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(an interoffice email exchange)

>   
>   On Fri, Sep 19, 2008 at 9:50 AM, David wrote:
>   So creating liquidity for toxic assets RTC style.
>   

maybe, jury is still out on how that might work

>   
>   Make the government a little money and inspire confidence in banks, ok.
>   
>   We are thinking that this is overtly inflationary for financial assets (maybe all
>   assets?)
>   

supports a lot of equity value by removing a large element of risk, but cost to shareholders still unknown

fixed income going higher in yield, prices there going down

>   
>   Should I expect this to re-inflate the commodity asset bubble in the medium
>   term???
>   

not directly. crude price up to the Saudis.

>   
>   Do you think the dollar’s rally will help cap any commodity asset price rise???
>   

yes, in the competitive markets. crude is not a competitive market. saudis merely set price and let quantity adjust

>   
>   PS- I expected to come in today to $110+ crude, $8+ gas, and $900+ gold.
>   

as above. crude up even with dollar up, but gold down.

warren


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13 Responses

  1. I’m trying to figure out what this whole plan does, operationally. Is it in effect substituting U.S. Gov. liabilities for private liabilities? So, in effect, it will massively increase the “debt”, thereby increasing net private sector assets? So one would expect that this will allow a vigorous expansion to take place (especially since many of the cash flows currently tied up in debt service will presumably be reduced once the loans are marked down.) Am I at all right in this?

  2. Professor Delong (when he isn’t attacking McCain) had the below to say. I don’t know Jim, every dendron and axon in my brain is shuddering with these large centrallized control structures being bantered about. Maybe I watched “Blake’s 7” too much as a kid. When the gods on mt. olympus are so far detached from the other “market participants” in knowledge and understanding and emotional control – I just don’t see good things for the worshippers.

    “Government isn’t the solution to our problems, government IS the problem” – Ronald Reagan

    and from the comments:

    You can encapsulate the lessons learned in a disaster by creating new laws and regulations. That’s how institutional memory gets preserved. The Reaganites have spent 40+ years dismantling the structures that were the lessons learned in the 1930’s with the predictable results.

    http://delong.typepad.com/sdj/2008/09/understanding-t.html

    It is not enough to provide unlimited liquidity at a penalty rate (stage I). Instead, the Fed or the Treasury or both must make the price of risk or the quantity of risky assets or both an administered price. Just as for more than half a century there has been a consensus that the level of the short-term interest rate is too important a price to be left to a market full of easily spooked and not very rational financiers, so stage III leads us to the conclusion that the price of risk is also too important a price to be left to the market.

    (snip)

    Second, I don’t believe that after this the price of risk will ever again become a free-market price, just as after the Great Depression the short-term price of liquidity–the short term interest rate–ever became a free-market price. The federal government, in one form or another, is going to be in the business of insuring debt securities against steep declines in value. Securities that are not so insured will simply not be traded. What Fannie Mae did for “conforming” home loans, the Treasury or some other government agency will do for derivative securities. It will offer insurance, charge for that insurance, and supervise and oversee financiers much more strictly.

  3. Jim, there is no plan yet. I’m waiting for monday to see if they come up with one.

    ‘borrowing to spend’ adds to demand as spending is demand. borrowing to re arrange financial assets doesn’t alter demand.

    luc- assume that stuff is from de long? he has no clue on monetary operations and causations.

    in the banking sytsem, risk is highly regulated- legal assets, quality, duration, gap, diversification, etc. are all gov determined, as are capital requirements. and if you don’t do it right they declare you insolvent and shut you down.

    and anyone who supports the notion of a ‘penalty rate’ is suffering from a massive failure of logic as well.

  4. Warren, the nytimes was reporting that the treasury plan to purchase
    distressed assets only includes american financial institutions. Being that many of these assets ( don’t know if its a majority or not) are help by foreign entities, what are the implications?

    Seems to me this is good for the US as long as foreigners continue to have strong US dollar savings desires. The US economy has had twin fiscal and current account deficits for a long time. This money has been hoarded by foreign institutions which has has afforded us a higher standard of living because we can consume more than we produce. Now, much of this money in foreign hands is being destroyed because of the current asset deflation crisis. That is, the hoard of foreign savings is now diminishing. Isn’t this good for the US because the foreigners will want to replenish this hoard by producing more products for the US to consume assuming we maintain big enough deficits.

  5. Need to see details of the plan. If banks sell to the tsy at low prices they still have to take the losses and lose any chance of recovery. not sure how popular that would be.

    yes, exactly right! if foreigners want to add to their hoards of $US fiancial assets our net imports go up as does our standard of living.

    problem is, not sure that’s what’s going to happen. might be more of the reverse.

  6. problem is, not sure that’s what’s going to happen. might be more of the reverse.

    Well, then you are saying foreigners are going to increase their consumption or reduce their production. Or that they are going to increase their desire for US goods and services ( as you have alluded to before)

    Note, there is reporting, albeit absent details, that ‘analysts’ are predicting the bailout will increase the fiscal deficit by a large amount.

  7. Warren said:

    “in the banking sytsem, risk is highly regulated- legal assets, quality, duration, gap, diversification, etc. are all gov determined, as are capital requirements.”

    Warren, you make a false assumption, you ASSUMED this was highly regulated, but back in 2004 the GENIUSES at the SEC decided to let 5 big banks use INTERNAL models to do capital regulation and move from 12 to 1 to 40 to 1 leverage ratios – even the SEC commissioners at the time knew this was stoopid – but I bet the banking lobbyists paying off dodd and frank thought it was smart – they should all go to jail. As Icahn proved friday – him and all those other wall street and washington boys with their mba and law degrees are all just corrupt dumb crony types.

    securities.stanford.edu/news-archive/2004/20040428_Headline08_Drawbaugh.htm

    April 28, 2004

    EXCERPT: U.S. market regulators on Wednesday approved new rules that would let some major Wall Street brokerages reduce the amount of money they set aside as net capital, in some cases by as much as 30 percent. In a move in line with bank regulatory changes in Europe, the U.S. Securities and Exchange Commission voted unanimously in an open meeting to approve two optional sets of rules. Under one of them, five big U.S. brokerages are expected to apply soon to be designated as “consolidated supervised entities,” or CSEs. Each application for CSE status will have to be reviewed by the SEC, likely several months from now. Goldman Sachs , Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns have expressed keen interest in CSE status, SEC Market Regulation Director Annette Nazareth told reporters after the meeting. “They are all very well-capitalized firms,” Nazareth said. In line with new capital adequacy standards coming into force soon under Europe’s Basel accords, brokerages granted CSE status would be able to use in-house, risk-measuring computer models to figure how much net capital they need to set aside. Under Basel standards, some institutions could soon be cutting their net capital by as much as 50 percent. But the SEC’s new CSE rule added a $5-billion floor to the Basel model, reducing the likely level of reductions to 20 to 30 percent. The SEC approved a second set of net-capital rules, also voluntary, that would designate an institution as a “supervised investment bank holding company.” But Nazareth said there has been little industry interest expressed in it. SEC Commissioner Paul Atkins said monitoring the sophisticated models used by the brokerages under the CSE rules — and stepping in where net capital falls too low — “is going to present a real management challenge” for the SEC. Since the new CSE rules will apply to the largest brokerages without bank affiliates, SEC Commissioner Harvey Goldschmid said, “If anything goes wrong, it’s going to be an awfully big mess.”

  8. Cutcheon said:

    “Well, then you are saying foreigners are going to increase their consumption or reduce their production. ”

    My asian friends in china say they don’t want all that crap they make to send to suckers in the USA, culturally they still like a lot of thier “old ways” and not being a couch potato TV aholic who buys every doodadd on the QVC shopping channel and latest hummer.

    America just needs to send more marketing execs to thier country so we can get thier women watching lotsa advertising and start their kids off young with the consumerism brainwashing.

    Production wise – the china gubbment boys know idle hands are the devils work and don’t want 1 billion revolting – so they got to keep them doing something. But the gubbment here in the USA know that too, and they don’t want a bunch of idle hands either, so its a race to see which gubbment can make the least idle hands – sometimes these gubbments get together on the golf course and decide a big ole war will help with the respective idle hands in each country (snicker)

    “Or that they are going to increase their desire for US goods and services ( as you have alluded to before)”

    LOL! BWAHAHA! What do we make but useless crackhead party princesses like Brittney Spears and useless MBA harvard types who think inhouse computer modelling should replace old capital regulations that have worked for a long time. I am sorry, I don’t love my country enough to lie for it, because I see lots of idiots and scammers and I personally want to see them crash and burn. I am sure many feel the same way about me as well. Not that I don’t think there are lot of useless people in other countries as well. These are bad memes to have though, because it leads to stuff that gives rise to folks like Hitler in various countries.

  9. My asian friends in china say they don’t want all that crap they make to send to suckers in the USA, culturally they still like a lot of thier “old ways” and not being a couch potato TV aholic who buys every doodadd on the QVC shopping channel and latest hummer.

    Good for us … bad for them. They are in effect working for worthless paper ( even more worthless b/c the probably hold lots of US mortgages) because they are not trading with us and they are doing more manufacturing and polluting. Would rather be a worker in our often criticized “service” economy than a slave laborer living in a chinese factory. I’d rather be a realtor or mortgage broker than a trinket maker on some chinese assembly line breathing toxic acetone all day. LOL .

  10. add this to the mix-

    if we do move to increase agg demand without an energy policy to cut consumption of crude/gasoline by at least half, the Saudis will likely raise prices and further improve their real terms of trade.

    so all the output gains due to higher employment would go abroad via increased exports to pay for the increased price of crude imports.

    it’s all an excercise in futility if we don’t break the crude monopoly, and there’s no move to do that anywhere i’ve seen

  11. “it’s all an excercise in futility if we don’t break the crude monopoly, and there’s no move to do that anywhere i’ve seen”

    dieoff.org says we gonna see human suffering on an unbelievable scale.

    I thought the whole IRAQ thing was to break the oil boyz backs? I know I remember britain and france and even russia over the past 50-75 years also had their various adventures in that region of the world for the same thing – OIL no? You don’t really believe it is about bringing democracy to starving muslim babies do you? Didn’t you see the pictures of Lee Iacocca riding a bicycle, it would get fatass americans some exercise and cure their diabetes problems and reduce oil usage – I sold my car 7 years ago – only bikes for me.

    Warren didn’t you say you funded some MBA grad students – adding to the problem of too many agent smith MBA clones? Here is a 12 year old kid working on the problem – why didn’t you fund him and other science students?

    http://hardware.slashdot.org/article.pl?sid=08/09/18/177238

    12-year-old William Yuan’s invention of a highly-efficient, three-dimensional nanotube solar cell for visible and ultraviolet light has won him an award and a $25,000 scholarship from the Davidson Institute for Talent Development. ‘Current solar cells are flat and can only absorb visible light'” Yuan said. ‘I came up with an innovative solar cell that absorbs both visible and UV light. My project focused on finding the optimum solar cell to further increase the light absorption and efficiency and design a nanotube for light-electricity conversion efficiency.’ Solar panels with his 3D cells would provide 500 times more light absorption than commercially-available solar cells and nine times more than cutting-edge 3D solar cells. ‘My next step is to talk to manufacturers to see if they will build a working prototype,’ Yuan said. “If the design works in a real test stage, I want to find a company to manufacture and market it.””

  12. Cutcheon said:

    “They are in effect working for worthless paper”

    I think many of the common folk in china realize that at this point, and several have told me they only want goods or gold, they don’t want US clownbucks – they are donkeys who are choosing to sit down. Our military being the worlds police force and keeping oil flowing globally is the only reason for the other 7 billion to keep us 300 million around, if we fugg dat up, we got no use to them.

    ” ( even more worthless b/c the probably hold lots of US mortgages) ”

    The foreigners hold about 70% of fannie/freddie paper according to my hedgie friends. I personally don’t want to bail them out, but the global megacorps have told gubbment leaders world trade will collapse if we don’t and that will really hurt these global megacorps who exist above the laws of any one nation state.

    “manufacturing and polluting. Would rather be a worker in our often criticized “service” economy than a slave laborer living in a chinese factory.”

    You may want to do some googling about US water supplies, in many cities antibiotics and anti depressant drugs are being passed through the treatment plants to the drinking water – no you know why we have lots of ADD babies who grow up to be deficient CEO’s! LOL!

    “I’d rather be a realtor or mortgage broker than a trinket maker on some chinese assembly line breathing toxic acetone all day. LOL .”

    I hear you brother, I saw a special on PBS about this couple with a daughter in china that lived way in the chinese interior where there was no pollution and they had small village life with healthy food, but the wife was told they had to move to the big city so their daughter could get a good EDUCATION and be a success in life. The father said the pollution and crime and loss of family culture and values was not worth moving to the city, but the wife RULED – so they moved, the daddy caught cancer, the daughter was getting beat up, they all were miserable, but the wife still insisted that it was better to live that way than in a pollution free, healthy food, nice community of people where the daughter couldn’t get a good education – talk about a jared diamond WET DREAM idiocy – pathetic – it makes me want to puke how people can be so dumb and only focus on one little thing in life and not see the big picture.

  13. Looking forward to being able to buy those new solar cells!

    I’ve been funding econ students who are learning it the ‘right way around.’ many have graduated and are now out there educating the next generation.

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