Is There Anything the Credit Bubble Cannot be Blamed For?
The debt and/or credit bubble has had ramifications all across the financial spectrum. The most visual culprit we have was the housing bubble. As I work in Biotechnology, many of my coworkers ask me what is the difference between the Nasdaq tech bust of 2000 (which nailed biotech badly) and the current bust as they see all the bailouts and such.
The answer is both simple and nasty. Here are the differences:
Technology Bust of 2000
Who was hurt: Mainly retail investors that bought Abbie Cohen's tech stocks and the general public who held the worst stocks at all time highs.
Policy Action: Tough break. The free market can be rough. Hang in there!
Credit Bust of 2008 (ongoing)
Who was hurt: Big banks and large investment firms that are stuck with worthless mortgage assets and other toxic credit derivatives.
Policy Action: Holy sh#t! This free market is dangerous! Start up the bailout machine and keep that baby running! Save the financial system!
Remember these key differences when the powers that be tell you they are trying to get credit to you to help the economy.
This bust is also different because regular people were able to get access to obscene leverage to buy homes, leverage never available to buy stocks or options. Hence the bigger bust.
But I digress. Another little tidbit came by the way of Bespoke Investment Group and their chart showing the money that Mexican workers send back to Mexico. These payments back to their country are called remittances. With all the houses built in California, New Mexico and Arizona during the credit boom, there was also a boom in money flowing back to Mexico. I think you can guess how that is going now;
you do not need a sharp eye to see the blow off top coinciding with the housing bust. I am not certain, but I am pretty sure that this does not include illegal immigrant workers, so imagine those numbers!
See, there is nothing we cannot blame on the credit bust! Soon we will have to bail out Mexico which will certainly face budget issues if this keeps up.
Bigger, Badder, Better
It seems nothing can stop the runaway train of bailout proposals. Each one gets bigger and more insane as the days move on. There seems to be no way to make the government stop and think about what they are doing, only a race to "do something" no matter what. I saw this headline on Calculated Risk (from CNBC) tonight and did not feel surprise or even a mild shock:
Bank Bailout Could Cost Up to $4 Trillion: Economists
The cost of restoring confidence in U.S. financial firms may reach $4 trillion if President Barack Obama moves ahead with a "bad bank" that buys up souring assets.
The figure far exceeds even the most pessimistic estimates of how great the loan losses might be because there is so much uncertainty about default rates, which means the government may need to take on a bigger chunk of bank debt to ease concerns.
Goldman Sachs economists said ideally the public sector would step in to remove the hardest-to-value assets, which would alleviate nagging worries about future losses and hopefully help get lending going again.
"Unfortunately, with an unprecedented meltdown in mortgage credit and a deep recession in the broader economy, there is a great deal of uncertainty about the value of almost every asset," they wrote in a note to clients.
I have a memo for Goldman Sucks, I mean Sachs: The PUBLIC IS BUYING THE BAD ASSETS ALREADY! Who do you think the "government" is Goldman? I can assure you the only money the government has is taxpayer money, also known as PUBLIC MONEY. With minds like these no wonder Paulson and Geithner are so smart. More article:
Goldman Sachs estimated that it would take on the order of $4 trillion to buy troubled mortgage and consumer debt. That number could shrink if the program were limited to only certain loans or banks, but it could also grow if other asset classes such as commercial real estate loans were included.
New York Sen. Charles Schumer has said that a number of experts thought that up to $4 trillion may be needed to buy the bad assets, an estimate that a Senate aide said was based on informal conversations with people in the industry.
Stephen Stanley, chief economist at RBS Greenwich Capital, said although that sounds similar to the sort of financial engineering that spawned the credit crisis in the first place, it would be structured so that the central bank or whichever agency oversees the program is last in line to take losses.
"If things turn out so bad that the Fed ends up on the hook for $1 trillion in losses, then the financial sector, the economy, and everything else will be dead anyway," he said.
NEWSFLASH Mr. Stanley! One Trillion is hopelessly optimistic on the loss front. I guess everything is dead!
I have covered my thoughts on all this very clearly before. Not to rehash old posts, but I feel the following ones are very meaningful in the current environment. If you are bored or just think my writing is the greatest thing since the Sham-Wow then take another look at these posts:
25 Billion Here, 300 Billion There, Another Trillion Here and Pretty Soon You Are No Longer Talking About Real Money
Discussion on why the numbers are no longer causing concern as they are just too big to wrap one's mind around.
Does the United States Have a Debt Chandrasekhar Limit?
Is there a theoretical limit to US debt issuance? We should really find out. Fast.
There is No Going Back to a Free Market
The government will NEVER get out of the loan business. They should have thought about this a little harder.
Have a good night.