Friday, January 9, 2009

Do we need Tarp II and Tarp III?

Anecdotal evidence from American Apparel to natural gas pipeline operator El Paso Corp. suggest that banks are reluctant to lend. There are still plenty of problematic assets on banks' balance sheets.Big banks may face another wave of losses from credit cards, commercial real estate and traditional home mortgages. Credit losses will top $2 trillion, up from around $1 trillion today, according to Nouriel Roubini of New York University's Stern School of Business. Some are already calling for Tarp II and even Tarp III.

From BusinessWeek:
American Apparel (APP) executives should have been focused on the sales of their leggings and T-shirts this holiday season. Instead, management spent most of the critical shopping period worrying about $125 million of debt due on Dec. 19. After weeks of intense meetings with major banks, the trendy retailer landed a last-minute extension on a loan. The onerous strings: a $2.3 million fee and limits on capital spending. "The credit markets are still frozen," says Chief Financial Officer Adrian Kowalewski. "Even companies that are performing well can't get loans at reasonable terms."

....Despite all the government's best efforts in recent months, big banks still aren't lending money freely. One sign of the crunch: New loans to large companies slumped 37% in the three months ending Nov. 30 from the preceding three months. "Banks are being extremely cautious," says Edward Wedbush, chairman of the Los Angeles brokerage Wedbush Morgan Securities.

source: Why Banks Still Won't Lend
BusinessWeek, January 7, 2009

Monday, December 29, 2008

The Worst Predictions About 2008

From Jim Cramer's "No! No! No! Bear Stearns is not in trouble", said on CNBC on March 11, 2008, to "I think you'll see (oil prices at) $150 a barrel by the end of the year" by T. Boone Pickens on June 20, 2008.

1. "A very powerful and durable rally is in the works. But it may need another couple of days to lift off. Hold the fort and keep the faith!" -- Richard Band, editor, Profitable Investing Letter, Mar. 27, 2008

At the time of the prediction, the Dow Jones industrial average was at 12,300. By late December it was at 8,500.

2. AIG "could have huge gains in the second quarter." -- Bijan Moazami, analyst, Friedman, Billings, Ramsey, May 9, 2008

AIG wound up losing $5 billion in that quarter and $25 billion in the next. It was taken over in September by the U.S. government, which will spend or lend $150 billion to keep it afloat.
continue reading

source: The Worst Predictions About 2008
BusinessWeek, Monday December 29, 10:46 am ET
By Peter Coy

Monday, December 22, 2008

Anglo-American bankers want more power

First we screw up and as a reward we want more power! - That is the ridiculous plea of leading central bankers in London and Washington. In some parts of the world CEOs of corporations that went bankrupt were asked to commit suicide, but that is not part of the thinking amongst the anglo-american elite. They just want more power.

BoE Deputy Governor Gieve:

"This is a major storm we have not seen the like of for a hundred years. It would be very surprising if we were not learning some lessons from it."

Please do, but first it would be nice to see your resignations.

click for video

Thursday, December 18, 2008

Martin Feldstein - a very long and very damaging downturn

A depressing outlook on the economy with Martin Feldstein, former Council of Economic Advisors chairman/National Bureau of Economic Research president emeritus. Double digit unemployment rate possible!
click for video

source: Digging Out of the Recession

CNBC video
with Martin Feldstein

Tuesday, December 9, 2008

The party is over for the next 20 years says BCG

Boston Consulting Group, one of the leading global management consulting firms, warns corporate banks of the "new normal" in the form of slower economic growth, higher loan losses and scarce liquidity.

“The speed with the adjustment that’s happening now is quite surprising,” said Juergen Schwarz, a senior partner at the Boston Consulting Group who wrote the report, said in an interview. “We will revert back to the ‘new normal’ over the next two years and it will stay there for at least the next 10 to 15 to 20 years.”

source: Corporate Banks Face ‘New Normal’ After Slowdown, Report Says
Bloomberg, 12/9/08

Thursday, December 4, 2008

Roubini on the economic outlook

The man who saw it all coming, Nouriel Roubini, economics professor at NYU Stern School and chairman of RGE Monitor, warns of a severe recession with a global deflationary risk.
click for video

2009 Recession Will Be Severe: 'There Is a Global Deflationary Risk,' Roubini Says
Posted Dec 04, 2008 12:18pm EST by Aaron Task in Newsmakers^dji,^gspc,TLT,UDN,UUP,GLD,SPY

ECB lowers rates by 75 basis points to 2.5 percent in December 2008

From the introductory statement:
Looking further ahead, on the basis of our current analysis and assessment, we see global economic weakness and very sluggish domestic demand persisting in the next few quarters. ...Eurosystem staff project annual real GDP growth of between 0.8% and 1.2% for 2008, between -1.0% and 0.0% for 2009, and between 0.5% and 1.5% for 2010. These figures represent substantial downward revisions relative to the previous ECB staff projections for 2008 and 2009 published in September.

Consistent with this assessment, the December 2008 Eurosystem staff projections foresee annual HICP inflation of between 3.2% and 3.4% for 2008 and declining to between 1.1% and 1.7% for 2009. For 2010, HICP inflation is projected to lie between 1.5% and 2.1%. The HICP inflation projections for 2008 and 2009 have been revised downwards substantially in relation to the September 2008 ECB staff projections, reflecting mainly the large declines in commodity prices and the impact of weakening demand on price developments.
Looking through the shorter-term volatility in headline HICP inflation rates, risks to price stability at the policy-relevant horizon are more balanced than in the past.

On monetary analysis:
It should be recognized that the intensification of the financial market turmoil since mid-September marks a potential watershed in the evolution of monetary developments. The most recent money and credit data indicate that this intensification has had a significant impact on the behavior of market participants. Thus far, such developments have largely taken the form of substitution among components of the broad aggregate M3, rather than sharp changes in the evolution of M3 itself.

The latest available data, namely up to the end of October, reveal a continued moderation of the growth rate of loans to the non-financial private sector. At the same time, for the euro area as a whole, there were no significant indications of a drying up in the availability of loans. The annual growth rate of loans to households also moderated further, in line with the weakening of economic and housing market prospects and tighter financing conditions. The data do signal an impact of the intensification of the financial turmoil on bank behavior. Looking forward, more data and further analysis are necessary to form a robust judgment.

A few thoughts from JCT's press conference:
"situation in money markets is tense"
"it is a global phenomenon"

"bank lending surveys clear indicate hardening (conditions)"
"published figures show loans to non financials 11.9 pc increase in Oct08 vs 12.1 in Sep08. Growth remains very impressive. But acceleration of previously committed credit lines and (other factors) are important."

Trichet makes the distinction between deflation and disinflation:
"Today we are not in a deflationary period."

click for video

source: Introductory statement

Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
Brussels, 4 December 2008

Wednesday, December 3, 2008

Krugman on wages and employment in the 1930s

Nobel laureate Paul Krugman has some interesting thoughts on the effect of wage increases during a period of very low interest rates. At the margin low interest rates can lead to liquidity trap conditions, as experienced for example in the US in the 1930s and Japan in the 1990s. During those times nominal wage increases were generally believed to decrease output and employment (Y). Economists determine an aggregate supply curve (S) that depends on the ratio of the aggregate price level (P) to the wage rate (W):

Y = S(P/W)

Macroeconomic equilibrium is determined by the intersection of the aggregate supply (AS) curve with the aggregate demand (AD) curve, representing the demand side of the economy. By increasing nominal wages the AS curve is shifted upwards, which leads to a higher price level and lower output (see left panel on the chart below).

Krugman challenges this assumption:
"Well, in normal times the AD curve slopes down, we think, because other things equal a higher price level increases the demand for money, which drives up interest rates, which reduces desired spending. (In
terms of IS-LM analysis, higher P leads to lower M/P which shifts LM left.) But in liquidity trap conditions, the interest rate isn’t affected at the margin by either the supply or the demand for money – it’s hard up against the zero bound."

click for chart

to Krugman during liquidity trap conditions there is no adverse effect of a wage increase on output.

Paul Krugman 12/2/08