Thread: Foreign investors veto Fed rescue

Foreign investors veto Fed rescue

By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 1:13pm GMT 17/03/2008

As feared, foreign bond holders have begun to exercise a collective vote of no confidence in the devaluation policies of the US government. The Federal Reserve faces a potential veto of its rescue measures.

Asian, Mid East and European investors stood aside at last week's auction of 10-year US Treasury notes. "It was a disaster," said Ray Attrill from 4castweb. "We may be close to the point where the uglier consequences of benign neglect towards the currency are revealed."

The share of foreign buyers ("indirect bidders") plummeted to 5.8pc, from an average 25pc over the last eight weeks. On the Richter Scale of unfolding dramas, this matches the death of Bear Stearns.

Rightly or wrongly, a view has taken hold that Washington is cynically debasing the coinage, hoping to export its day of reckoning through beggar-thy-neighbour policies.

It is not my view. I believe the forces of debt deflation now engulfing America - and soon half the world - are so powerful that nobody will be worrying about inflation a year hence.


Yes, the Fed caused this mess by setting the price of credit too low for too long, feeding the cancer of debt dependency. But we are in the eye of the storm now. This is not a time for priggery.

The Fed's emergency actions are imperative. Last week's collapse of confidence in the creditworthiness of Fannie Mae and Freddie Mac was life-threatening. These agencies underpin 60pc of the $11,000bn market for US home loans.

With the "financial accelerator" kicking into top gear - downwards - we may need everything that Ben Bernanke can offer.

Bear Stearns may be worse than LTCM collapse
Jeff Randall: A world addicted to easy credit must go cold turkey
How Bear Stearns ran out of the necessities
"The situation is getting worse, and the risks are that it could get very bad," said Martin Feldstein, head of the National Bureau of Economic Research. "There's no doubt that this year and next year are going to be very difficult."

Even monetary policy Ã* l'outrance may not be enough to halt the spiral. Former US Treasury secretary Lawrence Summers says the Fed's shower of liquidity cannot cure a bankruptcy crisis caused by a tidal wave of property defaults.

"It is like fighting a virus with antibiotics," he said.

We can no longer exclude a partial nationalisation of the American banking system, modelled on the Nordic rescue in the early 1990s.

But even if you think the Fed has no choice other than to take dramatic action, the critics are also right in warning that this comes at a serious cost and it may backfire.

The imminent risk is that global flight from US Treasury and agency debt drives up long-term rates, the key funding instrument for mortgages and corporations. The effect could outweigh Fed easing.

Overall credit conditions could tighten into a slump (like 1930). It's the stuff of bad dreams.

Is this the moment when America finally discovers the meaning of the Faustian pact it signed so blithely with Asian creditors?

As the Wall Street Journal wrote this weekend, the entire country is facing a "margin call". The US has come to depend on $800bn inflows of cheap foreign capital each year to cover shopping bills. They may have to pay a much stiffer rent.

As of June 2007, foreigners owned $6,007bn of long-term US debt. (Equal to 66pc of the entire US federal debt). The biggest holdings by country are, in billions: Japan (901), China (870), UK (475), Luxembourg (424), Cayman Islands (422), Belgium (369), Ireland (176), Germany (155), Switzerland (140), Bermuda (133), Netherlands (123), Korea (11, Russia (109), Taiwan (107), Canada (106), Brazil (103). Who is jumping ship?

The Chinese have quickened the pace of yuan appreciation to choke off 8.7pc inflation, slowing US bond purchases. Petrodollar funds, working through UK off-shore accounts, are clearly dumping dollars amid rumours that Gulf states - overheating wildly - are about to break their dollar pegs. But mostly likely, the twin crash in the dollar and US agency debt reflects a broad exodus by global wealth managers, afraid that America is spinning out of control. Sauve qui peut.

The bond debacle last week tallies with the crash in the dollar index to an all-time low of 71.58, down 14.6pc in a year. The greenback is nearing parity with the Swiss franc - shocking for those who remember when it was 4.375 francs in 1970. Against the euro it has hit $1.57, from $0.82 in 2000. Against the yen it has smashed through Y100. Spare a thought for Toyota. It loses $350m in revenues for every one yen move. That is an $8.75bn hit since June. Tokyo's Nikkei index is crumbling. Less understood, it is also causing a self-reinforcing spiral of credit shrinkage throughout the global system.

Japanese investors and foreign funds are having to close their yen "carry trade" positions. A chunk of the $1,400bn trade built up over six years has been viciously unwound in weeks. The harder the dollar falls, the further this must go.

It is unsettling to watch the world's reserve currency disintegrate. Commodities from gold to oil and wheat are taking on the role of safe-haven "currencies". The monetary order is becoming unhinged.

I doubt the dollar can fall much further. What is it to fall against? The spreading credit contagion will cause large parts of the globe to downgrade in hot pursuit - starting with Europe.

Few noticed last week that the Italian treasury auction was also a flop. The bids collapsed. For the first time since the launch of EMU, Italy failed to sell a full batch of state bonds.

The euro blasted higher anyway, driven by hot money flows. The funds are beguiled by Germany's "Exportwunder", for now. It cannot last. The demented level of $1.57 will not be tolerated by French, Italian and Spanish politicians. The Latin property bubbles are deflating fast.

The race to the bottom must soon begin. Half the world will be slashing rates this year to stave off credit contraction. The dollar will have a lot of company. Small comfort.

http://www.telegraph.co.uk/money/main.j ... iew117.xml

Comments

unlike the conditions that beset the world before WWII, western man's expectation of material wealth now is huge. We want it now and gratification instantly. USA and UK mind sets were "make do and mend". Families didn't have holidays; you spent only what you earned, period.
The whole sorry mess can be summed up by, yes, you guessed it, Mr McAwber: "Income £20 year, expenditure £19 19s6d, result: Happines. Income £20 a year, expenditure £20. 0s. 6d., result: Misery.
It's this simple, folks. We've lost the money plot.
Posted by dick naseby on March 17, 2008 6:35 PM
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Please understand that the Federal Reserve, The World Monetary Fund, The UN and The CFR are Old Money, Old Family and Private. They do NOT care about US or any other countries sovereignty, only their own interest which is steeped in One World Government, One World Fractional Banking and One World Court with them in the drivers seat. What we are seeing are Crimes Against Humanity, plain and simple.
Ask a Rothchild or a Morgan or a Rockefeller how their balance sheets are doing!!! They can and have caused Wars, Recession and Depression to accomplish their real goals. Wake up people!
Posted by Daddy O on March 17, 2008 6:28 PM
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This is SOOOOOO FRUSTRATING!!!!! ABOLISH THE FEDERAL RESERVE NOW!!!! Why do we have them? It is a private bank, ultimately owned by the true "kings" of this world.

This is an evil system that we are in. The free market should drive the value of our dollar, not the Federal Resrve creating more dollars out of thin air!


Posted by Regular Guy on March 17, 2008 6:22 PM
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So what are we going to do?
Seems like sky is falling apart. Wish these players had majored in ethics than money. All our education, that is suppossed to lead us in comfort, is leaving us with discomfort.

I am surprised, we have no world body or world congress that can address these issues in a collective manner, afetr all if US goes down economically, many others will never see sunshine for years to come. A collective effort is needed. This is a test for the world community and we need to make it through with grace and dignity. Please suggest things that we all can do to minimize the effects on small people as well these biggies.
Posted by AJ Duggal on March 17, 2008 6:19 PM
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Yes, Vierotchka, that is why Dr. Ron Paul has been predicting this for years and questioning Greenspan and Bernanke about why they were deliberately devaluing the dollar. That is more than any so called economist has been doing for the past twenty years. Dr. Paul is an economist/obstetrician,the most intelligent man to run for US Presidential office these past 100 years. He has my unwavering support.
Posted by GDS on March 17, 2008 6:17 PM
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"The Money Masters" - The Scourge of Civilization

Educate yourself and know your history or be doomed to repeat it. A financial crisis is on the horizon and we all need to know how and why. While we all try to carry on with our everyday lives and provide for our family's there is a sinister plot that is unfolding like the world has never seen before. You can call me a conspiracy theorist if you like but denying the truth is foolish. I urge everyone to go to the link at the end of this commentary and spend the 3.5 hours it will take to get educated on the greed of a select few that will in effect be the end of the middle class in the world.

I am sure that most everyone has heard of Central Banks and Fractional Reserve Banking. But if you have not then the best thing that you can do is learn about this scourge on civilization and how this system has conspired to take over the entire world economy. I will give you a hint, the Federal Reserve is not a United States institution but is a private institution made up of a very small elite group of very old families that have made it their goal to control world monies. Presidents, Popes, Politicians, Founding Fathers, Economist and others have warned us through out history about the dangers of this Elite and very Private group of Old Families. There is even admission and evidence that this scourge is real and very active. In case you did not know, these admissions go so far as to admit to causing wars and depressions to ensure their control over ALL World Economies.

If you know a Rothchild or a Morgan or a Rockefeller ask them how their balance sheet looks. Bright, rosey and upward, if they were honest would be their answer.

I urge everyone to go to the link below and educate your self as to who the REAL ENEMY is. This is probably the single most important thing you could do at this point in history. There are things that we all can do to protect our families but only if you have the necessary knowledge to move forward. THIS IS NOT A JOKE, YOUR FINANCIAL FUTURE DEPENDS ON EDUCATING YOURSELF.

The Money Masters - How International Bankers Gained Control of America
link
Posted by Daddy O on March 17, 2008 6:12 PM
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I stand by my presidential pick... should have given Ron Paul more of a chance.

Ron Paul is an economic genius that puts Bernanke in his place on a regular basis...
Posted by George on March 17, 2008 6:06 PM
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I stand by my presidential pick... should have given Ron Paul more of a chance.

Ron Paul is an economic genius that puts Bernanke in his place on a regular basis...
Posted by George on March 17, 2008 6:04 PM
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Chairman Bernanke and the Federal Reserve look irrationally frenetic in their futile effort to avert a US recession. The Fed’s stalling action is making long term conditions for the US economy worse by increasing gas and food inflation and causing the plunge in the US dollar. Americans will eventually have to pay dearly for the Fed’s actions, probably with a long, severe recession. The unprecedented action by the Fed, of saving Bear Stearns from bankruptcy by taking on credit risk of $30 billion dollars from the Wall Street investment bank, demonstrates the Fed’s willingness to protect their friends on Wall Street who now do not have to return billions in bonuses they received just a few weeks ago. The Fed’s possible illegal, contemptible new roll of agreeing to be the lender of last resort for investment banks is truly socialism for the rich and powerful. The Federal Reserve needs to be reorganized to primarily safeguard the American people, so the Fed no longer focuses on helping their clubby, pampered friends. I ask you, where are the good politicians, who are not in Wall Street’s pockets, when the people desperately need their help?
Posted by Eric L. Prentis on March 17, 2008 5:57 PM
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Will somebody please press the "EASY" button.

Restart or Reset?
Posted by Paul Clark on March 17, 2008 5:49 PM
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Yes indeed, the entire Country will pay for the current financial scandal on Wall Street. The banking interests--and their servants in Congress and the Executive Branch--will see to it. Last Friday, the Federal Reserve Chairman wrote a $280 billion check; more are on the way. The point is, individuals caused this mess. Greed and arrogance on Wall Street and corruption in Washington D.C. caused this scandal. Many should be sent to prison for their actions in this disaster.
Posted by Paul S on March 17, 2008 5:46 PM
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What idiotic nonsense! Congrats on a new low of pontificating about what you clearly don't understand. Foreign investors did not "veto" or "stand aside" in the U.S. T-bill auction. They were outbid. If foreigners had stood aside, the dearth of buyers would have forced T-bill rates to rise to attract replacement buyers. This simple concept of supply and demand is well understood by anyone with rudimentary knowledge of the bond markets, whih evidently excludes your befuddled Mr. Attrill. The reality is, T-bill rates declined and have been doing so for weeks. Why? Because we Americans outbid you bond-illiterate foreigners. Why? Because our equity markets stink, so an excess supply of U.S. investors pulled money out of stocks and put it into capital preserving vehicles like U.S. treasuries. We have been doing this transition for months, and had you lived here, instead of writing about the U.S. from over there, you would have grasped this no brainer fact.
Posted by Ken D on March 17, 2008 5:45 PM
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The underlying issue that few recognize, especially the post-Keynesian economist, is that every single Fiat Monetary System has an inherent terminal life-span beyond which it can no longer function. The current Fiat System that has been employed by this global economy is no different than any other in history: IT TOO WILL MEET ITS END!

This is not a uniquely American problem however, America has lead the way toward planting the seeds of a global economic meltdown through the use of Fiat Money. Since every single "dollar" must be borrowed into existence, it is only a matter of time before universal mathematical laws demand justice and terminate under the weight of the foundation of debt that it is created upon.

The Central Banking Systems of the world, especially of the U.S. have been a dismal failure since their inception. Remember, the stated goal of the Federal Reserve was to stablize the economy though monetary manipulation and yet only 15 years after its inception it presided over the largest economic and social depression in our history. It has been and will continue to be a failure; eventually the People will awaken to the massive deception imposed upon them by their government and the collaborators in the Federal Reserve and hang the lot ot them.
Posted by Republicae on March 17, 2008 5:43 PM
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I would try to open my mouth and explain that this problem is more about the appearance of a problem then a problem...

But I think everyone knows this is more of a loss of confidence in America being expressed by the world then anything else.

Gotta love scare tactic news, you really scared everyone, straight out of a recession into a depression.
Posted by Jon on March 17, 2008 5:43 PM
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Until the central banks stop bailing out all these failing banks and financial institutions, the worldwide economic problems will just continue to get worse.

The main problem is that we are living way beyond our means and some responsible leader needs to tell us this. Instead Bush & co keep pumping more and more money into the bad debt situation, which in the long run will just exacerbate the crisis. The system needs 'flushing out' and insecure people have to stop buying status symbols(such as big houses & cars) they cannot afford. People will have to learn to live within their means....until they do, there is no hope!

The UK is full of people living way beyond their means and 'getting by' on their credit cards so they can buy whatever they want whenever they want; we live in an selfish age of greed and instant gratification...and to quote an old adage... "greed sows the seeds of armageddon".

Things were very different as recently as 25 years ago when most people lived on, and spent what they earned. If they couldn't afford something they would save up.

The greed culture (which came over here from the US in the 1980s) will destroy our societies if we don't do something quickly. Sure, the lenders and banks are to blame for pushing cheap money onto stupid and uneducated people. Most of us knew this crisis would happen 10 years ago as you cannot build a strong economy based on debt.

Greed is an unfortunate trait of the human race but sadly it has well and truly been exploited in recent years and we are about to see the end result of this unethical and immoral practise.
Posted by David on March 17, 2008 5:34 PM
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Well written, but even more disasterous is the technological tranfers that road along with this. The Wall Street robber barrons used their twisted version of globalization to scour the world in persuit of cheaper production costs and maximum short term profits. Their transfers of technologies directly supporting the rapid military buildups in China and India will lead to a global conflict in the near future. American companies like ITT sold night vision technologies and equipment, Boeing sold cruise missile guidance systems, Tektronix sold high speed oscilloscopes and other equipment used for nuclear weapons development, Apple transferred *all* of the production and plans for their latest computers to China, Indian technician's have stole plans for underwater guided missiles, our latest shoulder fired field missiles, and the plans for nearly all of American AND European infrastructure, personal information on our citizens - everthing from health and banking records to controls for the electrical grid, power plants, even information governing bank and credit transfers. Armageddon is a very real possibility.
Posted by Mike Brooks on March 17, 2008 5:27 PM
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I dunno - am I missing something here??

It seems to me that all this financial blood-letting we are witnessing right now, is being caused by one thing...
Namely American sub-prime mortgages. These were sold to people who perhaps could not read or write too well, or perhaps didn't speak English too well, - and genuinely did not understand what they were getting themselves into.

Maybe I am asking a stupid question here, - but why is apparently NOTHING being done to help these people?

Some of the shark - like selling done on sub - primes it seems to me, borders on criminal misrepresentation.
What's happening is that after a 'Honeymoon' period of low interest, and low mortgage repayments, - then the 'second phase' kicks in, with substantially higher interest and mortgage repayments, - which the borrowers - try as they might, - simply cannot afford.

OK - simple solution.......
How about an Amnesty for all Sub - prime Morgage holders?
How about an Act of Congress passed that limited the jump in interest rates on such mortgages to say - no more than 2 % of the origianal rate??
Retrospectively.......... of course.

That wouls mean house owners - COULD- then repay the lower rate mortgages, and the crisis would simply vanish.

What's wrong with that??

JP

P.S
I laughed at a recent report that the Zimbabwe dollar had hit 25 million dollars to the USA dollar. The Zims dont bother counting it any more, - they weigh it instead.
Mugsy Mugabe must must be rubbing his hands.
Posted by The Lone Ranger on March 17, 2008 5:16 PM
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Wish the U.S.of A. Newspapers would give
us whole story though I am picking up a little bitterness and mocking from the author of this article, lol
Posted by Steven Taylor on March 17, 2008 5:13 PM
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Well as a non economist whos only got a rudimentary overbiew of all this money printing stuff I would appreciate an explanation as to how the fed bailouts are inflationary.

the way I see it the existing ammount of money in supply was based upon the ammount of debt (crappy mortgages) and the income flow from that debt.

Now if the fed prints new money at no cost (tap tap on the computer) and takes the crappy mortgages they take that chunk out of the money supply including the future income flow (as they have nobody saying they have to reinject that money).

Its only if they offer intrest on the T bonds they exchange for the rubbish that adds to the money supply.

So if they just offered to take all the rubbish at some % of face value e.g. 80% and replace it with special bonds paying no intrest wouldnt that actually reduce the overall money in circulation.

They would then then have direct control of the mortgages which they could set at normal rates and reduce the principal as they have asked to do and never reinject the intrest payments.

That way couldnt they recapiltalise any balance sheet if the bank wanted to forgo the income stream to allow new lending and choose a set moral penalty which wouldnt destroy the system.

And as all the existing debt is effectively taken out the back and shot wouldnt the money supply and hence inflation actually go down?
Posted by rob on March 17, 2008 4:42 PM
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Clear reporting on the crisis. Thanks for pointing out the international linkages and changes in behavior such as the US Treasury auction participation of of trading partner country financial investors. As for whether the Bear Stearns rescue qualifies as a "Bail-out," it may be more properly described as an expedided bankruptcy where the Judge, attorneys and accountants were shortcircuited out of the process in the interest of time urgency. The value of the remaining Bear assets will depend upon how quickly the broad financial markets can find stability.
Posted by Brian Wade on March 17, 2008 4:34 PM
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I cannot for one minute understand how some of you, including Mr. Ambrose-Pritchard, can say that we are going to be looking at a massive deflation. Based on what evidence do you make such claims? I just don't see what you're talking about.

We should be so lucky as to see a couple of banks go under, leading to deflation. That's not a risk, it would be a miracle. If some of the excess money would fall off the board, we'd see the dollar rise again and stabilize--and it would solve the housing crisis, as well. Some companies would lose a ton, but hang on. Some would fold. Bad loans would see their homes repossessed and sold for their actual value. This is the price that must be paid--bad financial decisions are costs that have already been incurred, and can only be set right by allowing those who made them to pay the price. There is no alternative except to make the entire country pay, but when the entire country pays, the cost is even greater. It's an expensive, and foolish, fix. It's basically highway robbery, where the money to pay for all these nonsense is taken by an invisible tax from everyone in the country, most of whom are blameless and should not be made to pay for this.

If we did the right thing, they'd protect the value of the currency, which is clearly not what they (the Fed) are doing. There would be turmoil, but on the other side the average American's money is still worth something, and we'd be in a better financial position in the long haul.

Right now they're just throwing bad money after good--and insulating those who've made bad decisions from the consequences thereof.
Posted by James Deppeler, Jr. on March 17, 2008 4:27 PM
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What's the big deal? A $ 200 bio bailout is small change.

According to this March 14 Reuters article, copied verbatim by NYT, WaPost, Forbes, ABC etc... the US's GDP - at $ 13 million trillion - is now 1000 times bigger than last year (and so is Europe's).
link
Posted by phil on March 17, 2008 4:20 PM
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Futile to buy gold now.
Buy a Handgun, a Huffy, and lots of Honey.
Wait for the bulldozers to arrive.
Prepare to nurse the poor.
Save your strength for WWIII.
When all this dust unsettles, blame the whole thing on Florida.


Posted by KBegley on March 17, 2008 4:19 PM
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My stockbroker is advising all of his clients to invest in canned goods and ammunition.
Posted by Heath on March 17, 2008 3:55 PM
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'It is unsettling to watch the world's reserve currency disintegrate'

C'mon, it's a great time to be a financial reporter
Posted by ray on March 17, 2008 3:53 PM
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dan, you're an idiot. If you had the slightest clue about how science works, you would never make such a silly statement.
Posted by me on March 17, 2008 3:51 PM
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The Honorable Ron Paul is ignorant of an ongoing conspiracy to topple, financially, the West, in order to equalize the world's economies; for building one-world government under GLOBAL ECONOMIC SOCIALISM. // The conspiracy began in the 1940s with the GATT formulations. // Ask why Greenspan had violated his chairmanship duties by advising prospective home-buyers to take out an ARM. // Ask why Greenspan had sent out fed regulators to warn banks that they'd be charged with RACISM if they didn't loosen home-loans for minority, HIGH RISK home-buyers. // Ask why Greenspan recently, TRAITOROUSLY, had advised OPEC oil producers to de-link from the U.S. dollar. // Greenspan - the FEDERAL RESERVE - has embarked on a purposeful set of monetary policies designed to destroy the West's financial underpinnings. // Read about the WHO, the HOW, and the WHY of it in my below article (first one): Planned Destruction of America: link // Corporate America: What Went Wrong?: link
Posted by Anonymous on March 17, 2008 3:47 PM
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Only a damn fool will get worked up over these reports. To ignore might be to your peril, however....

Economists are on par with scientists who study global warming. If you cannot get your act and forecasts in harmony, why should we believe you?

Like the old adage.... "when in trouble, when in doubt, run in circles, scream and shout".
Posted by dan on March 17, 2008 3:37 PM
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Relative to the euro, the USD can fall much farther. Chinese yuan are backed largely by USD, as they have bought so much of US debt. Also they are just not a trustworthy source of reserve currency due to China's own economic and political problems. So what's left to serve, the UAE dirham? No, it has to be something bigger and more general. The euro is the only thing left. That, and oil and gold!

I see the USD going 2:1 on the euro by mid-Q2 of this year. "Can't happen!" you say? "Bear Sterns sold for $2/share this week-end." --> If I told you that this past Thursday would you have believed me?
Posted by Matt on March 17, 2008 3:37 PM
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Roderick - I totally agree with you about Bear. When the news came out last week about Bear being bailed out by JPM and the Fed, nothing was said by any research analysts here in the US about the fact that JPM lending Bear that amount of money would result in JPM having access to the books of Bear. On Friday I checked the trading volumes and saw tonnes of shares being sold. Nothing was rushed out.

My experience in finance is limited to fixed income and my 'poor perfomance' earnt me a lay off in late December (I spoke out about what I thought was a bad investment which less than two months down the line showed me to be correct). I am sitting laughing now because my boss owned a lot of Bear shares (revenge is sweet!). However, from actions last week I can assume a couple of things:

1 - The finance houses don't want to talk each other down. They all know they are near bankrupt but no one wants to admit it. It would be like them throwing stones in a glasshouse. They are all up to their necks in debt that isn't worth a dime, which has left a huge hole on their balance sheet.

2 - The trading volume of Bear shares traded hinted towards people in the know getting out. I am wondering why the SEC hasn't offically launched an investigation.

3 - Sarbox created an administrative nightmare for finance companies in the US. To get a research report out takes too long. Everything has to go through compliance and it takes too long. I know of one analyst in the UK who called it right. I guess they were able to get the report out because the compliance requirements are very different.

The UK has a huge mess on its hands. Northern Rock went the way of Bear and look at how the UK Government screwed that up. It might not be pretty but the Fed closed this out ASAP. It is a bitter pill to swallow for those that owned shares of the company but debt holders will be repaid. This fact is vitally important. The majority of bonds are held by mutual funds. If the bonds had failed the mutual funds would have had to sell out of other finance companies. This would have resulted in an absolute blood bath.

What is next is for the major indicies to drop. Western world companies are not going to be able to raise capital and consumers are not going to be spending.
Posted by NEKP on March 17, 2008 3:35 PM
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The root of this problem is the government and more government is not going to fix the problem. The government's artificial provision of easy credit has led to malinvestment, inflation, and now those poor decisions are falling apart. The government needs to get out of the way entirely and let the purging take place. The Fed needs to reign in monetary policy and keep the dollar stable after it returns to its 1\300 gold level or so.

The one thing that absolutely must not occur at any cost is nationalisation. Our government has no constitutional, moral, or otherwise justifiable authoirty to nationalisation private American businesses. If you want to destroy liberty and economic propserity for all time and make the government our master rather than our servent just allow it to own us.
Posted by Pliny on March 17, 2008 3:27 PM
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Why do rich bankers at bear need socialist government bailouts? How uniquely-American. Americans scoff at welfare for the poor, and say its the poor's own fault. And they are right. Yet there is no foul cry when the richest professional class is bailed out by the government? Are the rich more deserving than the poor? None of them needs a bailout. We don't need socialist central banks propping up rich people.
Posted by butlmat on March 17, 2008 3:26 PM
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Ambrose anticipates the deflationist alternative, and inclines against gold for that reason. A 1930s chart of Homestake Mining, the premier gold miner in those days, would dispel his skepticism. The company's shares fell during the actual crash of '29 to around $70 per share. By the summer of 1932, the orthodox bottom of the overall stock market, by which time even the DJIA had lost 90% of its peak value, Homestake was trading up around the $125 mark, and within a year or so had exploded to $360 per share -- all during a deflation. Check out the chart at gold-eagle.com/editorials_98/homedjia.gif (you'll need the www prefix).
Posted by Mike M on March 17, 2008 3:18 PM
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Whatever happens to the dollar longer term I cannot say. But if we have a complete financial meltdown (increasingly likely), it is likely that all financial institutions will have to close temporarily since their counterparties cannot pay. It will be like turning off a switch. Your bank accounts will be inaccessible, your credit cards won't work, and the only thing that you can spend is paper money. There will be a run on grocery stores and gas stations, since without payment systems they will not be able to restock. Large sections of the economy will have to be nationalized, possibly under Martial Law. It is time to stock your own emergency reserves and prepare for survival mode.
Posted by Andrew P on March 17, 2008 3:11 PM
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Economics is hardly a science when there are so many different "schools" and opinions about what will or will not cause something else to happen. I have lived as an adult through several "crises" in the past 35 years, each of which was claimed by various economists to be likely to cause far worse things to happen than actually did happen. I sure am glad that I did not buy any gold in 1980 or whenever when it was $850 an ounce and most predictions were that it had nowhere to go but up. I make no pretense to know much about economics, but I do know that free markets move from extremes of pessimisim to optimism and back in pretty large amounts. I suspect that these moves have as much to do with crowd psychology as basic economics. This may finally be the one time when the world does go to financial hell, but based on all the dire predictions I've seen that have failed to materialize over the years, I'm not betting on it.
Posted by Frank on March 17, 2008 2:58 PM
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Ah, doom, gloom and rampaging hysteria. Soon be tome to buy again, especially blue chip banks.


Posted by Neil Murphy on March 17, 2008 2:49 PM
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Attributing the dollar's problem to "benign neglect" demonstrates a complete lack of sophistication and confused perception.
Posted by Roger-Kent: Pool on March 17, 2008 2:40 PM
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"ALL the fiat paper currencies are just pieces of paper with pictures of dead presidents or leaders on them and are worth nothing---PERIOD."

True, but to think Gold is inherently "worth something" is also foolish. Gold today is vastly overvalued compared to its utilitarian value. The rest is speculation and fear of paper currencies (rightly so), but to buy security in gold at these prices is also quite foolish. I would recommend other hard commodities that is priced more accurately in terms of their utilitarian value.
Posted by Nils on March 17, 2008 2:31 PM
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The white mans greed is upon us again... but the good old boy network in the white house will bail them out.

How can a firm like Bearns go down like that and the expert do not see it coming...
Posted by Roderick on March 17, 2008 2:24 PM
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"Ron Paul is an Austrian economist, a student of von Mises, Hayek and Rothbard." --Posted by David WA Robertson, Inverness on March 17, 2008 9:45 AM

Nonsense! Ron Paul is an American obstetrician whose notions of economy are erroneous, at best.
Posted by Vierotchka on March 17, 2008 2:24 PM
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The once mighty Dollar is about to go over the Cliff edge.

While on the sidelines, Bush, like the Irishman who fell off the top of the Empire State Building, can be heard to say "so far, so good" as he falls past each floor....

Poor economic management, and the Industrial-Military complex that Eisenhower once warned about, have now sunk the US Economy.

Next stop 1929 all over again.
Posted by Joe McT on March 17, 2008 2:23 PM
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Long-term US debt held in Luxembourg or the Cayman Islands is probably not being held by investors in those places but actually belongs to those elsewhere. These are tax havens. The question is, who ultimately owns it?

Posted by Diane on March 17, 2008 2:23 PM
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TIME IS THE ONLY SOLUTION

There is no real way the U.S. Government, (or any other) can forestall the unfolding crisis. Greed and corruption (in the housing lending industry) fueled this event.

The only real solution is to just let it unfold, and see your stocks go to values about 50% of their 2006 levels. I am prepared to accept this. Those who just "stay with it" and don't leave the party will do great after the collapse is finished, in my opinion, in about 2-5 years.

The Fed has done enough. I have no sympathy for investment bankers or loan officers. They made their own bed. They don't really add or produce anything to economies.

If you still have a job, you are king. Hunker down and don't over-spend.

But don't expect government to bail you out. They can't do it, and what's more...they shouldn't.

sanjosemike
Posted by SANJOSEMIKE on March 17, 2008 2:19 PM
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Could Babylon = Global Financial Market in the following verses?

Revelation 18
After this I saw another angel coming down from heaven. He had great authority, and the earth was illuminated by his splendor.

With a mighty voice he shouted:
"Fallen! Fallen is Babylon the Great!
She has become a home for demons and a haunt for every evil spirit,a haunt for every unclean and detestable bird.
For all the nations have drunk the maddening wine of her adulteries.
The kings of the earth committed adultery with her, and the merchants of the earth grew rich from her excessive luxuries."
Then I heard another voice from heaven say:
"Come out of her, my people,so that you will not share in her sins,so that you will not receive any of her plagues.
Posted by John Harper on March 17, 2008 2:14 PM
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Well it looks as though the "Money Makers" are well underway in their plot to be Master of a "Global Central Bank". The only ones that will come out on top are the "Old Families" and their select choice friends. Central Banks and Fractional Banking is the single worst scourge that civilization has ever seen and they will make Trillions while the Middle Class TOTALLY disappears. Get ready people and don't fool yourselves. The Rothchild's, Rockefeller's, Morgan's and the rest have us right where they want us. Make no mistake about it they have CAUSED this to happen and they are the only ones that will benefit. They are so entrenched in ALL aspects of civilization that only a miracle could save the common man. Choke on your money Old Family Fools, you have lost your soul in the process.
Posted by Daddy O on March 17, 2008 2:14 PM
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Cutting interest rates is the wrong medicine
(Europe sure as hell is not doing it). It is knee-
jerk. There is too many dollars in circulation--
they need to be taken out of circulation. It is
only a matter of time until the Fed has to shove
the interest rates up to 10 and 20% (to stop their
circulation). This happened after the Vietnam
War and it is starting to happen now. Nixon,
Carter and Reagan couldn't stop it. Just
remember kids, greed and war ain't good and
national greed and imperialism is a disaster.
Posted by Ardie on March 17, 2008 2:12 PM
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As a kid that grew up during the last depression I know the horror. That's when girls whistled at boys. Then I saw Berlin when the girls would do anything for a hot soappy bath. It's a great time if you're a lad. that's the bright side. Unfortunately we have smarter economists now. I remember the top man in washington bragging how he took money out of the "system" to protect it and another million workers lost their jobs and he never saw cause and effect.
Posted by Jimmy on March 17, 2008 2:12 PM
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"Basic problem! "GREED"." I would say that the basic problem is stupidity and negligence. And its everywhere with human society. Where does it come from? Mental and moral laziness. Always wanting to get away with doing as little as possible - and doing what is easiest. This is the result. How many of those folks that took out sub prime mortgages bothered to read the terms of their contract? How many of the firms that issued these mortgages bothered to think about the longer term ramifications to their clients and themselves? How about the organizations that were all too willing to keep loaning the money that made all this possible without thinking about what was happening? And on and on. Only in human society is such stupidity routinely encouraged and endorsed by the masses. Far too many "Homer Simpson's" out there...
Posted by mb on March 17, 2008 2:06 PM
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"It's more likely than not that the 2008 elections will be canceled or postponed indefinitely."

Do you know anything about the American political/electoral system? (that's rhetorical... you do not).
Posted by Bob on March 17, 2008 2:05 PM
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Get ready to buy Barclays and other quality banks, folks.
When it looks to be totally, completely, ridiculously INSANE to venture into the market, that is the very time to do so.
In the early 1970s I worked for a company that made car waxes, petrol additives, spray paints and everything else you could think of related to cars. Its raw materials were petrochemical.
Then came the oil crisis.
The shares of the company PLUMMETED.
The sense of doom spread to the employees. Nobody in the company bought a single share, even though we KNEW it was still trading perfectly profitably.
We were all paralysed with fear.
Yet within 18 months those shares were 10 times higher.
Posted by charles lee on March 17, 2008 1:56 PM
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It all boils down to the old "there's no such thing as a free lunch." The results (chickens) of decades of government spending more than its receipts are now coming home to roost with a vengeance.
Posted by Dennis on March 17, 2008 1:54 PM
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Just think, if prudent Gordon Brown hadn't sold off our gold reserves at rock bottom prices, we would be a wealthy country now. No silver lining here Gordon. You screwed that up all by yourself.
Posted by Ian K Pestell on March 17, 2008 1:50 PM
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It just gets better and better - we're all off to Disneyworld or Space mountain in the summer. Hurrah!

Not only is Ambrose Evans-Pritchard nakedly pitching hard for the Europeans to follow the Fedsters and their weapons of mass economic devestation, he's now made the fatal mistake of responding to requests for advice from commentors.

The man who gave us 'the Fed's right(crashing currency, soaring prices) but they need to go further, and the Brits and Continentals must follow suit NOW' to paraphrase him, follows up this barefaced, cockamamy BS with the pearl of investing in property in Florida/Arizona starting early summer, especially due to the advantageous exchange rate. This proves categorically that AEP is not within the inner sanctum of world finance or he's a flatout disinformation agent. It's obvious to even the interested amateur that the Fed, world bankers, powers that be have set out to destroy the dollar, the US economy and the US as a sovereign nation. The last thing that'll be going down in Summer '08 will be bargain hunting in The Everglades. The US is headed for economic breakdown, and almost certainly martial law, whether officially declared or de facto. It's more likely than not that the 2008 elections will be cancelled or postponed indefinitely. Those Americans who survive the next 3 to 4 years will almost cetainly be living in a new country, The North American Union with a new currency, the Amero or such like. America is being taken down just as Germany was post WWI and the British Empire and its colonies post WWII. It's served it's purpose for the elite who used it - time to move on. God bless and best wishes to all true Americans.
Posted by p.kelly on March 17, 2008 1:43 PM
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We are witnessing the collapse of the American nominal monetary system. In this timely, generally excellent, article; Ambrose states: "I doubt the dollar can fall much further. What is it to fall against?" Here, he completely misses the mark, the dollar can fall in terms of everything and anything that has a substantive value, such as gold, wheat, oil, etc.; quite literally, the dollar can go to nothing, because there is nothing of substance that supports it. A hundred years ago, the Yale economist, Irving Fisher, said that the only way to end our monetary disturbances (inflation and deflation) was to issue a monetary unit that was backed by inflation-adjusted assets. He proposed a basket of commodities, which is unworkable; but residential real estate is the ideal asset to serve this purpose. Contrary to gold and silver, it can expand and contract with the population; and no one can run off with it. It is firmly fixed in its place. If inflation, and deflation, were measured properly; then the mortgage obligations and payments for American home owners would be ratcheting down with the values of their homes. A U.S. dollar backed by securitized inflation-adjusted mortgages would consistently represent a fixed, constant claim on American homes; provided that the mortgage underwriting was properly carried out. By factoring out the inflationary premium in the real amortizing rate, real mortgage payments in America would initially drop by 25% to 35%; but then, increase with inflation or decrease with deflation over time. Wages indexed to inflation would move in unison to the mortgage payments, substantially ending the mortgage defaults. Banks would earn a fixed real rate of return, no matter what the inflation or deflation rate; and home owners would always be able to make the payments; barring unemployment, health or age problems, which can be insured against. We now have the technology to create a real monetary system, but this cannot occur until there is a substantive change of perspective in the leadership of the American monetary system. The Federal Reserve has to stop representing the American banking cartel interests first, and start representing the American people first. The U.S. Treasury must force the banks to accept inflation-indexed (real) mortgages and real securities. Until the Federal Reserve and the U.S. Treasury act together to promote a real monetary system, this quagmire will continue. How bad can it get? It has just begun. At worst, the U.S. dollar can follow the Soviet Union's ruble into oblivion. Gold can go to millions of dollars an ounce. Why? Because the U.S. dollar has no substantive backing, except the printing press. This insanity must end. The more serious question is whether the United States will survive this crisis; and, where will the world be without the U.S.? As foreigners revel in America's monetary problems, they should reflect on this question.
Posted by Thomas W. Tripp on March 17, 2008 1:33 PM
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The ECB needs to get off its a$$ and cut rates NOW. It thinks Europe is insulated from credit problems, but it will soon be reminded how un-insulated it really is.

They are not helping matters and seem to be oblivious.
Posted by Richie Rich on March 17, 2008 1:26 PM
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The dollar is being tanked on purpose so that SPP.gov can dance in the Amero.

This is not an accident and has been planned by the Federal Reserve.
Posted by Brian on March 17, 2008 1:23 PM
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get the gold watch back from green span. roll back the mortgage interest rates to an acceptable level. have the employees of all companies return their bonus money and pay only straight salary. without customers for the product there are no sales.
Posted by common sense on March 17, 2008 1:21 PM
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George W, here. My friends, don't panic. Things are fine, it's just a rough patch we - well, not "we" really - you are going through. I've got my wealth protected offshore in the Caymans, and Daddy has his there, too. So our family is doing just fine and dandy. The 'conomy's cookin! Besides, if it all goes to hell in a handbasket y'all can come down t'Paraguay where I own 97,000 acres of prime, arable land on top of South America's largest aquifer, so there'll be drinkin' water for everybody. Y'see, while the rest of y'all were wasting time watching football and drinkin' beer, I was sockin' away those trillions of dollars that went missing from Iraq. So you could say, that for us rich folk, times couldn't be better. And y'all know that the reason there are lemons, doncha? Heh, heh. Give ya' sumpin' to suck on when the feces hits the air circulator…
Posted by John Drake on March 17, 2008 1:09 PM
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Basic problem! "GREED". Banks, the UN and governments around the world have stollen the hard eraned efforts of poeple around the world and now want to cry blame the other country. The only thing worth a damned in all of this is FREEDOM. Banks and goverments cannot fix nor repair any of the worlds woes... So hang on, the ride through all of this is going to be grand.
Posted by j gibbs on March 17, 2008 1:05 PM
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Hold onto your hats ladies, it's going to be a bumpy ride. Now, where did I put the number of the broker who was trying to sell me Gilts a few months back?
Posted by Big Gorilla on March 17, 2008 1:01 PM
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Hold onto your hats ladies, it's going to be a bumpy ride. Now, where did I put the number of the broker who was trying to sell me Gilts a few months back?
Posted by Big Gorilla on March 17, 2008 1:01 PM
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Old man Greenspan was so out of touch we are all paying for it now. Still, congress, you know, our elected officials we voted into office, are even more to blame than Greenspan, they have to cut their wasteful spending or we'll all be living on the streets, another depression. In the 1920's Euro government over spent and kept over spending and America tried to financially bail them out which caused the great depression. Gee, sounds familiar doesn't it. Until Congress gets it, the pain has only just begun. We need to elect new congress people that actually get it.
Posted by Wendle Minkler on March 17, 2008 1:00 PM
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Ambrose is suggesting that dollar cannot fall much further because other currencies will also devaluate.

I am not certain here.
It may be realized world wide that dollar is a dead horse and other countries may decide to free themselves from exchange rate implications by raising trade barriers against US if there is no other way around a problem.
On the other hand it is possible that others like EU will water down their currencies so exchange rate with dollar will stabilize but nevertheless there will be a massive inflation of commodities prices.
That may lead to eventual collapse of paper currencies involved.
In this situation we may have to return to gold standards or pay millions of dollars/euros for a box of matches.

Anyway I think, that financial Armageddon is here and now.
I never thought that bankers are so stupid... but here we are.
Posted by Martin Dowing on March 17, 2008 12:51 PM
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"The high house prices were caused by central bank hawks"

No, it was central bank doves getting their way too often - the UK MPC is a case in point where most of the members are hired in by none other than the Government (so much for independence!!).

When central banking decisions are allowed to become politicised as they have, rack and ruin soon follow.
Posted by paul on March 17, 2008 12:51 PM
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Reply There has to be a better way on March

I'm delighted that my brother taught you economics and inspired you to do a BA.

I will pass that on to him. He will be very heartened.

He is more a Keynesian, while I am more monetarist/Austrian
Posted by ambrose evans-pritchard on March 17, 2008 12:48 PM
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this credit scare is the MOB psychology game, and they are doing a dame good job at it. Everyone should be buying US dollar NOW, this is the moment to buy .....
Posted by zigag on March 17, 2008 12:46 PM
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reply There has to be a better way

yen "carry trade" unwind. The Japaense are withdrawing massive sums. The UK was a major destination.

There is also an expectation of sharp rate cuts as property buckles
Posted by ambrose evans-pritchard on March 17, 2008 12:42 PM
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"They need to state that they WILL take all measures necessary to restore house prices to their level at 1st January 2007, however long it takes. Then all houses and mortgage securities will immediately start looking investable again. Then they need to hold them at that level for a long time so they deflate in real terms, by keeping nominal rates and real rates low and implementing reserve ratio controls, so that real wages soar, inflation and interest rates follow it up, and the savings ratio slowly normalises as people use the high real wage growth to pay off these very high mortgages ever quicker."
Maybe housing prices as of January 07 were way too high to be affordable for most americans. I would like to see housing values drop in half, so that working class people can afford houses again without needed ridicoulous rate subprime morgages

"with rigid low inflation targeting having the same effect as the Gold Standard. "

Do you really believe that our current rate of 7% inflation here in the united states for 07 is having the same effect as the price of gold in the twenties? Gold was stagnant because no new sources had been found, causing deflation. Our current inflation is only rising prices for consumers

Posted by Ian Fromme on March 17, 2008 12:37 PM
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For a small country, Ireland appears very exposed to US long term debt, with about one fifth of the exposure of huge economies such as Japan and China. Can anyone give an opinion of what the consequences are likely to be?
Posted by Billy Clancy on March 17, 2008 12:15 PM
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David Robertson (9:45) says: "We are now at the end of what Mises termed the crack-up boom."

It's nothing of the kind. This is how von Mises described it:

"This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.

"But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against 'real' goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them."

Price inflation has been low as the banks have created money against debt. What people are getting jittery about is whether their shares and bank deposits will become worthless. That's why they're piling into gold and commodities.

Bernanke's doing precisely the right thing in printing the US out of a recession, as he's only compensating for the bank-created money that would disappear from the economy as bank after bank went bust.
Posted by Michael Petek on March 17, 2008 12:11 PM
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Bring back the gold standard,more important sell your house and buy gold gold gold whilst there's still some left.
Posted by jim on March 17, 2008 12:04 PM
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I don't think so, Mr Evans-Pritchard. The US Federal reserve provides a model in how not to restore market confidence. Why should we follow suit?
Posted by Pierre Bernardi on March 17, 2008 11:58 AM
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Question for Ambrose:

Why has the pound dropped in value so dramaticaly against the Euro since the end of last week and so far today when the exchange rate between the 2 currencies has been fairly stable over the last 3 weeks.

Has this been caused by the flight from the Dollar to the Euro or do the markets know there is something more sinister about to happen in the UK economy?

What better week can you choose to reveal damaging information about your bank when the markets and your branches will all be closed for 4 days.

A former pupil of John Evans-Pritchard who inspired me to study a BA in Economics.
Posted by There has to be a better way on March 17, 2008 11:41 AM
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Armegeddon Jim - but not as we know it.
(Posted by wrightie at 9:01 AM)

SURELY ITS "I'am A GEDDIN OUT OF ERR"

(with applogises to Spike Milligan)


Posted by CR on March 17, 2008 11:24 AM
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“I have to assume that David Goldsby is a buy-to-let landlord. This is not a housing crisis, that is simply a symptom of too cheap credit for far too long.â€