View Full Version : US Bailout - and the Rest of the World!

Monday, September 22nd, 2008, 12:55 PM
This isnt simply an American Thread - it is a world thread, since the interconnections are now so seriously enmeshed that if one falls, all suffer! In this context, what begins in America (?) may well up undermining certain European structures. NO surprise there!

Financial Crisis: America rises to the occasion as storm heads towards brittle Europe

By Ambrose Evans-Pritchard

Telegraph 21/09/2008

An almighty crash has been averted, very narrowly. There is no guarantee that the revolutionary actions of the US government will prevent a full-fledged global slump, but at least we now have a fighting chance............:(

By taking the colossal wreckage of the credit bubble onto its own books in a $700bn (£382bn) taxpayer sink, Washington has forestalled a run on the world banking system, and may hopefully have saved the viable core of modern capitalism.

Hank Paulson's "Super Sink" is the "game changer" we have all been waiting for in this interminable crisis. It puts a floor under the toxic debt that is bleeding the banking system to death, and ends the downward spiral of CDOs, CLOs, HELOCs, and such instruments of leveraged excess that lie at root of the credit terror. No doubt the Fed, the Treasury, and Congress have made a string of mistakes but they are now rising to the occasion - the reflexes of a wounded but still formidable superpower. The US has shown time and again that it has the institutions and flair to pull itself out of disaster.

We will find out soon enough whether the rest of the world can respWond with such dispatch as the hurricane smashes into them. As of today, the core risk is no longer in the US. It has rotated to the weaker and more brittle polities of Europe, Latin America, and Asia - especially China.

Europe has embedded paralysis in its treaty law.:| Maastricht prohibits a Keynesian blitz. Budget deficits above 3pc of GDP are not allowed until an EU country is already in dire straits, and even then approval requires a committee vote by 27 states:D:| !!

So Ireland, Italy and France must now tighten fiscal policy into the downturn. There is no EU Treasury to back the euro, and therefore no Euro-Paulson with the powers and legitimacy to take sweeping steps in an emergency. By extension, there is no clear-cut lender of last resort either. Each country is on its own, yet none have the instruments of monetary policy to carry out a Paulson-type rescue with credible punch.

The European Central Bank stands aloof with Teutonic severity ;) , as hawkish as the old Bundesbank - or the Reichsbank in 1931 . It too is a prisoner of a rigid treaty mandate. There was a mad Wagnerian feel to its July rate rise. We now know that Euroland was already slipping into recession when it acted. Do the hawks mean to unleash Götterdämmerung on the peoples of Spain, Ireland, Italy, Portugal, and Greece, with all the dangers that must accompany a disintegration of EMU?:D:|

(( goodness !! -- as bad as that ??.....))

It is incessantly repeated - (often by people with an animus against the US) - that "dead-beat America" cannot afford these serial bail-outs. Perhaps, but compared with whom, and to what?

The US government debt (owed to the public, using the IMF measure) is just 48pc of GDP, one of the lowest of the G7 industrial powers. This compares with 57pc for Germany, 94pc for Japan, and 100pc for Italy. After the Second World War, the US debt touched 120pc of GDP. As the Habsburgs liked to say, today's drama is desperate but not serious...........:D

Note too that the US is the only power (bar India) with a birth rate high enough to meet its future pension costs. Japan is already shrinking; China faces the start of workforce implosion within seven years; Russia is a demographic basket case.

Mr Paulson's Super Sink is modelled on the Resolution Trust Corporation, which cleaned up the Savings & Loan mess in the early 1990s. The RTC added no debt and made a profit in the end.

The Paulson plan will not prevent a deep US recession, but as the spearhead of a policy crafted to keep Americans in their homes, it will slow the avalanche of foreclosures and change the profile of future mortgage defaults. House prices may not, after all, drop by 34pc as now priced by the futures market. That is a reprieve for hundreds of regional lenders on death row.

Call it moral hazard if you want, but as President Bush said: "There will be ample opportunity to debate the origins of this problem. Now is the time to solve it."

The game was up in any case on Wednesday when yields on three-month Treasury notes fell to zero in a panic flight to safety, and investors began mass withdrawals from America's $3.5 trillion money market funds.

After the trauma of the last week - the Lehman bankruptcy, the state seizure of AIG, the Morgan Stanley scare, the heart attack in the market for credit derivatives, and the monoline debacle at AMBAC - it should be clear to everybody that rigorous debt liquidation would be viciously destructive.

The world has seen nothing like this (in peacetime) since President Franklin Roosevelt shut the banking system and confiscated gold in March 1933, though his words were more memorable than last week's Bushisms.:(

"The rulers of the exchange of mankind's goods have failed, through their own stubbornness and their own incompetence. They know only the rules of a generation of self-seekers.

"The money changers have fled from their high seats in the temple of our civilisation. We may now restore that temple to the ancient truths," he told the nation.

Will we hear such language before long from President Obama, addressing the most radical House and Senate in living memory? Probably. From moral hazard to moral rebirth.----------

?? really - is it as bad as that?

Monday, September 22nd, 2008, 04:16 PM
Financial crisis: How two other countries are doing

Telegraph 20/09/2008

Russia - Struggling with a bear market
==================== (( pun intended ??)

The Russian prime minister Vladimir Putin and his protégé, president Dmitry Medvedev, have built their overwhelming popularity on the back of an oil-fuelled economic boom that has filled Moscow’s streets with Mercedes and its residents’ pockets with a wealth they have never before enjoyed.

Now stock indices are plummeting and several brokerages are rumoured to be on the brink of collapse as the global credit crunch hits full-steam. However, ordinary Russians do not blame Mr Medvedev and Mr Putin – yet.

Memories of the 1998 economic crisis remain painfully fresh. The country went into a financial tailspin as it defaulted on its debt and devalued the rouble, wiping out the savings of most of its citizens. Most Russians, relying on reports on state-run television, blame their historic enemy, the United States, for the market meltdown.

The Kremlin has unloaded billions of dollars to help the country’s markets, which have plummeted 57 per cent since mid-May, wiping off about £410million in value (?). Russia has been struck not only by the global credit crunch, but by a sharp drop in investor confidence following its August war in Georgia, a messy shareholder dispute at the British-Russian oil company TNK-BP and a state-led attack on the coking coal producer Mechel.

The country’s wealth remains mainly linked to the price of oil, which has plunged 37 per cent from its mid-July high of $147 a barrel. The underpinnings of the economy – a projected growth rate of at least 7.5 per cent, the world’s third largest foreign exchange reserves and a sovereign wealth fund holding almost £110billion in windfall oil revenues - remain strong.

But if foreign investors don’t come back, and the oil price continues to fall, Russia’s boom might come to look like a short-lived miracle.


China – Hiding behind the bamboo curtain

Beijing is censoring financial websites over fears that China’s plunging stock market will lead to protests from investors who have seen their life savings evaporate as share prices drop.

The Communist Party’s publicity department is understood to have ordered websites to remove all negative comments and reports about the state of the markets. Anger is rising among ordinary Chinese savers and investors over the failure of the government to protect them from the effects of the global financial meltdown. The Shanghai Composite Index, China’s equivalent of the FTSE 100, has plunged by almost 70 per cent over the past year, as a result of the slumping American economy and rising inflation at home. Over the same period many Chinese have seen the value of their pensions and savings plummet.

Some are now blaming the government for mismanaging the strictly controlled stock market, while economists are calling for a major overhaul of the way the market operates. Many people feel that the government has failed to do its job in allowing formerly state-run companies to offer shares without proper supervision.. Millions of Chinese entered the stock market when it was experiencing an unprecedented bull run (high!).

Between 2005 and 2007, the Shanghai Composite Index rose an astonishing 500 per cent. The Chinese urge to become rich, combined with their love of a flutter, made the stock market irresistible and everyone from pensioners to schoolchildren rushed to invest*. By the end of 2007, there were 150 million investors in the stock market, according to the investment bank JP Morgan.

(( * buyer beware ....? ))

Monday, September 22nd, 2008, 08:16 PM
Hank Paulson's "Super Sink" is the "game changer"................

not too sure everyone sees it quite like thAT .... but there was/is certainly a crisis in American finances --- and its not only there!! It will be interesting to see how the Americans deal with this latest government proposal, what Congress eventually make of it. The markets are very nervous; there is a fear that things could slide AGAIN.....

Meanwhile -

Finance | 22.09.2008 Deutsche Welle

Germany Not Planning US-style Financial Rescue Plan

Germany said on Monday it sees no need to create a US-style financial sector bailout of its own even as the European Commission welcomed the US financial rescue package. (!!)

Germany has no plans to join in the massive US bailout operation for financial institutions that have run into difficulties with risky mortgage debt, officials said Monday, Sept 22.

The six Group of Seven economic powers aside from the United States do not plan any measures comparable to a US package to support the banking sector, German Finance Minister Peer Steinbrueck said on Monday.

Ulrich Wilhelm, a spokesman for German Chancellor Angela Merkel, too said the government saw no need for such an undertaking in Germany.

US reportedly seeking help

A foreign ministry spokesman said the US had not approached Europeans on the issue so far.

(( But it is clear there are already high level discussions....))

The US administration reportedly wants other countries to come up with rescue plans similar to a $700 billion (480 billion euro) rescue package announced in Washington on Sunday.

US Treasury Secretary Henry Paulson said some countries had signaled their readiness to help out, but there had been no firm commitments.

Plan aims to head off credit freeze

The plan, which must still be passed by Congress, would give the Treasury Department the power to buy bad mortgage debts from troubled financial institutes to head off a disastrous credit freeze that could bring the international finance system to its knees.

Finance Minister Steinbrueck added that the US plans were very important to stabilizing markets. There is no reason to fear a credit crunch in Germany, he added.

The US government lurched from one crisis to another last week, standing by as Lehman Brothers investment bank declared its $600 billion bankruptcy and as Merrill Lynch investment bank was swallowed up by Bank of America.

It then stepped in to rescue the insurance giant American International Group Inc (AIG) to the tune of $85 billion.

Markets not only in the US but around the world fluctuated wildly but returned to about where they had been at the beginning of the week after news of the rescue package emerged.

EU welcomes bailout plan ((!! - NWO stuff ?? :D ))

The EU Commission welcomed the bailout plan when it was announced.

EU spokesman Johannes Laitenberger said the EU executive "welcomes U.S. action to stabilize the financial system" and would continue to follow the situation closely and attentively....................

But he would not comment on the details of the plan because the situation is still evolving, he said.

After Paulson called on other countries to come up with similar plans to help stabilize the global financial system, Laitenberger said this is "not a question that falls directly under the commission's competence." (:D - as if ))

DW staff (jen)

Tuesday, September 23rd, 2008, 12:25 PM
House prices needed to fall by 34%, as they have nearly doubled in recent years. Likewise, the investment banks, hedge funds, and 'leveraged buyouts' created a bunch of fictitious money by loaning it to eachother and then buying inflated 'assets', sooner or later this scheme has to unravel.