59

Uh Oh


 

“The result has been an explosion of the Fed’s balance sheet and of the monetary base. With assets approaching $2,263bn and capital of less than $40bn, the Fed increasingly resembles a public hedge fund, leveraged at more than 50:1.”

That’s Niall Ferguson, writing in last Friday’s FT. He ends by suggesting that the easiest solution to the crisis might be some sort of debt holiday, but the piece is interesting throughout. I also liked this line:

“Is it really plausible that the cure for excessive leverage in the private sector is excessive leverage in the public sector?”

link


 
Filed under:

Uh Oh

  1. “Is it really plausible that the cure for excessive leverage in the private sector is excessive leverage in the public sector?”

    No.

    Most of what governments are doing makes no economic sense, from the company bailouts (saving companies that consume more than they produce), to the industry bailouts (taking money from industries that are expanding to give to the shrinking industries), to the ridiculous fed rate (paying people to borrow money), to the fact that the general strategy to fix the problem of excessive credit has been to encourage more and more credit.

    It’s all madness.

    And we can thank the coalition for bringing the madness to Canada.

    I believe we will end up with some severe inflationary problems.

    • sf, it is certainly madness, but the coalition is not entirely to blame. Sure, if it took over the two-maybe-three-headed beast would likely have inflicted even greater damage to our future prosperity. But the Tories are throwing the future away betting on losers because if they didn’t the government would fall and maybe an election would be held, and don’t assume a Tory majority would follow: Canadians are not ready to live with some unemployment now when the kids can swallow the bill later.

      So WE are to blame.

      • Maybe if you were carrying the sort of debt load that many ordinary Canadians apparently are, the thought of losing your job wouldn’t thrill you either. As for the kids swollowing the bill, it’ nothing new. What was this insane housing boom about, if not the parents eating their kids future?

        • My “I have to agree comment” is a response to “madeyoulook”.

          KC: I do like your point about the housing boom, when people with no incomes buy huge houses for big money, they are clearly not thinking about their future and their kids’ future.

        • kc, I inherited a severe allergy to debt, and so I worked my a$$ off paying off the mortgage as fast as possible. No fancy trips, no dinner-and-a-movie, no extravagance, but man the mortgage-burning was fun.

          So now my taxes, and those of my then-grown kids, will join other responsible citizens’ contributions to subsidizing everyone else’s irresponsibility. Yip. Pee.

          • It’s a pity more people didn;t follow your example, we’d all be better off. i was pointng out that many people ar’nt as fortunate. It’s their responsibility, i hear you say, correct again. But at some level wev’e all contributed to the building of this monster. ‘Mindless production, for witless consumption’, F Mowat, i believe.

          • kc, you say we all have had a hand in the creation of this monster. Correct. Which makes the passing along to the next generation the bill that deliberately keeps this insanity afloat a little longer all the more unforgiveable.

      • I have to agree. I was alluding to the fact that the fiscal update suggested that the Tories were willing to risk popularity by avoiding the orgy of bailouts. Now that is no longer a possibility, the bailouts are here.

        • reply MYL
          Point taken. Somehow doubt yr take and mine on what the madness really is are the same; but then again, maybe not.

  2. Nice. It’s all the coalitions fault!

    Didn’t Harper spend about $4 billion to the auto-sector? Where is that all going?
    Didn’t Harper just “infuse liquidity” into the economy? What exactly is the nature of the mortgages that were acquired?

    Seems like Harper is just a push-over when it comes to his throne. And you blame them for this weakness?

    Coalition’s fault. Indeed.

    Austin

  3. Ummmm. I bet The Coalition is sorry they let Lehman Bros. fail now. Damn that Jack Duceppe.

  4. Sisyphus – thanks for clarifying things for sf. Everything was obviously going swimmingly in Canada until the Coalition reared its supposed ugly head! Or at least that is what the Tories would like us to believe.

    • All of you are focussing on my comment about the coalition.

      Well, it was the coalition that screamed loud and wide that we need massive government intervention. It is the coalition that threatened to bring down the government – because the government was not throwing money left and right. Bailouts galore or we bring you down!

      But frankly, please don’t twist my words, as all of you have done, to insinuate I blame the coalition for the meltdown. I blame neither Harper nor the coalition, this is obviously not a made in Canada recession, and Canada has fared remarkably well compared to many other countries.

      • The coalition did set the agenda for stimulus, and they should wear it. But that does rather overlook that rather pathetic FU Flaherty gave about a hundred yrs ago. Another thing that puzzles me is why SH has caved so spectacularly to their agenda? Is it panic, or simply a realization that, better late than never, he has to work with the house; and if so is the GG’s hand anywhere in this?

      • It could be we’re all focussing on your comment about the coalition because you brought it up apropo of nothing other than partisan wankery.

        Don’t twist your words to insinuate you blame the coalition?
        How is it twisting your words to think “And we can thank the coalition for bringing the madness to Canada.” means that Coalition should be blamed “for bringing the madness to Canada”? Goodness.. people are twisting your words around to mean exactly what you said in the first place.. how horrid.

        How about, don’t be a partisan hack when there’s absolutely no reason to.

        • The “madness” referred to what I was talking about: bailouts and government intervention. The very first sentence in my post was the quote I was responding to. So who the heck is the partisan hack here? You need to improve your reading comprehension.

      • One week, the coalition comes about because of the party subsidies… but then when its convenient, the coalition comes about because the government wasn’t spending enough on bailouts and stimulus. You con hacks need to start keeping your story straight.

        • You guys are freakish partisans. Can’t you have a normal conversation without resorting to your Cons are Evil Frankenstein routine?

          • sf: the very first comment on this article was you, saying “And we can thank the coalition for bringing the madness to Canada.”

            You are a freakish partisan. Can’t you have a normal conversation without resorting to your Coalition is Evil Frankenstein routine?

            I think that’s what’s most adorable about conservatives – their complete, utter, epic lack of self-awareness.

          • I was just about to say. Call me partisan, call me whatever you’d like, but don’t do it while standing on your pedestal, proclaiming to be an anti-biased, non-partisan commenter yourself.

      • The coalition would’ve never happened had Harper not submitted an FU instead of a Financial Update

        • I’m glad you added this nugget of wisdom to the conversation.

          • Well it goes to show that although you like to blame the bomb… I prefer to blame the person who detonated it.

  5. “Is it really plausible that the cure for excessive leverage in the private sector is excessive leverage in the public sector?”

    Investors around the world certainly think so. They are giving the US government their money for 30 years @ 2.6%…i.e. they are basically giving their money to the US government for free.

    Socialism works fine when the government can get 30-year money from investors at 2.6%. Private equity firms have made fortunes with much more expensive money.

    • Socialism never works fine at any price, and please never underestimate government’s ability to throw away money. Cheap money, expensive money, it’s still thrown away money. Makes me think of a neighbour who clearly could barely afford her mortgage, let alone the fur coat she just bought: “But it was on sale!”

      • Government, business, they’re all just collections of people. If those in one area can throw money away, those in another can just as well.

    • Yes, I found this news shocking, the low treasury rates. Are these investors expecting deflation? There is a lot of panic out there. People could be buying the cheapest stocks in 30 years, instead they are buying 30 years at 2.6%.

  6. My call:

    investors in the end are rational.

    The market has dropped to lows last seen years ago.

    Expect a fair amount of stock buying at the first sign of a bit good news, which in turn will ease fears, free up capital ect. This thing will turn good as quickly as it turned bad.

    Cheers.

    • Thanks for the Xmas cheer, kody. Remind us all again your call for the Fall ’08 federal election?

      I do not see this “turn good as quickly as it turned bad.” Why anyone would want to invest in a market drifting away from market principles and toward nationalization, in societies throwing away their future wealth for the privilege, is beyond me. Just ask anyone who had serious coin in Harare five years ago how their investments are doing.

      • MYL, people may be reluctant to invest (not quite for the reasons you specify), but the main problem right now is that, even if they did want to invest, investors can’t borrow the money to invest because the banks are wildly overstretched. The USG bailout of Wall Street is to try and get that lending going again. The choice was either to partly nationalise the banks or to just give them the money. Which do you prefer?

        The bottom line is that the bill for the delirious consumeristic fantastyland we’ve all been inhabiting these last seven years (or longer) has finally come due. As someone with a horror of debt, do you want to walk away from the bill or pay it? We in North American have already borrowed the money in the form of the insane US trade deficit propped up by consumer debt propped up by the housing bubble; we just didn’t know we were borrowing it. Defaulting on that debt would have economic consequences in the form of a depression which your grandchildren would be paying for long after this bailout money is well paid off.

        • But Jack, that’s the very problem. We ARE walking away from the bill. We’re putting OUR mortgage on the kids’ credit card!

          Personal Bankruptcy punishes the person by stripping everything away in exchange for a monitored, day-parole style do-over, and punishes the creditor (at “x” cents on the dollar) for being so foolish as to tolerate such an unsuitable debtor.

          Corporate Bankruptcy punishes the corporation, the shareholders, the bondholders and other creditors (which could include some customers), the employees, for the privilege of restructuring. Nowhere does it say your grandkids should pay to DELAY a failing company’s inevitable demise by enabling (deliberate, Al-Anon vocabulary used) the present-day irresponsible just a little more. So we dug a deeper hole: rock-bottom still awaits.

          I will say again. WE have earned this recession. If it comes to it, WE have earned this depression. Bring it on. A popping bubble should not be forced back together to just grow some more — bubbles cannot grow forever.

  7. Last time I looked, the bread lines in the streets were not long, and the dust bowl was settling, so all this talk about depression is overboard.
    However, I hope that our government can avoid the fate of 90s Japan, and run-away spending is not the way to go.

  8. I found this editorial in the DC Examiner last week to be alarming:

    “The United States of America is bankrupt. Don’t believe it? Consider this: Federal obligations now exceed the collective net worth of all Americans, according to the New York-based Peter G. Peterson Foundation. Washington politicians and bureaucrats have essentially mortgaged everything We the People own so they can keep spending our tax dollars like there’s no tomorrow.

    The foundation’s grim calculations are based on Sept. 30 consolidated federal statements, which showed that Americans’ total household net worth, diminished by falling stock prices and home equity, is $56.5 trillion. But rising costs for unfunded social programs like Medicare, Medicaid and Social Security increased to $56.4 trillion – and that was before the more recent stock market crash, $700 billion bank bailout, and monster federal deficits chalked up in October and November.” Dec 16, ’08

    • There’s a serious demographic problem coming our way, in the form of a rapidly aging population. (Proportionately speaking. I assume we’re all aging at the same rate, with the odd exception like Keith Richards). That, in combination with everything else, is going to extend this recession/depression far beyond a half-decade blip, if we’re not careful.

      For the all the unknown economic factors facing us, it’s frightening that we’re not at least accounting for the ones we can predict.

      • I have been reading a lot about the Japanese economy recently and how they have basically had a recession that has lasted 10 years and counting. Japanese government has tried many different stimulus packages to get the economy growing again and nothing seems to be working.

        I have started to wonder if the lack of growth has anything to do with Japanese demographics because they have one of the fastest aging, but least growing, populations in the first world. It makes me think about what’s going to happen to Canada if we don’t start producing more babies to take care of our rapidly again population.

        • Well, don’t look at me. I’ve tossed three kids into the mix. Hopefully others reading this will be inspired to reproduce for the sake of the country’s economic health. (Just lie back and think of Canada…) Or, we could invite in a bunch of folks from the overpopulated regions of the world (but I don’t really want to start an immigration debate today, so lets just leave it as a plea for everyone to spend their holidays making babies).

  9. Madeyoulook,

    but for the Quebec vote parking, my call was bang on. In all other areas of Canada it was a complete rout.

    You may also recall that I predicted the polls would undercount the cpc/lib spread by 5 points.

    The polls: undercounted the cpc/lib spread by 5 points.

    What I find remarkable, is the very myopia that failed to see this downturn coming,

    is now failing to see the turnaround coming as well.

    There is a world beyond the immediate 48 hour rolling period.

    Buck up kids.

    To those predicting a ’30s style depression, you may want to get your head out of your butts. The fundamentals are not even close.

    For some perspective: go to your local mall,

    Are they barron wastelands, or are they bustling mad houses?

    I read some news accounts that sales were down…..gulp…. a few percentage points from last year. Put it in context kids. We just came off an unprecendented period of sales growth. It being down a bit isn’t the end of the world, its called a normal business cycle.

    Is it a bit worse than the last? Yes. But that’s only because we haven’t had a real economic adjustment in decades.

    The fundamentals of our economy are strong.

    If you have some spare change, I’d buy some stock.

    Cheers.

  10. On cue, from the AP:

    “Many economists think this quarter could mark the low point of the recession, which is already the longest in a quarter century, having started in December 2007.

    They are forecasting smaller GDP declines in the first and second quarter of next year before the economy starts growing again next summer.”

    Growth by summer.

  11. Thanks again for the cheer-up, kody. If your crystal ball would indulge us a little further:

    Are our grandchildren paying through the nose in order to fund this recovery? Or was this recovery going to happen anyways, and we should get our bloody paws out of their unborn pockets?

    Many thanks. Oh, and can you lend me $50K? I have it on good authority that I should be buying stock. Couldn’t hurt to borrow to do that, now could it…

    • MYL, let’s keep it in perspective. Our Canadian share of bailout money is only a few billion so far — not exactly devastating to our grandchildren yet.

      If grandchildren are the real problem here, maybe you should encourage your kids to remain single? I realise it’s too late for you . . .

      • Agreed that the Canadian share of the insanity is not overwhelming — yet. It is more than a little nerve-wracking to watch your major trading partner seek to guarantee future drain-circling, however.

        The enviro-nuts have been advocating no-kids as a strategy since a while now. I guess that’s one way to have it all: put your mortgage on everybody else’s kids’ credit card. There’s proabably a moral lesson to be learned in there somewhere, but who needs moral, when it’s time to be, what’s the word, pragmatic…

  12. Our Grandkids will have far better standards of living, as we now do compared to our grandparents.

    “Poor” now, in North America, means only 40 Channels and a used car.

    “Poor” fifty years ago meant almost starving.

    Our standards are changing. There will always be those saying there are too many “poor”. But there will always be poor. In a market economy “poor” changes in scope as the pie gets bigger.

    As for your request for money to buy stock?

    Given low interest rates and a market at recent historical lows,

    buying on margin (using debt to buy) isn’t necessarily that bad of an idea, particularily if you have some equity to back up the debt.

    It’s not a crystal ball btw. It’s called the market. Take a look at the 80 year chart of the markets in North Amerca. If you zoom in on the dips, placing your eyeball only at that particular portion of the chart, it looks scary. If you take several paces back and view the whole chart, you’ll see a very consistent upward trend.

    We’re at a bit of a dip.

    Buy now.

    Cheers.

    • Maybe we could print out a few thousand of these charts and hand them out at plant gates the day the factories close, kody. I’m sure all the displaced workers in their 50’s will be comforted to know that stock prices shuold go back up again in a few years.

  13. Toby,

    It would be nice to live in a utopia, where no one feels economic pain (even untrained individuals, who for decades garnered wages well in excess of their market value due to union extractions that are contributing to this very crisis in the first place, and who for decades made salaries in excess of highly trained trades people, nurses, teachers, accountants),

    but every effort to create such a utopia has generally ended in mass starvation of some sort, and genarally lower the standard of living for all, so that all are “equal” in their destitution.

    In the meantime, certain segments will have feel some pain, go to basic cable, buy used instead of new, retrain, cash in savings, take early retirement packages.

    None, I suspect, will starve to death.

    • kody’s Christmas cheer didn’t last long. Union extractions are contributing to this crisis. Are’nt union negotiations a part of the market. it’s you who live in a utopia where only unions extract and extort beyond their value. Others take the view that unions help to set wage values for the rest of us working slobs. if we are to point the finger at overpaid unions we mighy want to remember that not all unions are formal , blue collar or unskilled.

  14. Every market has innefficiencies.

    Unions are a biggie.

    The reason the big three are going under and the Japanese aren’t is because of the powerful unions. Not just in terms of pay, but also a massive web of clauses, restrictions ect, not to mention very expensive benefits.

    (check out a picture of a big three union agreement – it can be measured in feet thick. )

    Union created innefficiencies killed the goose that laid the golden eggs.

    The market eventually rights itself.

    And it’s doing it right now.

    Someone who’s taken no risk with his own capital, has not stuck his neck out or worked his ass off trying to get that degree for the betterment of his family, and instead has relied on others’ risk, has been drawing a rediculously high salary (as a relatively unskilled uneducated worker), since he was 19 years old, had his house paid off decades ago and debt free, as a result,

    doesn’t really draw a lot of sympathy from me.

    • Kody don’t blame the guy/gal onthe assembly line for piss-poor management decisions. The line worker didn’t design cars that no-one wanted. The benefits package is probably too rich, but can you blame them when they look over and see the ceo’s gorging themselves. leadersship starts at the top. I see you are peddling that half- truth that the domestic guys are over-paid vs theif import brothers. If you stiip out the benefits the hourly wage is comparable.
      Your last pt is laughable, i ‘ve met any number of degreed folks who contrary to yr assertion, didn’t work their asses off and whose contribution to the general good is zilch. Those car companies benefited hugely from increased productivity , but guys like you don’t want it to be shared with the hired help; you’d rather it just got creamed off by all those degreed investors who do all the hard work. Stow the capilatist dogma Kody, there’s going to be more than enough pain for everyone, no need to be selective.

  15. You can believe that the union guys at the big three, cost the same as those working for the Japanese co’s.

    You would also be wrong.

    Very wrong.

    You’re right, there will be plenty of pain to go around. The small business owner, however, will not have severance or EI benefits. He’ll just go broke, and have to stick his neck out again, risking his capital and hiring workers (and contributing to their EI premiums for the next downturn) if he wants to make another go of it.

    Remember them the next time some liberal starts waxing eloquent against the eeeevil businesses and the need to tax them more.

    • kody – i took the time to address all of your points. The only time you even came close to addressing mine was your recognition that there would be enough pain to go around. You are a one man band – you’re not interested in a discussion or dialogue or even countering arguments. You’re like the guy who has his ipod turned way up, everything else is just white noise. Well, what does it matter anyway. One advantage of sticking unwaveringly to your own certitudes is that sooner or later you’ll have the satisfaction of being right. The downside is that you’ll have to wait for that particular planetary allignment to occur again.

  16. You can start every new thought

    with a new paragraph. It’s been tried. Frankly, the costs outweigh the benefits.

    Speaking as an ideologue,

    that’s my view. Take it,

    or leave it.

    • I
      Like
      It.

      • The most

        dispiriting thought about him

        leaving so
        much empty space

        between his words

        is that he
        might

        choose to fill
        that

        space with
        even
        more
        stupid

        words.

  17. Businesses employ.

    They enrich their shareholders.

    They provide goods and services that people want or need.

    Thank god that there are still folks out there not waiting for the nanny state to provide for them, and not afraid to lose everything on a dream.

    A Christmas wish to business owners large and small: May your dreams be fulfilled, may your ideas bring forth rewards to both you and your customers, and may you stay union free.

    Merry Christmas to all.

  18. With or without the bailout, Joe Sixpack/Plumber, Main Street, whatever it is you want to call us working stiffs, are going to get the shaft from the recession, and from the collapse of the NA auto sector. The Rich & Famous will go on as usual. $#!+ rolls downhill. All the bailout can do is spread it around so the entire country pays the burden instead of sticking it all on the people directly involved.

    Any comment I may have about people who think politics is about right & wrong choices would be contrary to the spirit of the season, so I won’t say anything along those lines, but politics is always about which of several bad options to choose from & trying to figure out which one is the least bad. Taking money from successful companies to prop up losers isn’t a good thing (although with the lowest corporate tax rates in the developed world, it’s us workers who are doing the loser propping, not our employers), but letting tens of thousands of working stiffs go unemployed because their bosses are stupid isn’t a good thing either. Show me the “good” decision here.

    Maybe the “market” can solve this problem on its own. (Maybe we should start capitalizing Market, since that’s how some people talk about it.) If you can show me a sector of the Canadian economy that can absorb tens of thousands of auto workers in ten years or less, and we should give the Market-knows-best/Market-moves-in-mysterious-ways option some some serious consideration. The executives, the engineers & accountants will all find new jobs within five years, but the rank-and-file employees? The Asian automakers will take some, but I’d be surprised if it’s more than a quarter. The rest? The only option I see is that the oil industry in Alberta & Sask could expand to take a lot of them, but it would need infrastructure investments of tens of billions of dollars from the government. The northern prairies (an oxymoron, as the oil is in Shield country) are scarcely populated & have limited public resources. Schools & hospitals will need to be built, roads expanded, new processing plants will have to be online. Say ten years and $100 billion dollars to do all this. This shift is probably going to take place no matter what, but it needs to happen slowly. The current extraction technology being used is too destructive to expand this quickly.

    The infrastructure for those people to work is in Ontario. It has been paid for by Ontario provincial taxes collected from Ontario workers. It’s a significant investment. Other industries can grow to take advantage of it, in ten years or more. If the NA auto sector slowly shrinks & disappears one by one, it’s not quite a national disaster. If it collapses at once, it could well be. Bailout or no bailout, our kids & grandkids will be paying for the stupidity of our past business & political leadership. But that’s nothing new.

    By the Way, Kody (is that like Cody except Kommunist?) I agree with Mr. Harper that this is a good buying opportunity. I’d be investing more if it wasn’t for my student loans (thank you uncle Jean), but even on my limited financial budget I will probably be able to retire a year or two sooner than if the dot.com, 9/11 & recent financial crashes hadn’t happened. (thank you Reaganomic deregulation) Hopefully we’ll have a return to New Deal era bank controls & my investments will be safe, but if not, it’s not too hard to read the top of a bubble & switch to safer investments when the market is high. But show me some evidence investors are rational. I think there’s a case to be made that some investors are rational most of the time, but evidence shows that most investors tend to hold on to loser stocks & sell the winners, especially when they’re institutional investors who are paid a bonus for short-term gains. Sell the good stocks & report a gain & get a bonus. Keep the bad stocks, hide the loss & get a bonus. This behaviour depresses the market & overallocates capital to underperforming companies. I’ve done about five hundred tax returns for people with significant investments (over $100k) in the stock market, and trust me, very few have the slightest idea what they’re doing. They made their money in farming, construction, consulting, whatever, but don’t know Jack about finances.

    • Your argument is weak.

      If, as you are claiming, the other (not big 3) automakers would be capable of providing all of the world’s cars with their current workforce and maybe a small proportion of those workers from the big 3, then it is true that there would be the need for the workers in the big 3 to find jobs in other industries. But this is simply not possible.

      If the big 3 go bankrupt, they will be restructured, or replaced, or absorbed by the other automakers, or they will disappear while the other automakers grow much larger.

      No matter what the case, the existing workers will mostly be absorbed again, by the new companies, the restructured companies, or the other auto companies. The industry will change, and some jobs may be lost, but most jobs will reappear in a new form.

      Because there will be the a huge hole in the supply that is required to meet the world’s demand for cars, so this will be filled by something, and this something will need workers to do the work.

    • About the auto-workers:

      Recessions make weak companies go under. Nobody suggests the big 3 auto companies or their workers started it, but they were extremely weak before it started, so weak that they are now a free-fall to insolvency.

      Companies with a healthy bottom-line survive. Companies that were in bad shape before a recession, those are types of companies that do not make it through.

Sign in to comment.