So, the crisis has been averted, yes? The Dow shot up 300 yesterday and Asian markets closed 2% higher. European markets have jumped 4-6% today. The rate cut, and the expectation of another .75% rate cut next week has saved us all, right? For crissakes Zandar, shut up about the economy already. We’re fine!
“This is not a normal crisis”. George Soros, the doyen of international finance, the man who made billions from sterling’s expulsion from the Exchange Rate Mechanism in 1992, and who now spends much of his time on philanthropic activities, is listened to in Davos respectfully. Yesterday he had something important to say about the state of the world’s financial system: “central banks have lost control”; a “global sheriff” to patrol international markets should help them out.
George Soros didn’t make all those billions by being wrong about the global financial picture. If arguably the world’s leading financial guru is saying “We’re screwed” then it’s worth considering that this is far more than just an ordinary recession.
Mr Soros offered the proceedings a deep historical perspective. To his mind, he told participants at the World Economic Forum, we are “at the end of an era”. The 60-year economic supremacy of the US and the dollar’s status as the international reserve currency of choice is drawing to a close, fundamentally weakened by the shift in economic power eastwards with the rise of China. A more recent era is also over: that of “superleverage”. Regulators, the financier said, have not yet fully appreciated the portent of these developments. “Systemic failure” may be upon us.
Most likely the Euro will replace the US dollar as the world’s reserve currency. It’s a question of when and how painful will it be. The Powers That Be aren’t completely unaware of this. They know that they only reason foreign countries are holding dollars is because they have to in order to buy oil. If the Euro replaces the USD, that reason goes away. And so does the value of the dollar.
We’d become a third world country overnight. And the continued rate cuts, making the dollar weaker and weaker, only hastens that moment. Eventually somebody’s going to get the idea to try to make an orderly exit from the dollar. The government says simply that foreign countries have so many dollar reserves that anyone who tries to get out will wreck the global market, so that the world has no choice but to stick with the dollar. The dollar’s too big to fail, the argument goes, because if it does it will take the entire world with it.
Are you willing to bet your job, your family, your livelihood on that assumption?
You already have. And so has everyone else in America.
But what about the markets? I discussed yesterday that the markets were a global confidence game, emphasis on the word confidence. Without confidence in getting paid back, the debt market shell game can’t survive.
So why did the Dow make a 600 point upwards swing yesterday from 1PM to 4PM?
One word. Bailout.
Talks in New York with the unnamed banks are part of Insurance Superintendent Eric Dinallo’s effort to stabilize the bond guarantors and bolster the market’s finances, said agency spokesman Andrew Mais in an interview. Insurers MBIA Inc. gained 33 percent in New York trading and Ambac Financial Group Inc. soared 72 percent.
New capital may help preserve the top credit ratings for the bond guarantors such as MBIA, the industry’s largest, and halt any erosion of investor confidence in the $2.4 trillion of assets they guarantee. Ambac, MBIA’s biggest rival, lost its AAA grade from Fitch Ratings this month on concerns that losses tied to subprime mortgages may increase.
“The market is obviously viewing it as positive news,” said Kathleen Shanley, an analyst with bond research firm Gimme Credit LLC in Chicago. “Shareholders and holding company creditors should keep in mind, however, that the insurance department’s primary mandate is to protect policyholders, not to boost the share price.”
MBIA and Ambac are monoline insurers, the companies that pay up on the default of municipal bonds. As a result, the most important asset they have is their credit rating. They’re the companies that allow the bond market and more importantly the bond debt market to exist. They’re the lender of last resort, the company that insures that those IOUs I was talking about yesterday get paid back. They are insurance companies, and companies pay them yearly premiums to protect the bonds they buy. That way they buy certainty. They are certain to get their money, and the monoline gets paid their premiums and makes money because after all, municipal bonds are too big to fail. Several folks here in BooLand have brought up the fact that both these companies have tanked on the markets because those too big to fail bonds have done just that.
When you sell certainty and suddenly the market is flooded with the subprime time-bomb mess and people are no longer certain or things, you’re in trouble. But the financial sector is bailing out these companies. They are protecting their own because without them, the game is over. They were close to defaulting, and THAT’S what caused in part the selloff this week.
The infusion may be as much as $15 billion, the Financial Times reported. MBIA rose $4.08 to $16.61 in New York Stock Exchange composite trading, while Ambac added $5.73 to $13.70.
News of the meeting helped spur a rally in U.S. stocks, which slid Jan. 18 after Fitch lowered the rating of Ambac. The Standard & Poor’s 500 Index halted a five-day slide, rising 2.1 percent to 1,338.60 after losing as much as 3 percent earlier.
“Clearly the market likes it,” said Gregory Peters, credit strategist at Morgan Stanley in New York. “But it’s not an easy situation to fix. The intent is good but we need the details; the details matter.”
Wow, $15 billion dollars. And banks are losing 5 to 10 billion dollars a shot every time they open their mouths for another public admission of a writedown. Pretty soon you start talking about real money there. The dollar trap is forcing foreign investors to bail out the Fed, the Fed’s forced rate cuts are bailing out the banks, and the banks are now forced to start bailing out the monolines, the monolines force the market to behave by bailing out the stock prices, and the upward market and all of those forces brainwash the consumer to keep spending to buy foreign economic products to keep the foreign investors happy.
That’s what our economy is built on right now. Forced preservation of self-interest. The house of cards is being held up by sheer force of will.
There’s just one problem. The Fed can only cut interest rates so much. Keep in mind that we’re talking an unprecedented cut here in rates and an unprecedented bailout of monolines to pull the market out of a freefall, plus all this happy talk of a $140-$150 billion dollar bailout in rebates and tax cuts at a time when our deficit is already sky high. There’s only so many times you can do that, and frankly the underlying problem is still there. It took all three of those to stave off disaster in the last few days.
But all the fundamental problems are still there. The roving bailouts haven’t done a thing to address those issues. We continue to ignore the cause of the problem and are only addressing the symptoms.
So when we find ourselves in the same boat down the road, when Asian markets plummet another 10% in 2 days because US inflation and unemployment continue to increase, what will we do next time?
We’re almost out of rate to cut. When we hit 1% or so, that’s when things get interesting. So we’ll see what happens. At this point it’s a question of how long will it take.