The short-term funding markets remained on strike today despite the massive liquidity injections and rate cuts from the world’s leading central banks. Three-month dollar Libor rose another 7 basis points to 4.82%, the TED spread pushed out to new record levels, and the LIBOR/OIS spread jumped to a new high of 366 basis points.
For an example of what this means in practice, consider this:
The credit crisis is spilling over into the grain industry as international buyers find themselves unable to come up with payment, forcing sellers to shoulder often substantial losses.
Before cargoes can be loaded at port, buyers typically must produce proof they are good for the money. But more deals are falling through as sellers decide they don’t trust the financial institution named in the buyer’s letter of credit, analysts said.
“There’s all kinds of stuff stacked up on docks right now that can’t be shipped because people can’t get letters of credit,” said Bill Gary, president of Commodity Information Systems in Oklahoma City. “The problem is not demand, and it’s not supply because we have plenty of supply. It’s finding anyone who can come up with the credit to buy.”
So far the problem is mostly being felt in U. S. and South American ports, but observers say it is only a matter of time before it hits Canada.
I assume that some enterprising financial concern will step into the void. The opportunity is clearly there.
Don
Or else, since much of the items can be produced locally, we will find ourselves buying home grown produce that no longer needs to compete with the low prices of countries who refuse to let their currencies rise against the dollar.
Here in the Midwest, we will not starve if China fails to send us contaminated but cheaper food. We will learn to not use their cheap electronics until our own industries are built back. We will find alternatives to oil. (It’s already happening). My brother has solar panels heating his entire home, my home is heated with a pellet stove, and cooled with a whole house fan. When electric cars are available, I will have a solar array placed on my roof to power them.
Tell me again why it was so great to have foreign goods bought on credit, and shipped on foreign ships with US flags? I would much rather support local industry that does not need high shipping costs and can obtain credit based on their local character and presence.
DonGander, you are dreaming! You must have sipped a gallon of the ‘free markets = all is well” Kool-Aid! We are in this mess exactly because a number of ‘enterprising financial concerns’ (Lehmann Bros., CountryWide, etc.) found ‘creative’ new ‘products’ called credit-default-swaps and other equally noxious items which they gleefully sold among each other, reaping outrageous fees with every trade…while their GOP neocon buddies and clients were in charge, proclaiming that ‘regulation is BAD’, and passing gilt-edged tax breaks for the top 5% (the ONLY fraction of income to rise the past 10 years). Well, too many people bought it, voted in Cheny/GWB & Co, and now we working and middle-class folks will pay for it FOREVER, as will our children and grandchildren. THANKS, GOP!!! THANS, NEOCONS!!! THANKS, YOU MINDLESS FOOLS WHO BELIEVED RUSH LIMBAUGH & CO AND VOTED THESE JERKS INTO OFFICE!!!
Well, LC, you managed to rehearse just about every left-wing shibboleth in the belch of kultursmog. BTW, who was running Countrywide for all those years? Didn’t I read about certain Senators who are in charge of overseeing companies like CW getting sweetheart deals from it?
3. Little Cabbage:
Where did the “‘creative’ new ‘products’ called credit-default-swaps and other equally noxious items” origionate, or perhpas more accurately, through whom did all those things go to be santized for market consumption? These noxious things were developed to protect the financial institutions from the bad loans encouraged/demanded by government and sanitized for the market by Freddie & Fannie. The polititians that foisted the laws that accomplished this were of Democratic Party origination.
I’m quite glad that you have a well exercised opinion – it will be of use to the truth should you ever adopt it.
Don
Actually, I believe credit default swaps were a creation of a British fellow. Nice, regulated Britain.
6. Jeffersonian:
I don’t even to know the originators of the idea. I did not mean to infer such. I do know that they were no major part of the market until more recent times.
They became useful to the market when a vast supply of bad loans needed to be marketable. Does anyone remember their use in the 1930s?
Don
Oh, and while we’re dealing with our falling stock market and credit crunch, those wonderfully regulated markets (and top-shelf gun control!) in Cuba are [url=http://www.breitbart.com/article.php?id=D93NQBO00&show_article=1]out of food[/url]. Viva el socialismo!!
I honestly don’t understand why Cuba is not more self sufficient in food. Why doesn’t everybody grow stuff in their back yards? Or have hens? Then you can trade with your neighbors. Does the government steal home grown produce?
The idea that these were created by Fannie and Freddie isn’t quite accurate, Jefferson.
As far as blaming Cuba for not being able to grow its own food, perhaps if we decided to trade with them, we might exemplify that we believe the things we say about the free market. Perhaps if we had honestly believed in the free market rather than make Cuba a political football by those who need Florida’s votes, it might actually be a free country.
The embargo hasn’t done a good job of making Cuba capitalist. You’d think that after 40 years of trying, we might do something different. Like try capitalism.
It does seem to me, jefferson, that your world view means that there are only two systems: capitalism and socialism. One is good, the other bad. Sweden might as well be Stalinist. The French, just a bunch of commies. I mean, if that’s how you think, then, good for you.
Most economists recognize that there are different ways governments engage corporations. They can regulate monopolies (or not regulate them: see the energy scandals in California about a decade ago). they back the money capital needs to trade. They monitor the greedy so small businesses can compete.
I’m all for what Paul Heyne calls a “commercial society.” The real policy issues about how that sort of society can be maintained include the government enforcing rules everyone understands. Unless we have rid the world of sin, envy, and greed, people break the rules when they can. And as we’ve seen, the same ones who benefit most from the deregulation of the markets, are loving the government bailing them out, going on our dime. In the end, free marketeers are just as dependent upon the government as others. But the rest of us don’t have as many lobbyists.
I say, if we’re going to give the banks money, we should have a stake in them, as investors.
RE: “THANKS, GOP!!! THANS, NEOCONS!!! THANKS, YOU MINDLESS FOOLS WHO BELIEVED RUSH LIMBAUGH & CO AND VOTED THESE JERKS INTO OFFICE!!!”
You are mistaken — I am not Republican. However — I’m a conservative, and I adore Rush.
Thank you for the compliments! ; > )
Keep it up and I’ll think all liberal Democrats are buffoons spewing incoherent idiocy.
RE: “I assume that some enterprising financial concern will step into the void.”
I agree, Don Gander . . . unless, of course, liberals in power [in both parties] manage to insert themselves into the mess and foreclose any market solutions. Looks as if they’re going to do that, and the market will look elsewhere.
And then several months later, since the latest attempt by the government hasn’t worked, they’ll need to do more. And more. And more. Each time making it worse, rather than better.
RE: “Perhaps if we had honestly believed in the free market rather than make Cuba a political football by those who need Florida’s votes, it might actually be a free country.”
Lol.
Yeh . . . if only we hadn’t boycotted Cuba, it could be a free country — just like China is.
[blockquote]The idea that these were created by Fannie and Freddie isn’t quite accurate, Jefferson. [/blockquote]
I agree there were additional factors, but without the concentrated efforts of Fannie and Freddie, there wouldn’t have been a housing bubble to pop. And the popped housing bubble is what is driving this.
[blockquote]As far as blaming Cuba for not being able to grow its own food, perhaps if we decided to trade with them, we might exemplify that we believe the things we say about the free market. Perhaps if we had honestly believed in the free market rather than make Cuba a political football by those who need Florida’s votes, it might actually be a free country.
The embargo hasn’t done a good job of making Cuba capitalist. You’d think that after 40 years of trying, we might do something different. Like try capitalism. [/blockquote]
Oh, I quite agree. Not that I think it would make the slightest difference in the on-going catastrophe that is the Cuban economy – after all, Cuba is perfectly able to buy food, etc. from the other 200-odd nations of the world – but it would remove that arrow from the Castro junta’s quiver of excuses as to why their nation is a perennial basket case. On the downside, what would TEC’s PB have to talk about in her visits to Gulla-Gulla-Gulag if we did lift the embargo?
[blockquote]I say, if we’re going to give the banks money, we should have a stake in them, as investors. [/blockquote]
All the more reason to let this thing sort itself out with the market.
Ok, please, can any further comments on this thread be about the credit freeze and its crippling impact on the global economy. This is not a thread about the current administration, Neocons, Democrats, etc. Please stay on track–thanks.
Well it definately is crippling the economy. My sister’s hospital are having trouble meeting payroll as they are used to obtaining a 2 million dollar six month loan every January which they pay off when insurance and Medicare finally pay. (Money tends to run out in January as all insurance companies pay off their bills to beat the end of the year. It trickles in around March. This year will be different. My guess is that my sister will be laid off in two months (but will probably be able to work locums for a few months or if necessary years. Thank God, the kids are old enough to come into the hospital with me when I am on call or be left alone for a few hours at night.
I imagine that my salary will drop in half as my own hospital deals with the credit shortage. Last week the nurses were in tears because their work load had essentially increased by a third with mostly part timers. My former hospital has laid off over 140 nurses, technicians, food service workers and the like. They are trying to get their docs to take personal loans to pay salaries until “things work out” but actually since most docs have huge medical school bills and bought big houses this is unlikely to fly.
But we figure we are lucky. Our house is paid off and we have no debt. We have a backyard garden and 3 hen chicks. We have fruit and nut trees, and my kids college funds are in CDs. We’ll be fine, but we may be doing locums around the US for a while and seeing very little of each other. Other folks around here are seriously hurting. A number of small businesses have put up “going out of business signs” and others seem to be “for sale”.
We live in interesting times.
I wonder how much of this is due to mark-to-market write-downs banks are having to take. Anyone?
“I wonder how much of this is due to mark-to-market write-downs banks are having to take. Anyone?”
Jeffersonian [#16]: Mark-to-market writedowns change a bank’s financial statements, not its financial health.
Insofar as accounting masks real declines in asset values, it may actually deepen banks’ current reluctance to trust each other.
The basic problem is the difficulty of evaluating a bank’s loan portfolio (and other relatively illiquid assets) from the outside. If the bank overvalues its assets, then it may be insolvent despite having a robust-looking balance sheet. If it is insolvent, then you risk losing money you lend to it.
The Japanese banking debacle of the 1990s illustrates the perils of needlessly opaque accounting. Others had bought and banks had financed property at preposterous prices (e.g., as though the grounds of the Imperial Palace in Tokyo were worth more than the entire state of California). When the property bubble burst, the borrowers continued to value the property—and the banks continued to value the loans—at historical cost. This was supposed to maintain public confidence in the system. But people knew better, so unreal accounting actually promoted distrust of the system. Japanese consumers hunkered down for what became the “Lost Decade.”
_ _ _ _ _ _ _ _ _ _ _ _
BTW, the difficulty of evaluating bank loans also poses what economists call a “lemon problem.” The bank knows its loans better than you do. Thus you as a prospective buyer must worry that the bank is ditching the loan because it’s a lemon even though the loan’s full lemonhood has not yet become apparent. Under current circumstances, this distrust makes it difficult for banks to turn assets into cash without inordinately discounting the price.
Jeffersonian in #16, Paul Kedrosky has a good discussion of the mark to market issue here:
http://paul.kedrosky.com/archives/2008/10/01/marktomarket_my.html
Thank you, Dr. Harmon, it’s as I feared (though he mischaracterizes it as “negative feedback” when positive is actually what’s going on):
[blockquote]Further, we have a negative feedback loop making things worse. Marking newly illiquid assets to a non-existent market makes companies less viable, which causes default swaps to go swooping higher, and that in turn can lead to downgrades by rating agencies. Following the bouncing ball, that can lead to companies failing, which causes less liquidity and lower prices, and so on and so on. You get the picture. It’s dumb and artificial.[/blockquote]
#15 thanks, that is the kind of anecdotal information I find helpful. I was chatting on the Internet to a friend today and a friend of my friend’s phoned him to say that his wife called him just then to say that the four people in front of her at the gas station were all turned down because they would not accept their credit cards, only cash.
[blockquote]Jeffersonian [#16]: Mark-to-market writedowns change a bank’s financial statements, not its financial health. [/blockquote]
That’s a distinction without a difference. If no MBSs are trading, performing or otherwise, then the value of them approaches zero and banks with portfolios of 100% performing loans are forced to value them at similarly rock-bottom levels. This causes their capitalization to plummet (despite being as healthy as ever), so they begin hording capital and we have what we see now: a credit crunch. I was chatting with my uncle, a Merrill-Lynch broker for years, and he said this must be done on a quarterly basis…I assume that’s the case. If so, it’s no wonder the market took a dive at the beginning of the month – all these banks suddenly going into the negative worth range would spook anyone.
I understand the impulse behind mark-to-market, but its real-time, undamped application is making a bad situation far worse.
#12 – the free market has changed China’s economy for the better, Sarah. It’s had a pretty enormous impact. That you mention it, it is kind of ironic we’ve decided to trade with the Chinese and not Cuba. But since they are some of the heaviest investors in the US economy, perhaps it makes sense. Perhaps you can educate me on how the Embargo has successfully changed Cuba into a democracy. Then perhaps you can answer why we now trade with Libya and other great democracies.
Jefferson, its interesting how you underestimate the power of the free market when it comes to Cuba. It would have pretty much removed the primary justification Castro had for being in power: that we were in a de facto ward with them. Politics trumped the market, Jefferson.
Jeffersonian [#21]: Let’s review our interchange.
You asked in #16, “how much of this is due to mark-to-market write-downs banks are having to take. Anyone?â€
#17 offered a careful explanation of why distrust—not accounting—is the driving force in the current crisis.
You responded in #21 with a cavalier dismissal, evidently without reading more than the first sentence of #17.
I should have know better than to think reason could dent your preconceptions. What’s the point of asking a question if you listen only to what fits your preconceived conclusion? Now that’s a feedback loop.
I think I made it clear, Iranaeus, that there has to be a way to objectively evaluate value of a bank’s assets. I suspect that is somewhere between Japan’s historical fiction as well as our current mark-to-market fiction. In Japan’s case, everyone knew it was a lie that properties maintained stratospheric values and acted accordingly. In our case, everyone knows it’s a lie that properties are worthless, but banks are forced to horde capital anyway to cover themselves because of regulations.
The collapse of apparent capitalization makes other banks reluctant to loan, leading to our current predicament. The distrust does not spring out of the ground.
RE: “the free market has changed China’s economy for the better, Sarah. It’s had a pretty enormous impact. . . . . ”
Agreed. I was not addressing whether China had been impacted by capitalism.
I’ll say it again: “if only we hadn’t boycotted Cuba, it could be a free country—just like China is.”