half from previous peak levels. There are forecasts implied by at least one property derivatives market indicating that nationwide house prices could fall from their previous peaks by as much as 25 per cent over the next several years. We do not have comparable experiences on which to base predictions about what this will mean for the overall economy, but it is hard to believe declines of anything like this magnitude will not lead to a dramatic slowing in the consumer spending that has driven the economy in recent years. Second, it is now clear that only a small part of the financial distress that must be worked through has yet been faced. On even the most optimistic estimates, the rate of foreclosure will more than double over the next year as rates reset on subprime mortgages and home values fall. Estimates vary, but there is nearly universal agreement that – if all assets were marked to market valuations – total losses in the American financial sector would be several times the $50bn or so in write-downs that have already been announced by big financial institutions. These figures take no account of the likelihood that losses will spread to the credit card, auto and commercial property sectors. Nor do they recognise the large volume of financial instruments that depend for their high ratings on guarantees provided by credit insurers whose own health is now very much in doubt. Third, the capacity of the financial system to provide credit in support of new investment on the scale necessary to maintain economic expansion is in increasing doubt. The extent of the flight to quality and its expected persistence was powerfully demonstrated last week when the yield on the two-year Treasury bond dropped below 3 per cent for the first time in years. Banks and other financial intermediaries will inevitably curtail new lending as they are hit by a perfect storm of declining capital due to mark-to-market losses, involuntary balance sheet expansion as various backstop facilities are called, and greatly reduced confidence in the creditworthiness of traditional borrowers as the economy turns downwards and asset prices fall. READ IT ALL

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