High priority report: a geopolitical sitrep on the financial crisis

 

 

Fabius Maximus | Sep 16, 2008

We now enter the third phase of the crisis.  Past events along the way, milestones on the road, each generated headlines and thousands of articles – are forgotten as we move to the next phase.  And rightly so.  The overall process is the important thing to see, so large that it is visible only in our mind’s eye.  This is the end of the US debt supercycle and the post-WWII geopolitical regime – these are the domestic and international sides of the same coin.Contents

 

 

1. The 3 phases so far of the crisis.

2. We have squandered the “golden hour.”

3. What will happen in this third phase?

4. The Election

The story to date, in three phases

(1)  Collapse of the mortgage brokers, starting in December 2006 – met with laissez faire (indifference).

(2)  Collapse of flawed financial institutions (Countrywide bank, Bear-Stearns, the government-sponsored enterprises) – met with massive intervention and bailouts.

(3) Contagion and failure of healthy institutions.

 

 

Note that the first two phases were characterized by confidence.  Confidence that the problems were contained.  Confidence that the government had the wisdom, knowledge,and power to solve these problems.  Confidence that the worst was over.  Happy talk by our leaders fueled this confidence.

Larger, sterner measures will be needed now, as confidence fades.

The golden hour

In emergency medicine doctors speak of the “golden hour”, a concept created by Dr. R Adams Cowley:

There is a golden hour between life and death. If you are critically injured you have less than 60 minutes to survive. You might not die right then; it may be three days or two weeks later – but something has happened in your body that is irreparable.  (source)

{For more on this see Wikipedia; for its possible origin in study of WWI battlefield treatment see here.

Global leaders, both business and government, have squandered the golden hour – during which large and bold actions might have arrested the downcycle, or at least resulted in a controlled landing.  Their actions have been reactive, incremental, and ineffective.  Leaders take small steps in order to keep their options opened.  That’s a delusion; time inexorably closes options.  Their remaining options are both difficult and problematic.

 

 

The key error has been to address this as a series of unrelated interventions to help individual firms.  A microeconomic response to a macroeconomic problem.  As I have said so many times on this site, correct diagnosis must precede effective treatment.

Phase 3

How will phase 3 differ from the first two?

(1)  We enter the third phase with considerable downward momentum.

(2)  The credibility of business and government leaders has been expended, fruitlessly – and may be difficult to rebuild.

(3)  Fear is appearing.

(4)  Private sources provided much of the new capital to support ailing financial institutions; that will no longer be possible.

(5)  The public policy tools used in phase one are exhausted – complex maneuvers with hidden costs (assurances to the public of a small price to pay):  Fed loans, Fed purchases of junk assets, bailouts short of explicit nationalization, etc.

(6)  The recession (US certainly, perhaps global) will become more severe, exacerbating the crisis.

Treatment of the financial system, not its parts, will be needed, IMO.  This may come in phase 3, or be delayed to phase 4 – by which time the crisis will have grown more serious.  What sort of actions might we see?

* massive fiscal and monetary stimulus programs,

* large scale and explicit nationalizations,

* coordinated central bank action to adjust relative currency values and control capital flows.

The change of Administration may halt or slow rescue operations at a critical point, esp. if there is a change of control in either or both Congress and the Executive branches.

Failure of the major nations to agree on a coordinated response to the crisis would have large and unpleasant consequences

 

The Election

Unless its tenor changes soon, historians will marvel at the 2008 election.  With so many great events taking place, the US public debates trivia.  The major foreign and domestic issues of our time, immediate and pressing issues, remain almost invisible.  I can recall no similar episodes in the past, either the US or other democracies.  Does this mark our unfitness to govern ourselves?

Fortunately there is time.  The election is our opportunity to influence these events, whose resolution might shape America’s destiny.  Make your voice heard.  Donate your time and money.  Discuss these things with everyone you know, by every media at your command.  The clock is running.

Update #1 – this is the glop both sides feed us

McCain speaking today (AP story):

 

 

“Our economy, I believe, still, the fundamentals of our economy are strong, but these are very, very difficult times, so I promise you: We will never put America in this position again. We will clean up Wall Street” … “The McCain-Palin administration will replace an outdated, patchwork quilt of regulatory oversight and bring transparency and accountability to Wall Street. We will have transparency and accountability and we will reform the regulatory bodies of government.”

Please share your comments by posting below.  Please make them brief (250 words max), civil, and relevant to this post.  Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

A few of the most important posts about this subject

1. A brief note on the US Dollar. Is this like August 1914?, 8 November 2007 – How the current situation is as unstable financially as was Europe geopolitically in early 1914.

2. The post-WWII geopolitical regime is dying. Chapter One, 21 November 2007 – Why the current geopolitical order is unstable, describing the policy choices that brought us here.

3. We have been warned. Death of the post-WWII geopolitical regime, Chapter II, 28 November 2007 – A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).

4. Death of the post-WWII geopolitical regime, III – death by debt, 8 January 2008 – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.

5. Geopolitical implications of the current economic downturn, 24 January 2008, – How will this recession end?  With re-balancing of the global economy, so that the US goods and services are again competitive.  No more trade deficit, and we can pay out debts.

6. A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.

7. What will America look like after this recession?, 18 March 208  - The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.

8. The most important story in this week’s newspapers , 22 May 2008 – How solvent is the US government? They report the facts to us every year.

9. Prof Nouriel Roubini describes “The Decline of the American Empire”  ,18 August 2008

10. The World’s biggest mess, 22 August 2008 – A brillant ex pat looks at America from across the ocean.

11. “The changing balance of global financial power”, by Brad Setser, 22 August 2008

12. “The Coming US Consumption Bust”, by Nouriel Roubini, 6 September 2008

13. Treasury Secretary Paulson leads us across the Rubicon, 9 September 2008

To see the all posts on this subject, go to the archive for The End of the Post-WWII Geopolitical Regime.

 

 

 

 

olja  oljekrig  oilwars  USA  FED  nyliberalism  nyliberal  neoliberal  skojare  liberaler  kollapsen av nyliberalismen  militär keynesianism  Bush  Clinton  McCain  Förenta Staterna  George W Bush  liberal kris  den osynliga handen  globalisering  internationella förhållande  amerikansk ekonomi  dollar collaps  the invisible hand  neocons  militar speditures  structural crisis trade balance  Globalisation  Globalization  globalism  Globalisering   IMF  world bank  corporate bond equities markets  disarray; the banking system  collapsing  consumer spending  tax revenues  national debt black holes  krigsförbrytare  war criminals  Democracy  liberal democracy  dictatorship  fascism  McBush  11/9  9/11  Palin terrorism  War on terrorism Russia  Georgia  Bush  Putin  south Ossetia  War nuclear  Nato  Election 2008  Obama  McCain  Iran  11 september   Accounting    Asset    Asymmetric information    Autarky    Average cost    Average propensity to consume B   Barter system    Bonds    Budget    Business economics C   Call money market    Capital    Capital Asset Pricing Model    Capital market line    Commerce    Commodity    Company    Corporate finance    Credit    Currency D   Depreciation    Diversification    Duty E   Economics E cont.   Efficient frontier F   Finance    Main Page    Gini coefficient    Microfinance    Price floor    Equity    Financial economics    National stock exchange    Budget deficit    Sample    Financial instrument    Fixed capital    Foreign exchange rate    Future value H   Hedge funds I   Industry    Inter-connected Stock Exchange L   Lending    Loan M   Macroeconomics    Money Supply    Money changer    Money market N   Normal distribution O   Option    Over-The-Counter Exchange of India P   Present value    Price    Product    Profit R   Repo rate    Return on investment    Risk    Risk management S   Secondary market    Security Market Line    Sell    Share    Share certificate    Standard deviation    Stock    Stock market T   Tariff    Taxation    Time value of money  Treasury bonds Y   Yield Z   Zero-coupon bond  Foreign policy law of the United States  imperialism  noninterference  nonintervention  regionalism  axis-of-evil  Bill of Rights  blow-back  budget  capitalism  caucus  civil rights  collateral damage  depression  disinformation  doublespeak  fascism  free speech  free enterprise  Federal Reserve System  FDIC  globalization  mpeachment  inflation  laissez-faire  MSM   Mainstream media  Neo-liberalism  Neo-conservative (Neocon)  New World Order  outlays  POTUS  propaganda  privatize  recession  revenue enhancement  republic  SCOTUS  Supreme Court of the United State  SEC  social security  subsidy  think tank  tyranny  terrorism  unilateralism  Weapons of mass destruction  antiterrorism  expansionism  geopolitics  neocolonialism  neoliberalism  ultraconservatism  Dollar Collapse  Credit Default Swap  CDS  Credit derivatives finance  Credit-default swaps on Fannie and Freddie  Credit Default Swaps and Financial WMDs trade  quote market  dealer  the bid  strategy  investors  lower the overall cost  shares   principal  mortgage  outstanding. Average life    weighted-average time   receipt   future cash flows  using as the weights the dollar amounts  principal paydowns. Average maturity The average time to maturity  securities  mutual fund  Changes in interest rates  bondholders and stockholders  Dow Jones Industrial Average  contract  financialoptions contractstraded  Corporation  financial institutions   bids  offers  tradedbonds  bond government agency   corporations created  manage a revenue-producing public enterprise. authority bond  municipal bond  margin protections  incorporated  authority bond contract  institutional investors  transact block business  purchase  sale   security  Markets   price   free interaction of prospective buyers  sellers floor  stock exchange  stocks preferred  dividend discount model   share  equity  low price-earnings ratios  high dividend yield  futures and options  contract  executed  exchanges   closing period  taxpayer  cash flow   risk  profit   asset value exceeds market value  A security  collateralized  Stock Price Riskless Indexed Notes. Zero-coupon four-year bonds repayable  security   commodity  financial_institution   syndication. This implies the entity that agreed and negotiated the project financing structure  bank  underwriter entitled to syndicate the loan or bondissue  convertible arbitrage index arbitrage  and international arbitrage  profits differences  price  extremely similar  security  currency  commodity  traded  two or more markets  Lower-rate refunding issue proceeds  invested Treasuries  first call date  interest rate Preferred Stock  equities  call provision in a municipal bondindenture   right of redemption  issuer  interest payment  general equities  order to buy or sell  quantity of stock  convertible securities. Interest  accumulated  market value  discount bond  liability  pension plan  strategy  available information forecasting techniques  better performance  buy  holdportfolio  asset  protected  potential loss  insurance  hedging Adjustable rate   convertible securities  interest rate   dividend adjusted standard market rate  outside control of the bank or savings institution  Treasury bonds  notes. Bush  McCain  Obama  Imperialists  hegemony  american century  pax americana  Palin  Finanskris  kreditkris  dollarraset  olja  oljekrig  oilwars  USA  FED  nyliberalism  nyliberal  neoliberal  skojare  liberaler  kollapsen av nyliberalismen  militär keynesianism  Bush  Clinton  McCain  Förenta Staterna  George W Bush  liberal kris  den osynliga handen  Bernake  Greenspan  kreditkrisen  finanskrisen  bankkrisen  konsument krediter  skuld  nationell skuld  räntenivå  recession  konjunktur strukturell kris  national debt handelsbalans utlandsskuld  nykeynesianism; internationell ekonomi  ekonomiskt läge  globalisering  internationella förhållande  amerikansk ekonomi  bankväsendet  finansmarknad  avreglering  pension  globala rånet  nyliberal skojeriet  neoliberalism  neocons  financial crisis  bank crisis  recesion  depresion  economics  voodoo economics  freakonomics  Federal reserve  Dollar Collapse  neokeynesianism interest rate  obligations  CDOs  state obligations  economic colapse  the dollar empire  monetary policy  national debt  state debt  credit crisis  credit card  mortgages structured investment vehicles   financial asset   credit crunch  Bank of England   financial panic   Individual Voluntary Agreement   toxic packages   sub-prime mortgages  privatization  deregulation  foreign debt  dollar asssets  dollar collaps  the invisible hand  neocons  debt mortage loans  mortage debt  consumer debt  bonds  trasure bonds inflation  consument price index  producent price index  energy price  oil price  bonds price  stocks  stock  Wall Street  financial markets  militar speditures  structural crisis trade balance  Globalisation  Globalization  globalism  Globalisering   IMF  world bank  corporate bond equities markets  disarray; the banking system  collapsing  consumer spending  tax revenues  national debt black holes  Closed Economy The Black Economy  Recession  Leverage  Treasury Bill  Asymmetric Information  The Long Tail  Demand Forecasting  Monetization  Monopoly  Monopsony  Duopoly  Oligopoly