Tuesday, September 16, 2008

AIG, FED, CapitulationS

It is rumored now that AIG will be saved by the Govt. They are way too big as the final insurer of many swap products. It is argued in the "national interest".

The FED went all in a 12 month of crisis. That's it tapped out. There was no saving for Lehman. Many commentaries try the ideological line of free markets, saying "about time". A trillion of support and we still have free market fairies. They are broke, end of story.

The only good thing today was that sense of capitulation, it is dark everywhere, there is no exit. Something in me says there will be capitulations, with an S, not just one. This too shall pass.

Meanwhile overnight (ON) monetary pays 10%. That's right, 10%. Sign of the times. If these are the death throws of the credit markets, they sure are impressive.

This sub-prime virus, I am telling you!

10 comments:

aarone said...

Far be it from me to speak calm, but 10% is nothing.

Go to Money Tree and get a payday loan and see what they'll give you. On the other side, I could max out my Visa and give the markets a nice 1.9% on the first 30 days.

This (the overnight rate) is not a crisis, it's just an indicator that people are scrounging, and probably means there are some more big deals being put together. The only other thing that would spike the short term rates is a run on deposits, and that's not happening.

But let me spread some FUD of a different color. A scare that the government won't be able to able to back FDIC due to looming insolvency over it's recent debts (and lack of international T-bill buyers) might very well cause a run on banks and a boom in mattress sales.

Alternately, fear of mass inflation if the government tries to pay down their recent debt acquisitions with more paper would have a similar effect, where eveyone goes out and spends before their money becomes worthless.

That could be a real short term economic stimulus, but with skittishness for savings or investment, wouldn't hold up long. The Fed holding at 2% and commodities dropping is a real good sign though.

I worry about the oligarchy getting smaller and gaining more control. Nobody likes to see trustbusting, though. We've been through this before with oil and banks.

Another concern is Latin American currency scares spreading to Asia and Europe. That's the more direct cause for the recent injections there. Fear of a weak dollar might actually cause other currencies to plummet precipitously, thereby buoying the dollar.

Marcf said...

Thanks for the input. Good to hear that a 10% is completely a one-off thing. A big deal in the works could be good news. Wouldn't a run on the shadow banking system create the same effect though? If the rate goes back down it would be welcome.

I heard Roubini talking about FDIC insolvency. I can't remember the exact numbers but they were... interesting. Big gap between potential claims and actual cash on hand at the FDIC. It won't come to that...

Mass inflation is something I tend to not believe in. Clearly the delevering is offset by printing presses. M4 can be kept constant or delevering at a controlled rate. Point is: wiggle room for the Treasury.

Totally agreed on the comment about Oligarchy, Nathalie pointed it out this morning saying "and when the nationalizations are done and the companies are making money, it would be sad if the companies were privatized russian style". The corruption of it.

Alex said...

There is an article on Nouriel's blog(I have lost touch but have known him for a while being in DC)about FDIC at:
http://www.rgemonitor.com/index.php?kwd=fdic&option=com_search&task=search

You can request a free 14 days subscription.

Scary times ..

How is Madrid doing?
I love working there a few years back ..

Rob said...

So... was the shadow banking system anywhere near this powerful (or dangerous) when the Glass-Steagall Act was in effect after the great depression and until 1999?

That law was put into place to stop reckless moves by banks. 8 years after we've repealed it, surprise surprise, the banks are doing stupid things again.

Why are people constantly surprised by this? And why isn't anyone proposing that we reactivate that law?

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