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February 10, 2009

House of Cards

All you folks who kept assuring me that what happened back in September had been exaggerated by the administration as part of some sort of silly mechanism to justify an unpopular bailout plan that made them even more unpopular may find this instructive: (h/t Tyler Durden)

Note that the irate caller, though I happen to agree with her about the proper mechanism for a second stage stimulus package, is still waiting for the Clue Bus to arrive and b**ch slap her into some rudimentary awareness of what almost happened last fall.

After. All. This. Time. Back then, I linked this Megan McArdle post that said essentially the same thing as Rep. Kanjorski:

Thus was touched off a general run on money market funds that held money for institutions--the kind that require buy ins of a couple million or more....

Investors were particularly worried about any exposure to financial paper. So, frankly, were the managers of money market funds. From Lehman, the worries spread to Wachovia, Washington Mutual, and beyond. Suddenly, said one source, no one could sell two-week Wachovia paper at 30% yield-to-maturity--which in layman's terms means they were offering a hell of a discount on a loan that was pretty likely to pay off. Some funds bragged they didn't have Wachovia, which only made the others seem ominously silent in comparison. The fund runs started to hit money markets that had no obvious problems (Putnam, BKNY/Mellon, American Beacon) causing them to shut down or redeem the shares in kind. Investors began worrying State Street's massive short-term investment fund complex was holding Lehman, which whipsawed its stock price 50% in one day.

Money market funds are generally designed to be the functional equivalent of a bank account: short-term vehicles where you park cash you aren't using at the moment. Investors are supposed to be able to pull their money out at any time. That meant that all the funds, sound or not, were vulnerable to a run. And virtually any fund that experienced a run would "break the buck" because while these funds are perfectly safe and liquid in normal circumstances, no one could dump a billion dollars worth of securities on the market without seeing the price of those securities plummet. Since funds definitionally try to hold their asset base near a dollar a share, and distribute the yield, there was no gigantic cushion to pad the sales.

The runs meant that all the money market funds were in the same boat: everyone wanted to sell and hoard cash in case of a run. No one wanted to buy. Once busted funds had gotten rid of their very short paper, they were stuck with the weeks/months maturities, which were virtually unsaleable. Unless the parent institutions make your investors whole the only thing you can do in that situation is distribute the assets in kind, to investors who can't sell them any more than you could.

Ultimately, despite last week's bailouts, no one wanted to hold financial company paper. Unfortunately, as I understand it that paper made up the bulk of the money markets, which is hardly surprising given the volume of trades they do (did) every day.

Banks have tens of billions of debt maturities to refinance in the coming months. The overwhelming majority of it will be good even under distressed circumstances--unless they can't roll any of it over. At that point, they experience the same problems you would if your credit card company pulled your credit line and demanded you pay back everything you owe them.

There are two related concepts here: in the absence of perfect information, value is more closely tied to perception than it is to reality. And because no one wants to lose their shirt, fear skews our perceptions of value in a sharply negative direction.

And yet somehow, the government "should" have done nothing to stop the bleeding? How is that sane? Even to the point of watching the whole applecart get overturned?

Required reading for this evening:

Clive Crook on the increasing politicization of economics:

Economics outside the academy has become the continuation of politics by other means. If you wish to know what Mr Krugman thinks on any policy question, do not read his scholarly writings; see which policies are advocated by the progressive wing of the Democratic party. Mr Krugman agrees with liberal Democrats about most things, and for the rest gives as much cover as the discipline of economics can provide – which, given its scientific limitations, is plenty. He does this even on matters where, if his scholarly work is any guide, the economics is firmly against his allies. Liberal Democrats are protectionists. Mr Krugman is not, but politics comes first.

The syndrome affects economists on the right as much as on the left. Just as there is a consensus among economists that protectionism should be opposed, most economists believe that a powerful fiscal stimulus is both possible and desirable in present circumstances, and that the best stimulus would include big increases in public spending. Yet recently, Robert Barro, a scholar with conservative sympathies, wrote in the Wall Street Journal that this view was an appeal to “magic”.

The problem is not that Mr Krugman questions the consensus on trade (if indeed he does), or that Mr Barro questions the consensus on fiscal policy (as he certainly does). It is that both set the consensus aside so carelessly. In doing so, these stars of the profession destroy the credibility of their own discipline. Mr Krugman gives liberals the economics they want. Mr Barro gives conservatives the same service. They narrow or deny the common ground. Why does this matter? Because the views of readers inclined to one side or the other are further polarised; and in the middle, those of no decided allegiance conclude that economics is bunk.

Steve Conover: Read the whole thing. Too much common sense to excerpt. [Ed. note: changed my mind. Get over it: I'm a woman.]:

Speaking of money, I've been wondering if anyone besides a handful of people understand what almost happened five months ago, in mid September. Jim Cramer warned about it on his CNBC show: it was an electronic run on the money market, and he spotted it as it was happening. A "run on the bank" causes the bank to collapse; a "run on the money market" causes the entire financial system to collapse — and that's what nearly happened in mid September (one money market fund "broke the buck" -- a rare occurrence, and a very bad omen). We came within a few hours of financial collapse, which would have been followed quickly by the collapse of our political system. If more than just a handful of politicians understood that they were almost fired en masse five months ago, I bet today's conversation would not be about the Titanic's deck chairs. But that's just my educated guess; I have a history of overestimating politicians.

He gets it, though, which isn't surprising considering he's way smarter than most of us.

And finally, this eerily prescient piece (it was written in March of 2008) on the Japanese Lost Decade (you'll recall Obama mentioned that last night during his spectacularly dishonest diatrabe against the 'failed policehs of the past 8 years', advancing the somewhat novel theory (unless you're Joe Biden, that is) that the Bush tax cuts caused our current predicament. What a maroon:

The United States is experiencing an intensifying lack of credit availability that is causing a sharp economic slowdown--until recently unforeseen by most economists, including those at the Federal Reserve. This is understandable--though not comforting--because most economic models capture the link between financial markets and the real economy with movements in the level of interest rates. A credit crunch in which interest rates do not move much but credit becomes severely restricted is difficult, if not impossible, to model accurately.[1] The result: weaker-than-expected growth during a period of rapid Fed easing. The federal funds rate was cut by 225 basis points--from 5.25 percent to 3 percent between August 17, 2007, and January 30, 2008. Fourth-quarter growth, at an annual rate of 0.6 percent, was sharply lower than the 4.9 percent third-quarter growth rate. First-quarter 2008 growth will probably be negative.

In a deflationary economy, it is important to watch nominal, not real, GDP growth.

Many sectors of U.S. credit markets are frozen because transactions at market-clearing prices and interest rates would imply asset prices substantially below levels being assumed in financial reports prepared by banks, investment banks, insurance companies, and other financial institutions. A fear of solvency problems is constraining liquidity. Beyond that, accounting convention calls for valuation of real estate-related assets based on current real estate prices, not expected (lower) future prices. This convention amounted to a conservative assumption when prices were rising, but it is unrealistic when prices are falling. It results in expectations that upcoming financial reports will show further deterioration of balance sheets. The distribution among financial institutions of balance sheet deterioration is uncertain, and so investors require a higher risk premium on returns on mortgage-based and complex derivative securities, virtually all of which are exposed to falling prices of residential real estate. The problem may grow worse as commercial real estate prices come under pressure, in turn, from an intensifying credit crunch.

Despite a tightening credit squeeze that is resulting in a sharp slowing of U.S. growth to recession levels, there is no reason to suppose that the United States is headed for a lost decade like Japan's. Prompt, aggressive easing by the Fed, along with a clear recognition that deteriorating credit and economic conditions may require further easing, constitutes a vital first step toward avoiding a prolonged recession that brings with it the danger of deflation. It is deflation that was immensely damaging to Japan after 1998 and continues to be a threat there today. Fed chairman Ben Bernanke was clear in his February 14 testimony before the Senate Banking Committee on the economy and financial markets that he recognizes the risks posed to the economy by deteriorating credit markets: "It is important to recognize that downside risks to growth remain, including the possibilities that the housing market or the labor market may deteriorate to an extent beyond that currently anticipated or that credit conditions may tighten substantially further."

Yeah, it's long. Read it anyway - you won't be sorry.

Posted by Cassandra at February 10, 2009 06:04 PM

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Comments

So then, in a matter of an hour or so, $550 billion was "withdrawn" from maonry market accounts.

It would be really nice to know by who[m].

It wasn't me.

According to Kanjorski, we came within 24 hours of having the entire world economy razed.

I don't know about you, but that's ..... scary.

Posted by: ZZMike at February 10, 2009 08:01 PM

It would be really nice to know by who[m].

Hey! Jou can buy a lot of chous weeth that kind of money!

Posted by: Jewish Chinese Mexican-American Lawn Princess at February 10, 2009 08:15 PM

One reasons I quit commenting on the bailout and related economic trivia is that I read this post word for word, and felt trapped in a Larson cartoon.

Blah blah blah, Armorer. Blah, blah, blah blah.

Sigh.

Sadly, I suspect much the same holds true for many of the 536 people who have decided they have the wisdom to deal with the issue.

Despite overwhelming evidence to the contrary.

Posted by: John of Argghhh! at February 10, 2009 09:22 PM

Well John, that is their job :p

No one wants it. Not Bush. Not Obama. Not Congress. But it's theirs nonetheless. The thing is, if we pick up a history book we see that we'll get by. The only open question is, how much will it smart? :p

I hate to bring the subject up myself but sometimes I read something that just grabs me. Today was one of those days.

Posted by: Cassandra at February 10, 2009 09:28 PM

Look at it this way, John.

At least you're not trying to sell a house in this market :p

Posted by: It is to laugh... at February 10, 2009 09:30 PM

Okay, so let's take Kanjorski's word that the government had to do something.

What, exactly, did it do?

We know that some portion of the TARP money has actually been handed out, though we have no idea how much was given out nor where it went because the authority responsible for it completely lost track of what it was given and what it handed out. We know it didn't go to buy up Troubled Assets because no one holding any of those assets have had any bought from them. We know a chunk of the money went to banks that were in no trouble at all.

So what did the government do to forestall this supposedly world-ending crisis? I didn't see it to anything but panic and grab 350 billion dollars from us that it then promptly lost.

I do not exactly trust Kanjorski, who has a vested interest in making us believe that what he did saved the world. I want to see some paperwork. I want to hear from the money men involved what government actions prevented the disaster.

Posted by: Jimmie at February 10, 2009 10:31 PM

This is what happens when you listen to a dumb ass Polack congressman. Who basically can't keep his facts straight. There was NO withdrawl of 550 billion dollars in 'an hour or two'.

More like 120 Billion over that week. Which is bad enough, I suppose, but it wasn't 'the end of the world.'

You silly people are scaring yourselves.

Posted by: Eric Blair at February 10, 2009 10:39 PM

"Lost"?

Where did this money go? Did it go "poof"? Does money do that - just disappear like magic? Gone, without a trace? :p


Posted by: Cassandra at February 10, 2009 10:40 PM

I'm not scared, Eric. So I'm not sure what you're talking about.

Posted by: Cassandra at February 10, 2009 10:41 PM

Where did this money go? Did it go "poof"? Does money do that - just disappear like magic? Gone, without a trace? :p

So many freezers, so little time...

Posted by: BillT at February 11, 2009 05:51 AM

"Where did this money go? Did it go "poof"? Does money do that - just disappear like magic? Gone, without a trace?"
Poof is a good descriptor if your money was based on assets in stocks, bonds, 401*'s, money market funds, home, land, and other similar assets... Poof works pretty well to sum up the valuation at this moment versus 6 months ago.

It's hard to argue against insuring liquidity for the large financial institutions that keep the wheels of the nation turning. But the track record of government oversight and transparency in how the taxpayer money is spent is about par for the course.

And just for grins I'll ask if anyone can make the case that there is not, as is usually the case, a fair amount of overblown... hysteria, for lack of enough coffee to think of any other way to say it?

As most folks can imagine, it's easier to stuff multiple trillions of dollars in necessary spending down the taxpayers maw, if everyone is in a panic. Or as Chucky Schumer said about all those little, tiny, porky amendments... the American people don't care.

So when the Stimulus/Spendulust bill hits BO's desk and is signed, I'd wager that it will be more than a little interesting (infuriating) to add up all the little, tiny, porky amendments. Throw in TARP and Son of TARP, and I wonder if we'll ever get an accounting of where the money went.

Sans accountability for all who manipulated, sluffed off responsibility, and otherwise built and blew down the house of cards, beginning with CRA, Fannie and Freddie, I hope that I live long enough to see a reckoning. I'm saving a barrel of tar and a bale of feathers just in case.

Posted by: bt-dey-vil-rue-de-day-dey-vus-burn_hun at February 11, 2009 07:46 AM

It's hard to argue against insuring liquidity for the large financial institutions that keep the wheels of the nation turning.

Keep your eye on the ball, there :p

First of all, my 'poof' referred to the first bailout funds and what they purchased for us, not to our investments lost in the September meltdown. There are so many parallels to national defense here. If preventative measures work, the feared consequence never happens and critics are quick to say it was never needed at all citing the very success of the antidote as "evidence" that the malady never existed.

Again, how conveeeeeenient ;p

If you think there's been an unacceptable drop in value in market and real estate based assets now, what do you think you'd be looking at if the major financial institutions (whose assets, as we saw, were tightly coupled) suddenly went "poof"?

...just for grins I'll ask if anyone can make the case that there is not, as is usually the case, a fair amount of overblown... hysteria, for lack of enough coffee to think of any other way to say it?

I don't think you really want to hear my opinion on that, do you?

Because I think there's been plenty of overblown hysteria *and* hyperbole on both sides of the aisle. I didn't stay up until midnight last night when I have to get up at 4 am because I enjoy working on *&^% charts for several hours after working a 10 hour day.

I did it as an attempt to lend a bit of quantitative perspective to the screeching I'm hearing from both sides.

I don't think either "side" has it entirely right, frankly.

I think some folks in the Republican leadership are seizing on this as a "gotcha/comeback" moment not too far removed from Harry Reid's "We're going to pick up seats as a result of this war" moment, and that's unconscionable.

It will also work, more's the pity, and that's precisely why they're doing it but it's bald faced demagoguery nonetheless.

A few points:

I don't like the pork in the bailout.

This stimulus is NOT an emergency.

*But*, I'm not sure I agree with the Republicans who think tax cuts alone will float us out of this, *if* that's even the goal. Let's be pragmatic.

If job losses continue unstemmed, people will get scared and vote for whatever handouts they can get. So NOT doing something in this climate is NOT an option because the party that refuses to "help" or "care" will lose votes and strengthen the party that panders. It's essentially like the situation with divorced parents where both adults bribe the poor kid to buy his love.

Sad, huh? But it's reality, and we're not kids, and to some extent we're complicit in the bribing.

And I think Democrats are enjoying flexing their muscles and using this crisis to strong arm their colleagues into approving all sorts of budgetary chicanery that would never fly during normal times. And that's unconscionable too.

Posted by: Cassandra at February 11, 2009 08:16 AM

The good news, boys and girls, lies in looking at the long term.

Contra Barry's fear mongering, I see no evidence that we're headed into a recession "we can't recover from", and if you need some comic relief, try reading his response to that AP reporter in which he tries to tell her he said something he didn't say.

It is to laugh. We wanted a smooth talking Prez.

We got one.

Posted by: Cassandra at February 11, 2009 08:19 AM

Heh. It Is To Laugh sez "Look at it this way John, at least you're not trying to sell a house in this market."

Heh. You.are.100%.wrong.

8^p

Posted by: John of Argghhh! at February 11, 2009 08:42 AM

"Keep your eye on the ball, there :p"
I know... but this ball has morphed into the political equivalent of a superball in a handball court. And having lost ~40% of my accumulated assets value in the past six months, I may be just a little cranky. Panicked no, cranky yes. That and I'm still juicing up on coffee this am.
"If you think there's been an unacceptable drop in value in market and real estate based assets now, what do you think you'd be looking at if the major financial institutions (whose assets, as we saw, were tightly coupled) suddenly went "poof"?
"It's hard to argue against insuring liquidity for the large financial institutions that keep the wheels of the nation turning. But the track record of government oversight and transparency in how the taxpayer money is spent is about par for the course."

I think we're in agreement here.

I don't think you really want to hear my opinion on that, do you?

Because I think there's been plenty of overblown hysteria *and* hyperbole on both sides of the aisle. I didn't stay up until midnight last night when I have to get up at 4 am because I enjoy working on *&^% charts for several hours after working a 10 hour day."

M'lady, I always enjoy reading your opinion and appreciate the time you take to put together a tight and well reasoned post. If I had the energy, or I thought that my commentary mattered to any degree, I would take the time to proof my comments before I post. Instead, I converse as I would with someone across the lunch table... so I hope that I do not incite anger. At least in those I do not intentionally set out to anger which would include you...

Ok I admit, it's a short list =;^}

Posted by: bt-dey-vil-rue-de-day-dey-vus-burn_hun at February 11, 2009 08:51 AM

"Lost"?

Where did this money go? Did it go "poof"? Does money do that - just disappear like magic? Gone, without a trace? :p

"Lost" as in the government that took it from us and handed it out has no idea where it is right now. No clue.

Posted by: Jimmie at February 11, 2009 09:23 AM

I fear we will not be the same capitalist country we have been for 230+ years after this "stimulus" is passed. Too many socialist agenda items have been tucked into it, and I fear they will not be easily undone. Do we really want to turn ourselves into Europe? They are worse off than we are. That's what my real concern is. We might be losing our Republic, all the while cheering its destruction. Bread and circuses. And, it's this what the Dems want? Get enough people to vote their own self-interest for what handouts they can get from the government, and not what is in the best interest of the nation as a whole. I'm in a financial tight spot right now. No one got me here but me, when I decided to not work a full-time job in order to go back to school. Then, I wasn't working at all those last 7 months of school. I was banking on getting a teaching job that following school year. Well, even though (at least in my opinion), I have an excellent resume and I (generally) interview well, I am still without a teaching job. Thank God I found a full-time (though "temp"/contract) job last April. I could use an influx of cash, but I'm not asking or expecting anyone to just give it to me. Where I am is the result of my own choices, and miscalculations. Sucks to be me, but it's not your responsibility, or the government's, to "bail me out".

Posted by: Miss Ladybug at February 11, 2009 10:46 PM

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