Crisis Diary as it unfolds ….


First, Geithner announced a plan of private-public partnership where in private players bear initial 15% of losses taxpayers bear the remaining share of the pie. Then, FASB changed the rules of the game to do away with mark-to-market accounting. Well done folks! This is a game changer – well, what you’d otherwise call for changing rules of the game in the middle of the game?

An article on Seeking Alpha thinks this is a great plan though.

The real change won’t come from accounting changes but will come as a result of Geithner’s PPIP. This program will create trillions of dollars worth of demand for these toxic securities in an environment that could have very little supply. Most assume that the prices for these toxic assets will rise from .22 on the dollar up to as high as .60 on the dollar. I think these estimates are too conservative. With Geithner’s plan these assets will return to much higher levels…even approaching a full 100 cents on the dollar as housing stabilizes and investors return to the space.

Is it just a false optimism or is it bit disingenuous?

MBSes are backed by houses whose asset value has declined substantially and there is no way these ‘toxic’ MBS are going to come to a level of full dollar. Although, I agree that uncle sam will manage to inflate and bring the asset prices above its current depressed state.

Marc Faber said it all,

We always had bubbles and investment mania in the world. Even in the 19th century, under the gold standard, from time-to-time investment manias and bubbles developed in railroads and in canals and in real estate, just to name a few. Under a fixed monetary, or gold, standard, where the quantity of money cannot be increased indefinitely; there is a natural limit to the scale of the crisis. Usually when there’s a boom in one sector of the economy, you have some kind of deflation somewhere else; that was also the case in the 1970’s. We had a boom in commodities, but bond prices collapsed.

What Mr. Greenspan and Mr. Bernanke have achieved is historically quite unique. They have managed to create a bubble in everything, everywhere in the world: in real estate, equities, commodities, art, worthless collectibles; even bond prices continued to rise as interest rates fell due to the loose monetary policy. Since 2007 and 2008, everything has collapsed.

But government bond prices continue to rise, and went ballistic between November 2008 and December 2008, when 10- and 30-year Treasury yields collapsed. So my view would be that this was the last bubble they managed to inflate. From here on, the government bond market will fall. In other words, the trend will be for interest rates to actually go up.

If inflation returns, the only place you want to be is in hard commodities – oil, gold, copper, steel, agri.


April 5, 2009 Posted by | Crisis Snapshot | Leave a comment

18-March-09: Meanwhile ..

Catching up on the update meanwhile ..

1. Outrage in US over AIG – Benranke called it most upsetting event in the crisis, outrage on AIG bonuses.
The real question is, who is actually being bailed out by bailing out AIG? Essentially the counter-parties. The details are here from Econobrowser.

2. Jon Stewart vs. Jim Cramer extended showdown here

3. UK embarked upon QE – to purchase long-term Gilts among other measures

4.The account of Global Stimulus efforts by Dani Rodrik

5.Martin Wolf makes a case for affordability of indebtedness

6. Falling JPY and CHF..battle for safe haven currency over? Gold keeps spiking in between, but 1000 us$ is strong resistance

7. S&P rebounded at 666, cound be intermediate bottom.

March 18, 2009 Posted by | Crisis Snapshot | Leave a comment

20-Feb-09: Crisis watch

Crisis watch as of 20-Feb-09.

S&P 500 : 769.50


VIX : 49.30


TED Spread : 97.99


GOLD : 1002$/toz.


Oil : apprx 40$/bbl


February 22, 2009 Posted by | Crisis Snapshot | , , , , , , | 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.








Which adds up to:


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


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.


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


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

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

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

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

It’s Boxing Day and Toronto is shopping

Ok, so this is completely anecdotal. I don’t even have any yesteryear’s experience to compare it with. But it didn’t look all that bad at Eaton Center, Toronto. It had no hint of recession, as if entire Toronto was shopping. The queue at check-out counter of Sears made me rethink on my decision to go out shopping, I got pushed and nudged couple of times at apparel section and I even had to wait for my turn at escalator.

dsc00363 dsc00366

Well, I guess this doesn’t mean anything though. People were definitely out shopping, but that is that. It doesn’t mean they shopped for the same amount they are generally used to or if discounts were more this year to attract more shoppers.

Also, CNBC today reported that Amazon is having their best ever December sales. Part of it must be due to bad weather, but otherwise it is also because shoppers are looking for cheaper alternatives. Shoppers are more than willing to compromise the flexibility of feeling the product before buying it of the shelf of retail store for lower cost of online shopping. So the bottomline is …… grim.

December 26, 2008 Posted by | Crisis Snapshot | , , | Leave a comment

24-Nov-08 to 30-Nov-08: Terror strikes financial capital of India – Mumbai

The Mmumbai-attacksaximum City burns in terror

By far, the biggest news of the week was the terror attacks on Mumbai. Mumbai burnt in the horror that started on Wednesday Nov 26 night and lasted for almost 60 hours leaving almost 200 persons dead, 400 injured, Taj and Oberoi hotels ravaged and a nation of 1 billion deeply pained and outraged. The issue of global Islamic terror network is back at the table. The time when the world is facing the gravest of the economic crisis, the last thing world wants is another war that has potential to unfold itself in a world war. In coming days, the commitment of Pakistan to assist India in fighting terror and the role of US to influence swift action on part of Pakistan are going to be crucial to how situation pans out.

Obama’s economic team

Obama unveiled his economic team packed stalwarts like Geithner, Larry Summers, Paul Volcker. Many of Obama’s team worked for Clinton during second Clinton administration. Also, important thing is there are no left-extremist in Obama’s policy team, which is not such a bad thing.
But is Obama’s team full of too much of ego per capita? Will they ever reach a consensus decision?

This week stock markets took a breather and bounced back a bit. Are we gearing up for some Obama bounce? or some stimulus news stimulated bounce?

Unstable BRICs

Among emerging markets economies, Russia seems to be in really bad shape. Falling ruble, falling commodity prices, drying forex kitty and frozen credit markets, just nothing seem to be working for Russia. China, with its announcement of record rate cut by 1 percent, seem to be panicking about the situation. Record stimuluses, massive rate cuts only point to desperate measures to support falling economy.

Crisis watch for the week:

TED spread 2.18 (prev 2.12)
VIX 55.28 (prev. 80.26)
S&P 500 896.24 (WoW return +11.2% )

November 30, 2008 Posted by | Crisis Snapshot | Leave a comment