Global financial system implosion begins

[free spirit]

A bit of relevant light relief for a Friday

hold on... 2143? think i got retired in 2100, but tbf I'd got bored by then

 

[Zeppo]

Guardian article today on G20 countries level of debt = 13.72 trillion. UK comes in with 1.2 trillion. If more public borrowing is one of the answers, these debt levels will go stratospheric.

Next generation may have to pick up these tabs, no wonder the youth are getting stroppy.

 

[elbows]

Full statement from the G20 meeting:

http://news.bbc.co.uk/1/hi/business/7731741.stm

All the stuff you would expect for dealing with the systemic weaknesses, would obviously have been more use before the crisis than after, and is designed to ensure as much business as usual, trust in the god of growth and free markets, continues.

Summary:

Stronger regulation, especially when times are good..
Proper reporting of off balance sheet stuff and fancy financial instruments
Proper risk assessment
Cross-border regulation of cross-border entities
Change bonus structures so they dont reward excessive risk-taking
No knee-jerk protectionist policies, or at least not for a year. And get that world trade round completed, powerful countries being more generous with their bargaining positions by the sounds of it
Make the CDS system better
Reform all the Bretton Woods institutions to give other countries more power
Expand the Financial Stability Forum to include more countries and give it a bigger role
Dont allow this stuff to overshadow efforts geared towards energy security, climate change, the war on terror etc.

Specifics divided into actions that should be completed before March 31 2009 and others that are for the medium-term.

 

[Bernie Gunther]

So, to summarise: 'We're going to carry on doing all the same old shit you've getting shafted by since Pinochet, Thatcher and Reagan, because it makes us all richer at your expense, but we'll try to be a bit more careful about how we manage it.'

 

[Bernie Gunther]

Somewhat predictable viewpoint, from the British Chambers of Commerce:

"If the markets interpret the UK measures as being reckless, the pound may plummet to dangerous lows, and yields on gilts could rise sharply, thus forcing the Government to change course and frustrating its policy aims," it said.

The fiscal stimulus package should focus on tax cuts initially, while lower business taxes and NIC rates are an effective way of staunching a rise in unemployment, it added.

source

 

[boskysquelch]

 

[david dissadent]

So DD and darkfibre - do you think Swedish style hard dip, then recovery, a Japan Style decade of torpor or something else?

The hard dip is often called a "V" shaped recession by economists and a sustained one a "U" shaped dip (and of course the "L" shaped dip). I have no idea. Seeing the problems build was not hard, working how politics, sentement and external factors will affect the crisis long term is much more difficult. The reason this crisis was always going to hurt badly is the huge amount of the US's dependence on consumer spending and the dependence that had on confidence, credit and house price rises. The banks have been given vast, no gargantuan, amounts of cash to recapitalise. At some point they are going to have to start putting that cash to work and earn money with it, LIBOR is dropping and eventualy they will feel that the worst of there own exposure has been aired. Confidence will return and a more chastened, more sober American economy will come back.

For example I would not be able to predict where an 'onshoring' of services and manufacturing will happen, a return of call centers and factories too the US and if it does what the impact will be, but it is a solution I believe will be very closely looked at.

 

[Dr Jon]

I spotted this the other day:

David Clarke's warnings about the risks of failure in highly connected systems have proved to be prescient in light of recent events

In view of what has happened since I wrote this piece in January I should probably mention that, in my view, the natural frequency for the cascading failure of the economic system is quite variable. We have electronically linked systems in some areas, while other areas rely on lawyers and accountants laboriously unwinding CDS and other derivatives by hand. The variability means that contrary to what I was hearing yesterday, this cascade is far from finished

 

[darkfibre]

I spotted this the other day:

Excellent piece. Really hammers home the stuff about 'over-optimisation' and it's effect on resilience.

I don't particularly agree with his conclusion, although he sounds less than sure of it himself:

I still maintain that a sudden collapse is unlikely, but if it is already happening, then it could certainly look sudden when we eventually notice it.

His update sounds like a heavy penny dropping.

Buried in the comments somebody posted a link to a short sci-fi story written in 1908 by E.M. Forster that I read many years ago.

I'm glad to have found it again (having forgotten it's title and author) as it's also somewhat prescient.

"The Machine," they exclaimed, "feeds us and clothes us and houses us; through it we speak to one another, through it we see one another, in it we have our being. The Machine is the friend of ideas and the enemy of superstition: the Machine is omnipotent, eternal; blessed is the Machine." And before long this allocution was printed on the first page of the Book, and in subsequent editions the ritual swelled into a complicated system of praise and prayer. The word "religion" was sedulously avoided, and in theory the Machine was still the creation and the implement of man. but in practice all, save a few retrogrades, worshipped it as divine.

<--->

No one confessed the Machine was out of hand. Year by year it was served with increased efficiency and decreased intelligence. The better a man knew his own duties upon it, the less he understood the duties of his neighbour, and in all the world there was not one who understood the monster as a whole. Those master brains had perished. They had left full directions, it is true, and their successors had each of them mastered a portion of those directions. But Humanity, in its desire for comfort, had over-reached itself. It had exploited the riches of nature too far.

[Kuno skypes his mum, leaving the webcam off...]

"The Machine stops."

"What do you say?"

"The Machine is stopping, I know it, I know the signs."

She burst into a peal of laughter. He heard her and was angry, and they spoke no more.

"Can you imagine anything more absurd?" she cried to a friend. "A man who was my son believes that the Machine is stopping. It would be impious if it was not mad."

"The Machine is stopping?" her friend replied. "What does that mean? The phrase conveys nothing to me."

"Nor to me."

The Machine Stops.

The manner in which the machine eventually stops, or rather, how people react to the signals that it's stopping, echo Clarke's observation 'it could certainly look sudden when we eventually notice it.'

 

[Barking_Mad]

Excellent piece. Really hammers home the stuff about 'over-optimisation' and it's effect on resilience.

I don't particularly agree with his conclusion, although he sounds less than sure of it himself:
His update sounds like a heavy penny dropping.

Buried in the comments somebody posted a link to a short sci-fi story written in 1908 by E.M. Forster that I read many years ago.

I'm glad to have found it again (having forgotten it's title and author) as it's also somewhat prescient.



[Kuno skypes his mum, leaving the webcam off...]



The Machine Stops.

The manner in which the machine eventually stops, or rather, how people react to the signals that it's stopping, echo Clarke's observation 'it could certainly look sudden when we eventually notice it.'

Cheers for that, will go hunt it down and buy the book. Book are

 

[Barking_Mad]

 

[Dr Jon]

Something I just spotted in New Scientist:

Economics blind spot is a disaster for the planet

It was my job, as senior economist in the bank's environment department, to review the draft and offer suggestions. I said drawing such a picture was a great idea, but it really had to include the environment. As drawn, the economy was receiving inputs from nowhere and expelling outputs back to nowhere.
...
That was when I realised that economists have not grasped a simple fact that to scientists is obvious: the size of the Earth as a whole is fixed. Neither the surface nor the mass of the planet is growing or shrinking. The same is true for energy budgets: the amount absorbed by the Earth is equal to the amount it radiates. The overall size of the system - the amount of water, land, air, minerals and other resources present on the planet we live on - is fixed.

Proof, as if it were needed, that deluded, money-juggling twats, including those at the World Bank, don't have a fucking clue about how the real world works.


More
here.

Looks like we're on course for the heart of the apocalypse.

"Having A Job Is Soooo 2007"

 

[Kaka Tim]

"A growing band of experts are looking at figures like these and arguing that personal carbon virtue and collective environmentalism are futile as long as our economic system is built on the assumption of growth. The science tells us that if we are serious about saving Earth, we must reshape our economy."

From the new scientist.

But this is hardly new, many many people have been arguing this for decades (including on here!). However it has been in the interests of the rich and powerful to keep on pumping out the growth myth becasue it was continuning to make them even richer and more powerful. Meantime politicians and the media collude with them because the alternative is not a story people want to hear. Now it looks like we are approaching crunch time and the no-brainer reality - that you cant have indinite growth based on ever increasing consumption of finite resources (especially hydro-carbons) - is starting to gain wider recognition.

However just getting a recognition of the reality is going to be a struggle because so much power and wealth is invested in preserving the fiction - in a way its analogous of the culture of denial within the failing soviet era regimes.

But a reality check is a vital first step before humanity can even begin to address the far more difficult challenge of making the necessary changes to our economimc social systems needed to avert a descent into barbarism.

I really really dont want my last ever words on the intenet (or anywhere else) to be 'we told you so!'

 

[Barking_Mad]

"A growing band of experts are looking at figures like these and arguing that personal carbon virtue and collective environmentalism are futile as long as our economic system is built on the assumption of growth. The science tells us that if we are serious about saving Earth, we must reshape our economy."

being hugely optimistic, maybe this is what Brown's 'New World Order' is all about!

No?

Oh well I tried for a brief moment.

Still, at least the whole subject of our economic model built on mystical 'growth' is being treated in the media as an outdated and silly notion. Oh no, its not - just bollocks about "regulation". and the like.

Burn baby burn.

 

[Dr Jon]

But this is hardly new, many many people have been arguing this for decades

I remember a college lecturer telling us about Limits To Growth, back in ooh, must've been 1980 or so. The Tory-boy smart-arse of our class made a remark along the lines of "we're doing fine now, why worry" which, as our exasperated lecturer pointed out, was basically the problem: that people were doing OK now (then) and didn't give a shit about the problem and the future.

... politicians and the media collude with them because the alternative is not a story people want to hear

Of course. People in "democracies" have basically been farmed since the war. The whole suburban / consumer trip was basically an open labour camp. The way to get the best from your slaves is to convince them they are free..

Now it looks like we are approaching crunch time

Le Crunch is here now - blame the French!

However just getting a recognition of the reality is going to be a struggle because so much power and wealth is invested in preserving the fiction

Let's pray that Obama and other leaders can tune people in. (and I'm an atheist BTW)

I really really dont want my last ever words on the intenet (or anywhere else) to be 'we told you so!'

No. The facts speak for themselves.

I find my favour oscillating between the suicide option and wanting to build a new world - with all the challenges that would entail.
Possibly a good topic for another thread?

All I wanted was an easy life.
Which I guess is part of the problem,,,

Ho hum..

 

[david dissadent]

I'm starting to get the feeling that this is going to be really bad. Worse than I have been expecting.

The tone of a recent meeting of national oil companies, many of which came from Opec countries, was “panic”, Fu Chengyu, chief executive of China National Offshore Oil Corporation, said this week.

All Opec members are struggling with the sharp drop in oil prices from this summer’s record of $147. Ecuador, Opec’s newest member, this week raised the spectre of defaulting on its loans.

Only the United Arab Emirates, Algeria and Qatar can balance their external accounts in 2009 with prices below $50 a barrel, according to research by PFC Energy, the US-based industry

Link

OPEC nations may be facing a very demanding time financialy. Domestic problems and failure to invest in future production may see oil production dropping somewhat steeper in the medium term than expected.

A business survey from the Philadelphia Federal Reserve showed that factory activity covering the key areas of eastern Pennsylvania, southern New Jersey and Delaware fell by more than forecast in November.

The index, which is seen as a key gauge of the future state of US manufacturing, slipped to minus 39.3 from minus 37.5 in October.

And new claims for unemployment benefits leapt last week to their highest in 16 years, according to the US Labor Department.

"The unemployment data was yet another ugly data point in a seemingly never ending stream of poor economic numbers," said Michael Wittner, global head of oil research at Societe Generale.

The White House indicated on Thursday that US President George W Bush would approve legislation to increase unemployment benefits.

Job losses are mounting worldwide, with aerospace firm Rolls Royce, AstraZeneca and French carmaker Peugeot Citroen announcing a total of 6,100 cuts

Link
Manufacturing is slipping fast in America and joblessness is really starting to spike. On top of that big name companies are cutting good paying jobs. This means more bankrupt individuals, more home foreclosures and less people spending than before. This ontop of the housing crisis adding to eat feeding on itself.

China has warned its employment outlook is "grim", amid worries that economic problems could lead to social unrest

And more worries of social unrest spreading on the back of the crisis in yet another volatile area (ok OPEC includes several Middle Eastern, North African and an African and South American countrie as amoung the 'volatile')

All of those jobless now will default on this mountain of pain:

Over the past decade, American households have piled on $8 trillion in debt, an increase of 137 percent, twice the gain seen in the size of the economy.

At $14 trillion, the debt load is now roughly equal to the entire economy's annual output. Much of the increase comes from home mortgages, which have expanded by $6 trillion since 1998, but it also reflects higher balances on credit cards and auto loans.

Despite the expanding debt burden, investors around the world poured money into securities backed by mortgages and credit card receivables for much of this decade, keeping borrowing costs low.

Thanks to the easy credit, U.S. consumers kept increasing their spending throughout the housing run-up, easily exceeding wage growth. Retailers opened hundreds of new stores to fill newly constructed shopping centers. Imports soared, swelling the reserves of exporters such as China. U.S. household savings dwindled to almost nothing.

That means paring the $14 trillion of debt, but there is no consensus on exactly how much households ought to borrow. This much is clear: the portion of income that consumers save has steadily declined over the past 30 years from around 10 percent to near zero, and that trend will be reversed.

That reverse will mean less money spent on goods so less people employed in the service sector and less jobs for people in China so lower overall growth to catch up with the increasing interest payments due on the national and personal debt mountain

Next year may be worse. Credit agency Fitch Ratings expects deeper credit card losses in 2009, and they could reach record highs. Card issuers are trying to cut losses while they can. "You're seeing a lot of pre-emptive strikes from banks," said Joseph Beaulieu, an retail sector analyst at Morningstar in Chicago.

How bad it gets depends on how many more jobs are lost as the U.S. economy slumps into a recession that could be the deepest since the mid-1970s. If unemployment climbs another two percentage points to 8.5 percent, as many economists expect, that would mean about three million more people out of work—and likely struggling to pay credit card bills and mortgages. Retailers have already suffered plenty of pain.

Aye but that is three million in America, around the world export processing zones and other free trade jollies people will be destitute without the meagre US social security to cover for them. Un employed people and falling government revuenues will mean difficulties for governments keeping above water.

Link

LONG BEACH, California: Gleaming new Mercedes cars roll one by one out of a huge container ship here and onto a pier. Ordinarily the cars would be loaded on trucks within hours, destined for dealerships around the United States. But these are not ordinary times.

For now, the port itself is the destination. Unwelcome by dealers and buyers, thousands of cars worth tens of millions of dollars are being warehoused on increasingly crowded port property.

"This is one way to look at the economy," Art Wong, a spokesman for the port, said of the cars. "And it scares you to death."

The backlog at the port is just part of a broader rise in the nation's inventories, which were up 5.5 percent in September from a year earlier, according to the Commerce Department. The car industry has been hurt particularly, with sales down nearly 15 percent this year. General Motors has said it would run out of operating cash by the end of the year if it does not receive a government bailout.

Roughly 20 percent of the nation's container imports last year came through Long Beach, putting it close behind the largest container port, Los Angeles. This year, shipping volume at Long Beach is down 10 percent from 2007, and nearly all major ports around the country have seen similar declines. Veteran port workers say the slowdown since mid-October is like nothing they have ever seen. And it is having a cascading impact on other businesses and workers.

Link

That could be indicative of a 10% drop in world industrial activity.

"A year ago, I was looking into buying one of these for my wife," said Kurt Garland, the terminal manager overseeing the unloading of the white, silver and black sports cars, sport utility vehicles and sedans. "Now I'm not. I'm saving money, paying bills, hunkering down."

Classic deflation, people save there money, factories are grossly over capacity, they cut prices people hoarde cash hoping for better prices and fearing joblosses.

This gets really really ugly for the US and UK just after Christmas (or just before) when the retailers give up the ghost and start laying off people in droves, round January they are going to be giving away whatever is left of there christmas stockpile and planning shop closures. This will see a big tide of jobs go. If the holiday markets are real poor as well this moves to other service sectors and again feeds of off the unpaid debt, eating into the recapitalisation of the banks.


And Nothern Rock cuts adrift it securitisation vehicle.
Link, Im guessing this could be a major default or bankruptcy in the offing. Not sure yet so I will track this closer.


All in all it looks like the gloomier predictions are starting to bear fruit and that the recapitalisation of the banks has not stopped a very very painfull recession, although it probibly stopped an all out collapse of the bank industry (or at least significantly reduced the risks of one)

Its grim all round.

 

[david dissadent]

China has said its employment outlook is "grim", amid worries that economic problems could lead to social unrest.

Unemployment is expected to rise next year as businesses close because of a lack of orders.

Chinese leaders are already warning that an economic downturn could lead to further protests by those facing financial hardships.

link

Professor Joseph Cheng, of Hong Kong's City University, said the legitimacy of the Chinese government was built on economic growth.

"If people see that economic growth can no longer be maintained, then the very basis of the government has been eroded," he said.

He added that the widening gap between rich and poor in China could exacerbate current economic problems.

"Because of this, the hardships of those who suffer might become unbearable," he said.

 

[david dissadent]

Link

An intersting veiw on China, basicaly that it has been selling goods without recovering the capital outlay for the factories and the like, that it is headed for a very nasty bump and its banks are due to take "a bath". If this is correct then China will be pretty close to the worst hit country in this crisis. I had always known that a large percentage of Chinese bussiness loans are non performing and that it needs the 10% growth to get grow out of its weak loan book. If true they screwed everyone else over to get the orders to run the factories and screwed themselves over by not increasing wages of workers and loosing vast amounts of the peoples savings.

 

[kyser_soze]

China has already bailed out it's banks a couple of times because of dodgy loans going bad hasn't it? Not recently, but a few years ago there were some really big issues...

 

[Bob_the_lost]

China has those huge huge Dollar stockpiles, if they tank what's to stop them selling them and starting a stampede on the dollar?

 

[kyser_soze]

Because the Chinese economy needs to keep the $ relatively high so that when the merkins buy Chinese product, the Chinese get good value for their goods&services.

Some dude on Newsnight likened it to two people, each with 1 wooden leg, running on a treadmill, and that as soon as one of them fell off the other would fall too...

 

[david dissadent]

-- Mortgages on offices, shopping malls and hotels that were based on projections of soaring income during the real estate boom are roiling the bond market.

In the case of Westin Portfolio, revenue was estimated to increase 13 percent. That never materialized. Falling demand in the next few months is likely to lead to further declines in rents and higher vacancies across the U.S., New York-based Moody’s Investors Service said today in a report.

Similar loans across the nation are starting to turn bad.

Pro-forma loans became a “common phenomenon” in late 2006 through the end of 2007 as property values soared and rents skyrocketed, New York-based Deutsche Bank analysts said in a Nov. 18 report. They allow borrowers to take on more debt on the assumption that they will have higher incomes to pay the interest and principal. Cash reserves are set aside to cover the difference until the income rises to the anticipated level.

Overly optimistic assumptions were used in connection with a number of property types,” said Michael Haas, a partner at law firm Jones Day in Cleveland, who specializes in commercial real estate. “The optimism was consistent with the times. Everybody believed in their numbers.”

The stumbles in the commercial mortgage market echo those seen in residential debt, where loans were made to borrowers based on unrealistic expectations of soaring home prices. The housing market is now doing through its worst contraction since the Great Depression as defaults on subprime borrowings reach 35 percent.

Link

Again long predicted but its starting to turn up now, the comercial property market is showing many of the same symptoms of the housing market. Tens and probibly hundreds of billions of dollars worth of comercial property loans are liable to go bad. That offcourse will knock into other areas afecting jobs and bussinesses that will have there own wave of defaults from lost bussiness and job losses.

The U.S. government may step in to rescue Citigroup Inc. after a crisis in confidence erased half the bank’s stock-market value in three days, according to investors and analysts.

Citigroup’s $2 trillion of assets dwarfs companies such as American International Group Inc. that got support from the U.S. government this year. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke may favor a rescue to avoid the chaotic aftermath of Lehman Brothers Holdings Inc.’s bankruptcy in September.

“Citi is in the category of ‘too big to fail,’” said Michael Holland, chairman and founder of Holland & Co. in New York, which oversees $4 billion. “There is a commitment from this administration and the next to do what it takes to save Citi.”

Link

Citigroup is up the shitter. Even as stocks went wild yesterday on Obamas new treasury secetary, Citi got a pasting. The fact that something as big as Citi is on the rocks should be a guide to how serious all of this is.

 

[Dr Jon]

Citigroup is up the shitter...

They're swinging the axe here in India:

Citi shows door to 37 senior execs

 

[david dissadent]

"I see dead people"

Link

(for the US) "5% drop in GDP next year"

Right or wrong this chap seems to be very haunted but is claiming to be up 40% this year.

 

[Dr Jon]

Right or wrong this chap seems to be very haunted but is claiming to be up 40% this year.

That's Hugh Hendry. I saw him presenting Dispatches "Don't Bank on the Bailout" last month.
He was warning of grim times ahead then.

ETA:
Dispatches is still available here if you missed it.

 

[Darios]

Citigroup is now looking very grim indeed.

 

[Kanda]

Not sure if this has been posted: Peter Schiff Was Right 2006 - 2007

This is nuts, not for Peter Schiff's doughty performances, but for the other interviewees' ridicule and predictions - "Merrill Lynch is so cheap they might as well be giving it away in cereal boxes" [at about 5X today's price, I think].

 

[Badgers]

Deep sigh and here we go again with another black/blue/brown Monday.

 

[Kanda]

Looks like Citigroup have been bailed out: http://news.bbc.co.uk/1/hi/business/7745168.stm

 

[darkfibre]

That's not a 'bailout'.

It's an 'investment'.