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(email exchange)

>   
>   On Mon, Oct 13, 2008 at 3:00 PM, Craig wrote:
>   
>   Since nobody understand the local currency / foreign currency distinction and
>   since these obligations are part of the normal financial commerce of these
>   countries, is it possible that these loans will allow the markets to normalize,
>   

Yes.

>   
>   Allow the various governmental bodies to remove the guarantees/lending and
>   never realize this risk existed?
>   

Probably not.

>   
>   Everybody was perfectly happy with these private sector risks before the
>   credit markets seized up. Other than the sudden realization of everything
>   you’ve pointed out, what factors will put this over the edge?
>   
>   All this boils down to this question: Does this necessarily have to end badly?
>   

Looks that way to me.

>   
>   Or can the participants use this as a life rope to deleverage successfully,
>   ending the need for the life rope?
>   

I think the incentives are now in place for massive fraud.

Eurozone banks will find it hard to resist the demand for USD loans to their ‘friends’ in finance and industry, that will be based on inflated appraisals, inflated income statements, etc.

Just like the subprime issue was here.

It’s open season and my guess is the Fed is about to be in shock at the size of the first auction.


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13 Responses

  1. I guess the question, from a purely nationaiistic standpoint, is who is likely to get the brunt of the bad effects – the U.S. or the Eurozone?

  2. “Just like the sub prime issue was here.”…

    That is exactly the problem THERE they bought all the sub prime AAA and AA CDO tranches etc. I think THOSE are the dollar denominated assets they were funding with dollars.

  3. 1. depends on policy follow up. at first the US may be worse off, until we pull the plug, then they get hurt a lot more

    2. could very well be

  4. With this event, can we safely say the ECB and the EURO are not going to collapse? Germany is probably not going back to the DM.

  5. They will be ok for as long as the Fed keep this window open, but there is the risk the quantities continue to grow maybe geometrically and the Fed pulls the plug.

    this could happen quickly

  6. ” the risk the quantities continue to grow maybe geometrically and the Fed pulls the plug. this could happen quickly”

    You are so out of the loop Warren, shocking. Bhagwati knew krugman, that guy that just got a nobel prize. Bhagwati is my friend at the CFR, and he assures me that the FED is committed to one world government and money, the concept of the independent nation state that can restrict trade flows because of silly peasants with nationalist pride is going to die like the dodo bird. Bhagwati says by 2100 all will be well, the world will be united and the brotherhood of man will not be restrained by silly concepts like national pride and free trade will dominate. All suffering will be gone and plenty of shopping malls for everyone.

  7. Bank of Japan Offers Unlimited Dollars to Banks (Update1)
    http://www.bloomberg.com/apps/news?pid=20601087&sid=adK4MaqnHpnU&refer=home

    “The Bank of Japan’s supply of dollars comes from a swap agreement with the U.S. Federal Reserve. Last month the two central banks agreed to swap as much as $120 billion for yen. The increase to unlimited dollar supply came a day after the Fed removed caps on swap lines with the European Central Bank, Bank of England and Swiss National Bank. The Fed confirmed in a statement the same move for Japan today. ”

    This is madness…Japan offers unlimited do;ars AFTER the fed offers it to them?

  8. Warren/Anyone,

    When does the Fed start lending under these new terms? Anyone know when we will receive the news about how the first offering went?

    Thanks. -Tom

  9. 8. yes, the boj is doing same as the uk, switz, and the ecb…I know that , the only way they can go “unlimited” is if we give them the unlimited!

    So why is that a headline?

  10. Greetings from Paris. I had some moldy cheese go bad down in the cellar and couldn’t get the dumb american tourists to buy that stuff. Thankfully this nice american banker has offered to take it off my hands. I always knew that statue of liberty donation would pay off someday….

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