Friday, October 10, 2008

Years of Counterfeiting

The big news for most people in the US this week was not the equities plunge but the plunge's impact on retirement assets - they've lost 20 percent of their value in the past 15 months. This will cause a seismic shift in retirees' feelings about markets - right as the boomers try to retire in earnest.

The other big news is that the confidence fixes didn't work. The feds didn't do nothing like 1929. But they did next to nothing like 1987. Actually more than 1987. But junk wasn't enough, and buying commercial paper wasn't enough, and the math still doesn't work out - the market in Credit Default Swaps is worth $62 trillion! So now the Repubs have to tear their hearts out and take government ownership positions in exchange for cash. And it still won't work.

Why not? Because banks won't lend to other banks whose assets are counterfeit. Many many many assets consist of notes whose value was created in the writing of the notes, and which hinged on leveraged debt. These notes had that value once in a specific exchange. They don't have it anymore.

I'm not saying credit isn't real. I'm saying issuing credit is like printing money. There was way too much of it. The amount of "M3" money increased from 1971 to 2006 by a factor of 14. People depended too much on it for their standard of living. It also made life to expensive. The deflating of invented assets isn't over yet.

Costs of other bailouts (from Le Monde October 3, 2008 p 9):

1986 -1995: savings and loan bailout - $160 billion, or 3.7% of GDP, 78% paid by the government

1991-1993: Swedish banking crisis - $65 billion crowns, or 4% of GDP

1998-2001: Japanese banking crisis - Y60 trillion, or $500 billion dollars, 12% of GDP; 70% of cost to state paid by selling shares on the market

No comments: