Crisis Diary as it unfolds ….

China conundrum

Here is a great blogpost by Brad Setser explaining China America relationship and how the interests of the two economies are diverging.

Three final observations:

1) The US needs financing, but China also needs markets for its exports. The “balance of financial terror” is such that China cannot reduce its financing of the US without also reducing the market for its exports. That limits China’s options. My own guess is that China is more constrained than in the past, as it presumably doesn’t want to do anything with its reserves that would add to the global slump in demand for Chinese goods. If hot money outflows subside, China will almost certainly need to continue to add to its reserves. And China’s ability to shift its reserves from dollar to the euro is also constrained by its desire to maintain good relations with its European trading partners. Key eurozone countries wouldn’t appreciate a big euro rally right now induced by a surge in Chinese purchases, especially if China maintained its dollar peg during the process.
2) China’s currency has appreciated significantly in real terms even as the pace of its appreciation against the dollar has slowed. That implies more not less friction between the US and China. China was willing to allow the RMB to go up against the dollar when the dollar was going down against other currencies and other countries were snapping up more Chinese goods. Now that the dollar is going up and Chinese exports are going down, China is reluctant to allow the RMB to appreciate at all against the dollar. But the US naturally cares far more about the RMB’s value against the dollar than its value against other currencies.
3) Even though China’s currency has appreciated significantly in real terms recently, most real exchange rate indices put it only a bit above its levels in 2000. The expansion of China’s current account surplus since then – and the huge increase in China’s exports since then — suggests that the RMB remains fundamentally undervalued. Other Aisan countries exports are actually falling faster than China’s exports. But the RMB’s real appreciation clearly came at a less than opportune time. The RMB was weak in real terms when China’s domestic economy was strong, and now it is getting stronger when China’s domestic economy is slowing sharply.

The US — a large deficit country — would benefit in a lot of ways if it could export its way out of trouble. That would also help to bring the world closer to balance. Yet with its own economy slowing sharply, China’s willingness to accept a stronger RMB has likely gone down. Here, US and Chinese interests diverge. Both want to draw on external demand to support their own growth.

Fortunately it is a littler harder to see why China would think that a major fiscal stimulus isn’t in its interests …


January 25, 2009 Posted by | Crisis Snapshot | , , | Leave a comment

Ouch, professor!

Dr. Krugman finally took on all conservative economists in one sweep.

What’s been disturbing, however, is the parade of first-rate economists making totally non-serious arguments against fiscal expansion. You’ve got John Taylor arguing for permanent tax cuts as a response to temporary shocks, apparently oblivious to the logical problems. You’ve got John Cochrane going all Andrew-Mellon-liquidationist on us. You’ve got Eugene Fama reinventing the long-discredited Treasury View. You’ve got Gary Becker apparently unaware that monetary policy has hit the zero lower bound. And you’ve got Greg Mankiw — well, I don’t know what Greg actually believes, he just seems to be approvingly linking to anyone opposed to stimulus, regardless of the quality of their argument.


Dr. Mankiw responded here.

Meanwhile, it’s getting really ugly out there in economic environment. In sudden change of weather, sky is all covered with dark clouds, as if heavy pouring is going to start any minute.
I’m getting really really bad feeling that something sinister is about to happen.

January 19, 2009 Posted by | Uncategorized | , , | Leave a comment

12-Jan-09 to 18-Jan-09: Oh, no…not again!

Please, oh good Lord, please have some mercy! This is how Mr. Helicopter Ben is praying these days.
Imagine this. Ben is sitting at the Fed window (yes, the same window which he opened for every crook on the street last year) and CEOs of AIG, Big-3, Citi, BofA, WF et al are waiting in the queue for their turn. Everybody takes his turn, gulps down few billions of taxpayers’ money and goes back to stand at the end of the queue waiting for his next turn. The line never ends. Ben is printing money which evaporates at a rate faster than the rate at which any Obama-supporting group fills up on facebook. And where does this money go? Mostly in further writedowns and in executive compensations aka retention bonuses.

Glass is neither half full nor half empty. It is completely empty and broken. No matter how much water you pour in it , glass stays empty .

Bailout and more bailouts

Bailout saga returned last week. Gov’t bailed out BofA in much the same fashion as it did Citi a month back.

Bank of America announced the results hours after it won $20 billion in new capital from the government’s $700 billion Troubled Asset Relief Program (TARP).

Won? I did not understand what CNBC meant by that. So when you lose money and go begging, you win. Nice. Heads I win, tails you lose. Socialize losses, privatize gains. Well played capitalism! I don’t think I am a lefty. But I believe if gov’t must bailout these banks, gov’t should at least punish common-stock holders and management for their sloppy handling.

In other main news, Citi finally decided to break itself in two entities isolating all cancerous cells.

“It’s one of the first steps toward some positive news and the end of this nightmare,” said Michael Holland, founder of Holland & Co in New York, which manages more than $4 billion of investment

I agree.

On the similar lines, uncle Sam is planning to create big giant state-owned bad bank for everyone to dump their garbage. This is return of TARP. TARP has already used more than half of its allocated money and hardly any of it went to buying troubled assets, which was the original objective of TARP. TARP-phase 1 was more of a Troubled Bank Capitalization Program.

Paul Krugman (here and here), who always argued for capitalization and gov’t equity stake in troubled banks, did not like the new ‘bad bank’ idea a bit. In his compelling argument he says,

I suspect, though I’m not certain, that policymakers are once more coming around to the view that mortgage-backed securities are being systematically underpriced. But do we really know this? And how are we going to ensure that this doesn’t end up being a huge giveaway to financial firms?

I’m not dead set against this proposal — but I’m still waiting for some explanation of why this is supposed to be more than rearranging the deck chairs on the Titanic.

To answer Paul’s question on giveaway, no sir, we are worried at this point if it is a giveaway to banks. The financial markets are in crisis and this is the only way stock market can go up and continue to go further up. We are not worried about taxpayers at the moment, next elections are not due for another four years.

UK follows US’s footsteps

Meanwhile, UK is also planning for similar ‘bad bank’ program. Look at the numbers, they are just staggering.

The bad bank plan has climbed the political agenda in the past couple of weeks as the Government has become aware of the extent of the lenders’ bad debts.

Sources said that a bad bank would have to take on about £200 billion of toxic assets. That would take the Government’s total commitment to solving the banking crisis to almost £1 trillion in taxpayers’ money that has either been spent or pledged.

That equates to about £33,000 per taxpayer. The total sum is equivalent to more than two-thirds of Britain’s annual GDP of £1.4 trillion.

The £1 trillion figure includes the £500 billion announced in October to buy shares in the banks and to guarantee their debt. It also includes a further £100 billion fund, which will also be announced next week as part of the rescue package, to provide the banks with cash to lend to ordinary customers and businesses.

As well as creating a bad bank, the Government is planning to use Northern Rock as a “good bank” which can dramatically increase lending to individuals and businesses.

During initial days of TARP, US followed UK’s idea of capitalizing banks instead of buying sh!t. Now UK wants to follow US idea of bad bank. What gives?

Oil Contango

What’s the deal with oil? Why such contango? Are all arbitrageurs dead? Nobody has any money to lend even when clear risk-free opportunity of making a quick buck is staring in the face?

Mark Thoma posted this puzzle on this blog. IMO, the winner is ‘Counter-party risk’.

The entire idea of ‘bad bank’ is also aimed at bringing trust back to the system. Just the problem is how to effect the idea of bad bank making sure that everyone gets the fair deal.

Crisis Watch for the week

In the good news, TED continues to improve. In the bad news VIX and S&P are catching cold. Will TED follow thru?
TED spread 1.03
S&P: 850.12 (-4.5%)
VIX: 46.11 (+10.00%)

January 18, 2009 Posted by | Crisis Snapshot | , , , , , , | 1 Comment

05-Jan-09 to 11-Jan-09: New year, old worries

Summary of the week in one line – the crisis is back.
~~Another half a million jobs lost in US – but not as bad as some expected.
~~Equity markets ended lower, but bond markets, libor and VIX seem to be calming down, which is a very good sign.

Some tiny bits of much awaited Obama Stimulus are now available,
– Plan will be of the size of $775 billion and will span across two years
– 40% of the stimulus is of the form of tax cuts, but not exactly the kind of tax cuts supply siders would want to see. Though, most likely, existing Bush tax cuts will not be repealed.
– The plan for 4 million job creation is detailed by Christina Romer and Jared Bernstein here.

Who says what about Obama’s stimulus plan?
Paul Krugman is not happy about the size of the stimulus and the amount of public spending. He is more unhappy and even scared here.
Greg Mankiw doesn’t think Obama team is using right multiplier for tax-cut (0.99). This report uses 0.99 as tax-cut multiplier and 1.57 as Government spending multiplier. Greg Mankiw continues his stimulus skepticism in his NYT OP-ED as well.
Alex Tabarrok of Marginal Revolution was quite satisfied with overall composition of Obama’s stimulus plan in his initial reaction.

Crisis watch for the week:
TED spread 1.19
S&P: 890.35 (-3.8%)
VIX: 42.82 (+1.00%)

January 11, 2009 Posted by | Weekly News | , , | Leave a comment

…. and the satan returns to the office

Ok… so now he is back.
Last week when I sent a mail to Satan inquiring his whereabouts, I got an out of office autoreply saying that he was currently out of office for christmas vacation and will return to haunt the wall street and financial markets in first week of January.

So Dow Jones took a 250 points beating today, but I believe this was just the trailer of what’s more to come. On Friday unemployment numbers and retail sales numbers are due sometime this week. can Obama continue to charm the markets or will the reality check pull the markets down again?

Some of the headlines of the day
1. India’s Enron – Satyam chief confesses to massive accounting fraud
2. No buyers for German government bonds – what gives?
3. Earnings season is expected to get uglier. But is market already pricing in worse?
4. Oil slipped near $40 on rising US inventories and easing Gaza

Holidays are over. Crisis is back.

January 7, 2009 Posted by | News | , , | 1 Comment

22-Dec-08 to 04-Jan-09: Year ends on a positive note

Finally, it’s over. I mean 2008 is finally over. New year, new hopes, BHO has a tough task cut out for him.
Markets are very calm and up on mostly low volumes. Also, markets are up expecting big stimulus by Obama.

Some of the economic news to look forward to in new year,
1. Decision on auto bailout
2. Obama stimulus plan – how big, who benefits
3. Eurozones response to rapidly falling inflation
4. UK struggling to stabilize the economy
5. China and exchange rate manipulation

Who said what about 2008?
Stefan Karlsson on currency movements in 2008
Justin Wolfers of Freakonomics blog about the happiness index of the year 2008
Bond Tangent on 2008 bond market

Who is hoping what from 2009?
Dani Rodrik is looking forward to 2009?
RGE blog on banking in 2009
Martin Wolfe on 2009
Brad Setser captures his view on 2009

Crisis watch at the end of Y2K8:

TED spread 1.33
S&P: 931.80 (+4.2%)
VIX: 39.19

January 4, 2009 Posted by | Weekly News | , , , | Leave a comment

Happy 2009 …

Here goes rather usual annual ritual for rather unusual year of 2008.

Highlights (mostly lowlights) of 2008
Landmark american elections and without doubt the personality of the year was Barack Hussein Obama. Will he stand up to the expectations? So far, not so good.
– First ever olympics to be hosted by China. – is China a rising global super-power or was that the pinnacle of Chinese glory?
– Terrorist attacks on Mumbai infuriated a nation of one billion. Is anybody going to do anything about it?
– It’s economy stupid. The lowest lowlight of 2008 was the grim economic news all across. This is the single worst year since 1930 for the world. By the turn of 2008, US, UK, Eurozone, Japan all are fighting severe recession, others are falling thru.
– As if this much bad news wasn’t bad enough, everybody grew older by one year this year. Sad!


Expectations 2009
– No wars please! Gaza is looking ugly and Russia is getting nasty again, though I don’t think India will take any drastic steps.
– No depression please! Well, recession is here for good, but let’s hope that he doesn’t invite his fierce monster cousin depression to stay with him.
– Some sanity in financial markets will be greatly appreciated! Free markets do not mean gambling houses. Will somebody understand this and put some oversight in place? We don’t want patch up work to seal the holes. We need complete regulatory overhaul.
– No severe winter in Toronto please! Yea, that sucks. What happened to global warming? 


Parting Message to 2008
You were an eye-opener. But please do NOT come back again.


Welcoming 2009 …
We should consider ourselves lucky if 2009 is only half as bad as 2008. Let’s hope so.

January 2, 2009 Posted by | Crisis Snapshot | , , | Leave a comment