Market Fun

The world markets have responded to Bush’s plan to put the country further into debt to put $800 of spending money into each American taxpayer’s pocket in much the same way they responded to 9/11.

Stocks across Asia took precipitous falls Tuesday for the second day in a row, reflecting fears that a weak U.S. economy could derail growth worldwide.

The drops were even more severe than those on Monday and several markets hit multiyear lows. Indian shares plunged so quickly — nearly 11 percent — that its stock markets halted trading soon after opening. In South Korea, volatile futures prices prompted the main Kospi market to briefly suspend program selling orders at midday. The Australian market suffered its worst one-day fall ever, while Japan’s Nikkei fell to its lowest since 2005.

Globally, the sell off has involved some of the worst market declines since Sept. 11, 2001 and has erased more than $5 trillion from stock markets this year.

Granted, much of this panic was also caused by the news that the insurers that are supposed to be insuring nice stable municipal bonds but instead are insuring the Shitpile can’t really insure the Shitpile.

But I can’t help but think of what this panic is going to do for our efforts to get a bunch of foreign investors to bail out our over-exposed financial system. More and more foreign banks are having to write off their chunk of the Shitpile. That can’t really be a selling point for them to buy more of it. And meanwhile, when Bush went to Saudi Arabia and asked, as politely as Barbara taught him how, that they please forgo oil revenues so the poor American consumer can continue to drive her SUV, Saudi Arabia, just as politely, told us to fuck off.

The Saudis may give Bush little comfort: Saudi Oil Minister Ali al-Naimi said in Riyadh that more crude would be pumped only "when the market justifies it.” The minister noted that economies are still growing with oil higher than $90 a barrel and said his country wants to avoid "cycles of volatility.”

Saudi Arabia supplies the U.S. with about 1.4 million barrels of crude oil a day, one-seventh of U.S. imports and second only to Canada’s 1.9 million barrels. Saudi clout in production shapes the world oil market, and its policies will weigh on the Feb. 1 meeting of the Organization of Petroleum Exporting Countries.

As Bush’s trip unfolded, U.S. dependence on Saudi Arabia was further illustrated when Saudi Prince Alwaleed bin Talal, Citigroup Inc.’s biggest individual investor, disclosed that he had put more money into the New York-based banking company. The increase was announced the same day Citigroup posted a $9.83 billion fourth-quarter net loss, the biggest in its 196-year history, tied to the mortgage meltdown.

(Our attempts to get Saudi Arabia not to wield the oil weapon are probably not helped by the fact that Israel, in the face of Saudi demands to make peace with the Palestinians, are themselves wielding the oil weapon.)

I know that US economic failure is not in the interest of the rest of the world, as efforts to decouple from our own collapsing Shitpile suggest. But the next couple of months may determine whether others in the world decide–either out of necessity or impatience with our own unwillingness to make important changes–to stop propping up the US.

33 replies
  1. CasualObserver says:

    In addition to the shitpile (which looks and smells very much like the energy shitpiles of yesteryear’s Enron, et al.–only bigger), it’s also my impression that the market has become way, way, overbought and over valued. I don’t know if this is going to be a crash, a correction, or what. But I do hope and believe that the market has finally encountered reality. And, regardless of the damage that may be done in coming weeks, any encounter the markets have with reality is a good thing.

      • CasualObserver says:

        Though I’m more worried about the pain that having the US encounter fiscal reality is going to bring about.

        That’s the bad part, and one has to think there will be damage and pain to people and families that don’t deserve damage and pain.

        Like the energy feeding frenzy that drained California dry, this shitpile was avoidable. In this case, sensible regulation, and consumers who are educated sufficiently that they can’t be suckered in, would have prevented this I believe. Easier said than done, I realize. But that would be government regulation, and Washington “on people’s backs”. And we all know that Government Regulation is never the solution, but rather is always the problem. So said Saint Ronald of Shining City–it must be so.

  2. JimWhite says:

    Is there any indication of where the hedge funds are on the coming market correction? In other words, are they going to be next in the bail-out line behind the subprime mortgage firms and the institutes that bought the packaged loans, or have they taken a position where they stand to profit from the correction?

    • BillE says:

      There have been a few bankruptcies of hedge funds since august 07. Bear Stearns in particular has a couple that were incorporated overseas and the bankruptcies also offshore, tough luck hedge fund holders. There is a lot of exposure to hedge funds out there. I thought it was telling when Bernake called in the top hedge fund managers for a fresher course. These investment vehicles are so crazy even “serious” people have problems understanding them.

      The likely hood of bailout is proportional to the players who are invested. In the late 90’s a big hedge fund was on the brink of collapse when it was saved by the fed and private banks. It didn’t hurt that the price of the fund was 10,000,000 to enter. The big NY money people stood to be hurt like David Komanski of Merrill. Sure enough bailout.

      A little reported point of risk are Money Markets. A lot of the investement banks have cash sweep money markets that pay a small interest rate. Those funds invest in something. Some have bought “safe” mortgage backed securities. Oops. Can only get you a golden parachute at the top.


      • prostratedragon says:

        If you mean the LTCM rescue, that one used no Fed or taxpayer money. The president of the NYFed branch co-ordinated meetings among the bigger bankers and insurance companies who were involved, and at those meetings a private bailout was created. So while it’s true that not everyone can get the Fed to knock the heads of their creditors together, the result was not precisely a Fed bailout.

        Interesting thing that only a decade or so ago that failure seemed like a huge thing at the time, with a loss of about $5b over one quarter. Compare that to the bond writedowns, etc., that we now see almost daily.

  3. BayStateLibrul says:

    Check Bush’s e-mails to see if he twisted Ben’s arm?
    What about Cheney’s Haliburton…. he may have sold ahead of the curve?

    • TheraP says:

      Depends on what kind of mortgage a person has. If they have a fixed rate mortgage, then there is no effect. If their mortgage is adjustable, it all depends what the rate is “tied to.” So, usually there’s some formula related to another Fed figure. And that varies according to the loan.

  4. Temmoku says:

    How many barrels of oil will I be able to buy with my $800? I know it won’t pay my mortgage for even a month!

  5. TheraP says:

    Fascinating how if the Fed doesn’t act, that’s a bad sign. And if they do act, that’s even worse!

    Yes, it’s fun!

    • TheraP says:

      Keep up your questioning. You do a great service on this blog, I think, by doing that. Many others may have similar questions, but hesitate to ask.

  6. Neil says:

    So what will my Sun Microsystems stock be worth after the fall? ;-} It still hasn’t recovered since the bubble burst in the late nineties. I keep it because the certificates are printed on bright colorful paper.

    Why is it Republicans cite “free markets” as a magically-endowed naturally-occurring self-sufficient mechanisms and as justification to reject consumer protection legislation banning abusive deceptive consumer credit vehicles, as a matter of principle, except for moments like NOW when their financial future is threatened?

    Now they want the Federal Reserve to manipulate interest rates and the Federal government to institute tax rebates to stimulate consumer retail. (Look around, how far will $800 go and who hasn’t spent it already?) More to the point, aren’t the markets correcting themselves already with the same magical powers they’ve always had? And how did we get here?

    The problem with KumByA politics is that when the time right to put a stake in the heart of wrong-minded ideas – abused to manipulative wealth to the wealthy from the not so wealthy (credit card legislation, predatory mortgage loan business deals) – the ideological fight is averted to the detriment of the country and citizens.

    • masaccio says:

      Now they want the Federal Reserve to manipulate interest rates and the Federal government to institute tax rebates to stimulate consumer retail. (Look around, how far will $800 go and who hasn’t spent it already?) More to the point, aren’t the markets correcting themselves already with the same magical powers they’ve always had? And how did we get here?

      If you think about it, it looks like the major use most people have is to repay some of their debt. In other words, we lose tax revenues to help bail out the holders of the big shitpile.

      The market isn’t responding very well. No one knows just how great their exposure is to the big shitpile. No one really knows just how badly things will go as people start defaulting in the potentially huge numbers being suggested, not only in mortgages (including but not limited to sub-prime mortgages), credit cards and auto loans and leases. No one really knows what will happen to all those loans banks made for going private transactions, expecting to be able to syndicate them to other banks and private lenders and now find that they cannot. And no one knows just how much debt in off-balance sheet financing vehicles will have to be taken back onto the balance sheets. That might happen because of guarantees written into the transfer documents. Or it might happen because those vehicles issued commercial paper which was bought by mutual funds run by the banks, and to maintain value, they have to buy the securities back. Of course, that last one wouldn’t have happened if the ideologues of the republican right hadn’t gotten rid of Glass-Steagall.

      Naturally enough, given that they think they bought the current administration, the greedheads who caused this mess want a bail-out. They’ll get it, at your expense.

      • bmaz says:

        Yes; I believe that started in earnest today, because that giant rate cut benefits those at the top and hurts those at the middle to bottom. As Bush himself made crystal clear, all he cares about are the “haves and have-mores”.

  7. Evolute says:

    With the aroma of the pile insidiously approaching gag level seems everyone’s checking their own shoes.

    Should make for a frivolous State of the Union address, eh.

    • jdmckay says:

      I check there regularly, but not so sure I agree w/much of what he says in that piece.

      This has been a long time coming, I’m only surprised it’s taken this long to hit. I think, w/out drastic changes here at home (that aren’t on the horizon), from the US POV we’re not looking at an “adjustment” rather a global realignment… the US brand just ain’t what it used to be.

      Beranard @ MoA wrote this on 12/3… a bit more realistic IMO.

  8. 4jkb4ia says:

    Brad Setser is really excellent in my very uninformed opinion. I hope the blog will continue to be available for free.

  9. randiego says:

    The Bushies only care about one thing – delaying any meltdowns for 12 months. Long-term consequences of current actions are for the next guy to worry about.

  10. masaccio says:

    Jon Stewart got the Great Genius Greenspan to admit that the function of the Federal Reserve Board is to support stock market prices. Take a look at this. The question if we cut interest rates, we hurt small savers who are collecting interest, and benefit the stock market, and all the rich people who hold huge equity interests in corporations. This is the classic trickle-down: support giant money, and maybe they’ll give you a job.

  11. masaccio says:

    I’m thinking there’s gonna be one more dead cat bounce. Maybe I’ll sell out if there is, otherwise, might as well ride down. I do like these economics threads.

  12. joejoejoe says:

    Bush’s plan to put the country further into debt to put $800 of spending money into each American taxpayer’s pocket

    Since Congress is pretty much on-board with this kind of stimulus and timing is supposed to be important — why bother cutting checks? Couldn’t Congress just figure out what size stimulus they want and then tell employers to rebate the income tax deductions people have taken from their check for 2 weeks or however long it takes to “stimulate” the economy?

    It seems comical to have Nancy Pelosi and Harry Reid talking about how urgent the problem is in one breath and then say that maybe they’ll have legislation done in a month that will start cutting checks in June. Since we’re borrowing all this money in the first place…why not just stop collecting the taxes for a few weeks and tell everybody to go out and buy stuff. And if it’s so urgent…why not have a special session in Congress and just hack it out in a week instead of a month?

  13. Evolute says:

    What’s needed is a honest discussion on the dismantling of the Glass-Steagall Act and how that has led to the current financial crisis. How allowing commercial banks to merge with investment banks has produced worthless paper mirroring the 1929 crash.

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