It is Insolvency Stupid!

The Term Asset-Backed Securities Loan Facility (TALF) deadline has been extended. This doesn't sound good but you can be the judge:

Today, the Fed delayed by two days the March 17 deadline for submissions of proposed packages of debt that investors can buy with Fed financing. No agreements have been announced yet for proposed securities. Brokers and investors have had difficulty agreeing over contract terms for the Term Asset-Backed Securities Loan Facility, the people said.

After reading the article, I thought to myself is there an interest in or demand for such a facility present. Secretary Geithner is counting on TALF to unfreeze the credit markets. Look, I want to see him succeed and I hope I am wrong. But something tells me we should be focusing like a laser beam on the issue of solvency and dedicate our very limited resources to addressing this issue.

TALF would finance AAA rated securities containing loans for autos, education, credit cards and small businesses. Sure this very important provide liquidity this these markets but liquidity is not problem. Credit markets remain frozen because of issues of solvency, confidence and trust.

We learned yesterday that household net worth fell the largest amount in fifty years. Today, there is a story that collateralized loan obligations (CLOs) are experiencing record losses because of businesses defaults and bankruptcies. TALF is not going to help this situation. Funny, they are considering using TALF to bailout the CLO market.

Unfortunately, we may not have even seen the bottom of the mortgage crisis and credit card crisis is right behind that. There are a lot of mortgages that are due to reset within the next year. These mortgages and the credit cards have been securitized somewhere and they are still in the system.

I want to be optimistic. Unfortunately, I don't think we are addressing the issue of insolvency head on particularly as it pertains to the zombie banks (despite their rose short-term profit statements). These zombie banks have hundreds of billions of toxic stuff still on their books and we have yet to reach bottom with the mortgage crisis and credit card crisis is right behind that.

We should declare them dead, liquidate and recapitalize and move on.

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I hear ya

it's also scary that the Treasury department isn't even staffed with the worst global financial crisis since the 1930's.

China's economists will determine

Treasury and Fed's next moves.

We've already sold our soveriengty

I was looking over some old blog diaries I wrote last year and I ran across something I had forgotten about. Allow me to plagiarize myself.

On the night of July 12, Fannie Mae Chief Executive Officer Daniel Mudd was having a quiet night with his wife and a glass of wine when his phone rang. The person calling was Treasury Secretary Henry Paulson and he was very worried.
Fannie Mae, the biggest mortgage finance company in the history of the world, was in trouble. It's stock prices had dropped 45% since the start of the year. It's borrowing costs were rising as creditors became worried about the chances of Fannie Mae defaulting on its debt. "We're trying to solve a crisis of confidence," Paulson told Mudd after he explained the taxpayer bailout designed by the Bush Administration. "Would this do it?"

It seems that Paulson's boss had called him just a few hours earlier and explained in no uncertain terms that America was in for an economic nightmare if the American taxpayer didn't backstop Fannie Mae.

The problem was his boss in this case wasn't President Bush.
It was China.

Investors in Asia, the biggest foreign owners of Fannie Mae's $3 trillion of bonds, were asking the Treasury to bolster the government- sponsored company and its smaller competitor, Freddie Mac, said three people with knowledge of the talks.

The next afternoon, before financial markets opened Monday in Asia, Paulson announced the rescue plan, saying he would seek authority to buy unlimited equity stakes in the companies and their bonds if needed, while the Federal Reserve would lend directly to Fannie and Freddie. Congress included the proposals in a broader housing bill that President George W. Bush signed into law last week.

Freddie and Fannie rely on foreign institutions. Investors and central banks outside the U.S. own about $1.3 trillion of Fannie and Freddie's corporate and mortgage bonds, according to the Treasury. Chinese institutions are the biggest holders in Asia.

Paulson had visited China just a few months earlier and failed to win any concessions from China concerning their currency practices. He also caved in to China last December.

The reason I point this out is because Paulson met with the Chinese President just two weeks after the Bear Stearns collapse.
A month later Paulson was on his way to the middle east.

United States Treasury Secretary Henry Paulson will fly to the UAE and other Gulf states this week to reassure regional governments on their funds in the US following recent furore about the role of their investments.

At the same time that America was entering the worst financial crisis since the Great Depression, our Treasury Secretary, instead of tending to the domestic upheaval, was jet-setting around the world like an international salesman.

crisis of "confidence"

Do these people ever stop selling and peddling and sit down and look at the books? Ya know, good ole fashioned accounting knowledge?

The fact I find the most striking on the situation with China is the China PNTR has only been in effect for less than 9 years.

In other words China has conquered the United States of America in less time than it would have taken to go to war and even worse, the United States surrendered and instigated that surrender through bad trade deals.

But it seems now that China owns the United States and sucked the economy dry....what happens in this case next?

I feel the plan is for China to trade places with the United States, i.e. they become the reserve currency, the dominate world economy and the U.S. becomes more like a 3rd world nation.

But in this little trick of China owning the U.S. through debt....what does that really mean, what are the global, relative implications when this buying up of bad U.S. debt plan implodes?

If I sound CT, I'm feeling dramatic. One can work their ass off for good policy, for candidates one believes will actually put the United States and it's workforce first, will stop these corrupt practices but as soon as they take office....wham o, we have basically the same agenda of the last 40 years.


Like I said, welcome to the company store. China's our pay day lender.

Fort Knox

Just wait until the gold at Fort Knocks is shipped to Beijing.:-)

Insolvency...and it's cures

Is it possible that the Keynesian prescription (of taking on more debt to jump start the economy) is the exact opposite of what really needs to be done, which is bringing down debt, fast? Is the Obama team plagued by neo-classical thinking?

RE: Insolvency and it's cures

Folks, can you please format your links?

One point is this post is how Keynesian, in order to work, must put funds only back into the domestic economy from where the government expenditures originated.

I wrote about this also and how the current Stimulus, especially the tech, could be offshore outsourced and currently the government refuses to stop the use of illegal labor and that's another sieve in terms of keeping the funds domestically, or in the above ground economy.

We also know TARP funds have gone abroad and there are reports GM used their bail out funds in part for Brazil.

So, analyzing the results of deficit spending to stimulate an economy in a global world is sorely needed...

unfortunately the above article doesn't have any mathematics, which is what I would be interested in reading.

I've looked at it from the Keynesian domestic economy and it looks bad to do much of anything, due to the above but in terms of global economies, the interaction, that's what I would like to see more theory, plugging in the numbers on.

It's really two steps

First stabilize the patient, then cure him. I just hope we don't stop with the stabilization. You're absolutely right we need to reduce debt- in fact, I'm one of the few who believe we need to redesign the system around creation of wealth instead of creation of debt. But you can't get there without *first* keeping people alive. You don't want to be pumping donated blood into the patient forever, but you do need to have a pint or two to start the operation.

Moral hazards would not exist in a system designed to eliminate fraud.

Maximum jobs, not maximum profits.

Serious Mathematics specifically in "Rory Robertson Designs A Car" Steve Keen says, "The ratio of the change in debt to aggregate demand yields a dimensionless number that tells you how much of aggregate demand is debt financed. Since debt finance can turn on a dime–it can go from expanding to contracting virtually overnight–this ratio can tell you more about where the economy is headed than virtually any other indicator." Further, "The ratio of Debt to GDP is a comparison of dollars to dollars per year. The resulting ratio is years:

Dollars/Dollars/Year = Years

Does this matter when assessing the health of an economy? You betcha. Especially when that economy has been booming along on an orgy of debt-financed speculative spending. The ratio tells you how many years it would take to reduce debt to zero, if all of GDP were devoted to doing that."

Once again, we need to consider capacity to sustain debt (relative to GDP)...over and above mere debt:GDP ratios:-)

yes, debt to GDP ratio is a critical test

I was thinking more in terms of what happens in the Keynesian economic model when one uses U.S. tax payer dollars to create jobs in India or bring in workers from India instead of U.S. citizens....what happens with foreign companies, or U.S. companies who offshore outsource jobs...
like IBM get billions...

What happens in Keynesian modeling with these current realities? I don't actually have an answer I looked over some of the mathematics and see a huge problem with the above things I just mentioned but not aware of other modeling to take into account all of the effects. I went off of the basic Keynesian equation.

I think all of us on EP have mentioned, hmmm, just when does the US plain take on too much debt and we risk default but none of us have written a detailed blog post with projections, graphs and so on to date. Nor have I seen one really with that level of analysis.