October 2008

A $2 Trillion federal budget deficit

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All these bailouts have a price tag, and its one we can't afford.

Oct. 10 (Bloomberg) -- The global financial crisis is turning into a bigger drain on the U.S. federal budget than experts estimated two weeks ago, ballooning the deficit toward $2 trillion.

Bailouts of American International Group, Fannie Mae and Freddie Mac likely will be more expensive than expected. States are turning to Washington for fiscal help. The Federal Reserve said this week it will begin buying commercial paper, the short- term loans companies used to conduct day-to-day business, further increasing costs. And analysts now say the $700 billion bank- rescue plan passed by Congress last week may have to be significantly larger.

What is Behind the Curtain - Lehman CDS Auction Gives a Hint

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Wizard of Oz Behind the Curtain

 

The Final Price for Lehman Brothers CDS auction is 8.625. That's 8.625% on the dollar and is much less than what was expected, 9.75.

 

That means CDS Lehman sellers have to pony up 91.375 cents on the dollar. That's the Biggest Payout Ever and will assuredly result in further write downs and losses for these sellers.

A New Bretton Woods

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The days of the dollar being the world's reserve currency are quickly coming to an end.

Oct. 10 (Bloomberg) -- Italian Prime Minister Silvio Berlusconi said political leaders are discussing the idea of closing the world's financial markets while they ``rewrite the rules of international finance.''

``The idea of suspending the markets for the time it takes to rewrite the rules is being discussed,'' Berlusconi said today after a Cabinet meeting in Naples, Italy. A solution to the financial crisis ``can't just be for one country, or even just for Europe, but global.''

The Dow Jones Industrial Average fell as much 8.1 percent in early trading and pared most of those losses after Berlusconi's remarks. The Dow was down 0.5 percent to 8540.52 at 10:10 in New York.

Is this 1873 instead of 1929?

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Stumbled across an interesting article - a reprint from the Chronicle of Higher Education.

The Real Great Depression
The depression of 1929 is the wrong model for the current economic crisis

By SCOTT REYNOLDS NELSON Scott Reynolds Nelson is a professor of history at the College of William and Mary. Among his books is Steel Drivin' Man: John Henry, the Untold Story of an American legend (Oxford University Press, 2006).

From a Chronicle article, The Real Great Depression.

Not being particularly well educated in history - especially our own, we tend to forget how volatile our economy was during the 19th century - and how devastating the various recurring 'Panics' could be.

Why Have the Markets Crashed?

The major US stock market averages have lost over 20% in two weeks alone, and over 10% just in the first four days of this week. Every single day, a major bank on some continent fails. We are in the midst of a full-fledged run on the financial system (I hasten to add: NOT your neighborhood savings bank) that by all definitions except the formal one of a 10% loss in a single day, should be called a crash.

I'll confess right here. I did not believe a crash would happen. In 1929 and again in 1987, crashes occurred less than 3 months after a fresh, exuberant high had been reached. It was exactly one year ago today that the DJIA reached its all time high of 14,165. Until 2 weeks ago, the decline was a slow grinding inexorable washing out much like 2000-2002 or 1973-1974. So much pessimism was already in the system that a crash seemed almost impossible. Then, after Lehman was allowed to fail, suddenly the emergency was upon us. Kudos to Lee Adler of the Wall Street Examiner who exactly cautioned a couple of weeks ago that his technical indicators were consistent with an imminent crash. He was right.

But that does not tell us WHY the market has crashed. This diary is somewhat stream of consciousness, and I'll add on graphs if I can later on, but for now, a narrative of why.

16% of Homeowners In Big Trouble

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Nearly 1 in 6 Owners 'Under Water':

The relentless slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the home is worth, raising the possibility of a rise in defaults -- the very misfortune that touched off the credit crisis last year.

The result of homeowners being "under water" is more pressure on an economy that is already in a downturn. No longer having equity in their homes makes people feel less rich and thus less inclined to shop at the mall.

And having more homeowners under water is likely to mean more eventual foreclosures, because it is hard for borrowers in financial trouble to refinance or sell their homes and pay off their mortgage if their debt exceeds the home's value. A foreclosed home, in turn, tends to lower the value of other homes in its neighborhood

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