This week’s most interesting articles about the financial crisis!

In our quest to bring you the finest insights for your weekend reading, here are this week’s offerings.

1. The best comment of the week on the FM site:  McLaren’s about some conservatives discussing the economy.  Gallows humor at its finest.
2. Most interesting article:  “Can Countries Really Go Bankrupt?“, Der Spiegel, 30 January 2009.
3. The best briefing I have seen about the crisis:  “How Did We Get Here? The Financial Crisis: The View from America“, Brad Delong (Professor of Economics at Berkeley), November 2008, 16 slides.  Esp note the last line on slide #11.

Last, below are two excerpts:  the “best quotes of the week” and “Best review of this week’s performance by the Clown Patrol in Washington.”

(A)  Best quotes of the week (it’s a tie)

(1)  Excerpts from two reports dated 6 February 2009 by economist David Rosenberg, (bold emphasis added):

Now, there is just a feeling of dread in the lead-up to these employment reports, even for folks like us that have had a bearish view on the economy for some time now. It is one thing to forecast a depression and quite another to actually live through one. Not that this is the 1930s, but it is clearly not a garden-variety recession of the likes we became accustomed to know and understand in the post-WWII era, which were dominated by inventory cycles and when traditional policy stimulus could always be relied upon to provide at least a flicker of light at the end of the tunnel.

After all, the “average” post-war recession lasts 10 months and the two longest in the past five decades were 16 months apiece. Yet, here we are, 15 months into this downturn, and the only thing we see at the end of the tunnel right now is a train.

… The Household survey was even worse than the payroll report {establishment survey}, if that is possible – showing a record 1.24 million job plunge. The data go back to 1950, and we have never seen something like that before; even in per cent terms (-0.9%), there has not been a decline of this magnitude in over 40 years.

And almost all of the January plunge was in full-time employment – down an eyepopping 1.1 million, taking the cumulative loss since the recession began in late 2007 to 6.1 million, which is unprecedented. In a “normal” recession, we lose a little more than 2-1/2 million full-time positions. We have already lost nearly three times that amount and counting.

(2)  Jeff Immelt, CEO of GE (Reuters, 5 Feburary 2009):

“We’re at least to 1974-75 … Once you break through ’74-’75, you don’t stop ’til you get to 1929. Unlike the other downturns that I’ve been a part of, this one is faced with limited liquidity. If liquidity exists, it’s not coming back readily. That’s why the government’s role in this cycle is so gosh-darned important.”

(B)  Best review of this week’s performance by the Clown Patrol in Washington

They are running the country, for sure.  Running it into the ground.  For more evidence see “Bad Banks, Insurance Wraps and Other Fanciful Notions“, Instituteion Risk Analyst, 2 February 2009 — Excerpt:

As with the muddled thinking on asset valuations we heard last year from Fed Chairman Ben Bernanke, this new plan supposes that there is a “happy medium,” some compromise that awaits taxpayers in the US (and the UK too) in terms of buying bad assets from already insolvent banks without requiring the purifying step of insolvency and restructuring.

Indeed everyone from our usually sagacious friends at BreakingViews to the Financial Times to US Economic lider maximo, Larry Summers, seem to be coming under the nonsensical notion that there is some alternative to restructuring for the large money center banks in the US and Europe. The editors of the FT in particular seem to forget that their continued existence as a business comes from a healthy, private financial market, not the politically-conflicted statist paradise envisioned by Geithner, Bernanke and their masters at Goldman Sachs.

We are encouraged that a growing number of Republicans in the Senate seem to have figured out that the only way to protect the US taxpayer from further rape at the hands of the profligate souls who inhabit the senior appointed posts at the Fed and Treasury is to first mark the assets of the largest banks to market, a process that must necessarily wipe out the equity of these institutions. Like we said last week, the bondholders are the true owners of Citigroup, Bank of America, et al.

One key indicator that the children’s hour continues at the Treasury and Fed is the talk of issuing more equity warrants to “protect the taxpayer” as part of a bold plan being considered by the Obama Administration. Geithner is said to be the chief proponent of this idiocy, but we have heard even good friends in the analyst and Buy Side worlds prattle on about how we can draw the line at the equity of the parent companies of the money centers and then commence a credible recap.

… Thus when you hear people in Washington talk about buying bad assets from already insolvent banks, the illogic of their position should be apparent to all. Let’s walk through the two basic alternatives under a “bad bank” approach.

Scenario A: The Treasury buys the “bad” assets at inflated prices, say par value, taking the assets from the bank without incurring a loss. The unrealized loss is passed to the taxpayer, who now owns this asset at well-above market value. Unless you believe that the market value of these assets will recover at some time in the future, the prospect is for a subsidy by taxpayers to the bond holders of the large bank. The solvency issues of the large bank may or may not be resolved, but in consideration for taking the bad assets, the taxpayer is clearly now the owner.

Scenario B: The Treasury first forces the banks to write down the value of their assets in a one-time “Come to Jesus” M2M exercise, a global celebration of Fair-Value Accounting, if you will. The equity and the junior sub debt of C would be completely wiped out, with senior bondholders and new investors comprising the new owners. The large bank will then be solvent and could continue to sell assets and restructure its business to repay the taxpayer for previous support and meet a new business model.

The “Bad Bank” approach in Scenario A represents further delay and temporizing, a strategy that ensures that the US economy remains mired in crisis and recession for years to come. Scenario B represents a painful but ultimately quick remedy, the path whereby we can jump start the US private sector and get on with the process of rebuilding the global financial system. All that is required is courage and leadership, two qualities that still seem to be lacking in Washington.

Afterword

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For more information from the FM site

To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp interest these days:

• About Financial crisis – what’s happening? how will this end?
• About End of the post-WWII geopolitical regime

Some posts on the FM site with analysis of the financial crisis:

1. The most important story in this week’s newspapers, 22 May 2008 — GAO estimates the government’s liabilitis:  $57 trillion.
2. Essential steps to surviving the current crisis, 23 September 2008 — analysis
3. More reasons why the government will be taking over allocation of America’s capital, 27 October 2008
4. The US economy must go to Defcon 1, 13 November 2008
5. A certain casualty of the recession: the US Government’s solvency, 25 November 2008
6. The greatness of John Maynard Keynes, our only guide in this crisis, 4 December 2008
7. About the state of economic science, and advice from a famous economist, 8 December 2008
8. Destroying houses in order to boost home prices
9. “A depression is for capitalism like a good, cold douche.”, 17 December 2008
10. President Bush: “I’ve abandoned free market principles to save the free market system”, 20 December 2008
11. Words of wisdom about the global recession, from the greatest economist of our era, 29 December 2008
12. An Epistle to the good savers of America, 6 January 2009
13. A warning from Paul Krugman of what should be blindingly obvious (but is not obvious to many experts), 7 January 2009
14. “We are likely enduring a depression today”, 27 January 2009