Asian Bailout of USA: “May You Live In Interesting Times”

By Gayle Plato-Besley

According to the New York Times, the Asian bond market is losing the taste for American Pie:

“In the past five years, China has spent as much as one-seventh of its entire economic output on the purchase of foreign debt – largely U.S. Treasury bonds and American mortgage-backed securities. But now, Beijing is seeking to pay for its own $600 billion economic stimulus – just as tax revenue falls sharply as the Chinese economy slows. Regulators have ordered banks to lend more money to small and midsize enterprises, many of which are struggling with slower exports, and Chinese bankers say they are being instructed to lend more to local governments to allow them to build new roads and other projects as part of the stimulus program.” (http://www.iht.com/articles/2009/01/07/business/yuan.php)

What does this have to do with anything?  If other countries are not willing to buy up our guaranteed debt, we will not be ready for the real estate collapse that is still coming.  Remember, China bought alot of those mortgage backed bonds–no more.  We have yet to see the commercial real estate collapse–you know, the see- through office buildings with few tenants, the strip malls built with risky construction loans now going under, and the complete tightening of any growth loans as to help bridge the drought of capital for moderate size businesses.  The till is empty.

If you don’t know who Nouriel Roubini is, you should.  He’s a financial advisor and media-dubbed Dr. Doom.  Roubini speaks and nations listen- Obama’s team listens.  See the latest report from ‘The Doctor’:

“The very cumbersome U.S. Treasury proposal to dispose of toxic assets – that was presented by Treasury Secretary Tim Geithner today – can be best understood (subject to the large fog of uncertainty about its many details) as combining taking the toxic asset off the banks’ balance sheet with providing government guarantees to those private investors that will purchase them (and/or public capital provision to fund a public-private bad bank that would purchase such assets). But this plan is so non-transparent and complicated that it received a thumbs down by the markets as soon as it was announced today as all major US equity indices went sharply down…. RGE Monitor (available in a paper for our clients) suggest that total losses on loans made by U.S. financial firms and the fall in the market value of the assets they are holding will be at their peak about $3.6 trillion. The U.S. banks and broker dealers are exposed to half of this figure, or $1.8 trillion; the rest is borne by other financial institutions in the US and abroad. The capital backing the banks assets was last fall only $1.4 trillion, leaving the U.S. banking system some $400 billion in the hole, or close to zero even after the government and private sector recapitalization of such banks. Thus, another $1.4 trillion will be needed to brink back the capital of banks to the level they had before the crisis; and such massive additional recapitalization is needed to resolve the credit crunch and restore lending to the private sector. So these figures suggests that the US banking system is effectively insolvent in the aggregate; most of the UK banking system looks insolvent too; and many other banks in continental Europe are also insolvent.

There are four basic approaches to a clean-up of a banking system that is facing a systemic crisis:

1 recapitalization together with  the purchase by a government “bad bank” of the toxic assets

2. recapitalization together with government guarantees – after a first loss by the banks – of the toxic assets;

3. private purchase of toxic assets with a government guarantee and/or – semi-equivalently – provision of public capital to set up a public-private bad bank where private investors participate in the purchase of such assets (something similar to the US government plan presented by Tim Geithner today for a Public-Private Investment Fund);

4. outright government takeover (call it nationalization or “receivership” if you don’t like the dirty N-word) of insolvent banks to be cleaned after takeover and then resold to the private sector.” (http://www.rgemonitor.com/roubini-monitor/255507/it_is_time_to_nationalize_insolvent_banking_systems)

Is this scary?  Nationalization of the banks kicks in and the global slide begins.  The Chinese proverb, “May you live in interesting times,” is seen as a meaningful comment by some sage.  It’s not known for sure of what the origin, but there is historical evidence that the proverb is actually a curse. 

 Interesting times indeed.

 

 

 


Comments

  1. Precinct Committeeman says

    Interesting?

    A good newspaper story is about 500 words.

    A good blog entry is even shorter.

    740 words seems about typical for this writer. Some people write like they talk – to just hear themselves.

  2. Hey ya PC–

    What? I couldn’t hear what you said. I was too busy talking about myself. It was a good conversation though… 🙂

    So why do you read this if it’s too long for you? Newspapers are dying btw. Maybe they got too short for the people who could read beyond a 4th grade level. The USA Today Syndrome!!!

    Here’s the twitter version– China buys all our paper–NOT!

    Dim Sum doesn’t add up with Dr. Doom at the controls.

    Thanks,
    Y’know I could have been at the Chris Isaak show but no, I stayed home to help you people… hmmm

    Gotta go sit down and think about how much I know and what to write about tomorrow. I’m speechless.

    Gayle has left the building!! G’Night Everybody!!

  3. Wait– YOU COUNTED MY WORDS? I am so touched but really get a hobby.

  4. Antifederalist says

    Odd, the FT reported this morning that the Chinese feel they have nowhere else to invest BUT U.S. Treasury bonds:

    http://www.ft.com/cms/s/0/a403d716-f8a6-11dd-aae8-000077b07658.html?nclick_check=1

    I’m sorta convinced China’s decision is a bad one. If they keep buying our bonds, we keep borrowing. We’re already $10 Trillion (and climbing!) in debt and we’ve got a tsunami of entitlement spending about to hit us. If we don’t slash government in a hurry, we’re doomed.

    While Roubini rightly warns about market black swan events, I fear that to prepare for such events is to tie up so much capital as to prevent the creation of wealth in the first place. It may be that if we follow his advice, there won’t be a market to tank. Besides, market booms and busts are cyclical and a force of nature. To think that we can avoid the cycle without seriously killing growth is to be as gullible as Billy “I killed the business cycle!” Klinton. The FT also indicated that Roubini favors nationalizing troubled banks. That makes him a socialist. I’m just not too impressed with socialists.

  5. Antifederalist-
    I actually agree with you as I am concerned that Roubini is like the Pied Piper in this– I still think he needs to be read and watched as I know the DC crowd loves him and that makes him a concern.

  6. Precinct Committeeman says

    Gayle –

    Good communicators reach the audience.

    You have “brilliant” ideas. And, while long-winded, a style all your own for writing.

    But, no, I don’t read your entire articles – they are too long and boring. I did not have to count your words. I’ve written so much, and read even more, for so long that I can estimate the number of words in a story by glancing at its length.

    Short stories are not just for the ignorant or shortened attention readers. It’s good writing to be concise. You might try it. After all, your comments on here were more interesting than your message.

  7. I found your blog by chance . but i have to say that it’s great blog very useful information and very interesting subjects just greetings and good luck
    i’m not going i will be always checking for updates.I’m very interested in CMS and all its related subjects.

  8. cash is a worry for many people and I do not think this particular reports will help

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