The blog- o- sphere’s pundits and seers are no less guilty of waffling than their establishment alter- egos.
James Kwak says:
BREAKING-UP TOO BIG TO FAIL INSTITUTIONS.
Notwithstanding any other provision of law, beginning 1 year after the date of enactment of this Act, the Secretary of the Treasury shall break up entities included on the Too Big To Fail List, so that their failure would no longer cause a catastrophic effect on the United States or global economy without a taxpayer bailout.
… that is, the TBTF will cause a catastrophic effect. Here’s Steve Hochberg and Pete Kendall via Elliott Wave via Jim Puplava:
When Wall Street’s total value of assets rose to a “mind-boggling 36.6 percent of GDP” in late 2006, The Elliott Wave Financial Forecast published a chart of U.S. financial assets literally rising off the page.
“In the financial context,” say Prechter and Parker, “knowing what you think is not enough; you have to try to guess what everyone else will think.”
We do know one thing: When everyone is thinking the same, the opposite will happen.
That is, the consensus favors more financial products which will also have a catastrophic effect. Here’s another one, at random: Karl Denninger suggests the inner- circle of banks doing daily business with the Fed are more broke than ever:
Why would the primary dealers demand relief from Tier Capital requirements in order to engage in reverse repos with The Fed, when they were recipients of the original “excess reserves” that occurred when the money was printed in the first place?
The answer is simple: those “excess reserves” no longer exist, having been sucked into the vortex of debt deflation.
Says Ambrose Evans- Pritchard;
Regime-change in Tokyo and the arrival of Yukio Hatoyama’s neophyte Democrats – raising $550bn (£333bn) to help fund their blitz on welfare and the “new social policy” – have concentrated the minds of investors at long last. “Markets are worried that Japan is going to hit a brick wall: the sums are gargantuan,” said Albert Edwards, a Japan-veteran at Société Générale.
Simon Johnson, former chief economist of the International Monetary Fund (IMF), told the US Congress last week that the debt path was out of control and raised “a real risk that Japan could end up in a major default”.
The IMF expects Japan’s gross public debt to reach 218pc of gross domestic product (GDP) this year, 227pc next year, and 246pc by 2014. This has been manageable so far only because Japanese savers have been willing – or coerced – into lending for almost nothing. The yield on 10-year government bonds has been around 1.30pc this year, though they jumped to 1.42pc last week.
In other words, adding debt on top of debt renders the whole blatantly unpayable which will cause a catastrophic effect. Add a mini- hurricane in the Gulf of Mexico and inquiring minds are wondering, “When are the bad things going to happen?”
Everyone from Stoneleigh to Nouriel Roubini to David Rosenberg have been promising disaster for a long time! Yet ‘it’ never takes place! It’s always, “eventually”, or “at some point”, or “as a consequence”. What dies is not the economy but the credibility of economic analysts.
There are powerful forces arrayed against collapse.
The world’s governments have vastly expanded their borrowing and spending. Banking and finance have together expanded their collective balance sheet to a corresponding – and monumental – scale. Capitalist governments have have inserted themselves into activities long considered outside their reach and have done so to an extraordinary degree. This is ‘Key Man Insurance’ with an attitude; the US Federal government is not allowing any dominoes to fall. It is bailing out State governments and the economies of other nations. The US has provided balm and subsidy for the domestic auto industry, for home- building, for commercial real estate, for money- center and commercial banking, for securities backing all kinds of mortgages; it subsidizes student lending as well as is vastly increasing its investment in health- care spending – the part of it not already subsidized, that is.
All of this is taking place while the Pentagon is running two large- scale wars far from home and aiming to start another … or even two or three more …
There is the disturbing sense that the US government has taken on too many commitments, that the center is losing its grip as its focus is divided. The happy- talk is a mask that disguises a rapidly deteriorating ability of the establishment to shape events or arrive at resolutions.
Nevertheless … happy talk, prevails. The markets increase – finance soars, there is no breakdown …
Should this breakdown occur, it will certainly be a ‘Black Swan’! Who would’ve known!?
Right now the S&P is @ 1087; Nymex crude is @ $79.79. Finance’s soaring is a way of dividing the pie of financial wealth, dividing the number of claims set against the physical world. This increase means some of the increase will be redeemed while the rest are abandoned. The massive expansion of finance’s balance sheet cannot be met by an increase in base money, despite the strenuous efforts of central banks. Increasing base money adds upward pressure against interest rates. As a consequence, a delicate balancing act is taking place. Happy talk and Potemkin Markets have been enlisted to facilitate the endgame that is unwinding right under our noses.
Finance is dividing its wealth because their are no further places for wealth to ‘grow’ out of. The actions of finance and the markets say this is so, even as the apologists for finance declare the redemtion and resumption of growth. Wealth comes from energy and effort. The oil price indicates that the ability of energy to create industrial wealth has effectively ended. Finance is consequently creating a finance bubble to allow the claims to be laundered into cash – lifeboats for the wealthy.
The question is often raised when or will central banks increase interest rates to reflect inflation concerns.
The better question is when will central banks take action to re- direct the flow of funds away from oil producers and toward financial speculators? The funding at issue is that base money; claims are swapped for it. Markets need to function a certain way for the swaps to take place. At the same time, people pay base- money cash for fuel, they do not swap complex derivatives for it. Cash in circulation is held mostly by ordinary citizens. To redirect the funds, higher nominal rates are required, rather than the deflated- high real interest rates. Higher nominal rates are required to pull funds away from citizens toward institutions where the funds can then be swapped to financiers for otherwise- worthless claims.
Potemkin Finance is vicious circle; as it succeeds in raising markets, it allows the withdrawal of wealth from them.
The next deleveraging leg will begin when real rates prove unaffordable by some highly- leveraged institution. Which institution? One that is unable to converts its claims to cash. One that is too bid to bail; the failures of the past six months have been successfully swept under the rug to support the markets. Under the current regime, neither of Bear- Stearn’s mortgage- backed securities hedge funds would have been publicly closed, Bear itself would have survived as a commercial bank and Lehman Brothers would have been bailed out rather than allowed to enter bankruptcy. The current regime has seen a timely array of rescues and papered- over help- downs. Catastrophic effects are averted, one at a time; consider GM/Chrysler, CIT, Fannie/Freddie, the major banks’ fraudulent profits, the re- inflation of the REITs. There are no ‘runs on the banks’ despite ongoing reasons for such.
This theater cannot be sustained for long as the process of swapping claims for cash is self- eliminating. A too- big to bail entity could be Fannie Mae … or Japan.
What to look for is something different and new. Not a bank run per se but some minor panic that increases the ratio of claims to cash. The event could take place in Eastern Europe or in the UK. It could be an international insurance company failure or another hedge fund rout.
In the background will be oil priced over $80 a barrel. We are at the limit, the clock is ticking. During the Great Depression, the process was the abandonment of the gold standard; the catalyst was the failure of a bank in Austria. Look for something like this happening before the end of the year.