Crisis of the Old Order: Wall Street melts as sabres rattle …
Destructive, unpatriotic trends that have obsessed me here across the past two years seem to have accelerated during my Summer Vacation.
The sabre rattling re Iran is at its height: Iran testing missiles in the night, and threatening to strike Tel Aviv if attacked. Rice seems the last muppet in the administration with any ability (not to say credibility) to speak on the world stage, and responded to Tehran Thursday employing the administration’s distinctive English:
“‘We will defend our interests and defend our allies. We take very, very strongly our obligations to defend our allies and no one should be confused of that,’ she said.”
Meanwhile the financial system continues to melt.
– After the market close on Friday (yesterday), the FDIC announced it was taking over IndyMac Bancorp., which had suffered a run of over a billion the past week as accountholders lost confidence that the doors would stay open. The second biggest bank failure in US history.
Citibank, Bank of America, Wachovia, Washington Mutual — all are in equally bad shape. IndyMac’s quietus came about only because it’s just not quite big enough not to fail.
– Fannie Mae and Freddie Mac — the massive core of housing finance in the US ($5 trillion in mortgages held, securitized or guaranteed) — are going under this week. Their stocks have fallen beneath $10 and will soon be measured in pennies.
Once Fannie and Freddie’s just about Dead, then some sort of governmental “recapitalization” — by taxpayers and/or asian investors (in US treasuries) — will reconstitute them. They will likely no longer be quasi-public “government-sponsored entitites” but rather more like an old public utility (the purpose of which is to package and resell residential mortgages). Not for profit. Not for sale.
– Meanwhile Lehman Brothers continued its plunge (down about 20% Wednesday, another 14% Thursday), weighted with mortgage bonds, spiralling it seems for the same drain that consumed Bear Stearns.
– And oil on Friday hit an all time high in dollars at over $147.
The Fed across the past few weeks had signaled it’s thru cutting interest rates due to fears of energy inflation. So that bullet’s been shot.
Also approaching its limits: The Fed’s capacity to continue trading cash/Treasury bonds for market-valueless structured finance bonds (backed by mortgages, auto loans, credit cards, student loans, mall leases, David Bowie royalties, etc).
Before Election Day will all the bullets have been spent?
One of the NY Times financial columnists, Gretchen Morgenstern, concludes her latest roundup (Silence of the Lenders) with:
“A week ago, Bridgewater Associates, a research firm, estimated that losses from the credit crisis we’re now mired in might amount to $1.6 trillion when all is said and done. We’ll have to wait years to see if this is accurate. But whatever the number is, it will also represent, in stunning red ink, the cost to society of financiers who are shortsighted and greedy and regulators who don’t regulate.”
For a broader vision of the near and mid-term future, read Arthur Schlesinger’s The Crisis of the Old Order. About the politico-financial collapse of the early 30s.
Particularly piquant is the account of hearings in the Senate in the fall of ’32, as FDR was running against Hoover, where Wall Street titan after titan, and Federal Reserve governor after Federal Reserve governor, all cleared their throats and told the Senators, We have nothing more to suggest. We are out of ideas. We’ve tried everything and nothing works. Our policies have failed. Our ideas are wrong.
The Fed of the early 30s, too, tried to ease the credit crunch, in a manner quite like today’s — lending Treasuries against market/confidence-challenged collateral. But then as now there was no reason in the world for a bank (healthy or no) to refuse in a confidence-poor environment a Fed offer to exchange Treasuries for wounded bonds. The banks of the early 30s took all there was to take, until the Fed had no more to give. Circa 1932.
When today’s Fed began, last fall, the Switcheroo, it said it was willing to swap 25% of its balance sheet (that 25% being roughly 200 billion). It has since exceeded that limit, while widening time after time the list of wounded bond types its willing to take on. Someday sooner than later the well is going to go dry.
The coming fall, then, is shaping up as a horrendous wild replay of 1932. As Obama challenges the Old Order.
Anonymous says:
Glad you mentioned Schlesinger’s book as the historical parallels between this era’s destructive Reaganomics and the depredations of the Gilded Age feudals are striking. But I wonder if this era’s oligarchs are as wont to concede the bankruptcy (pun intended) of their ideas.
July 11th, 2008 at 6:23 pm
ed says:
I’ve added to the post above a link to a review of the Schlesinger book by Henry Steele Commager.
Commager notes something that bears on Obama’s disturbing (for some of his fans) Move to the Middle since his conquest of Hillary:
“It is Raymond Moley who tells us how shocked he was when, during the 1932 campaign, Governor Roosevelt presented him with two opposing versions of a tariff speech and said insouciantly, “Weave them together.”
July 13th, 2008 at 12:28 am
ed says:
Sunday afternoon. Treasury and White House announce plan to in some sense Bail Out Fannie and Freddie.
Fed also will open Discount Window to them — apparently will be exchanging Fannie and Freddie bonds for Treasuries. (??) That well is going to go dry folks. Probably around Election Day. Ala 1932.
We shall see what we shall see. May help put a bottom in the wishy washy (as opposed to catastrophically overbuilt) real estate markets?
July 13th, 2008 at 6:52 pm
ed says:
I forgot to mention that Budweiser (Annhaeser-Busch) is being bought by a Belgian beverage combine. Something symbolic in sync with the sinking banks.
July 14th, 2008 at 8:02 am
ed says:
Re the Fed lending/exchanging Treasuries for wounded structured finance bonds, James Grant, long time editor of the Interest Rate Observer, reports in a recent guest appearance at Wall Street Journal:
QUOTE To facilitate the rescue of that system, the Fed has sacrificed the quality of its own balance sheet. In June 2007, Treasury securities constituted 92% of the Fed’s earning assets. Nowadays, they amount to just 54%. UNQUOTE
When the “rescue” began last fall, the Fed said it was willing to swap 25% of its assets. But if Grant’s numbers are right (they usually are), the Fed has now exceeded that original limit by close to double.
The 1932 parallel, then, holds. There is no reason for a bank NOT to suck as much out of the Fed as it can, regardless of that bank’s particular health.
By autumn 1932 the Fed had been bled dry; look for something similar soon.
Then: runs on regional and small banks like those that sank IndyMac last week, and firesale buyouts/mergers at the Too Big to Fail level.
THEN AGAIN, if the Gov’t's takeover of Fannie and Freddie indeed goes ahead, it might put ground beneath the wounded s-f bond markets, restoring confidence and market values.
That is: the Treasury buyout of FNM and FRE it seems should spell relief for the Fed “rescue” program.
This connection — that a reason to “save” Freddie and Fannie is to save the Fed from the fate it suffered in 1932, I’ve seen nowhere in the press, but must certainly be in the minds of all the players public and private.
BYW: I don’t agree with much of what Grant has to say. That is: I don’t think the current crisis is simply a case of Wall Street greed gone mad. His WSJ piece may be found at:
http://tinyurl.com/646ges
July 23rd, 2008 at 9:59 am