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19 comments on The Finance Round-Up: September 7th 2007

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GreyZone on September 7, 2007 - 9:49am

The financial insiders already know this and are terrified that the general public will discover it as well. Reports are that interbank daily lending has dried up, especially in Europe but here as well with the TBill/LIBOR rate difference climbing to record highs (indicating that the banks just don't want to loan money to each other, nevermind real customers). What it looks like to me is that those with cash are hoarding it because they are afraid that no one really knows the actual risk of any of the paper currently in circulation. Very clearly certain US AAA paper was anything but AAA so now that raises the question about all other US AAA paper and below.

Bernanke is pushing on a string. He has closed the Fed discount window to all except the most "credit worthy" of banks so that the less credit worthy have to borrow from those selected inner banks . This is to account for the actual risk. But the lending doesn't appear to be happening. Instead the inner circle is largely sitting on what they have and the market is seizing up. So what is Bernanke going to do? Call up Bank of America and tell them he'll call them terrorists and have Bush arrest them if they don't make loans?

It really looks like he is screwed if the other bankers around the world have lost confidence in each other's paper instruments. And that is the real problem, isn't it? Economics is never about science. It's about a CONfidence GAME (con-game).

"The greatest shortcoming of the human race is our inability to understand the exponential function." -- Dr. Albert Bartlett
Into the Grey Zone

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Stoneleigh on September 7, 2007 - 10:46am

You're absolutely right that it's all about confidence. That's why things can change so rapidly and dramatically - an implosion rather than a steady decline. Too many people think of markets as machines responding to something akin to physical forces in linear ways, with market actors acting rationally (ie the efficient market hypothesis, which I think is bunk).

IMO markets are all about herding behaviour, emotional swings (greed/confidence versus fear) and positive feedback, creating self-fulfilling prophecies. These aspects are especially clear during a mania and its aftermath, when change is rapid, there is little real information, and our animal natures are fully engaged. Once confidence evaporates, the game is over.

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Natural on September 7, 2007 - 3:42pm

Stoneleigh, Thank you for your excellent financial roundup post. As usual.I don't believe this crisis is a crisis of confidence. The internal mechanisms of the global economic system are seizing up. I found a very good description of what is happening in The Past, Present and Future In Gold by Lance Lewis at Minyanville. He gives an excellent rundown on the massive inflationary expansion of money driven by cheap credit following the 2001 recession. What I found so interesting was how inflation is critical for the survival of the system:

As for all the talk of “will the Fed cut or won’t they”, this is irrelevant in my view. Given the Wild West nature of the way the modern financial system has evolved over the past 20 years, it requires ever-expanding rapid credit growth, or it just dies. If credit growth slows, the system dies like a shark that stops swimming, and the social consequences of that option are much worse than an inflation problem, at least in the near term....When given the choice between a deflationary depression and the possibility of higher inflation on down the line, the Fed will always choose to inflate (because it must in order to assure the survival of the system), and that’s precisely what Feldstein was urging them to do this past weekend. ...The Fed must “do whatever is necessary” in order to keep the system intact, and that requires a massive inflation given the enormous credit bubble in real estate that was blown in the wake of the stock market bubble bailout. In essence, all roads lead to the same place in my view: to more inflation.

The system is in a crisis because it cannot longer create the money via lending, legitimate or no, to service the existing debt. People can't pay their existing debt, much less take on additional. The system is choking up.

And so this is why I think its less about a lack of confidence, but really real crisis that seems to be leading to recession (view the atrocious housing numbers). Mish at http://globaleconomicanalysis.blogspot.com/ has offers an excellent post, Moonbats Active Again in Massive Jobs Disaster, explaing how in fact the housing numbers are actually much worse than the 4.6% unemployment number show.
The growth of the money supply via credit has hit a wall. We're getting right now high inflation, with more to come in the near term. How long can the system resist the downward pull of the deflationary depression ? The lesson here again is that whether or not we can attribute the current crisis to high energy prices, the fact that the end of growth spells the end of credit expansion spells system economic crisis is very likely to be what we would see if it were.