BUSINESS WEEK - OCT. 22 , 2007
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an article headed THE ECONOMIC SAFETY VALVE claims that crises in the financial markets are a necessity to prevent lenders and borrowers from becoming too careless . there must be some residual fear in the market or investors will assume they can never lose any money in the market and would become even more reckless .
it's perhaps like speeding on the highway . if we all knew there would be absolutely no enforcement of traffic rules and speed , we'd likely all eventually drive like maniacs . watching a nasty accident and perhaps seeing someone else being fined (never me , of course
:wink: ) ,
reminds us to exercise some caution .
(btw ontario has started to apply a "street-racing law" against anyone exceeding the speed limit by 50 km/h (about 35 miles/h) . in addition to a stiff fine , the car is IMMEDIATELY impounded and the driver has to find some way of getting home - police have left drivers stranded ! lots of crying by grown men
being reported by the police . )
hbg
Quote:The Economy's Safety Valve
Periodic crises like the subprime mess may be necessary to keep global markets from melting down
Does a healthy global economy need periodic financial crises?
This may be a touchy question to ask, with Wall Street firms grimly toting up the cost of their bad subprime bets and the U.S. housing market nowhere near bottom. Still, we've seen five major financial disruptions over the past 20 years, starting with the October, 1987, stock market crash. Each event, when it happened, seemed potentially destructive. The 1990-92 credit crunch, for example, was called at the time the biggest banking crisis since the 1930s. And the 2000-02 tech bust was by some measures the worst bear market since the Great Depression.
Yet the damage in each case, while deep, was relatively limited in scope. Central banks and regulators responded vigorously, the financial markets did not collapse, and the world economy kept expanding.
Since 1987, global growth has averaged a 3.7% annual gain, with no down years. Over the same stretch, the U.S. has experienced two relatively mild and short recessions.
The latest financial crisis--and what likely will be the biggest nationwide home-price decline since the Great Depression--could cut U.S. growth to 2% or less, with some chance of a mild downturn. But the stock market hit new highs on Oct. 9, employment is still rising, and the subprime mess seems more like a bump than a disaster for the rest of the world. "If nothing worse happens, it shouldn't really have any substantial impact on world GDP," says Farid Abolfathi, an international economist at Global Insight Inc.
In fact, these financial disruptions, rather than being signs of instability, may serve as critical safety valves for the global economy. At least so far, the periodic bouts of volatility have scared investors and borrowers out of excess exuberance without causing any lasting major damage to growth. The implication: If the global markets are functioning well, we should expect a financial crisis every few years. Indeed, the bigger danger may be that the gap between crises gets too wide, so the excesses have a chance to build up.
Consider this: Global growth today is being driven, in part, by the free flow of capital. It's increasingly easy for people and companies around the world to raise money through any of a number of credit channels. The exact form is not important--the funds could come via private equity, or junk bonds, or subprime mortgages, or venture capital, or bank loans, or direct investments by corporations in emerging markets, or exotic derivatives.
Access to relatively cheap credit fuels spending and growth across the board--but it also opens up the possibility of dangerous lending and borrowing sprees. Central banks do what they can to keep a lid on excess. But in today's complex and globally integrated financial markets, it's almost impossible for regulators to plug every hole.
Instead, fear is what keeps borrowing from racing out of control. Lenders and borrowers have to be worried enough about losing their shirts that they exercise some caution.
In that way, a financial crisis every five or so years becomes part of the self-equilibrating mechanism of the global economy. One credit channel gets wiped out for a time and scares the heck out of market participants. But the rest of the financial system keeps functioning, especially if central banks react quickly enough and pump money into the markets. For example, when banks stopped lending to businesses from 1990 through 1993, the bond market took up the slack, providing corporations with plenty of funds. Today, banks are returning the favor, boosting commercial and industrial loans by $84 billion in August and September, the biggest two-month increase on record, as commercial paper markets froze.
This is not to minimize the real damage to individuals, many of them low-income, who are directly hit by a major financial disruption. Today, for example, many subprime borrowers could either lose their homes or find themselves stuck with staggering mortgage payments. Looking a decade back, the 1997-98 emerging market crisis sent countries such as South Korea and Russia into deep recessions. Unemployment in Korea, for example, skyrocketed from 2.1% in 1997 to a painful 8% by the end of 1998. Nevertheless, both of these countries have subsequently prospered, and now have a bigger share of the global economy than they did before the crisis.
There's also no guarantee that the next crisis won't spread and turn into the Big One, which undermines the whole financial system. That's the great fear of central bankers and economists. "The different components of the financial system are quite tightly linked to each other," says Barry Eichengreen, an international finance expert at University of California at Berkeley. "You don't really have a spare tire."
Raghuram G. Rajan, who served as chief economist of the International Monetary Fund from 2003 to 2006, worries that financial disruptions by themselves don't create enough deterrence for imprudent behavior. Because central banks are worried about recessions and spreading damage to the financial system, they step in before borrowers and lenders have been hit hard enough. "I think there's a limit of tolerance of collateral damage," says Rajan, who is now at the University of Chicago Graduate School of Business. As a result, "the market cannot punish enough."
Instead, Rajan argues that another round of regulation and self-regulation may be needed to restrain the excesses. "Finance goes through phases where innovation may exceed prudence for a little while," he says. "We figure out the kinds of places where things broke down, fix that, and move forward."
But to get rid of the financial crises completely would require far more regulation than is desirable or even possible. The occasional financial disruption, even a major one, is a good trade-off for open and easy access to credit and rapid global growth .
SOURCE :
THE SAFETY VALVE
The financial markets has everything to do with the world economy. IMHO, it doesn't look too good right now, and I fear we are all headed for a recession.
The U.S. economy is no day at the beach
With the stock market tumbling and gas prices rising, it seems a perfect time to take a vacation
Wednesday, August 01, 2007
Let us say simply that unless you are so rich that you don't have to pay attention to the economy or you were at the beach or somewhere else blissfully unplugged from the media last week, you probably found what was going on with the stock market, allegedly based on what is going on with the housing market, alarming.
There are about seven points at which ordinary Americans relate to the U.S. economy. One is the stock market, a second is the value of one's housing, a third is the price of gas, a fourth is inflation and overall prices, a fifth is the job market, a sixth is wages and salaries and a seventh -- if one has the means and inclination to travel outside the United States -- is the rate of the U.S. dollar against the Canadian dollar, British pound or Mongolian togrog.
Many, many Americans are involved in the stock market. You might think you aren't if you don't own stock, but your pension plan does. If you are one of the 63 percent of employed Americans who participate in a 401k plan, you also are probably a stock owner.
If you do follow the stock market, even if only as an non-owning observer, it was as bad last week as following the Pittsburgh Pirates or the Tour de France. The Dow Jones average had peaked the week before at above 14,000. By Friday it had dropped to 13,265.47 (which still represented a gain for the year of 8.11 percent). Investors needed strong nerves last week.
President Bush told Americans on Friday that they shouldn't worry. The economy grew by a healthy 3.4 percent in the second quarter, as opposed to a scrawny 0.6 percent in the first. Steady as she goes. China's economy grew 11.9 percent in the second quarter.
As economists probed the stock market jukes and jives they attributed the precipitous fall at the end of the week to another distinctly discomforting trend -- trouble in America's housing market and the resulting impact on credit availability. New and existing housing sales and the median price of houses fell in June. In other words, your house is probably worth less than it was earlier this year if you try to sell it. Suppose that you have an adjustable rate mortgage. Don't imagine the mortgage payment will drop. Or suppose that you had taken out a loan on your accumulated equity in the house, whose value has now fallen, and spent it. The payment on that loan won't drop either.
Now, shift to the perspective of banks or other lenders. Do you want to lend money -- perhaps to a less-than-fiscally-inspiring buyer -- with the value of houses falling? Or do you want to do something safer with your money? But if you don't continue to feed the housing-industry beast, that will cause unemployment, lower production of steel, nails and concrete, and in general push the U.S. economy under water.
Then let's try consumption. The normal reaction of normal people when they have less money is to spend less. That also causes the economy to contract. In the second quarter of 2007, consumer spending rose 2.4 percent less than it did the quarter before. All of this, with respect to the American economy, is made worse by the fact that the U.S. market is full of products made outside the United States, most often in China, which reduces U.S. production and employment and increases the foreign trade deficit, which the United States finances by borrowing, which pushes up interest rates.
In the meantime, gas prices stay high. It's gone down a few cents a gallon from its peak, but Americans have become more or less accustomed to higher prices for gas, catching themselves feeling pathetically grateful when they see a sign that offers it at less than $3.00 a gallon. This smacked us in the face last week as we learned that Shell's profits for the quarter were up 18 percent and Chevron's 24 percent. We are told that the high price of gas is due to refinery costs, but analysis of, say, Exxon Mobil's large quarterly profits indicated that the portion derived from refining was up 37 percent.
We are told that inflation is under control, up only 1.4 percent in the second quarter. We are told this is due to the fact that the Federal Reserve has not lowered interest rates. Of course, another result of the Fed's not lowering interest rates is restraint on the economy through tighter money for companies thinking of mergers and acquisitions and investing in expanding production, thus creating jobs, thus powering up the economy. And if there is so little inflation, how come gas, food and just about everything else continue to cost more, as our wages and salaries do not rise? This gets explained to us as a matter of "individual" cases. For instance, anything with corn in it will cost more because so many roasting ears will be converted into ethanol.
We won't talk about the cost of medical care to keep our blood pressures from going up, thus requiring more doctors' visits and medications, and we know what that costs. To measure that, look at the current negotiations between the United Auto Workers and the Big Three auto makers. Because of skyrocketing medical costs they are now negotiating who gets to go under the axe -- the old, retired auto workers or the whole industry?
The job creation rate remains anemic. The unemployment rate remains at 4.5 percent, not bad except that no one believes it since it doesn't count drop-outs from the economy, perpetual students and other under-the-radar citizens and noncitizens.
As for the conversion rate of the dollar, the greenback continues to drop against the euro, the yen and the pound. The good part allegedly is that it makes our exports more competitive overseas. The weak dollar also should attract more tourists looking for a bargain in the United States, although the Transportation Security Agency, the U.S. Immigration Service and American air carriers continue to do all they can to make us an undesirable destination except for masochists.
Don't let China's plus 10 percent growth rate make you envious. They are suffering from increasing polution, and even some cities are beginning to see housing problems; increasing prices and no buyers. They're over-building as if there is no tomorrow, and they are beginning to feel the impact of urban sprawl. Even our program director who lives in Beijing told me she and her husband use only bottled water. If you see the major growth around the area of the olympic stadium, called the bird's nest, it's even more frightening to see the added polution and drain on their water resources.
I don't envy China one bit!
While in Xian, we saw a long line of trucks waiting for fuel, because the station ration ran out! They're continuing to add more vehicles all over China, and the polution is palitable; when one blows their nose in the big cities, it comes out black!
The rich is getting richer, and the poor is getting much poorer. The inflation rate in China is 4.5 percent, and most are barely eeking out a living.
No envy; I feel sorry for most Chinese.
hamburger wrote:BUSINESS WEEK - OCT. 22 , 2007
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an article headed THE ECONOMIC SAFETY VALVE claims that crises in the financial markets are a necessity to prevent lenders and borrowers from becoming too careless . there must be some residual fear in the market or investors will assume they can never lose any money in the market and would become even more reckless .
it's perhaps like speeding on the highway . if we all knew there would be absolutely no enforcement of traffic rules and speed , we'd likely all eventually drive like maniacs . watching a nasty accident and perhaps seeing someone else being fined (never me , of course
:wink: ) ,
reminds us to exercise some caution .
This analogy works both ways -- one way of avoiding financial crisis might be some regulations constraining reckless lending. Notice that the current meltdown isn't coming from Europe, where banking regulations make it harder for banks to lend to borrowers who can't afford to pay them back. Don't let the globaloney in the article fool you: This is a US-made crisis, affecting foreign banks only insofar as they are exposed to the US mortage meltdown.
"This" US-made crisis afffects all econonies more than just the financial institutions.
Will there be "bread lines" in the near future?
thomas wrote :
Quote:Don't let the globaloney in the article fool you: This is a US-made crisis, affecting foreign banks only insofar as they are exposed to the US mortage meltdown.
seems there were plenty of european (german) banks that happily
joined up to "get a piece of the action" (the subprime mortgage market) .
i've noted with some interest that most of the banks that only recently happily aquired this type of business are now claiming "we had no idea that these were risky investments"
.
they were happy to make a pact with the devil while praying that they might go to heaven - no such luck !
reminds me of THE TEMPTATIONS singing WHAT A DIFFERENCE A DAY MAKES - except they'd have to sing it backwards
hbg
just picked up this example from google news , and i understand they are not they only bank being sqeezed a bit .
Quote:IKB vor Zusammenbruch Bank ohne Boden
Frankfurter Allgemeine Zeitung - vor 26 Minuten gefunden
Von Holger Appel 27. November 2007 Sechs Milliarden Euro! Der einstmals grundsolide Mittelstandsfinanzierer IKB droht unter der Last seiner Fehlspekulationen zusammenzubrechen. Zum Glück, mag mancher sagen, hat die IKB einen Aktionär, der den größten ...
never fear , ABU DHABI INVESTMENT AUTHORITY is ready to help CITIGROUP in its troubles .
a/t MSNBC other arab lenders are looking for bargains in the united states . apparently they are particularly interested in investing in financial institutions , home builders - particularly if they can get 51 % :wink: - , hotels and casinos .
well , they have to do something with the oilmoney they have accumulated ; no sense letting it sit under the mattress - or is that carpet :wink: ?
seems that president bush knew why it was a good idea to walk hand-in-hand with the saudi king .
hbg
full article :
Quote:Citigroup sells stake to Abu Dhabi fund
Deal valued at $7.5 billion gives bank capital infusion
The Associated Press
updated 10:57 a.m. ET, Tues., Nov. 27, 2007
NEW YORK - The Abu Dhabi Investment Authority will invest $7.5 billion in Citigroup, offering the nation's largest bank needed capital to offset big losses from mortgages and other investments.
The cash from the sovereign investment fund of the Gulf Arab state, which has benefited from this year's surge in oil prices, will be convertible into no more than 4.9 percent of Citigroup Inc.'s equity. Citigroup characterized the investment as passive and said the fund will not be able to name any board members to the bank.
The Investment Authority's purchase, announced late Monday, would make it one of Citi's largest shareholders.
"We see in Citi a highly respected company with a premier brand and with tremendous opportunities for growth," said the Investment Authority's managing director, Sheikh Ahmed Bin Zayed Al Nahayan. "This investment reflects our confidence in Citi's potential to build shareholder value."
The investment, which was expected to close within the next several days, will be considered Tier 1 capital for regulatory purposes, helping Citi reach its goal of returning to its target capital ratios in the first half of 2008, the bank said.
Citigroup's shares have lost about 45 percent of their value since the beginning of this year, wiping away $124 billion in market capitalization, as the drumbeat of bad news about its investment losses has mounted.
CITI BANK RESCUE
just some thoughts here;
how much $ are tied up in real estate loans in the US? certainly in the >20 Trillion $
how much of those are sub-prime? 600 Billion?
how many of those are at risk of default? 5%?
In the scheme of things, what's it all about Alfie?
from MSNBC :
Quote:Tues., Sept. 18, 2007
LOS ANGELES - The number of foreclosure filings reported in the U.S. last month more than doubled versus August 2006 and jumped 36 percent from July, a trend that signals many homeowners are increasingly unable to make timely payments on their mortgages or sell their homes amid a national housing slump.
A total of 243,947 foreclosure filings were reported in August, up 115 percent from 113,300 in the same month a year ago, Irvine, Calif.-based RealtyTrac Inc. said Tuesday.
seems that there were more than 1 MILLION home forclosures in the 12 months ending in august .
a/t to some investor types appearing on MSNBC , the worst is yet to come - apparently when one-year renewable mortgage come up foe renewal in 2008 ; of course , there will also some bargains to be had .
seems that the arab investors know when it's time for bargain hunting .
better buy some appropriate clothes to receive them when they appear with satchels of money
.
hbg
full report :
HOME FORECLOSURES
dys, I read or heard someplace that the sub-prime loans are close to one trillion. My thinking on this subject is that it's more than one trillion, because this type of loans have been going on for more than five years, and the speculators use this form of "investment."
Quote:the speculators use this form of "investment."
unfortunately even some some of the so-called solid canadian banks and pension funds as well as quite a few european banks thought that there was easy money to be made ... but "they made a pact with devil and DID'T go to heaven" .
i'm just surprised that they now all claim "i didn't know they could go sour " .
even the CBRS - canadian bond rating service , known as quite stodgy , gave a seal of approval to those investments (if that's what one can call them :wink: ) .
a/t to an article that appeared in the weekend GLOBE AND MAIL there was certainly some fear in canada that the banking system might crash !
the top canadian bankers , pension fund managers , investment dealers and insurance executives met behind closed doors in montreal for several days to hammer out rescue deals for those instituions that would take the worst hit .
it seems that a crash was averted - but only narrowly . SHUDDER !
hbg
An investment group from Abu Dhabi has put $7.4 billion into the ailing Citigroup. And, according to the BBC, Citigroup, which has already taken write-downs of $7 billion on bad loans, may have another $8 billion still to be written off.
What I find interesting is how desperate Citigroup was. The Abu Dhabi group will start off owning securities YIELDING 11% A YEAR. Then, a few years from now, those securities can be converted into Citigroup shares at an exercise price of about $34.00/share. Just a year or so ago Citigroup shares traded at $57.00 or so. There is no guarantee that the price will get back up there but the 11% impressed me. If the largest bank in the U.S. has to borrow money at 11%...
(I opened an account at Citicorp once and they didn't even give me an alarm clock).
rjb, When banks has to pay 11 percent for their "loans," it's really scary! It means they're really desperate!
ABU DHABI corporations are not shy when it comes to investing in north-america .
they just now purchased Pioneer Natural Resources Co's (PXD.N: Quote, Profile, Research) Canadian unit.
they enjoy spreading their wealth around - that's what capitalism is all about . they certainly have been observant students and are demonstrating to their american and european mentors that they are ready to put into practice what they have learned .
hbg
Quote:Abu Dhabi's Taqa wraps up Pioneer Canada purchase
Tue Nov 27, 2007 2:46pm EST
(In U.S. dollars unless noted.)
CALGARY, Alberta, Nov 27 (Reuters) - Abu Dhabi National Energy Co (TAQA.AD: Quote, Profile, Research) said on Tuesday it has wrapped up its $540 million purchase of Pioneer Natural Resources Co's (PXD.N: Quote, Profile, Research) Canadian unit.
The Abu Dhabi state-controlled firm, better known as Taqa, said the acquisition of Pioneer Natural Resources Canada, announced in August, would add 10,000 barrels of oil equivalent a day of new oil and gas production, and 59 million boed of reserves.
It's the second of three Canadian acquisitions announced this year by the expansion-minded Taqa. The company, 75 percent owned by the government of Abu Dhabi, is looking to build its Taqa North unit into one of Canada's biggest oil producers as it diversifies its holdings outside the Middle East.
The deal is among a number made by the cash rich Mideast Gulf states recently. Indeed, on Monday, Abu Dhabi Investment Authority agreed to pay $7.5 billion for a stake in Citigroup (C.N: Quote, Profile, Research), the biggest U.S. bank.
Along with the Pioneer buy, Taqa expects to close the C$5 billion acquisition of PrimeWest Energy Trust (PWI_u.TO: Quote, Profile, Research) by the end of January.
Taqa's first entry into Canada came in May, when it agreed to pay $2 billion for Pogo Producing Co's (PPP.N: Quote, Profile, Research) Canadian unit.
source :
ABU DHABI PURCHASES CANADIAN OIL PRODUCER
even the romans knew that MONEY DOES NOT SMELL ! :wink:
Quote:Pecunia non olet (Latin for "money does not smell") is a Latin saying.
The Roman Emperor Vespasian reintroduced a urine tax on public toilets within Rome's now famous Cloaca Maxima (great sewer) system. When his son Titus criticized him, he supposedly pointed out that a coin did not smell ('Pecunia non olet'), even though it came from urine (e lotio est). (Suetonius, Vesp. 23)
hbg, People holding a lot'sa US dollars can get sloppy; remember what happened to Japan when they held US bonds and started buying all kinds of real estate in California and Hawaii; most were big losers for them - and later sold back to US interests at pennies on the dollar.
"The nation's foreclosure crisis is metastasizing, and communities are in harm's way as property values and tax bases decline and crime increases.
In the third quarter, there were 635,000 foreclosure filings, a 30 percent increase from the previous quarter and nearly double from a year ago, according to RealtyTrac, a national real estate information service. That works out to one for every 196 households. Michigan and Ohio, which were hit early and hard by a combination of economic weakness and reckless lending, continue to reel. Foreclosures rose last year in Colorado, Georgia and Texas and are now surging in California, Nevada, Arizona and Florida. In those states unsustainable mortgages are at the root of the problem.
The Bush administration has been far too slow to respond, with some officials apparently worried that helping today's troubled borrowers might encourage future borrowers to take on too much debt. That misses a critical point: much of this crisis can be traced to lenders' failure to vet borrowers and the government's failure to regulate the industry. And it misses an even bigger point: unless something is done quickly, whole communities, not just people who lose their homes, will suffer.
http://www.nytimes.com/2007/11/29/opinion/29thu1.html?_r=1&oref=slogin
Rama, Good info in your last post. Most Americans are still in the dark about the impact of the subprime collapse, and how the economy of the world is going to suffer. We ain't seen not'n yet!
