Feb 11, 2009

world economy almost collapsed in a matter of hours

Just in from CLG: 'It would have been the end of our economic system and our political system as we know it.' --Rep. Kanjorski: $550 billion disappeared in 'electronic run on the banks'

09 Feb 2009 The Capital Markets Subcommittee Chair, Rep. Paul Kanjorski (D-PA), tells C-Span how the world economy almost collapsed in a matter of hours. In the C-Span video, Kanjorski reports on a "tremendous draw-down of money market accounts in the United States, to the tune of $550 billion dollars." According to Kanjorski, this electronic transfer occurred over the period of an hour or two. "The Treasury opened its window to help. They pumped a hundred and five billion dollars into the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts, and announce a guarantee of $250,000 per account so there wouldn't be further panic out there. And that's what actually happened. If they had not done that, their estimation was that by two o'clock that afternoon, five-and-a-half trillion dollars would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed... It would have been the end of our economic system and our political system as we know it."

European bank bail-out could push EU into crisis

By Bruno Waterfield in Brussels, UK Telegraph 11 Feb 2009 (hat tip to Jesse's Café Américain)

A bail-out of the toxic assets held by European banks' could plunge the European Union into crisis, according to a confidential Brussels document.

“Estimates of total expected asset write-downs suggest that the budgetary costs – actual and contingent - of asset relief could be very large both in absolute terms and relative to GDP in member states,” the EC document, seen by The Daily Telegraph, cautioned.

"It is essential that government support through asset relief should not be on a scale that raises concern about over-indebtedness or financing problems.”

The secret 17-page paper was discussed by finance ministers, including the Chancellor Alistair Darling on Tuesday.

National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors - particularly those who lend money to European governments - have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.

The Commission figure is significant because of the role EU officials will play in devising rules to evaluate “toxic” bank assets later this month. New moves to bail out banks will be discussed at an emergency EU summit at the end of February. The EU is deeply worried at widening spreads on bonds sold by different European countries.

In line with the risk, and the weak performance of some EU economies compared to others, investors are demanding increasingly higher interest to lend to countries such as Italy instead of Germany. Ministers and officials fear that the process could lead to vicious spiral that threatens to tear both the euro and the EU apart.

“Such considerations are particularly important in the current context of widening budget deficits, rising public debt levels and challenges in sovereign bond issuance,” the EC paper warned. Source

Guns, Drugs, and Booze as the only things people are buying (besides food)

From econompicdata: "I'm going to pretend that machinery = guns so that we can get the trifecta of Guns, Drugs, and Booze as the only things people are buying (besides food). I'm not sure if I'm scared or excited by this...

Just pay off everyone's damn mortgage!

Latest commentaries from some of my favorite economic pundits:
From themessthatgreenspanmade: "Just pay off everone's damn mortgage!
With this headline that just flashed across my screen -- $3 trillion! — Senate, Fed, Treasury attack crisis
-- it's become clear that, if the U.S. government really wants to solve the current economic crisis, they ought to just do what John S. suggested a while ago in the comments section of yesterday's post titled "Ten trillion dollars dollars to save the world":
Wouldn't it be cheaper to just simply pay off every mortgage in America? Then all those mortgage backed funky financial instruments would become sound. And relieving everyone of their mortgage payments means we can restart the the consumption bubble.
Not a bad idea - removing the uncertainty about souring Alt-A loans and the next wave of foreclosures would stop home prices..." Read all here

From nakedcapitalism: "I cannot recall a major US policy initiative being met with as much immediate revulsion as the so-called Geithner plan....
Aside from the impressive thumb's down from the stock market, the comments from economists and financial commentators are withering. From the Financial Times' Martin Wolf:
Has Barack Obama’s presidency already failed?
From bank expert Chris Whalen of Institutional Risk Analytics (via e-mail):
Real disaster. I am very concerned that the Obama Admin is going pear shaped before the snow even melts.
Kevin Logan, senior US economist at Kleinwort Benson:
They have a plan for a plan but they don't really have a plan. The whole proposal is so vague as to create new uncertainty, and maybe the problem is really so bad that they haven't worked out how to solve it..."
...Jim Hamilton likes to stay measured, so on his disapproval scale, this is pretty serious:
We obviously don't have clear details of the plan, only the concept, but it sounds to me like the wrong concept
Tony Crescenzi, an analyst at Miller Tabak:
It remains extremely uncertain how the Treasury will entice investors to do something they have been avoiding since the start of the crisis.
Paul Brodsky of QB Asset Management (via e-mail):
Is anyone else as stunned as I am?
The New York Times summed it up:
But the initial assessment of the plan from the markets, lawmakers and economists was brutally negative, in large part because they expected more details.
Paul Krugman hopes this Potemkin plan is actually a Trojan horse. If so, a lot of dollars are being deployed to mask the real aim, If Geithner weren't so attached to the world view of the industry, I could see this as an effort to show, "Gee, we really did try a whole bunch of stuff, which by the way you bankster types said you liked, they didn't work, so now we have no recourse but to take you over."

As I too often say, it would be better if I were wrong, but this sure isn't looking good." Read all here