by Alex Evans | Jul 23, 2008 | Global system
Lots of discussion in the US about whether FDIC – the Federal Deposit Insurance Corporation, which makes sure depositors get their cash back if banks go bust – can handle the banking bust that appears to be in the post. Nouriel Roubini points out that the collapse of IndyMac earlier this month used up fully 15 per cent of FDIC’s reserves.
As a result of that, FDIC will need to raise additional capital by hiking the premiums that banks have to pay, so financial services sector analysts are fretting about the additional costs this will imply for banks. What bothers me, though, is the fact that FDIC has five years in which to replenish its reserves. As an unnamed source put it to the FT:
The FDIC says it feels confident with $53bn … That’s incredible. The last crisis, in the ’90s, there were 550 institutions that failed. So far, there have been five. It can be a long season.
by Jules Evans | Mar 18, 2008 | Global system, Influence and networks
Back in September 2002, I wrote a cover story for Euromoney called ‘The End of Unfettered Capitalism’. I interviewed various wise sages of finance (Joseph Stiglitz, George Soros, er…Ann Pettifor) who opined to me of the end of neo-liberalism and the need for a new economic model.
Back then, in the aftermath of Enron and the bursting of the internet bubble, the financial press was full of soul-searching and chest-beating articles, usually by John Plender, wondering where free market capitalism had gone wrong and where it was heading.
My article was the culmination of two years of quiet guerilla warfare against free market finance, which I had waged since becoming a financial journalist after university. I secretly hated the free market, which I blamed for frustrating my desire to be a Sixties-style creative hippy. So I spent most of my time writing articles trying to find chinks in the armour of international finance, as an exercise in self-liberation…
It was quite fun to do this, while working at Euromoney – perhaps the arch-organ of international capital. And it was pretty easy to do, in 2000-2002, while financial markets were imploding.
But then, you know what happened? Firstly, I started to find proper outlets for my frustrated hippy creativity, so I became less of an emotional malcontent (one wonders how much radical criticism emerges as much from the emotional maladjustment of the critic as from the political maladjustment of their society); and secondly, I started to realize that actually private financial markets worked quite well, and the people who criticized them – people like Ann Pettifor, for example, or John Pilger, or Noreena Hertz – were by no means experts about the financial systems they criticized. (more…)
by Jules Evans | Mar 11, 2008 | Global system
Dark times in western markets. The financial press at the moment reads like a particularly gloomy prophesy from the Middle Ages. This from Euroweek:
Undreamt of volatility in dollar swap spreads…Debt professionals watched in disbelief as dollar swap spreads shot out to their widest level in years. ‘Now the world is definitely coming to an end, right? It’s been nuts, just nuts’, said a stunned swaps dealer on Thursday in New York.
The surge in levels was so savage that some onlookers suggested it presaged the failure of a major US financial institution…Citigroup has taken a terrible beating through subprime, and its failure, or that of a big bank like it, is whispered as a possibility in the corridors of Wall Street.
The market was also upset by the news from Ambac, the troubled monoline bond insurer. It’s not getting a bailout from the banks after all, but intends to raise $1.5 bn of new capital in the stock market. If Ambac is downgraded, over $1 trillion of securities it has insured face a rating downgrade as well, which could spark a vast bond firesale and consequent losses for banks holding that paper.
Mortgage bonds are screwed too, as are hedge funds who own lots of mortgage bonds, including the Carlyle Group’s hedge fund, Carlyle Capital, which owned several billion dollars’ worth of mortgage bonds, and which now appears to be heading for default. And who is the biggest investor in Carlyle Capital? Citigroup.
Meanwhile, in other markets, things are looking fantastic. The IPO of China Railways managed to attract $68 billion in Chinese retail orders. $68 billion! The Middle East is also completely flush with cash. Russia is embarking on a $1 trillion infrastructure renovation programme.
And these investors are now buying up Wall Street bit by bit – Credit Suisse has sold a big stake in itself to Qatar’s sovereign wealth fund, while Citigroup is being propped up by other big Middle East investors at the moment.
This may not be enough to save it though. Even they think it might go down without US government support. This from Dow Jones last week:
Mideast sovereign wealth funds may fail to save troubled U.S. banking giant Citigroup unless more cash is pumped into the lender, the head of a $13 billion Dubai-owned investment firm said Tuesday.
Sameer Al Ansari, Chief Executive of Dubai International Capital told delegates at a private equity conference that it will take more than the combined efforts of the Abu Dhabi Investment Authority, the Kuwait Investment Authority and Saudi investor Prince Alwaleed bin Talal to save the bank.
“It’s going to take more than that to rescue Citi,” Ansari said. He added that more write downs are expected and that Gulf investors would be required to bolster Citi.
We’re seeing a major shift in the balance of power. Just 15 years ago, western financial institutions like the IMF, the US Treasury and Citigroup called the shots in emerging markets, and emerging market countries had to go to them on their best behaviour, like Oliver Twist saying ‘please sir, could I have some more!’.
Now, as one banker from the beleagured UBS told me today, ‘these developing countries don’t need us anymore’. No, I replied. They don’t need you…they own you.
by Alex Evans | Jan 2, 2008 | Global system
So says Ambrose Evans-Pritchard in the Telegraph, so it must be true. He writes: “As the credit paralysis stretches through its fifth month, a chorus of economists has begun to warn that the world’s central banks are fighting the wrong war, and perhaps risk a policy error of epochal proportions.” And what might that policy error be?
Buckets of liquidity are being splashed over the North Atlantic banking system, so far with meagre or fleeting effects … “Liquidity doesn’t do anything in this situation,” says Anna Schwartz, the doyenne of US monetarism and life-time student (with Milton Friedman) of the Great Depression.
Peter Spencer of York University continues:
“The central banks are rapidly losing control. By not cutting interest rates nearly far enough or fast enough, they are allowing the money markets to dictate policy. We are long past worrying about moral hazard … [The global financial authoritie] still have another couple of months before this starts imploding. Things are very unstable and can move incredibly fast. I don’t think the central banks are going to make a major policy error, but if they do, this could make 1929 look like a walk in the park”.
I’m not sure that the ‘chorus of economists’ saying that it’s an insolvency crisis rather than just a liquidity crunch is really so new – Nouriel Roubini was saying so back in mid-August, as we observed at the time – but let’s let that pass. Here are three interesting, if controversial, thoughts that emerge from E-P’s piece:
1. Remember what happened to Japan in the 1990s:
In theory, Japan had ample ammo to fight a bust. Interest rates were 6 per cent in February 1990. In reality, the country was engulfed by the tsunami of debt deflation quicker than the bank dared to cut rates. In the end, rates fell to zero. Still it was not enough. When a credit system implodes, it can feed on itself with lightning speed. Current rates in America (4.25 per cent), Britain (5.5 per cent), and the eurozone (4 per cent) have scope to fall a long way, but this may prove less of a panacea than often assumed. The risk is a Japanese denouement across the Anglo-Saxon world and half Europe.
2. E-P’s outlook for Britain:
The risk for Britain – as property buckles – is a twin banking and fiscal squeeze. The UK budget deficit is already 3 per cent of GDP at the peak of the economic cycle, shockingly out of line with its peers. America looks frugal by comparison. Maastricht rules may force the Government to raise taxes or slash spending into a recession. This way lies crucifixion. The UK current account deficit was 5.7 per cent of GDP in the second quarter, the highest in half a century. Gordon Brown has disarmed us on every front.
3. Something you may not have considered vis-a-vis the European Central Bank:
The ECB’s little secret is that it must never allow a Northern Rock failure in the eurozone because this would expose the reality that there is no EU treasury and no EU lender of last resort behind the system. Would German taxpayers foot the bill for a Spanish bail-out in the way that Kentish men and maids must foot the bill for Newcastle’s Rock? Nobody knows. This is where eurozone solidarity stretches to snapping point. It is why the ECB has showered the system with liquidity from day one of this crisis.
In other news, Nouriel Roubini finds that in 2007, cash (in short term Treasuries or money market funds) outperformed the stock market.
by Alex Evans | Dec 5, 2007 | Climate and resource scarcity, Cooperation and coherence, Global system
Amid the torrent of news about (a) ongoing turmoil in financial markets and (b) rocketing prices in the real economy for energy and food, it’s fascinating to watch two worlds – the financial economy and the real economy – colliding. All of a sudden, various of globalisation’s chickens are coming home to roost – energy security, food security, hedge funds and financial innovation, to name just a few. And the worrying thing is that as policymakers play catch-up with these esoteric, highly specialised issues, it’s becoming increasingly clear that no-one has a clear strategic overview of what’s happening.
Start , for instance, with a quick snapshot of the financial markets situation from NY Times columnist Paul Krugman:
How bad is it? Well, I’ve never seen financial insiders this spooked — not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world. This time, market players seem truly horrified — because they’ve suddenly realized that they don’t understand the complex financial system they created.
Chip Mason, founder of Legg Mason (one of the world’s largest money managers, with $1 trillion of assets under management) says that credit markets are the worst he’s seen in 47 years in the business: “It is a very unusual situation. I have not seen anything like this, where nothing is traded.” Nor is the UK proving immune to the crunch. As Nouriel Roubini notes, two days ago the one month Libor inter-bank interest rate spiked 60 basis points from its Friday levels – to its highest level in nine years.
Already, a kind of inquest on financial innovation is opening up in some quarters. Krugman quotes Bill Gross – the managing director of Pimco, a leading bond manager – thus: “What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August.” (See also Gross’s more detailed – and very downbeat – assessment on Pimco’s own website.) Krugman’s own view: “The bottom line is that policy makers left the financial industry free to innovate — and what it did was to innovate itself, and the rest of us, into a big, nasty mess.”
But there’s disagreement over how much the current turmoil matters for the real economy. Not much, says former Bank of England Monetary Policy Committee member Willem Buiter: “The good news in all this is that much of the financial sector has become quite detached from the real economy. The implosion of much of this formerly privately profitable but never socially productive financial intermediation will have little if any adverse macroeconomic effect.” A lot, says Nouriel Roubini: “it does not make sense to avoid bailing out the real economy – and preventing a massive global loss of incomes and jobs – just in order to punish reckless lenders and investors in the financial market and thus avoid moral hazard.”
There’s disagreement too over what needs to happen on interest rates. Roubini thinks it’s urgent, but Wolfgang Munchau begs to differ: “The inflation outlook would justify a neutral policy stance at best. A bias towards low interest rates got us into this mess. Low interest rates will not get us out of it. Central banks should keep their cool.”
The question of inflation brings us neatly over to the real economy, and to prices for energy, crops and other commodities (another issue that we’ve been following here in recent months). If the financial turmoil does present a serious downside risk for growth, at the same time as energy and food prices – for which demand is relatively inelastic – proceed inexorably upwards, does that herald a return to 1970s-style stagflation?
Krishna Guha did a handy analysis piece on that question in the FT on Monday, and concluded that there was indeed at least “a whiff” of the s-word in the air, but that over a 1-2 year time horizon, “the world may see low growth or high inflation – but probably not sustained stagflation in any large economy”.
(I’m not so sure. The more I look at energy and food trends, the more it looks like we may have seen a structural shift towards long term higher prices for both. True, a slowdown in emerging economies would let off some steam. But it would take a very hard landing in China and India to eradicate the massive growth in their demand for energy and agricultural products of recent years. And it will still take a very large amount of investment – in energy infrastructure, in agricultural acreage expansion- to keep up with even lower end demand projections for these commodities.)
But here’s the thing. I know more or less enough about energy and agriculture to form my own views about what’s happening on that front. But I’m completely reliant on interpreters (like the ones I’ve quoted above) to explain the credit crunch to me. And I have no real way of evaluating which of them is right and which of them is wrong.
As the various worlds of the economy continue to collide, an integrated perspective of all of these issues is becoming increasingly urgent. And here’s what should really worry all of us: who the hell does understand both worlds? Almost certainly not any one policymaker, central banker or committee. Yet these are the people we trust to make crucial decisions on this tangled web. Increasingly, we’re going to come to see this perfect storm above all as a crisis in our ability to take and implement effective decisions. More on that in a future post…
