Category Archive: Finance & Markets
Before we debate the merits (more accurately, the lack thereof) of the latest trial balloon of a plan being floated to rescue overextended mortgage borrowers, we need to consider a few not sufficiently discussed facts:
1. The problem is that banks are not making loan modifications as they did in the past. That is turn is due to securitization In the old days, including in the nasty (in the Southwest and Texas) housing bear market of the early 1990s, it was standard practice for banks to modify mortgages. That was not charity on the part of the bank but a cold-blooded economic calculation, that in the majority of cases, it would take a lower loss by changing mortgage terms than by foreclosing.
Last week saw an important milestone in the credit default swaps sector, when counterparties to CDS trades on Lehman Brothers cash-settled their transactions.
Based on a protocol and auction process developed by ISDA, protection sellers paid 91 cents on the dollar to protection buyers. An estimated $6bn to $8bn was paid out. Over the past 25 years, the privately negotiated derivatives industry has developed a robust framework – one that governs and guides participants through such an event, and which includes procedures and processes for valuing and unwinding trades. Recent defaults show the value of these efforts – the industry’s infrastructure clearly works.
What evil lurks around the next corner? What horror story scares you the most? Halloween has come to Wall Street and instead of handing out treats, this street has only tricks. CDO’s dressed up as top grade investments. Financial institutions dressed up like unsinkable Titanics. Rigged Casinos dressed up like free markets. >From Darth Paulson “forcing” the Death Stock bailout package, to the Headless Horseman Bernake throwing flaming rate cuts, fear has gripped the world this October. Our politicians, and their bipartisan views, are like Lenny and George, (lacking any real direction) and the US economy and the dollar are like cute little squeezable bunnies. Our media looks like the little man from the monopoly game, and has been renamed Rupert Murdoch.
…and the only economist to get it right is named Dr Doom!
In this issue of The IRA, we turn to two veteran observers of the Fed and the US political process to get some perspective on the financial crisis and the policy makers who have arguably caused much of the present economic difficulty.
Roger M. Kubarych is Chief US Economist of UniCredit Global Research, part of UniCredit Markets and Investment Banking. He joined HVB Americas Inc., now part of UniCredit Group, in July 2001 with responsibility for advising management and clients on economic, financial market, and policy developments with significant implications for banking and investment decisions. He is also the Henry Kaufman Adjunct Senior Fellow for International Economics and Finance at the Council on Foreign Relations. He has published two books: Stress Testing the System: Simulating the Global Consequences of the Next Financial Crisis (2001) and Foreign Exchange Markets in the United States (1980).
GDP was negative in Q3 — worst quarter since Q3 2001 — and the headline number doesn’t even do the extent of the contraction justice:
“Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of 0.3 percent in the third quarter of 2008, (that is, from the second quarter to the third quarter), according to advance estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.8 percent.
There are plenty of things to worry about in the current economic situation. But deflation isn’t one of them.
Greg Mankiw had a great article last weekend in which he challenged the view that macroeconomists have learned enough to prevent a repeat of the Great Depression. Greg notes some disturbing similarities between our current difficulties and the problems of the 1930s:
The global financial situation is complex and wreathed in fog, but at least two things are clear.
- The financial crisis consists of fore-shocks before the main event.
- A new geopolitical order will mark the solution of this crisis; it lies far in the distance.
Marty Feldstein says it’s time to dampen the downward movement in housing prices to prevent overshooting the bottom, and to use government spending, including spending on infrastructure, to try to avoid a deepening recession:
Is the United States in recession? If one looked solely at the adverse shocks that have hit the economy over the last year, one would infer an unusually high probability of a recession. If one consulted some of the most import economic measures over the last year, one would say we clearly entered a recession last January. If one gauged the popular mood, one would hear, “Of course we are in recession !”
Before our political leaders get too fancy remaking capitalism next month at the Bretton Woods II summit in Washington, they should attend to urgent business. Since the closure of Lehman Brothers triggered a global banking panic, political leaders in the US and Europe have successfully thrown a cordon round their banks to prevent financial meltdown. What they have not done yet is to co-ordinate macroeconomic policies to stop a steep global downturn. This is the urgent agenda.