Crisis Diary as it unfolds ….

Rally on reassuring words from Ben

Market was looking for trigger for short-covering, which came from reassuring words from Bernanke. I don’t think anybody believes recovery is going to be that quick, not even Ben Bernanke. He knew he had to say it, so that markets can take a breather before they resume the selling again.

Is it the first time that markets have rallied on words of hope?

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February 24, 2009 Posted by | News | , , | Leave a comment

20-Feb-09: Crisis watch

Crisis watch as of 20-Feb-09.

S&P 500 : 769.50

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VIX : 49.30

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TED Spread : 97.99

tedsp

GOLD : 1002$/toz.

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Oil : apprx 40$/bbl

oil

February 22, 2009 Posted by | Crisis Snapshot | , , , , , , | Leave a comment

Too big to save? Europe in crisis

One of the phrases we repetitively heard during the crisis was ‘too big to fail’ – mostly coming out of Washington. Now as we learn new developments in Europe, the problem is not just that some banks are too big to fail, they are too big to save as well. Some of the European countries like Ireland, Greece and Austria may not be in position to save their banking system on their own even if they want to simply because these banks have debts multple times of GDP of their home countries.

Things are getting really ugly. The only way to reach some solution will be consorted effort by countries like Germany and IMF to bailout troubled economies and their banking systems.

If Euro survives this crisis, Euro as a currency will survive any crisis.

More resources:
The latest Roubini interview on European crisis can be watched here.

Yves Smith of Naked Capitalism – “European banks’ toxic debts risk overwhelming EU governments” and “Will eastern Europe will trigger a financial meltdown?”

Simon Johnson of Baseline Scenario – ‘Dublin and Vienna calling’

Tyler Cowen of Marginal Revolution – Easter Europe fact of the day

World Currency Watch on European debts

Stefan Karlsson – rise and fall of Baltic boom

Spin Doctor highlights a different aspect of rising social unrest in Europe amidst this crisis

February 21, 2009 Posted by | News | , , , | Leave a comment

Swiss banking model in question

Uncle Sam is after largest swiss bank UBS, and entire swiss banking is feeling the punch. Swiss banking has so far been a safe haven for tax evaders from around the world. For obvious reasons, Swiss court banned UBS from sharing any such information with US. But if US authorities are firm in their demand, can Swiss really dare not comply? Is it about the time for Intl. community to build pressure on Swiss to change their unfair practices of providing safety to fraudsters?

Ever since Obama took office, he has been talking a lot about transparency.
Mr. Barack Hussein Obama, are you the change we can believe in?

February 20, 2009 Posted by | News | , , , | 1 Comment

Gold

Shining metals are shining like never before – however old let it be, it is still Gold.

The recent rally in Gold is two thumbs down by owner’s of the wealth to the ponzi scheme fraudsters called central bankers, who print pieces of paper called currency notes and tell you to pretend that it is substitute for your wealth.

For there will be blood and chaos – perhaps all of 2009, perhaps more. And when this ends, a new world order will emerge. But first, we need to weather this storm.

People thought that history will treat George Bush as someone who brought US to her new lows. Now it appears that history will remember Mr. Bush as someone who drilled such big a hole in the titanic of US that it was just a matter of time before it eventually sank.

February 20, 2009 Posted by | Opinions | , , , | Leave a comment

Obama Stimulus: American Recovery and Reinvestment Act

Finally, US senate passed much awaited stimulus plan aka American Recovery and Reinvestment Act last week and singed into a law. This is one three important policy measures of Obama team. The other two important policy measures are financial stability plan and plan housing mortgages.

The plan is to spend 787b$ over a period of four years. It comprises of apprx 300b$ in tax breaks and 487b$ in spending. Along with infrastructure spending, there is substantial portion allocated to energy and education. The key facts of the stimulus are well-captured by Associated Press

Many liberal economists were not happy about the size of the stimulus and also the share of spending in it.

Atlanta Fed macroblog has a great post presenting American Recovery and Reinvestment Act in pictures.

A year-by-year look at where the money goes:

Note: The dollar amounts listed below are denominated in millions of dollars.

090218a

090218b

090218c

090218d

090218e

090218f

090218g

Which adds up to:

090218h

Finally, the relative size of each year’s spending:

090218i

There you have it.

By David Altig, senior vice president and research director, and Courtney Nosal, economic research analyst, at the Atlanta Fed

The pie for 2010 is much bigger than 2009. I’m not sure how this gels with Obama’s ‘We need to act now‘ rhetoric.

Econobrowser’s recap of CBO’s stimulus analysis can be found here.

Once again, I want to stress the adjectives “massive stimulus” conjoined to the noun “bill” is a matter of context. Dividing by baseline GDP shows that in a proportional (rather than dollar) sense the bill is rather modest. The fiscal impulse to GDP ratio never exceeds 2.5 ppts in any given fiscal year.

stim2.gif

Figure 2: Estimated spending and tax revenue reductions, per fiscal year, divided by GDP. Shaded areas pertain to spending occurring outside of the 19.5 month time frame. Source: CBO, H.R. 1, American Recovery and Reinvestment Act of 2009 (February 13, 2009) and CBO, The Budget and Economic Outlook: Fiscal Years 2009 to 2019, January 8, 2009.


February 19, 2009 Posted by | Crisis Snapshot | , , , , , | Leave a comment

Greed – for the lack of better word – is good?

FRONTLINE released its documentary ‘Inside the Meltdown’ on PBS.org capturing the dramatic wall street events of 2008.

The documentary runs for 1 hour capturing the events starting from Bear Sterns collapse. Devoid of any charts and figures, the focus of documentary is to present timeline, events and anecdotes rather than presenting an analysis of the crisis. It does meet its goal.

The video can be watched online at http://www.pbs.org/wgbh/pages/frontline/meltdown/view/

February 18, 2009 Posted by | Opinions | , , | Leave a comment

Is it a bottom yet?

We touched Nov lows again on DOW.

But after initial lower open, markets decided to rest at the level forever. As Bob Pisani of CNBC said, there was anxiety but no panic.

I guess tomorrow is crucial. If market bounces off from these levels in coming weeks we might see another 10-15% bounce.

Jim Cramer looked frustrated on his show today. He did not call it a bottom. I think this is ultimate capitulation. But whether is this the bottom? Anyone’s guess is as good as anyone else’s.

February 17, 2009 Posted by | Opinions | , , | 2 Comments

Extra-ordinary times call for extra-ordinary measures

The news  of  Japanese Finance Minister’s resignation could perhaps have one thinking that dire economic conditions of Japan must be the reason why he has to resign.

But apparently, that’s not the case. Mr.  Nakagawa will resign for his drunk blurt at the press conference that left everybody in state of shock. The only other thing, which would qualify as worse than what he did, is coming out naked for the press conference.

February 16, 2009 Posted by | News | , , , | Leave a comment

Davos

I know it is too late to blog on Davos, yet I don’t want to miss it altogether.

World Economic Forum was held in Davos in January’09 and details of Davos tidbits could be found on FT’s Davos blog

Various voices emerging out of Davos were,

1. China and Russia attacked west for the bad economic management. Apparently, these same people were not bothered when they were building their surplus by manipulating currency exchange rates and kending money to US to buy stuff from them.

2. Several economists did not like the idea of ‘bad bank’, while politicians lead by Mr. Brown continued their effort to sell the bad idea of bad bank.

3. Davos should be known for rather conspicuous absense of big players from Uncle Sam’s team.

‘Why Davos man is waiting for Obama to save him?’ by Martin Wolf was most widely quoted for its analysis of event by econo-blogosphere.

A hyperpower’s place is in the wrong. This is particularly true when, as last week at the annual meeting of the World Economic Forum in Davos, the hyperpower in question is barely represented, at least at the official level. But, truth to tell, the critics of the US – led by prime ministers Wen Jiabao of China and Vladimir Putin of Russia – had an easy story of incompetence and malfeasance to tell.

Yet, however easy it may be to blame the US for the current global economic woes, it is also to the US that the world looks for a solution.

The general mood in Davos was one of gloom verging on despair. The gloom is justified, as the update of the World Economic Outlook from the International Monetary Fund makes plain. Global economic growth is now projected to fall to a mere ½ per cent this year, its lowest rate since the second world war. Output in high-income countries is expected to fall by 2 per cent, the first annual contraction since 1945. Industrial production and merchandise exports are in free fall, as consumers decide they do not need that new car or other goody right now (see charts).

Given the rate at which they have been downgraded, reality could be far worse even than these forecasts. The global downward spiral of uncertainty, caution and cutbacks in lending and spending may continue. Alternatively, policy action may turn the ship around. But that action must be decisive. This is particularly true for the Obama administration, on which so much depends. It has a golden opportunity to reverse the spiral now. After that it becomes part of the problem. So far the evidence is discouraging. It should be far bolder.

Not all news is dreadful. Spreads between expected official interest rates and those on inter-bank lending have fallen sharply; those between US Treasury bonds and risky assets are also easing, though they remain at very high levels. The decline in oil prices represents a huge shift in income from savers to spenders. Since today’s collapse in demand and output is the lagged result of past disruption, better news may lie ahead.

Alas, such optimism must be kept in check. As the update of the IMF’s Global Financial Stability Report notes: “Worsening credit conditions … have raised our estimate of the potential deterioration in US-originated credit assets … from $1.4 trillion in the October 2008 GFSR to $2.2 trillion.” Losses are also spreading to many other asset classes and economies as the slump worsens.

Private credit growth is falling across most economies. Trade finance has been particularly affected, with dire results. The flow of private funds to emerging economies is collapsing: according to the Washington-based Institute for International Finance, net private flows are projected to be just $165bn in 2009, down from $466bn in 2008. Central and eastern Europe is particularly vulnerable.

Protectionist pressures are rising rapidly, not only in finance, but in trade. On the former, Gordon Brown, UK prime minister, turned up in Davos as hypocrite-in-chief, bemoaning the rise of the financial protectionism his own government has been practising. On the latter, nothing can surpass the folly of the Buy America provision in the draft US stimulus package. This is an invitation to retaliation. For a country that must export its way out of its slump, this is mad. For one that made an open global economy the keystone of its foreign policy for two generations, it is vandalism. Is this the change we must believe in?

Contrary to views expressed in some circles, notably in the US, depressions are neither good for us, nor unavoidable. What is needed is determined and globally co-ordinated action. The lead must come from the US: it remains the hyperpower; the economic system is one it promoted; and the crisis had much to do with mistakes its policymakers and private institutions made, even if aided and abetted by mistakes elsewhere.

So what are the principles to be followed? I suggest the following:

First, focus all attention on reversing the collapse in demand now, rather than on the global architecture.

Second, employ overwhelming force. The time for “shock and awe” in economic policymaking is now.

Third, make future normalisation of fiscal and monetary policies credible.

Fourth, act in concert. Even the US cannot solve its problems alone.

Fifth, avoid protectionism.

Sixth, strengthen the ability of global institutions to help the weaker.

So how are we doing against these standards? “Better than in the 1930s” is the best one can say. The world desperately needs Mr Obama to take a firmer grip at home and lead abroad. The plans he is now announcing give him a chance of doing the former. The April summit of the Group of 20 countries, in London, is his chance for achieving the latter.

Unfortunately, what is coming out of the US is desperately discouraging. Instead of an overwhelming fiscal stimulus, what is emerging is too small, too wasteful and too ill-focused. Instead of decisive action to recapitalise banks, which must mean temporary public control of insolvent banks, the US may be returning to the immoral and ineffective policy of bailing out those who now hold the “toxic assets”. Instead of acting as a global leader, there is resort to protectionism and a “blame game”.

This way lies a catastrophe. I expect little enlightenment from the rest of the globe: the European Central Bank is allowing the eurozone to collapse into deep recession; Japan is in meltdown; China has at least announced a big stimulus package, but it lacks a credible plan for needed structural reforms; and most other emerging countries can only try to stay afloat in these storm-tossed seas. Their accumulated foreign currency reserves of the 2000s will help. But the resources available to the IMF, even with their hoped-for doubling, are too small to give most emerging economies the confidence they need to risk keeping their spending up.

Decisions taken in the next few months will shape the world for a generation. If we get through this crisis without collapse, we will have the time and the chance to construct a better and more stable global order. If we do not, that opportunity may not recur for decades.

We are living on the cusp of history. The priority is to reverse the downward spiral of despair through overwhelming and concerted action. That will only occur if the US now gives the leadership we need. Mr Obama may even find, as many presidents have found before him, that leading the world is easier and more rewarding than cajoling a recalcitrant Congress. This may not be the challenge he expected. But it is the challenge he confronts. History will judge his presidency on whether he dares to succeed.

February 16, 2009 Posted by | Crisis Snapshot | , , , , , | Leave a comment