Crisis Diary as it unfolds ….

China’s call for global currency and who said what?

Chinese Central bank now wants to get rid of its US$ and has called for a global currency.

Wall Street journal

China called for the creation of a new currency to eventually replace the dollar as the world’s standard, proposing a sweeping overhaul of global finance that reflects developing nations’ growing unhappiness with the U.S. role in the world economy.

The unusual proposal, made by central bank governor Zhou Xiaochuan in an essay released Monday in Beijing, is part of China’s increasingly assertive approach to shaping the global response to the financial crisis.

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Mr. Zhou isn’t the first to make that argument. “The dollar reserve system is part of the problem,” Joseph Stiglitz, the Columbia University economist, said in a speech in Shanghai last week, because it meant so much of the world’s cash was funneled into the U.S. “We need a global reserve system,” he said in the speech.

Dr. Krugman says China is stuck with dollars and now is looking for easy way out.

The big news last week was a speech by Zhou Xiaochuan, the governor of China’s central bank, calling for a new “super-sovereign reserve currency.”

The paranoid wing of the Republican Party promptly warned of a dastardly plot to make America give up the dollar. But Mr. Zhou’s speech was actually an admission of weakness. In effect, he was saying that China had driven itself into a dollar trap, and that it can neither get itself out nor change the policies that put it in that trap in the first place.

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Two years ago, we lived in a world in which China could save much more than it invested and dispose of the excess savings in America. That world is gone.

Yet the day after his new-reserve-currency speech, Mr. Zhou gave another speech in which he seemed to assert that China’s extremely high savings rate is immutable, a result of Confucianism, which values “anti-extravagance.” Meanwhile, “it is not the right time” for the United States to save more. In other words, let’s go on as we were.

That’s also not going to happen.

The bottom line is that China hasn’t yet faced up to the wrenching changes that will be needed to deal with this global crisis. The same could, of course, be said of the Japanese, the Europeans — and us.
And that failure to face up to new realities is the main reason that, despite some glimmers of good news — the G-20 summit accomplished more than I thought it would — this crisis probably still has years to run.

Brad Setser adds more to what Dr. Krugman had to say

China’s 2007-2008 bet on global equities and riskier bonds likely cost it north of $50 billion — it all depends on exactly how much of its portfolio it put into risk assets. To be sure, it is in far better shape than Ontario Teacher’s Pension Plan, which lost a staggering 40% on its fixed income portfolio. Most of China’s reserves were in safe government bonds, and those bonds increased in value over the course of the crisis. But as Arvind Subramanian notes, China’s currency losses will eventually dwarf its equity market losses.

Those losses shouldn’t be a surprise. Currency losses on unneeded reserves are the price a country pays for subsidizing its exports with an undervalued exchange rate. But that doesn’t make it any easier to accept the losses – or to handle the inevitable argument that China’s leaders squandered China’s reserves.

China’s leaders are setting the stage to argue that these losses are the fault of bad US policies. They aren’t. They are the result of China’s own policy choices. Subramanian correctly observes “[China] is seeing itself as the victim of the dollar standard when it has been, for a long time, a beneficiary and promoter of this standard.” China’s leaders, though, have no incentive to recognize this.

But even if China didn’t explicitly plan to build up to many reserves, it now has them — and China’s leaders are no doubt interested in using them to increase China’s influence.

It isn’t hard to think of creative ways China could use its reserves to increase its global position. China alone could provide all the extra $500 billion the IMF now needs if it wanted to do so. Or it could set up a Chinese monetary fund to compete with the IMF.

To date, China has been fairly cautious, generally turning down countries that trekked to Beijing to appeal for emergency loans – though the recent expansion of RMB swap lines suggests that China may now be willing to take more risks. One potential problem: China would need to explain to its own citizens why it is using its reserves to help other countries rather than doing more at home.*

And then there is the elephant in the room: Will China’s large dollar holdings — and the fact that is is now the United States largest creditor — give it any influence over US policy?

No matter how this whole situation turns out, what China is going to do with its massive dollar reserves will decide the future of the US, the world financial system and US-China relationship. A lot depends on how China behave from here on.

April 5, 2009 Posted by | News, Opinions | , , , , , | Leave a comment

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?

February 24, 2009 Posted by | News | , , | 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

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

Simon Johnson, IMF economist, on banking crisis

“There comes a time in every economic crisis or, more specifically, in every struggle to recover from crisis, when steps up to the podium to promise the policies that – they say – will deliver you back to growth. The person has political support, a strong track record, and every incentive to enter the history books. But one nagging question remains. Can this person, your new economic strategist, really break with the vested elites that got you into this much trouble?
Simon Johnson, professor economics at MIT, former chief economist IMF

Here is the clip of Simon Johnson discussing banking crisis with Bill Moyers.

Vodpod videos no longer available.

more about “Bill Moyers Journal . Watch & Listen …“, posted with vodpod

February 15, 2009 Posted by | Economy, News | , , , | 1 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

What was SEC doing?

This is a new piece of evidence WSJ has brought in light.

In Nov’2005 – yes, way back in two thousand and five – Madoff’s rival hedge fund manager Markopolos submitted this written complaint to SEC.

The title of the submission reads “The world’s largest Hedge Fund is fraud
In opening remarks he gives two likely scenarios and says scenario-2 is highly likely.
According to Markopoloas, What was this scenario-2?

Scenario-2 (Highly Likely) Madoff Securities is world’s largest Ponzi Scheme ….

Then the paper goes on to describe its premise in very compelling and coherent manner over next nineteen pages.

So what did SEC do?
SEC closed the case in Nov’07, two years later, and SEC’s conclusion can be found here.

Conclusion Reached:
The staff found no evidence of fraud. …..

Inefficient and insufficient gov’t oversight is one of the main reasons why market economy stands where it stands today – on the brink.

Thank you SEC, we’d love to have socialism back. We’d rather gov’t screwed us directly than gov’t colluded with corrupt market practices to screw us. Because in that case at least we have a visible filthy fist to fight with.

Update: (02-feb-09) Here is Markopolos prepared testimony to US finance committee

December 20, 2008 Posted by | News, Opinions | , , , , | 2 Comments

Japan goes ZIRP .. well, almost

Fighting with the worries of rising Yen, Japan was quick to react. Although, Japan probably showed some defiance by reducing the interest rate from 0.3% to 0.1% but still leaving it marginally above zero. 

At the heart of japanese worries is ZIRP (Zero Interest Rate Policy) by it’s trading partners esp. by US and probably by UK.

Bloomberg reports

jpy

The Fed’s reduction brought the U.S. key rate below Japan’s benchmark for the first time since February 1993, making the yen a higher-yielding currency. The yen has gained 25 percent this year, eroding profits for exporters that are already cutting jobs, production and spending as global demand collapses.

 

Interest rate really didn’t matter much in Japan in last decade. It was zero thru most of the decade and recently had touched 0.5% level. But rise of zero/low interest policies across the globe, which result in dramatic JPY rise against most world currencies, put Japan in awkward spot as it started losing it’s interest differential edge.

When Japs did not know where to invest  their excess wealth and sell their excess production as their economy was not consuming enough and thereby not growing at all, they started exporting goods and financing capital to the rest of the world. Now, with this economic downturn, even world has turned its back to Jap capital and subsequently Jap goods are losing their competitive advantage due to rising Yen.

Nobody knows what’s the way out of this crisis for Japan. But one thing is sure, rate cut is not going to matter at all and vindicating this JPY reacted neutrally to the move.

December 19, 2008 Posted by | News | , , , | 1 Comment

Madoff’s Ponzi Scheme

Bernie Madoff’s hedge fund blow-up was the stunning piece of news on wall-street last week. The Ponzi Scheme that his NASDAQ ex-chairman ran amounted to a fraud of the scale of $50B. The detailed news here.

The features of his Ponzi scheme that hardly invested anything in any market,

Pay steady 10% returns to old investors from the investments of new investors

Steady and modest returns which enable him to keep it afloat for years.

Don’t ask don’t tell policy about underlying investment strategy – as long as everybody was getting steady returns nobody complained

Accounting fraud to show fake trades and profits

Several charity organizations and banks like RBS and HSBC invested in his scheme without any due diligence.

Although this was a huge news and had a potential to hurt the market sentiments further, markets were quite nonchalant about the news, which is another sign of market bottom. Worst unemployment numbers with more than half a million going out of job in one month, market goes up. Investors set to lose $50B in a ponzi scheme, market reacts neutrally. Goldman Sachs reports negative revenue and record losses, Goldman Sachs shares go up. These are all the signs of fear being overdone.

December 16, 2008 Posted by | News | , , | Leave a comment