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artificially support asset overvaluation, the original root cause of the problem

 
Me114
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10/22/2008 12:09 PM
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artificially support asset overvaluation, the original root cause of the problem
artificially support asset overvaluation, the original root cause of the problem

[link to www.atimes.com]

Page 1 of 5
US government throws oil on fire
By Henry C K Liu

Free-market fundamentalists have been operating in denial mode for more than a year, since the US financial sector imploded in a credit crisis from excessive debt in August 2007, claiming that the economic fundamentals were still basically sound, even within the debt-infested financial sector.

As denial was rendered increasingly untenable by unfolding events, champions of market fundamentalism began clamoring for increasingly larger doses of government intervention in failed free markets around the world to restore sound market fundamentals. For the market fundamentalist faithful, this amounts to asking the devil to save god.

Aside from ideological inconsistency, the real cause of the year-long credit crisis has continued to be misdiagnosed in official
circles whose members had until recently tirelessly promoted the merit of small government, perhaps even purposely by those in the position to know better and in whom society has vested power to prevent avoidable disaster. The diagnosis misjudged the current credit crisis as only a temporary liquidity quandary instead of recognizing it as a systemic insolvency. (See Fed helpless in its own crisis, Asia Times Online, January 26, 2008.)

The misdiagnosis led to a flawed prognosis that the liquidity crunch could be uncorked by serial injections of more government funds into intractable credit and capital market seizure. This faulty rationale was based on the fantasy that distressed financial institutions holding assets that had become illiquid could be relieved by wholesale monetization of such illiquid asset with government loans, even if such government loans are collateralized by the very same illiquid assets that private investors have continued to shun in the open market.

It is not that government officials know more than market participants about the true value of these illiquid assets; it is only that government officials with access to taxpayers' money have decided to ignore market forces to artificially support asset overvaluation, the original root cause of the problem. Instead of being the solution, the government with flawed responses backed by the people's money has become part of the problem.

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see link for more
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Me114 (OP)

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10/22/2008 12:13 PM
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Re: artificially support asset overvaluation, the original root cause of the problem
this 5 page report appears to be reviewing all that happened.. im still readin it
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Me114 (OP)

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10/22/2008 12:24 PM
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Re: artificially support asset overvaluation, the original root cause of the problem
...

Strategy ignores asset overvaluation
Although each step by the government in reaction to the credit crisis was a logical, targeted response to new systemic financial upheavals, the result was to prop up select distressed firms deemed too big to fail and support failing markets as they occurred, hoping in vain that it would be the last move needed to resolve the systemic crisis to put the economy on a path of recovery. The Fed and the Treasury appeared to be rushing from emergency to emergency without a strategic plan to deal with the fundamental problem of a debt bubble collapse.

The disjointed interventions appeared designed to keep a collapsing debt bubble from collapsing, a hopeless task that even former Fed chairman Alan Greenspan, the bubble wizard par excellence, was not naive enough to try. Greenspan merely replaced a burst bubble with a new bigger bubble, never trying to stop a collapsing bubble in mid course. Greenspan's approach was that of a post-disaster cleanup crew, not rushing into a collapsing structure as the current bailout team appears to be trying to do. Throwing good money after bad merely makes good money into bad. Spending good money after the collapse would infinitely buy more in the cleanup task.
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The Fed floods Europe with dollars
On Monday, October 13, the Federal Reserve opened up the dollar spigot to European central banks to support the European dollar credit markets by agreeing to provide unlimited dollars, up from its previous $620 billion in currency swaps, to the three major central banks: the European Central Bank, the Bank of England and the Swiss National Bank, to allow them to relieve liquidity pressure on commercial banks across their respective regions.

...

Meanwhile, to offer vastly more operational space to expand its liquidity facilities during the credit crisis, the Fed received authority from the Treasury in early October to start paying interest on reserves that commercial banks are required to deposit at the Fed.

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Crisis in East European banks
Banks in emerging economies in post-communist Eastern Europe, such as Hungary and Ukraine, were also hard hit. Ukraine, whose economy has been badly hurt from falling steel prices, may be unable to quickly accept a loan offered by the International Monetary Fund because the fund is seeking assurances on next year's budget from the cabinet, and the cabinet was recently dissolved by the president in a political shakeup.

While, with Iceland and Hungary, one of three European nations seeking aid from the IMF, Ukraine has complex political problems, being a country of 46 million culturally and politically divided between historical affinity towards Russia and new orientation towards the West.

...

Financial nationalism
While this wave of government intervention was billed as a positive sign of international coordination, the fact remains that such government measures were really driven by financial nationalism to prevent funds from leaving one national banking system for safer havens in another national banking system that offers better government guarantee.

Even the US Treasury dropped its earlier opposition to sovereign guarantees for funding, as such guarantees spreading across Europe to put US banks at a competitive disadvantage with their European rivals. Under the US plan, deposit guarantees will be provided by the Federal Deposit Insurance Corporation at higher limits. The US shift on sovereign guarantees makes it very likely that Canada, and possibly Japan, will follow suit out of self interest.

Once sovereign bank loan guarantees spread across Europe, the US had no choice but to follow suit, despite concerns among senior US policymakers that this could put added stress on the larger non-bank financial sector that competes with bank lenders. This development will prolong the seizure of the much larger non-bank credit market and possibly hasten its final collapse.

....
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Me114 (OP)

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10/22/2008 12:36 PM
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Re: artificially support asset overvaluation, the original root cause of the problem
...

By December 2007, the total notional amount of outstanding derivatives in all categories rose to $596 trillion. Two-thirds of contracts by volume or $393 trillion were interest rate derivatives. Credit default swaps had a notional volume of $58 trillion, up from $43 trillion a year earlier. Currency derivatives reached a volume of $56 trillion. Unallocated derivatives had a notional amount of $71 trillion.

The non-bank financial sector in the US is already under even more severe stress than its banking system. US sovereign aid for banks could intensify the non-bank collapse, unless more steps are taken to aid non-bank institutions in coming days. Contraction of the non-bank sector and failure of non-bank institutions could lead to more distressed sales of assets and firms, frenzied scrambles by non-banks for bank licenses and an accelerated shift of both assets and liabilities into the banking sector. The recent movement of investment banks, such as Morgan Stanley and Goldman Sachs, to transform themselves as regulated banks, is a direct response to new government policy.

The problem is that if the core banks have not only to fill the "capital hole" left by their trading losses and to fund de-leverage moves but also must absorb a wave of illiquid toxic assets liabilities coming into the banking system from the wider non-bank financial sector, banks will need a lot more than their half-share of the $250 billion in government capital, perhaps in multiples of trillions of dollars. No one knows exactly how much

For example, bankruptcy hearings revealed that Lehman needs to unravel more than 1.5 million contracts, mostly derivative swaps, before it can even to begin dealing with creditor requests for information on the bank's financial situation. Lehman's restructuring advisor is hiring 300 financial specialists for the challenging task, which will take between 45 and 60 days for Lehman merely to get its records in order. It is not clear if the final value of these contracts can be determined before they work themselves out at maturity.

...


The trading pattern in the stock markets in recent weeks is ominous, with massive selling pressure concentrated in the final hour of trading. This means that traders are unwilling to hold securities overnight for fear of new bad news while they are sleeping. Technically, such trading patterns are a clear signs of a protracted bear market.


...
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Sweet Thoughts!
I Unknown Depths of Love, You.
What Happens Next Loves me.
Help me Jesus, Life will let me know.
Living is Effortless Normal
God Inside, Outside, Everywhere, Forever!
homepage [link to heartdaughter.com]

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