On Wed, 15 Oct 2008 14:20:07 -0500, Ignoramus17346
wrote:
On 2008-10-15, F George McDuffee wrote:
OT: this thread seems a good place to insert this piece of
information.
Hi George... Have you given this a thought: just what is the limit of
the ability of the Federal government to support failing banks and
firms?
Let's say, for example, that house prices fall by 15 more percent.
That would, surely, put a lot more mortgages underwater and further
reduce the banks' capitals. Would the Federal government still be able to
prop up the banks?
Or, let's say that foreign investors decide not to buy as many
Treasuries as they used to. (or would insist on loans to be
denominated in non-US currency) That would raise borrowing costs for
everyone, including the Federal government, and add roughly 100
billion per year of debt servicing costs for the US government debt,
for every percentage point of interest rates.
I have a feeling, which I cannot yet quantify, that the staggering
amounts of money being used to plug up the dikes, may not be too far
from the maximum that the government could spend/print without the
currency free fall.
So, making a hypothetical logical leap, let's assume for a minute that
the losses exceed what the Federal government can finance. Then what?
We have a government that just spent trillions, cannot any more effect
any positive changes, and the crisis would continue but with the
government's hands already tied.
i
=========
When you are a sovereign country, you never go broke. Just like
the bank in a game of Monopoly you can always print more money.
Thus the government bonds and other obligations [denominated in
the domestic currency] can and will be paid to the last cent. No
one will lose a penny.
[Technically you don't need to waste the paper and ink. Through
a process of "monetizing the debt," the FRB can create and inject
as much "liquidity" as required/desired in the form of 1s and 0s
in their computer systems. The scam is that the FRB buys
treasury securities using FRB "notes", and through the magic of
fractional banking then issues up to 10X of the notational value
of the treasury securities in new Federal Reserve notes. Every
cycle through the magic money machine generates 9X "new money.,"
with 1X used to buy another batch of T-bills.]
Now whether this "money" is worth anything is a separate
question.
The Case-Shiller residential housing index followed a very
smooth and predictable path indicating the "natural" or normal
growth in the "value" of housing. When the housing bubble was
inflating, the actual housing prices grew far faster and far
above the Case-Shiller projections, although there were some
*SLIGHT* offsetting factors such as an increase in floor areas
and furnishing [i.e. granite counter tops], although IMNSHO most
of this was an increase in cost *NOT* value.
http://en.wikipedia.org/wiki/Case-Shiller_index
http://www2.standardandpoors.com/por...0,0,0,0,0.html
Because the housing bubble was not uniform across the country,
the house costs v the Case-Shiller index projection are different
in different areas, but in many of the bubble areas such as
Miami, Las Vegas, and most areas of California, the "ask" prices
are still 30 to 50% above the C-S "norms," and when the house
prices are pro rata adjusted to the CS, 50% or more of the "new"
mortgages are upside down [the mortgage is more, sometimes much
more, than the projected value of the house.] FWIW -- this
indicates that the "mark to market" accounting valuation of the
"toxic" CDOs and other derivatives is largely correct, i.e. they
are worth nil, nada, zip, zilch, zero.
As John C. observed, if you are running a consumer
society/economy, it is poor public policy to bankrupt the
consumer. Leaving all ethics aside, if you are a parasite, and
kill your host, you die too.
I posted this earlier in another thread, from information
available in many of the most important MSAs [metropolitan
statistical areas] a family would have to be in the top 20% [8th
and 9th] income deciles to afford even the median price home
under the max home price = 2_1/2 X annual family income rule.
With the proliferation of other debt such as credit card, auto
loan, and student loan, the 2_1/2 X is most likely still too high
and 2 X would be more reasonable. [Note this is family/household
and not individual income.] In 2006 and early 2007 in the Los
Angeles MSA, the median [1/2 above, 1/2 below] home sold for 10X
the median family [1/2 above, 1/2 below] income.
[in the following be sure to note if average or median]
http://www.creditcards.com/
http://www.marke****ch.com/news/story/new-credit-card-behavior-study/story.aspx?guid={2EAF46D7-53E7-460E-AE05-02AF4D22D3A9}&dist=hppr
http://www.creditslips.org/creditsli...m-weston-.html
======
snip
Instead of the $9,300 figure, Pulliam Weston cites statistics
from the Federal Reserve's 2004 Survey of Consumer Finance that,
for persons who carried a credit card balance, the median amount
owed was $2,200. Half would owe more than the median, and half
would owe less than the median--that is what a median is. Her
point is that U.S. households are not as desperately in credit
card debt across the board as the CreditCards.com statistics
would have you believe, but she also emphasizes that a sizeable
number of U.S. households are in dire financial straits. My
problem is that I can get the numbers from the Fed's Survey of
Consumer Finance to jibe with other consumer credit figures it
releases.
snip
-----------------
To cut to the chase, your question seems to be can the US and
other governments get this credit contraction under control?
Yes, they can.
The next question is will they do so? IMNOSHO not the way they
are going about it. Grandma knew "sending good money after bad"
is never the way to correct a problem.
For example, it is apparent that "derivatives" of various kinds
are the cause of much of the problems. It has been over a year
since the regulatory agencies and politicians start to whine,
moan, and complain about this, with absolutely no action.
Grossly excessive CEO and other officer/director
pay/benefits/perks have been contentious for years with no
action. Grossly excessive leverage and other financial
"engineering" is a clear contributing factor but the solution is
to repeal Sarbanes-Oxley and eliminate mark-to-market.
Traditional mortgage underwriting standards such as the 2_1/2 X
annual household income *MAXIMUM* house price limit have been
systematically evaded.
Just as you must generally wait until an addict or alcoholic
"hits bottom" before you can have a successful intervention, [and
even then a major of interventions are not successful, the addict
still dies after one last "fix," and the drunk dies after one
last drink] the politicians and financiers are not yet hurting
enough (if at all) for any meaningful and sustainable change to
occur. Just why would they not repeat their actions as soon as
they get the chance. For example
--------
Oct. 15 (Bloomberg) -- Goldman Sachs Group Inc.'s Lloyd
Blankfein, whose $70.3 million paycheck made him Wall Street's
most highly compensated chief executive officer last year, could
still earn tens of millions annually under the bank-rescue plan
run by his former boss, Treasury Secretary Henry Paulson.
snip
-------
for complete article click on
http://www.bloomberg.com/apps/news?p...KUs&refer=home
FWIW the DJIA is now down 733, back to 8578 [15 Oct 08] showing
the very transitory effects of operationally infinite [the market
can't take it any faster] "money" injections.
Unka' George [George McDuffee]
-------------------------------------------
He that will not apply new remedies,
must expect new evils:
for Time is the greatest innovator: and
if Time, of course, alter things to the worse,
and wisdom and counsel shall not alter them to the better,
what shall be the end?
Francis Bacon (1561-1626), English philosopher, essayist, statesman.
Essays, "Of Innovations" (1597-1625).