Saturday, September 27, 2008

“Something suspe[ct] ... uhhh, SUBSTANTIAL, must be done."

(Quote from President George Bush this week.[1])

Non-financial blue chip corporations are having difficulties raising money in the commercial paper market, along with their financial counterparts. They are now borrowing from banks at higher rates. Of course, many banks have high levels of investment in these same corporations and this suggests that, in reality, corporations outside of the large global conglomerates are the ones left without any real defence.

Interbank lending has shut down. Oligopoly banks with interlocking directorates and interlocking ownerships with the big 500 are not trading with each other. Are they also refusing to trade with their own global financial subsidiaries? If the latter statement is true the irony is stark, along with the economic repercussions. Intracorporate trade now makes up such a huge percentage of global economic transactions and this fact makes the unfolding crisis without modern historical precedent.[2]

Privately-owned central banks and public treasury officials have not been prepared to seize and shut down insolvent firms. The emphasis has been on financial bailouts rather than control of the outcome. It’s a panic and the risk has increased. Large private lenders with significant control in the overnight market are demanding higher compensation. (A billion dollars lent overnight at the US Fed rate (2%) yields only about $55,000, an amount deemed insufficient in today’s risky environment)[3].

In 1930 the private central banks increased the monetary base but with these same banks being insolvent and funds being withdrawn by worried depositors, money supply contracted regardless. ($16 billion was withdrawn from WaMu before it went down, according to Bloomberg [4].) What percentage of deposits went out of the banking system? How much was converted to cash and gold and how much was capital flight? What research has been done on this?

The determinants of how the crisis plays out go beyond the actions of financial and political authorities. Investor and consumer action will shape its evolution as well.


If central banks (i.e. the conglomerate of major private banking firms accessing taxpayer funds) continue to lend below-market rate (to themselves) the taxpayer will remain the only source of capital.

The taxpayer needs to insist that their lending is backed up by equity in these ‘private’ firms and be prepared shut them down quickly if they are now insolvent. The transition from publicly-funded ‘private’ banks to publicly-funded ‘public’ banks is not a big one.

[1] As cited by Juan Falcone on Naked Capitalism's "Europe Opens Ugly" as published on 26th September 2008.

[2] "Giant multinational corporations dominate the area of international exchange and a very large share of world ‘trade’ is actually between branches of these same corporations. In North America trade associated with U.S. parent multinationals or their foreign affiliates accounted for 54 percent of U.S. exports of goods and 36 percent of imports.[2] Forty percent of trade between the US and Canada in 1998 was intra-corporate.[3]. “Forty percent of the US-Europe trade is between parent firms and their affiliates, and in respect of Japan and Europe, it is 55 per cent; with regard to US-Japan trade, it is 80 %.”
From 'General Concept of Transfer Pricing'.By Khurram Khan. [t-price.pdf]
http://www.hmaconsultants.com/pdf/t-price.pdf
As cited in 'It's not international trade. Don't be fooled', Brenda Rosser. 24th July 2008

[3] Juan Falcone on Naked Capitalism's "Europe Opens Ugly" as published on 26th September 2008.

[4] Juan Falcone on Naked Capitalism's "Europe Opens Ugly" as published on 26th September 2008.

1 comment:

Myrtle Blackwood said...

Simon Johnson's idea, about how to assess 'fair market value' is an interesting one.

"In order to determine FMV in the first step for a given tranche of securities, a portion of the debt could be auctioned to the private sector. Any debt bought by the private sector will have no further recourse to the government, i.e., it is "bailout free". Properly designed, this auction will indicate.. the fair market value in a free market."

And here's where I disagree with Johnson. He writes:
"The government would then acquire the securities not bought by the private sector, at the price established in the auction. With their MBS gone, it will be easier to assess banks' solvency and determine the appropriate terms for a government recapitalization.

Yes, it's a good way to assess the banks' solvency but the more appropriate next step would be to nationalise any banks that can't stand on their own feet if necessary; allow others to go bankrupt IMHO.

After all, if the bank assets are unsaleable and the banks are run and co-owned by each other, then a working market doesn't exist in any case.