Rolf Englund IntCom internetional
Creditanstalt och andra banker i Österrike
Historical precedents make everyone very nervous whenever Austria and banks are mentioned together in the same sentence
What the ‘Chart of Doom’ is saying about a global recession
Sue Chang, MarketWatch Feb 8, 2016
“When Armageddon hits you’re always less prepared than you think.”
Frozen withdrawals in 2007 and 2015
Can the world's central banks rescue the slowing global economy even if they try?
The End of the Global Housing Boom
The recurring theme: policymakers are in uncharted waters.
Ten years after the financial crisis
He may be looking healthy now. But the next attack could be even more severe and the medical techniques that worked a decade ago may not be successful a second time.
– Marknaden för nyproducerade bostadsrätter har imploderat.
GAM blocks fund redemptions
If the western world has seen populism jump when economic times are good,
‘The internet is now disrupting politics ... and voters are responding with a squeal of anti-establishment anger’
Italy turmoil shows banking ‘doom loop’ still a powerful force
The Fed can't legally save the world financial system in another 'Lehman' crisis
There is a time to be in stocks… and a time to be out of them.
Even though they told us, and most of us believe, that QE was responsible for the inflation of asset prices across the board,
No hedge fund that wishes to survive is going to sit patiently on their repo silos at 95% leverage
US bond market sell-off deepens
Wells Fargo's head of interest rate strategy is detecting a major trouble spot in the bond market.
As the US Treasury gets set to issue upwards of $1.2 trillion of new bonds in the fiscal year (2019) starting in October
The political economist Benjamin Friedman once compared modern Western society to a stable bicycle whose wheels are kept spinning by economic growth.
Why do societies collapse?
I think all of us have been interested, at one time or another, in the romantic mysteries of all those societies that collapsed, such as the classic Maya in the Yucatan, the Easter Islanders, the Anasazi, Fertile Crescent society, Angor Wat, Great Zimbabwe and so on.
End of an era for irrational complacency in markets
Republican tax package will definitively put an end to 36-year upswing for Treasuries
Skräckscenariot: Sverige handfallet vid nästa kris
Skärpningen av amorteringskravet undantar nyproduktion
Professor på KTH efterlyser bostadskrasch
The world is set up for the unwinding of three mega-trends:
IMF Global Financial Stability Report
Bland annat hjälpte Swedbank Oscar Properties att ta upp ett lån på sammanlagt nära en halv miljard genom en så kallad obligation.
– Det vi pratar om är en icke säkerställd obligation där långivarna hamnar längst bak i kön,
Only at the peak of those two bubbles /“roaring 20s” and the dotcom mania of the late 1990s/
Stockholm och andra svenska storstäder kan bli det Nya Norrland, fast i en ond spiral av utflyttning och bristande affärsunderlag.
Plötsligt händer det – det som alla talat om i åratal. Luften har börjat pysa ur den heta bostadsmarknaden.
Efter börsens stängning en onsdagskväll i slutet på augusti vräkte det norska bolaget Obos, tillika en av Nordens största fastighetsutvecklare, ut aktier för drygt en miljard i bostadsbyggaren JM
Våg av borätter till salu – allt fler sänker priserna
The world's population is accelerating toward collapse and nobody cares
Hedge funds that built up bullish long-end Treasury wagers to the highest outright level since 2008 are
The global economy is caught in a permanent trap of boom-bust financial cycles.
The Bank for International Settlements said the rot in the global monetary system has not been cut out since the Lehman crisis in 2008.
“The end may come to resemble more closely a financial boom gone wrong, just as the latest recession showed, with a vengeance,” said Claudio Borio, the BIS’s chief economist.
The key point is this:
Sveriges Riksbank, Konjunkturinstitutet, Finansinspektionen, Boverket, Internationella Valutafonden, OECD, EU-kommissionen, European Systemic Risk Board,
A popular options-market gauge of so-called black swan, or difficult to predict, events
This is the most dangerous and overvalued stock market on record
Eight Years Of Bull Ends Tomorrow
Why Robert Shiller Is Worried About the Trump Rally
The cyclically adjusted p/e (CAPE), a measure created by economist Robert Shiller,
It is possible that asset prices will come down gradually,
Det är en del, företrädesvis fastighetsmäklare och bankekonomer, som försöker intala sig själva och oss andra att bostadspriserna kan plana ut.
Ray Dalio Warns A 1% Rise In Yields Would Lead To Trillions In Losses
Irrational exuberance begins to surface in US stock market
Trump, Englund och sedelpressarna
For the first time since the Great Depression, the world is in a global liquidity trap.
World economy stands on the cusp of another crash,
The crisis was not a failure of individual policymakers or bankers Lord King argues but of “a system, and the ideas that underpinned it...
Since the crisis, low interest rates have fuelled asset prices and a desperate search for yield,
The global financial system has become dangerously unstable and faces an avalanche of bankruptcies that will test social and political stability, a leading monetary theorist has warned.
The bear market in stocks has finally arrived
Soon Comes The Deluge
The global and US economies are heading into an extended deflationary recession;
The broad market has now gone sideways for nearly 700 days.
Wall Street’s Keynesian chorus cannot grasp the fact that there is such a thing as a collective balance sheet and that it can get used up. Moreover, when that happens there is no more effective “stimulus” to be had—-it just results in central banks pushing on a string.
“Fangs” — Facebook, Amazon, Netflix and Google
One of the (many) fascinating things about this latest global financial crisis is that there’s no single catalyst.
Today Will Be a Watershed Moment for Financial Markets
A rocky exit from low interest rates by the Federal Reserve risks
Fund manager and prominent bear John Hussman is warning investors once again of the potential for a big market plunge
International bond issuance, fuelled by ultra-low western interest rates, continues to swell:
The Coming Liquidity Crisis
Seth Klarman, the publicity shy head of the $27bn Baupost Group
ABOUT THE WORLD'S BIGGEST RISKS - (EMU, Bird Flu, Hard Landing in China)
The government’s list of the greatest threats facing the country.
Crash Course: Stocks and other investments are wildly overvalued
U.S. stock buybacks have reached 2007 levels and are running at around $500 billion annually. When dividends are included, companies are returning around $1 trillion annually to shareholders, close to 90% of earnings.
Additional factors affecting share prices are mergers and acquisitions activity and also activist hedge funds, which have forced returns of capital or corporate restructures.
The major driver of stock prices is liquidity, in the form of zero interest rates and quantitative easing.
Satyajit Das is a former banker and author of The Age of Stagnation (Prometheus Books)
The next global financial crisis could start with U.S. stocks.
A future crisis is likely to unfold as follows.
Rating downgrades or deteriorating credit quality of a sovereign result in falls in the value of government bonds held by banks, triggering losses.
Investors assume that the global financial crisis is now ancient history and normality has returned.
Despite talk of recoveries and reforms, little has actually changed.
If bubbles are out there these 10 sages will warn us
"A bravura performance"
Larry Summers, Paul Krugman, Gavyn Davies
And here’s the worrisome thing:
Higher rates may trigger increases in bad loans, which would also create problems for banks, creating a financial crisis.
Fitch says China credit bubble unprecedented in modern world history
Universa's view that a crash is coming is not widely held, making crash protection cheap
Universa president and chief investment officer Mark Spitznagel says he's pretty confident that the market will crash, or fall by more than 20%, in the next six months -- a year max.
Related: Is bond bubble losing air?
Are the markets going mad?
Profound tensions lurk beneath surface calm
It is easy to identify the reason for this: as this data has gone haywire in the past couple of years,
This has lowered interest rates on government bonds, forcing investors to search elsewhere for yield.
However the crucial question now is just how much longer these bizarre conditions can continue.
Right now the betting among most analysts I have recently spoken with in London and New York is that these distorted conditions will remain in place far longer than most people expect.
Take a look at a report recently compiled by Matt King, an analyst at Citigroup
The U.S. economy is in a bubble inflated by “phony money” from the Federal Reserve and will burst within a few years,
In an essay published yesterday in the New York Times (NYT),
Stockman, 66, is the author of “The Great Deformation: The Corruption of Capitalism in America,” which will be published tomorrow.
This is no recovery. And this is no "down cycle" that will soon be followed by a reliable "up cycle."
In the fixed interest sector something irrational is undoubtedly going on
Att varna för en förestånde finanskrasch har vissa likheter med att slå larm om en kommande jordbävning i San Fransisco-trakten.
Even Marc Faber isn’t perfect.
The long shadow of the 1930s
The Federal Reserve told the 31 largest U.S. banks to test their loan portfolios and trading books against a deep recession and a European market shock
The Fed said it would publish the results of the market shock scenario of the six institutions: Bank of America Corp., Citigroup Inc., Goldman Sachs Group, Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Company.
When EU regulators ran stress-tests on European banks in July,
The world is facing the worst financial crisis since at least the 1930s “if not ever”
Bank of England Governor Mervyn King has attacked the 'absurd' level of risk taken on by banks
We are now in the stage of the crisis where people get truly desperate.
Once the crisis hit Italy, followed by an absolutely inadequate policy response of the Italian government, the crisis has reached a point of No return.
Our economic predicament is not a temporary or traditional condition.
“Rates can be lower than you’d imagine for longer than you’d think,” said Kit Juckes, currency analyst at Société Générale.
The market can stay irrational longer than you can stay solvent.
Unless there is a dramatic and simultaneous shift in the politics of Italy, Germany and the European Central Bank,
We are in a worse situation than we were in 2008.
“We are in a worse situation than we were in 2008. This time around we have fiscal austerity and banks that are being cautious.”
Stephen Cecchetti and his team at BIS have written the definitive paper
The real effects of debt
Many ask whether high-income countries are at risk of a “double dip” recession. My answer is: no,
What has the market turmoil of August been telling us? The answer, I suggest, is three big things:
Those who fear deflation buy bonds; those who fear inflation buy gold; those who cannot decide buy both.
Welcome, then, to what Carmen Reinhart, senior fellow at the Peterson Institute for International Economics in Washington,
Those less apocalyptic might call it the “Japanese disease”.
In the normally quiet month of August we have seen these difficulties escalate so rapidly that
Det börjar likna Cataclysm, banne mig
The Wilshire 5000 Total Market Index, the broadest index of U.S. stocks, lost 891.93 points, or just over 7%, Monday.
Hundreds of municipal downgrades are next. But don't panic
The crisis that started in the US real estate sector in 2007
Britain's Economist magazine is warning of a double-dip recession in the US, a second downturn just three years after the last one. Many economists have been pointing out that last week's panic resembled the fear that swept financial markets after the collapse of US investment bank Lehman Brothers in September 2008.
Angel Gurria, secretary general of OECD
A year ago, Dr. Gary Shilling published the influential book The Age of Deleveraging,
2013 Investment Themes (excerpted from the January 2013 edition of A. Gary Shilling's Insight)
Why Deleveraging Still Rules Markets in 2013
Gary Shilling is looking for a brand new cyclical recession beginning in 2012
Many Americans will be forgiven if they can’t see the difference between that and the recovery we’ve been experiencing. That’s Shilling’s point. Usually, deep recessions like the one we just lived through are followed by strong snapbacks, like a growth slingshot.
This time, however, the recovery has been “distinctly subpar,” in his words.
The economy, he says, is like a four-cylinder engine, and a recovery usually requires all four to be firing. They are consumer spending, employment, housing and the reversal of the inventory cycle.
Shilling thinks only the last is really recovering — i.e., companies that brutally liquidated inventories during the recession have had to rebuild them through boosting production and some additional hiring as demand bounced off its lows.
Friedman and Keynes
The Coming Collapse in Housing
In a new book “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation”*,
I en intervju med nyhetsbyrån Bloomberg säger han att sannolikheten är en på tre att faktorerna ovan senast om två år kommer att sätta käppar i hjulet för den globala ekonomin.
Roubini Says ‘Perfect Storm’ May Threaten Global Economy
Roubini is among analysts who predicted the global financial crisis of 2007-2009 that was triggered by a collapse in the value of U.S. mortgage securities.
In Europe, officials need to restructure the debt of Greece, Ireland and Portugal, and waiting too long may result in a “more disorderly” process, Roubini also said.
Robert Shiller, co-creator of the S&P/Case-Shiller Home Price Indices
Not just that the global economy remains severely unbalanced or that it is business as usual in an unreformed financial sector.
It is not even that the euro area could trigger the sort of mayhem last seen in the autumn of 2008
Unravelling the reason for higher oil prices is tricky, but whether it has been stronger demand from the fast-growing emerging economies, the long-anticipated arrival of peak oil, speculation from hedge funds or a combination of all three, the era of easily available cheap crude is over for good.
It's not pretty but there are at least four possible choices. Choice one: do nothing because modern financial capitalism is robust and self-correcting, there is more oil in the ground than we think, and global warming is a fantasy.
IMF: Svenska huspriser för höga
"We estimate that house prices have peaked, and we believe that interest rates are set to continue to rise.
Bundesbank President och Grekland – “the central bank equivalent of nuclear deterrence:
Watch out for tail risks hanging over the $14,300bn US Treasuries market
How long before a new financial crisis?
It's as if 2008 never happened.
Global junk-bond issuance hit a record in the first three months of the year.
And Yale's Robert Shiller calculates that the Standard & Poor's 500-stock index is trading at 23 times earnings normalized over the past 10 years, compared with a historical average of 16.
The advanced countries are in no sense back to normality:
Credit rating agencies should never be taken too seriously, but for Standard & Poor's to put the United States on "negative outlook" is none the less something of event
If nothing else, S&P's bombshell highlights the hopeless mess the world's largest economy has managed to get itself into.
Coming on top of renewed escalation in the eurozone crisis, it feeds into a sea of worry about the sustainability of the economic recovery and the increasingly parlous fiscal position of many advanced economies.Full text
Oljan har tagit miljoner år att bildas. Och på dryga 100 år har vi förbrukat hälften av jordens oljetillgångar...
Peak Oil and the Second Great Depression (2010-2030):
Att varna för en förestånde finanskrasch har vissa likheter med att slå larm om en kommande jordbävning i San Fransisco-trakten. Till och med en jagsvag nybörjarprofet kan vara helt säker på att få rätt.
På samma sätt kan den besserwisser som 1999 bosatte sig i en husvagn i Birkastan för att liverapportera från den Stora Bostadskraschen se tillbaka på ett minst sagt segt decennium.
Finansiella luftballonger brukade vara något som dök upp en gång per generation eller så.
Det går att argumentera för att vi befunnit oss i något slags tillstånd av sinnesförändring under nio av de senaste tolv åren.
Based on one measure of volatility, stocks haven't risen this much amid price swings this narrow since 1971
Economics is not a science. There are no laws or cast iron relationships – as there are in "pure sciences", such as physics or chemistry. Throughout recent history, though, there have been a handful of economic variables between which the links have been pretty solid.
Ever since the early 1970s, every single time oil prices have spiked sharply (rising by 80pc or more),
Governments in Jakarta, Manila and New Delhi are grappling with their own subprime crisis of sorts.
Unlike the food-price spike of 2008, this one may be more secular than cyclical. Asia alone, for example, will have another 140 million mouths to feed over the next four years. Add that to almost 3 billion people in the fast-growing region and you have a recipe for booming demand.
China’s size and scope means it will be buying up evergrowing chunks of the world’s food supply. As the yuan rises, so will China’s ability to outbid everyone else. Increased trade tensions are inevitable and it will show the futility of food subsidies. Prices will rise as long as consumption does, so it’s really a matter of pouring money down the drain.
Former British Prime Minister Gordon Brown has said he
"I sense that in the first few months of 2011 we [will] have a major crisis in the euro area," he told BBC business editor Robert Peston.
He said the euro's problems were bigger than just its governments' debts.
Europe must also solve the euro's structural rigidities and the enormous debts of its banks, he warned.
Det finns egentligen inte någon Eurokris.
Tvärtom tvingar euron fram reformer som sedan länge varit nödvändiga,
vilket alltid har varit ett av de starkaste argumenten för en gemensam valuta.
Stefan Fölster, Magasinet Neo 2010-06-15
Gordon Brown says that the eurozone will not solve its current financial crisis unless it opts for a comprehensive and substantial rescue package, that would involve putting tens of billions of pounds of new capital into the eurozone's banks.
The former British prime minister said, in an interview I've just done with him, that the enormous liabilities of the eurozone's banks are a serious and substantial accident waiting to happen.
The central theme of his new book, Beyond the Crash, is that the US and Europe will be condemned to years of low growth unless and until the world's biggest economies co-ordinate their economic policies and their approaches to financial regulation
Beyond the Crash: Overcoming the First Crisis of Globalisation
Probably one of the best pieces of analytical commentary we have yet read on the eurozone situation
Europe heads back into the storm
The World Bank is set to join a German money market fund and Austrian life insurers in
The lender, whose goals are to fight poverty and help developing countries, is in talks with Austrian authorities about 150 million euros ($203 million) of Hypo Alpe junior bonds it holds, according to a World Bank spokesman, Derek Warren. The securities are part of 890 million euros in subordinated debt that will be wiped out once a law on Hypo Alpe’s wind-down, passed by Parliament’s lower house in Vienna last week, gets final approval.
The Austrian savings banks are on their own as government withdraws support for the banking system
The Austrian government’s recent decision to overturn the guarantee provided by the State of Carinthia to holders of Hype Alpe Adria’s subordinated debt has come back to haunt it.
Erste, Austria’s largest bank by assets, swings to € 1 bn loss after Romania writedown
It’s not quite Creditanstalt,
The profit warning last week from Austria’s Erste Bank, together with the accompanying share price crash,
Both these banks – Hypo and Erste – are big lenders into the emerging market economies of eastern Europe,
ECB is to flood the banking system anew with more liquidity support
Shares in Erste Group plunged 15 per cent on Friday after the Austrian lender said that problems in Hungary and Romania would drag it to a net loss of up to €1.6bn this year.
Austrian banks have lent a total of $300bn to clients in the region (Eastern Europe),
In 1931, Austria was attempting to deliver the kind of austerity now being witnessed in parts of southern Europe.
Under the Gold Standard, the only option to regain competitiveness was to force domestic prices and wages lower.
In May 1931, a Viennese bank named Credit-Anstalt failed.
The bank not only made loans; it acquired ownership stakes in all kinds of companies throughout the sprawling empire, from sugar producers to the new automobile makers. Its headquarters city, Vienna, was a place of wealth and splendor, famous for its opera, balls, chocolate, psychoanalysis, and the extravagant architecture of the Ringstrasse. The fall of Credit-Anstalt—and the dominoes it helped topple across Continental Europe and the confidence it shredded as far away as the U.S.—wasn't just the failure of a bank: It was a failure of civilization.
When the Austro-Hungarian Empire broke up after World War I, the bank continued to do business throughout the old empire without recognizing that the world had changed. Suddenly, more knowledgeable local lenders were getting the best deals, leaving Credit-Anstalt with the loans no one else would touch, says Aurel Schubert, an Austrian economist who wrote a 1991 book on the episode called The Credit-Anstalt Crisis of 1931. (There's a modern analogy in Greek banks' unwise loans in Bulgaria, Romania, and Serbia.)
The scariest thing about the Credit-Anstalt default is that it occurred in a small, peripheral country, just as today's worst problems are concentrated so far in Greece, Ireland, and Portugal, which combined make up just 5 percent of the 27-nation European Union's gross domestic product. "Austria is a tiny, tiny little place, and you wouldn't imagine it could set off a chain of domino reactions. But it did. I do see exactly that potential now," says James.
Harold James, a British historian at Princeton University, described what happened next in his 2001 book The End of Globalization: Lessons from the Great Depression.
Europe stumbles blindly towards its 1931 moment
If mishandled, Ireland could all too easily become a sovereign version of Credit Anstalt - the Austrian bank that brought down the central European financial system in 1931, sent tremors through London and New York, and set off the second deeper phase of the Great Depression, the phase when politics turned ugly.
The eurozone’s fiscal fund (European Financial Stability Facility) is fatally flawed.
Svenskt Näringslivs chefekonom Stefan Fölster:
De globala ekonomiska obalanserna fortsätter att växa och med dem skuldsättningen hos de redan hårt skuldsatta och ansamlingen av allt osäkrare fordringar hos kreditorerna.
Men det är också något sjukt och ohållbart med denna utveckling. För samtidigt som de ekonomiskt mogna länderna i Västvärlden som helhet, med USA i spetsen, lånar till sin privata och numera framför allt offentliga konsumtion så kanaliserar de betydande delar av sitt sparande till dessa i de flesta fall rejält överhettade och kapitalexporterande BRIC-länder.
Det är svårt att se att detta är en optimal kapitalallokering, utan snarare bidrar det till överinvesteringar och överhettning i de så kallade tillväxtekonomierna och ett förvärrande av de strukturella bekymren på hemmaplan.Top of page
Europas stabilitet är inte längre given
If you think we are gloomy, you should listened to Mervyn King, /chef för Bank of England/
King called for a "grand bargain" at the G20, that would include rules for capital flows and a rules to realign domestic demand to put the global economy on a surer footing, Reuters reports from London.
Most of the peripheral countries have completed most of the borrowing they had to accomplish this year.
A group of influential hedge fund managers with assets of about $100 billion
The group lay out their argument in the book The Gathering Storm.
The authors have placed investment bets based on their convictions and will be donating the proceeds of the book to charity.
The hedge funds argue that banks, including the nationalised lender Northern Rock, should have been allowed to collapse or been forced to repair their balance sheets rather than being propped up by the state.
The group is led by Lee Robinson, a former credit derivatives banker who co-founded the London hedge fund Trafalgar Asset Managers.
He writes: “I ask the question: has the increase in credit, and hence leverage in the system caused by repeated bailouts by central banks, actually made crises more likely to occur?”
Wiley; 393 pages; $34.95 and £23.99. Buy from Amazon.com, Amazon.co.uk
By the late 1970s housing had begun to replace defence as America’s engine of growth.
Mr Whalen is not alone in wondering how the American economy will cope without a buoyant property market.
We live in an amazing world. Everybody has big budget deficits and big easy money
Anders Åslund och den svenska fastighetsbubblan Rolf Englund blog 22/12 2010
Är friheten hotad i USA?
Så kan det bli ny världsdepression
All western governments face severe difficulties in the years ahead
All western governments face severe difficulties in the years ahead as societies’ virtuous bourgeois, as we might describe them with only mild irony, face pressure on their lifestyles for which there are no panaceas.
Earnings are flat, and likely to remain so in real terms, while cost inflation is steep especially for healthcare, energy and insurance.
The gulf between top and median earners is wider than at any time since 1929.
In 1980, 8 per cent of US earners received 16 per cent of national income. That same proportion now falls into the hands of the top 1 per cent, while the top 20 per cent take over half. There is a similar concentration of wealth in the UK.
Politicians have good reason to fear a new western world in which a small minority continues to prosper and spend prodigiously, while the living standards of middle earners decline.Top of page
At the current rate of job creation, the nation would need nine more years to recapture the jobs lost during the recession.
The vacancy rate, as of the end of June, stands at 21.4 percent in Phoenix, 19.7 percent in Las Vegas, 18.3 in Dallas/Fort Worth and 17.3 percent in Atlanta, in each case higher than last year, according to the data firm CoStar Group.
"USA har ryckt åt sig ett stort försprång och har världens mest framgångsrika ekonomi"
If you strip away the political correctness,
The IMF report – "Will It Hurt? Macroeconomic Effects of Fiscal Consolidation"
"Not all countries can reduce the value of their currency and increase net exports at the same time," it said. Nobel economist Joe Stiglitz goes further, warning that damn may break altogether in parts of Europe, setting off a "death spiral".
The Fund said damage also doubles for states that cannot cut rates or devalue – think Spain, Portugal, Ireland, Greece, and Italy, all trapped in EMU at overvalued exchange rates.
"A fall in the value of the currency plays a key role in softening the impact. The result is consistent with standard Mundell-Fleming theory that fiscal multipliers are larger in economies with fixed exchange rate regimes."
It is fallacious to cite the austerity cures of Canada, and Scandinavia in the 1990s – as the European Central Bank does – as evidence that budget cuts pave the way for recovery. These countries were able export to a booming world. They could lower interest rates, and were small enough to carry out `beggar-thy-neighbour' devaluations without attracting much notice. We were not then in our New World Order of "currency wars".
Joseph Stiglitz sees bleak future for euro as New Malaise takes hold
Freefall: America, Free Markets, and the Sinking of the World Economy
Den 6 maj 2010 föll Dow Jones med 1000 punkter.
I en holländsk dokumentär som sändes på SVT i går kallad ”Snabba klipp” framförs en teori om vad det var som faktiskt orsakade raset.
Enligt amerikanska finansinspektionen SEC/CFTC:s rapport som utredde blixtkraschen orsakades raset av att en enskild handlare sålde 75 000 e-mini-kontrakt för 4,1 miljarder dollar.
The activity of high frequency traders and the algorithms they used one year ago today when a ‘flash crash’ rattled the markets worldwide
“In 2010, the high frequency traders who are today’s liquidity providers represented well more than 50% of market volume and were net aggressive sellers during the broad index price decline," Schapiro told a gathering of mutual fund managers
Fear of 'Catastrophic' Crash Rising Despite Bull Market
This means the Flash Crash Advisory Commission that met on Friday has a long way to go in restoring confidence
What caused the Flash Crash?
They recommend changes to the present system-wide circuit breakers: reducing the initial trading halts to a shorter period of time, allowing the halt to be triggered as late as 3:30 PM, and using the S&P 500 as the triggering mechanism rather than the Dow.
With memories of last May's "Flash Crash" still fresh in investors' minds,
Bates believes should a similar event happen in the future, be it caused by further disturbances in the Middle East or something else that releases market jitters and a shock to the algorithmic programs that drive high-frequency trading, the effects will be more widespread.
The flash crash of May 6 was sparked by a rapidly executed $4.1bn sale of stock index futures by a single institutional investor
We live in an amazing world. Everybody has big budget deficits and big easy money
“It is a serious question. We are no longer talking about a single country having a big depression but the entire world.”
The exception is Germany, which protects its surplus ($179bn, or 5.2pc of GDP) by means of an undervalued exchange rate within EMU.
The global game of pass the unemployment parcel has to end somewhere. It ends in Greece, Portugal, Spain, Ireland, parts of Eastern Europe, and will end in France and Italy too, at least until their democracies object.
The three pillars of global demand at the height of the credit bubble in 2007 were – by deficits – the US ($793bn), Spain ($126bn), UK ($87bn).
If China continues to hold down its currency, the country will import excess US liquidity, overheat, and lose wage competitiveness. This is the default cure if all else fails, and I believe it is well under way.
Chris Whalen Inflated: How Money and Debt Built the American Dream
Ask Not Whether Governments Will Default, but How
Financial oppression as an alternative to outright default. Outright default is not the only way to impose losses on creditors. Financial oppression – the fact of imposing on creditors real rates of return that are negative or artificially low – can take other forms: repaying debt in devalued money (e.g., through unanticipated inflation), taxation or regulatory incentives on institutions to purchase government debt at uneconomic prices, for instance (see also “Default or Inflate or…”, The Global Monetary Analyst, February 24, 2010). Repaying debt in devalued money is particularly effective when the initial stock of debt is high – as it is now. Distorting prices in the government’s favour is particularly effective when the financing requirement is high – also a situation we face now and for years to come.Top of page
Fed is running the risk of replaying the disaster movie that led to the credit crisis
Even though Roach thinks that U.S. monetary policy is too loose, he also said the economy is still spluttering and describes himself as being in the "double-dip camp."
"This is not the time for an aggressive Fed tightening, but it is the time for the Fed to stand back (and be more strategic),"Top of page
Is the crisis coming back?
Housing led the U.S. out of seven of the last eight recessions.
I know it’s over the top, but here it is anyway:
Late last year the conventional wisdom on economic policy took a hard right turn. Even though the world’s major economies had barely begun to recover, even though unemployment remained disastrously high across much of America and Europe, creating jobs was no longer on the agenda. Instead, we were told, governments had to turn all their attention to reducing budget deficits.
But the apostles of austerity — sometimes referred to as “austerians” — Look at Greece, they said.
The skeptics countered that Greece is a special case, trapped by its use of the euro, which condemns it to years of deflation and stagnation whatever it does. The interest rates paid by major nations with their own currencies — not just the United States, but also Britain and Japan — showed no sign that the bond vigilantes were about to attack, or even that they existed.
Just you wait, said the austerians: the bond vigilantes may be invisible, but they must be feared all the same.
nominal 10-year bonds at 2.71%
Paul Krugman 11 August 2010
Det som händer nu är att marknaderna slutligen har upptäckt att pessimisterna hade rätt
Det behöver inte nödvändigtvis innebära en krympande bruttonationalprodukt, men det spelar ingen roll.
En längre intervju med Paul Krugman sänds i Godmorgon, världen nu på söndag 22/8 i P1.
The optimists will be right until they are wrong.
Top of page
"a loss of confidence – not merely in the idea that the future will be a brighter place, but also, most crucially, about whether anybody is able to predict that future at all."
Lawrence Summers, chief economic adviser to President Barack Obama, described the world’s leading economies as “in or near liquidity trap conditions”
So what could cause a global double dip?
The longer Europe muddles along without a new crisis, the more remote the risk of a sudden implosion becomes. According to Mr Buiter, “the disaster scenario of sovereign defaults is no longer on the table except as a tail risk”.Top of page
In extraordinary times, the economy may be close to non-linear phenomena such as a rapid deterioration of confidence among broad constituencies of households, enterprises, savers and investors.
The stress tests may ultimately lead to catastrophic real-life stresses on banks vital to the prosperity of Europe.
If banks hold government bonds, such as Greek government bonds, in their "banking" books - and thus intend to hold those bonds till they mature or come up for repayment - then those banks would not have to recognise even one cent of potential loss on their bond holdings.
I morgon släpps resultaten av de stresstest som ska avslöja hälsoläget hos Europas 91 största banker. Värst vore om alla klarade provet galant.
Allt bygger på att testet är trovärdigt. En bil som klarar sig oskadd från en kollision i fem kilometer i timmen imponerar knappast på en säkerhetsmedveten köpare. Lagom många banker i trubbel är bäst - det skapar en känsla av att alla problem dras fram i ljuset.Full text
IMF calls for more ‘stress-test’ openness
FT July 21 2010
Europe must ensure its stress tests are transparent to guarantee their credibility, according to staff at the International Monetary Fund.
But it reported resistance from eurozone authorities to the idea of more transparency.
On Wednesday the IMF said that those views were out of date and that the executive directors on the fund’s board – whose opinion is separate from that of the staff – “welcomed the eurozone authorities’ intention to use transparent stress tests.”
“If HRE is the only German bank that fails, that completely discredits the tests – not just for Germany but for the whole of Europe”.
Rolf Englund blog 2010-07-21
Eurointelligence skriver i dag stresstesterna, det som gör att, som jag skrev i går, domedagen blir på fredag.
Part 5B. What Happens If Things Go Really Badly?
In today’s post, we look at the effects of sovereign default on credit default swaps, interest rate swaps and options, and currency exchange contracts.
If you want to be really, really pessimistic...
CR Note: This series is from reader "some investor guy".
Out of the multitude of potential scenarios, I have settled upon one which is really bad, but doesn’t involve asteroids, mass extinctions, or apes taking over. It is consistent with prior bad episodes of sovereign debt default.
Here is the Really Bad scenario. It’s not a worst possible scenario. It is more like the Long Depression or the Great Depression reoccurring under 2010 conditions.
The Fed minutes warned of "significant downside risks" and a possible slide into deflation, an admission that zero interest rates, $1.75 trillion of QE, and a fiscal deficit above 10pc of GDP have so far failed to lift the economy out of a structural slump.
The world is at risk of another financial crash following a steep rise in asset prices,
“Financial sector crises are not as predictable [as those of economic growth]. The risks build up until, wham, it hits you.”
Don’t let another politician run the IMF
As Raghuram Rajan of the University of Chicago Booth School of Business and former chief economist of the International Monetary Fund notes in a thought-provoking new book, the underlying “fault lines” are still with us.
His voice is worth listening to: in 2005, he presented a controversial, yet now acclaimed, paper at the annual Jackson Hole monetary conference entitled “Has Financial Development Made the World Riskier?”
The crisis has revealed deep faults within western economies and the global economy as a whole. We may be unable to avoid further earthquakes.
In his book, Prof Rajan points to domestic political stresses within the US.
President Barack Obama – a pragmatic centrist – is vilified. On the right, the call is to overthrow the modern government in an effort to return to the 18th century. This, then, is a crisis of government itself.
The problem is that the countries that used to provide the demand – the US, at world level, or Spain, in the eurozone – have over-indebted private sectors. So we see a zero-sum battle over shares of structurally deficient global demand.
This is a threat to survival of the eurozone and even the open world economy.
We can see two huge threats in front of us.
The west is not the power it was; its debt-fuelled consumers are not the source of demand they were...
Fault Lines, Princeton, 2010
Raghuram Rajan, one of the few economists to see the financial crisis coming,
The rebellion against the 1930s fiscal and monetary policies of the Euro-complex is gathering pace.
Premature retrenchment threatens recession and even deflation, as I argued last week.
Some argue that the economy is always in equilibrium – that, in the words of Voltaire’s Dr Pangloss, everything is for the best in the best of all possible worlds.
Others argue, with Andrew Mellon, US secretary of the Treasury under Herbert Hoover, that, after a big credit boom, we should “liquidate labour, liquidate stocks, liquidate farmers, liquidate real estate . . . it will purge the rottenness out of the system.”
I am not addressing inhabitants of either of these caves. I am addressing those who recognise that past mistakes have put the world economy into a deep hole and want to escape as quickly as possible.
We must recognise the danger here: cutting public spending will not automatically raise private spending.
This is walking and chewing gum at the same time. Why should that be so hard?
A decision to turn the eurozone into a huge Germany would – and should – be seen as an act of mercantilist warfare upon the US.
How long would the latter put up with the hypocrisy of surplus countries that blame borrowers for the deficits their own surpluses make inevitable? Not much longer, would be my guess, at least now that the US government has become the world’s borrower of last resort.
A consensus is forming that policymakers should tighten fiscal policy
What if they find that it tips economies into recession, or even deflation?
Martin Wolf, 8 June 2010
The largest financial crisis in history is morphing from private entities (the banking sector and the household sector) to sovereign entities.
Hoppet är ute för EMU - Euron kollapsar i Spanien
"We've seen a crisis start in a country — Greece — become regional, impact the whole of the Euro zone and is on the verge of truly going global,"
So what is to be done?
Halting the financial doomsday machine
Andrew Haldane of the Bank of England, author of several brilliant papers on the crisis
The financial sector has become bigger and riskier. The UK case is dramatic, with banking assets jumping from 50 per cent of GDP to more than 550 per cent over the past four decades
The combination of state insurance (which protects creditors) with limited liability (which protects shareholders) creates a financial doomsday machine. What happens is best thought of as "rational carelessness". Its most dangerous effect comes via the extremes of the credit cycle.
Most perilous of all is the compulsion upon the authorities to blow another set of credit bubbles, to forestall the devastating impact of the implosion of the last ones.
In the end, what happens to finance is not what matters most but what finance does to the wider economy.
So what is to be done?
One idea, popular in US Republican circles, is: "just say no" to bail-outs. This is a delusion.
Another idea, popular among US liberals, is that the chief issue is "too big to fail".
A third notion is that the big issue is regulatory completeness. It is argued that if only oversight had been effectively imposed, the pattern of overleveraging and default could have been halted. This, too, is unlikely.
Policymakers are desperate to unwind the “unconventional support”, to activate “exit strategies” and begin the long march back to normality.
Rewind a year, and the world economy stood on the brink of outright catastrophe.
A year on, and the roof plainly hasn’t fallen in.
Yet there is a continued air of unreality about the whole thing.
Everywhere in the West, and even in China, the “recovery” – such as it is – floats on a sea of public support, with the hoped-for rebound in underlying private-sector activity as elusive as ever.
I am aware of the commitment of Europe’s elite to the success of the European project.
But the crisis is profound – for the eurozone, the European Union and the world.
As Wolfgang Münchau has pointed out, last week’s European Council was not a solution but a fudge.
Martin Wolf FT March 30 2010
The immediate challenge is Greece. On this, the heads of government decided that “as part of a package involving substantial International Monetary Fund financing and a majority of European financing, euro area member states are ready to contribute to co-ordinated bilateral loans”.
But, it continued: “Any disbursement ... would be decided by the euro member states by unanimity subject to strong conditionality and based on an assessment by the European Commission and the European Central Bank ...
The objective of this mechanism will not be to provide financing at average euro area interest rates, but to set incentives to return to market financing as soon as possible.”
The outcome looks unworkable.
The fiscal tightening agreed by Greece, of 10 per cent of gross domestic product over three years, looks impossible, given the absence of monetary policy or exchange rate flexibility. Maybe no programme would succeed given the unfavourable initial conditions.
“The effort to bind states together may lead, instead, to a huge increase in frictions among them.
China and Germany unite to impose global deflation
Let me introduce you to Chermany, a composite of the world’s biggest net exporters:
The core of Mr Schäuble’s argumentwas not about the mooted European Monetary Fund
I explained the first point last week. If Germany gets what it wants, the world’s second-largest economy would play an altogether negative role in the search for a way out from the global slump in aggregate demand.
Germany is in a supposedly irrevocable currency union with some of its principal customers. It now wants them to deflate their way to prosperity in a world of chronically weak aggregate demand.
If I understand China’s declared position correctly, it wants the US to deflate itself into competitiveness, instead, via fiscal and monetary contraction and, presumably, falling domestic prices. That would be dreadful for the US. But it would be dreadful for China and the rest of the world, too. It is also not going to happen. China surely knows that.
Due to the length of a typical lifetime and the number of those years that individuals are productive, it’s reasonable to think that someone in their mid-60s could retire today and look back at the last 40 years only to conclude that what they just experienced was normal.
Fed chairman Paul Volcker induced two debilitating recessions during Reagan’s first few years, breaking the back of wage-driven inflation that came before the waves of cheap foreign imports
In a system of money and credit where there is virtually no limit on how much of the stuff can be created, there was a natural remedy for the economic downturn that followed the bursting of the internet bubble and the attacks that are now forever referred to as simply 9/11.
It’s no coincidence that the almost non-stop sequence of financial bubbles over the last forty years followed the abandonment of anything resembling a system of sound money.
Anybody who looks carefully at the world economy will recognise that
The doomsday cycle
Peter Boone, Research Associate, Centre for Economic Performance, LSE
Simon Johnson, Professor of Entrepreneurship, Sloan School of Management, MIT and CEPR Research Fellow
This column says the best route to creating a safer system is to have very large and robust capital requirements, which are legislated and difficult to circumvent or revise.
Given the inability of our political and social systems to handle the hardship that would follow economic collapse, we rely on our central banks to cut interest rates and direct credits to bail out the loss-makers. While the faces tend to change, each central bank and government operates similarly. This time, it was Mervyn King, Gordon Brown, Tim Geithner and Ben Bernanke who oversaw policy as the bubble was inflating – and are now designing our rescue.
When the bailout is done, we start all over again. This has been the pattern in many developed countries since the mid-1970s – a date that coincides with significant macroeconomic and regulatory change, including the end of the Bretton Woods fixed exchange rate systems, reduced capital controls in rich countries and the beginning of 20 years of regulatory easing.Full text
Greece's drama has already metastasised into a wider systemic crisis.
The world risks a replay of the Lehman collapseif this runs unchecked, this time involving sovereign dominoes.
Add East Europe's bubble and foreign debts top €2 trillion.
The scale matches America's sub-prime/Alt-A adventure and assorted CDOs and SIVS of the Greenspan fling. The parallels are closer than Europe cares to admit.
Writing in the NYT, Richard Thaler provides the disturbing potential conclusion on homeowners changing their viewpoint and strategically defaulting:
The Greek government has promised to slash its fiscal deficit
Some, knowing of my opposition to UK membership of the eurozone, may suppose that I find some pleasure in these looming difficulties.
The curse of long-term unemployment
America slides deeper into depression
The home siezures are occurring despite frantic efforts by the Obama administration to delay the process. This policy is entirely justified given the scale of the social crisis. But it also masks the continued rot in the housing market, allows lenders to hide losses, and stores up an ever larger overhang of unsold properties. It takes heroic naivety to think the US housing market has turned the corner
The fuse has yet to detonate on the next mortgage bomb, $134bn (£83bn) of "option ARM" contracts due to reset violently upwards this year and next.
The Bank for International Settlements will gather top central bankers and financiers for a meeting in Basel this weekend amid rising concern about a resurgence of the “excessive risk-taking” that sparked the financial crisis.
“The concern here is that the prolonged assurance of very cheap and ample funding may encourage excessive risk-taking,” the BIS invitation note says.
The cause of our crises has not gone away
The credit crunch of 2007-08 was the third phase of a larger and longer financial crisis. The first phase was the emerging market defaults of the 1990s. The second was the new economy boom and bust at the turn of the century. The third was the collapse of markets for structured debt products, which had grown so rapidly in the five years up to 2007.
Governments, and particularly the US government, reacted on each occasion by pumping money into the financial system in the hope of staving off wider collapse, with some degree of success.
The public support of markets provided on each occasion the fuel needed to stoke the next crisis. Each boom and bust is larger than the last. Since the alleviating action is also larger, the pattern is one of cycles of increasing amplitude.
The citizens of that most placid of countries, Iceland, now backed by their president, have found a characteristically polite and restrained way of disputing an obligation to stump up large sums of cash to pay for the arrogance and greed of other people. They are right.
We should listen to them before the same message is conveyed in much more violent form, in another place and at another time.
We made a mistake in the closing decades of the 20th century. We removed restrictions that had imposed functional separation on financial institutions.
Det var inte inflationen - det var Depressionen
In an article published in the FT this week, Arvind Subramanian of the Peterson Institute for International Economics, argues that economics has redeemed itself by rescuing the world economy from the crisis. I agree, but only up to a point.
First, we have the ongoing force of the balance-sheet recession
The headlines said that initial job-less claims dropped to 466,000
At some point, American workers will rebel.
The 'Real' Jobless Rate:
As experts debate the potential speed of the US recovery, one figure looms large but is often overlooked: nearly 1 in 5 Americans is either out of work or under-employed.
According to the government's broadest measure of unemployment, some 17.5 percent are either without a job entirely or underemployed. The so-called U-6 number is at the highest rate since becoming an official labor statistic in 1994.
The number dwarfs the statistic most people pay attention to—the U-3 rate
The difference is that what is traditionally referred to as the "unemployment rate" only measures those out of work who are still looking for jobs. Discouraged workers who have quit trying to find a job, as well as those working part-time but looking for full-time work or who are otherwise underemployed, count in the U-6 rate.Full text
New figures coming out of the US economy confirms that in almost every respect
it is doing significantly better than expected.
The world will hit one day peak Oil
Yes, I am still positive about oil ...
So the dynamics between the demand and the supply side look actually quite promising in the long run. ..."Financial Doom Blog
Even Marc Faber isn’t perfect.
"tro inte att det värsta är över"
Nouriel Roubini, även kallad ”Dr Doom”, varnade redan 2005 för ras på den amerikanska bostadsmarknaden.
I likhet med andra ”domedagsprofeter” är han bekymrad över dollarn, tror att dollarn kommer att försvagas och till och med riskerar att kraschlanda om amerikanska regeringen inte gör mer för att kontrollera underskottet och minska statsskulden.
Marc Faber, författare till det månatliga nyhetsbrevet The Gloom Boom & Doom Report.
Marc Faber menar att man inte lyckats göra någonting åt de svagheter i systemet som orsakade innevarande kris. Han spår ett totalt sammanbrott för de finansiella marknaderna och för regeringar på fem till tio års sikt när hela systemet kraschar.
Han tror inte heller att några G20-möten eller G7-möten kommer att mynna ut i lösningar som kan förhindra en framtida härdsmälta;
Peter Schiff är en av de domedagsprofeter som spår att dollarn kommer att kollapsa under den tunga bördan av massiva underskott och den ”besinningslösa” politik som Barack Obamas administration driver. Och han mycket kritisk till de gigantiska stimulanspaket som den sittande regeringen lanserat.
- Vi är i sämre skick nu jämfört med före krisen. Vi är djupare skuldsatta. Vi skulle ha låtit fler finansiella institutioner falla, säger Peter Schiff.
Enligt honom liknar USA:s ekonomi ett belånat pyramidspel. När krisen kom vacklade pyramiden.
You have been warned about “the mother of all carry trades.”
“The continuous depreciation in the dollar, and the U.S. government’s indication that, in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” Liu, chairman of the China Banking Regulatory Commission, said in Beijing yesterday.
Low rates and the dollar’s tumble have “seriously affected global asset prices, fuelled speculation in stock and property markets, and created new, real and insurmountable risks to the recovery of the global economy, especially emerging-market economies,” Liu told reporters in Beijing at the International Finance Forum.
Dangerous asset bubbles are developing in emerging Asia and in China in particular.
And it is not only independent critics: the World Bank, in its recent semi-annual report on East Asia, warned darkly of unsustainable asset-market conditions. Asset prices are frothy. Property prices are booming, especially in the big cities. All this is alarmingly reminiscent of the United States in 2006.
The mechanism inflating these bubbles is exceptionally accommodating monetary policies. Low interest rates in the advanced countries provide an incentive to borrow there and invest in higher-yielding assets in emerging markets.
Everyone realizes that the dollar will have to fall to enable the U.S. to export more, since American households will be consuming less. But this means that the expected cost of borrowing dollars is effectively negative for investors concerned with non-dollar returns.
It creates an irresistible temptation to invest in anything Asian that promises even remotely positive returns. Nouriel Roubini, always one with a phrase, calls this “the mother of all carry trades.”
Uppenbarligen krävs det mycket mera underlag än vad Roubini hittills har kommit med för att vi skall sätta någon tilltro till hans varningar /om dollarn/ .
Det är en skillnad mot den tidigare uppseglande bolånekrisen, som kunde påvisas i flera olika statistiska serier. Men att denna skulle leda till en världsomspännande finanskris kunde inte visas med statistik. Det berodde främst på att den var psykologiskt betingad och krävde sådana missgrepp som konkursen i Lehman Brothers för att blomma ut.
Vi är på väg mot en monsterbubbla på finansmarknaden
Roubini säger att han är oroad av att den amerikanska centralbanken gör pengar så lättillängliga och tvingar andra länder att följa efter. Men att stötta systemet nu med höjda räntor är inte lösningen, säger Roubini.
Mother of all carry trades faces an inevitable bust
Barry Eichengreen, a prominent American economic historian, says the crisis has “cast into doubt much of what we thought we knew about economics.”
Is this the death of the dollar?
For US Treasury Secretary Tim Geithner, who has inherited his predecessors' role as dollar wallah-in-chief, the currency's travails have made it all the more difficult for him to repeat the mantra that he "believes in a strong dollar" while keeping a straight face. Indeed, when he tried to insist at a university lecture in Beijing earlier this month that "Chinese financial assets are very safe," it drew floods of laughter from the audience.
He wasn't playing for laughs, but the irony of the situation is plain to see. If there were a textbook list of actions one could take to weaken a currency, the US (alongside most other developed nations) would be following it to the letter. It has cut interest rates to a whisker above zero; it has engaged in quantitative easing, pumping cash directly into the economy; it has committed to spending trillions of dollars on a fiscal stimulus package designed to pull the country out of recession; it has pledged tacitly to support its stricken banks so that no major institution is allowed to collapse. In any normal circumstances, actions like these would hammer a currency.
Like everything else, the currency's fate depends on how well the US authorities manage the crisis. The US is balanced on a knife-edge between possible Japan-style deflation as the weight of all its debts bear down on it and potential inflation as the force of all its powerful stimulus measures take root. No one knows for sure which way it will fall, but neither would be particularly good for the currency, and by extension for those who hold much in the way of dollar assets.
Indeed, as Mervyn King said in a speech earlier this year: "At the heart of the crisis was the problem identified but not solved at Bretton Woods – the need to impose symmetric obligations on countries that run persistent current account surpluses and not just on countries that run deficits. From that failure stemmed a chain of events, no one of which alone appeared to threaten stability, but which taken together led to the worst financial crisis any of us can recall."
Sustained recovery requires decreased domestic US spending and
Consider what would happen if the UK or US were to attempt Hungarian or Estonian style cuts.
There are three key flaws to panglossian hopes for a bull market and a V-shaped economic recovery.
The writer is president of Independent Strategy, a global investment consultancy
The first flaw can be simply put. If excess leverage in the US household sector lies at the core of the credit crisis and global imbalances, little has been done to address the problem.
The second flaw follows. If excess consumption lies at the core of the credit crisis, the problem has been made worse by government adding leverage to help households sustain their own unsustainable levels of debt.
The third flaw reminds us of the original problem. If excess credit creation and financial sector leverage caused the crisis, the problem has not been dealt with by the authorities.
The conclusions of recent stress tests concluded that the US banking system was solvent and needed little extra capital, which it could raise under its own steam.
A potentially more serious issue concerns bank liabilities and funding. Though there has been some thawing, the private sector wholesale funding market is still mostly closed.
This unforeseen crisis is surely a disaster for monetary policy.
There are four deflationary spirals presently at work in the world economy, i.e.
The four deflationary spirals we identified, although similar in structure, are different in one particular dimension.
The period prior to the crisis was one of excessive buildups of private debt and banks’ assets.
The forthcoming Group of 20 summit is going to be a disaster.
Dow below 7,000
Eastern crisis that could wreck the eurozone
Can't pay or won't pay?
European stocks tumbling to a six-year low
The U.S. housing market lost $3.3 trillion in value last year and
The U.S. Financial System Is Effectively Insolvent
Why the bank bailouts are doomed
Nothing to lose but their supply chains
Some say that manufacturing is special, because the rest of the economy depends on it.
They have nothing to lose but their web cameras
The famous final phrase of the Manifesto, "Working Men of All Countries, Unite!",
"Workers of the World, Unite. You have nothing to lose but your chains!" is a popularisation of the last three sentences, and is not found in any official translation. Since this English translation was approved by Engels, we have kept the original intact.
Protectionist dominoes are beginning to tumble across the world
Greece has been in turmoil for 11 days.
This is a foretaste of what the world may face as the "crisis of capitalism" - another Marxist phase making a comeback - starts to turn two hundred million lives upside down.
"If we are not able to do that, then social unrest may happen in many countries, including advanced economies. We are facing an unprecedented decline in output. All around the planet, the people have reacted with feelings going from surprise to anger, and from anger to fear," Dominique Strauss-Kahn said.
President-elect Barack Obama: "China must change its currency practices. Because it pegs its currency at an artificially low rate, China is running massive current account surpluses. This is not good for American firms and workers, not good for the world," he said in October.
This crisis has already brought us a monetary revolution as interest rates approach zero across the G10. It may overturn the "New World Order" as well, unless we move with great care in grim months ahead. This is where events turn dangerous.
The last great era of globalisation peaked just before 1914. You know the rest of the story.
"The question of having social unrest has been highlighted by journalists and I can understand that, but it's only part of the problem," he said.
Dominique Strauss-Kahn, Managing Director of the International Monetary Fund
G7 försäkrade att deras centralbanker ska fortsätta att samordna åtgärder för att lindra kreditkrisen.
Penningpolitiken måste vara den första försvarslinjen, enligt IMF.
Fed's weapon of mass desperation
Roubini's Latest "Why Things Are Hopeless" List Hits New Record, 20 Items! Be sure to read down to his last point, where he draws his bottom line,
The big difference in diagnosis is between those who still think in terms of a conventional business cycle with output fluctuating in familiar snakelike fashion around a stable trend given by “supply side” factors, and those who believe that something more apocalyptic has happened.
For this first group it is important to worry about the size of the current budget deficit, re-establishing fiscal guidelines in the medium term and the maintenance of an arm’s length relationship between governments and central banks. The obvious exponent of this view has been the European Central Bank, with its insistence that its economic task is just to maintain the stability of a consumer price index.
Critics say that Alan Greenspan’s reduction of the Fed funds rate to 1 per cent in 2003 sparked off the recent credit bubble and its subsequent collapse. They do not say what else should have been done to prevent Asian savings surpluses from generating a world depression. But even if it is conceded that Mr Greenspan went down too far for too long, Mr Bernanke now faces a radically different situation in which the very existence of the US and world monetary systems has been threatened.
Many analysts fear that central banks will soon have “run out of ammunition” because official interest rates cannot fall below zero. This is the famous “zero interest rate bound” known as ZIRB to its friends
central banks can expand the range of securities in which they deal, as they are to some extent now doing. But the ultimate weapon would be a fiscal stimulus financed by money creation – the equivalent of the famous helicopter drop.
The best recipe for avoiding a global recession
The world's financial firms have now lost $2.8 trillion
It's like an avalanche.
The world financial system is teetering on the "brink of systemic meltdown",
It is not too late.
Notwithstanding my long-standing bearishness on the global economy and world financial markets, I am now actually hopeful that the world is at a critical turning point. We have gone to the edge of an abyss that few thought was ever possible. Having stared into the darkness, the authorities hopefully have a better appreciation of what is truly at stake. It is not too late. If the world now pulls together, we can avoid the Armageddon endgame.
Let me explain now in more detail why we are now back to the risk of
It is obvious that the current financial crisis is becoming more severe in spite of the Treasury rescue plan (or maybe because of it as this plan it totally flawed). The severe strains in financial markets (money markets, credit markets, stock markets, CDS and derivative markets) are becoming more severe rather than less severe in spite of the nuclear option (after the Fannie and Freddie $200 billion bazooka bailout failed to restore confidence) of a $700 billion package: interbank spreads are widening (TED spread, swap spreads, Libo-OIS spread) and are at level never seen before; credit spreads (such as junk bond yield spreads relative to Treasuries are widening to new peaks; short-term Treasury yields are going back to near zero levels as there is flight to safety; CDS spread for financial institutions are rising to extreme levels (Morgan Stanley ones at 1200 last week) as the ban on shorting of financial stock has moved the pressures on financial firms to the CDS market; and stock markets around the world have reacted very negatively to this rescue package (US market are down about 3% this morning at their opening).
In a solvency crisis and credit crisis that goes well beyond illiquidity no one is lending to counterparties as no one trusts any counterparty (even the safest ones) and everyone is hoarding the liquidity that is injected by central banks. And since this liquidity goes only to banks and major broker dealers the rest of the shadow banking system has not access to this liquidity as the credit transmission mechanisms is blocked.
The next step of this panic could become the mother of all bank runs, i.e. a run on the trillion dollar plus of the cross border short-term interbank liabilities of the US banking and financial system as foreign banks as starting to worry about the safety of their liquid exposures to US financial institutions;
For most readers, the commercial paper market is something you don't think about.
There is something called the TED spread,
The Bank of England moved on Friday to inject longer term cash into money markets,
The money markets on the verge of a nervous breakdown
The money market, not the stock market, is where this financial crisis is playing out first and foremost. On this market, banks lend each others funds for short periods of time with no collateral. A favourite way to measure distress in the way money is the difference between the interest rate on 3-month Treasury – which are considered safe – and 3-month Libor. This is known as the TED spread. If you consider your counterparty bank safe, you would expect to receive only a slightly higher interest rate on 3 Libor than you would on 3 month treasuries. But if you expect to receive more than 300 basis points, as banks do now, then you doubt the financial viability of your counterparty.
Yesterday, the spread briefly peaked at 333bp, which must be an all-time record.
It’s 3 a.m., a few months into 2009, and the phone in the White House rings.
I’m not being melodramatic. The bailout plan released yesterday is a lot better than the proposal Henry Paulson first put out — sufficiently so to be worth passing. But it’s not what you’d actually call a good plan, and it won’t end the crisis. The odds are that the next president will have to deal with some major financial emergencies.
Maybe we can let Wall Street implode and Main Street would escape largely unscathed.
Many people on both the right and the left are outraged at the idea of using taxpayer money to bail out America’s financial system. They’re right to be outraged, but doing nothing isn’t a serious option.
Right now, players throughout the system are refusing to lend and hoarding cash — and this collapse of credit reminds many economists of the run on the banks that brought on the Great Depression.
It’s true that we don’t know for sure that the parallel is a fair one. Maybe we can let Wall Street implode and Main Street would escape largely unscathed. But that’s not a chance we want to take.
Mr. Paulson never offered a convincing explanation of how his plan was supposed to work — and the judgment of many economists was, in fact, that it wouldn’t work unless it amounted to a huge welfare program for the financial industry.
the bipartisan “agreement on principles” released on Thursday looks a lot better than the original Paulson plan. it “requires that any transaction include equity sharing.”
Why is that so important? The fundamental problem with our financial system is that the fallout from the housing bust has left financial institutions with too little capital. When he finally deigned to offer an explanation of his plan, Mr. Paulson argued that he could solve this problem through “price discovery” — that once taxpayer funds had created a market for mortgage-related toxic waste, everyone would realize that the toxic waste is actually worth much more than it currently sells for, solving the capital problem. Never say never, I guess — but you don’t want to bet $700 billion on wishful thinking.
Over the past few weeks three experiences have helped clear my mind on this crisis.
Money market funds in the US suffered an estimated $197bn of net outflows last week as confidence in their safe-haven status weakened after one fund “broke the buck” and others closed.
"Modern history’s greatest regulatory failure"
As Paul Volcker, former Fed chairman, has suggested, an enormous Resolution Trust Corporation-style approach for the banking and securities system may be required.
Extraordinary emergency actions by the Federal Reserve and the Treasury to date, while necessary, are insufficient to resolve the crisis.
We should move decisively to create a new, temporary resolution mechanism. There are precedents -- such as the Resolution Trust Corporation of the late 1980s and early 1990s, as well as the Home Owners Loan Corporation of the 1930s.
- Vi hade inte någon glaskula att titta i. Och vi hade blivit utskrattade.
The U.S. financial system was badly shaken Sunday by the failure of Lehman Brothers , the surprise takeover of Merrill Lynch and big asset sales by major insurer American International Group.
Sept. 14 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the financial crisis that began with the collapse of the subprime-mortgage market last year ``is probably a once in a century event'' that will lead to the failure of more firms.
What is a bundle of mortgages worth when nobody is willing to bid on them at auction?
The risk of a downward spiral of house prices is the primary danger facing the American economy.
“The topic du jour is Fannie and Freddie.
"Sedan i fjol har vår syn på världsekonomin förändrats markant.
"Jag är på den mörkare sidan av svart den här morgonen. Situationen är mycket värre än 2001", säger Thomas von Koch, som håller i investeringarna för EQT.
America's house price time bomb
Only luck can save America’s economy
"We interrupt regular programming to announce that the United States of America has defaulted …"
Lenders to the United States government have suffered significant losses .The losses have not been from non-payment but because repayments have been in a constantly debased currency – the dollar.
"We interrupt regular programming to announce that the United States of America has defaulted …" Part 2
Ultimately, the US may be forced to finance itself in foreign currency. This would expose the US to currency risk but most importantly it would not be able to service its debt by printing money.
For the moment, the US$ is hanging on – just. This reflects structural weakness in the Euro and Yen based on deep-seated problems in the respective economies.
In 1989, John Williamson described certain economic prescriptions - the Washington Consensus – that became a "standard" reform package promoted for crisis-wracked countries by the IMF.
The dry measured economic prose of the Washington Consensus does not capture its human elements. It will require reductions in US real wages and living standards on a scale that those who have not experienced it first hand cannot understand.
Warren Buffett in his 2006 annual letter
You Know The Banking System Is Unsound When...
1. Paulson appears on Face The Nation and says "Our banking system is a safe and a sound one." If the banking system was safe and sound, everyone would know it (or at least think it). There would be no need to say it.
7. Paulson says Fannie Mae and Freddie Mac are "essential" because they represent the only "functioning" part of the home loan market. The firms own or guarantee about half of the $12 trillion in U.S. mortgages. Is it possible to have a sound banking system when the only "functioning" part of the mortgage market is insolvent?
Merrill Lynch has warned that the United States could face a foreign "financing crisis"
The country depends on Asian, Russian and Middle Eastern investors to fund much of its $700bn (£350bn) current account deficit, leaving it far more vulnerable to a collapse of confidence than Japan in the early 1990s after the Nikkei bubble burst. Britain and other Anglo-Saxon deficit states could face a similar retreat by foreign investors.
Nouriel Roubini predicts the worst financial crisis since the Great Depression and
Dozens of large regional/national banks (a’ la IndyMac) are also bankrupt given their extreme exposure to real estate and will also go bust
In a few years time there will be no major independent broker dealers as their business model (securitization, slice & dice and transfer of toxic credit risk and piling fees upon fees rather than earning income from holding credit risk) is bust and the risk of a bank-like run on their very short term liquid liabilities is a fundamental flaw in their structure
Fannie and Freddie are insolvent and the Treasury bailout plan (the mother of all moral hazard bailout) is socialism for the rich, the well connected and Wall Street; it is the continuation of a corrupt system where profits are privatized and losses are socialized. Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.
SEC Panic - Shorting Curbs Placed on GSE Stocks
/government sponsored enterprises/
Treasury Acts to Save Mortgage Giants
The California-based IndyMac Bank, has collapsed
The government officials said that the administration had also considered calling for legislation that would offer an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies. But that is a far less attractive option, they said, because it would effectively double the size of the public debt.
It is unclear if current shareholders would see their holdings wiped out - leading to the pre-market sell-off.
Lehman Brothers shares tumbled 18% at the start of the session.
The word began spreading across Wall Street trading desks on Monday morning:
Just as with mortgage debt, credit card debt is put into pools that are then resold to investment houses, other banks and institutional investors.
That sound you hear is the popping of a financial bubble in housing,
It is now almost a year since the US subprime crisis went global.
Spreads between rates of interest on inter-bank lending in dollars, euros and sterling and expected official rates over three and six months are now wider than they were in March.
So what happens to the world economy next?
It is hard to see any outcome other than a sustained slowdown in the world economy. It is even quite likely that the trend growth of the world economy is considerably slower than was hoped a few years ago.
The creditworthiness of the US government cannot be taken for granted. If the ongoing deleveraging of the US economy weakened US consumption, the economy might go into a deep recession. US fiscal deficits would then soar and long-term US interest rates might jump. This could make the debt dynamics of the US government look very unpleasant. A flight from the dollar and dollar bonds might even ensue.
It is time to take a break from the gloom.
That is what I will now do.
I will be back at the end of August.
Bank for International Settlements annual report
It needs to be recognised that in the months ahead there is the real possibility that significant financial institutions will encounter not just liquidity but solvency problems as the economy deteriorates and further writedowns prove necessary.
It is quite possible that we are now at the most dangerous moment since the American financial crisis began last August. Staggering increases in the prices of oil and other commodities have brought American consumer confidence to new lows and raised serious concerns about inflation, thereby limiting the capacity of monetary policy to respond to a financial sector which Â– judging by equity values Â– is at its weakest point since the crisis began. With housing values still falling and growing evidence that problems are spreading to the construction and consumer credit sectors, there is a possibility that a faltering economy damages the financial system, which weakens the economy further.
Unfortunately we are in an economic environment where we have more to fear than fear itself. But this is no excuse for fatalism.
The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.
A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.
Under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks - call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot.
Ben Bernanke: "We have a problem"
What Exactly Is The G7 plan?
The International Monetary Fund (IMF) has warned that potential losses from the credit crunch will reach $945bn and could be even higher.
The IMF says that losses are spreading from sub-prime mortgage assets to other sectors, such as commercial property, consumer credit, and company debt.
It says that there was a "collective failure" to appreciate the risky borrowing by financial institutions.
För dem som har haft en övertro på marknadens självreglerande krafter är förstås den internationella kreditkrisen en allvarlig missräkning.
The day $2 billion walked out the door
It was early in the morning on Jan. 8, and the company's newly minted chairman - soon to be CEO - was meeting with a contractor to fix up his weekend house in New York's Westchester County. He'd expected it to be a quiet day. Then the calls started coming in.
One way of measuring how perilously close the U.S. financial system came to melting down in mid-March 2008
The three-month Treasury bill rate, which our friend Jim Bianco of the highly respected Bianco Research points out is the "risk-free" rate for many models such as the capital asset pricing model, the arbitrage risk pricing model and the Black-Scholes pricing model, fell to a 50-year low of 56 basis points on Tuesday, March 25
The bailout of Bear was an obnoxious /odiously or disgustingly objectionable : highly offensive/ necessity in view of the fact that the firm was too interconnected as a Wall Street counterparty and prime broker to be permitted to fail. Its collapse would have placed many hedge funds and other financial firms at risk
The time to ask about moral hazard is not when the system is about the implode
If the current crisis, and the recurring crises of the last twenty years, tell us anything, it is that market solutions are insufficient to protect the system from the greed and fear that drive markets.
Fed bailout of Bear Stearns
Two weeks ago, the world financial system hung by a thread as a battle raged among corporate leaders, government officials, portfolio managers and independent traders to control its destiny.
Stage I of dealing with a financial crisis is to provide liquidity to the banking system at high interest rates in order to keep commerce and finance liquid while punishing feckless overleveraged financiers. We passed out of Stage I at the end of last year.
With link to ALAN S. BLINDER, NYT: What about the operation's scale? Based on current estimates, such an institution might be asked to consider refinancing one million to two million mortgages... as much as $200 billion to $400 billion. The midpoint, $300 billion, is one-seventh the size of Citigroup and would rank the new institution as the sixth-largest bank in the United States....
Like a 1930s bank run
America's economy risks mother of all meltdowns
how bad might this downturn get? To answer this question we should ask a true bear.
His thinking deserves to be taken seriously. He first predicted a US recession in July 2006.
The risks are indeed high and the ability of the authorities to deal with them more limited than most people hope.
Speaking after the meeting of Group of Seven finance leaders, Peer SteinbrÃ¼ck, German finance minister,
The Rising Risk of a Systemic Financial Meltdown:
Why did the Fed ease the Fed Funds rate by a whopping 125bps in eight days this past January?
To understand the Fed actions one has to realize that there is now a rising probability of a "catastrophic" financial and economic outcome, i.e. a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe.
The Fed is seriously worried about this vicious circle and about the risks of a systemic financial meltdown.
To understand the risks that the financial system is facing today I present the "nightmare" or "catastrophic" scenario that the Fed and financial officials around the world are now worried about.
First, this is the worst housing recession in US history and there is no sign it will bottom out any time soon.
Second, losses for the financial system from the subprime disaster are now estimated to be as high as $250 to $300 billion. But the financial losses will not be only in subprime mortgages and the related RMBS and CDOs. They are now spreading to near prime and prime mortgages
Third, the recession will lead - as it is already doing - to a sharp increase in defaults on other forms of unsecured consumer debt: credit cards, auto loans, student loans.
Fourth, while there is serious uncertainty about the losses that monolines will undertake on their insurance of RMBS, CDO and other toxic ABS products, it is now clear that such losses are much higher than the $10-15 billion rescue package that regulators are trying to patch up
Next, the downgrade of the monolines will lead to another $150 of writedowns on ABS portfolios for financial institutions that have already massive losses.
Fifth, the commercial real estate loan market will soon enter into a meltdown similar to the subprime one. Lending practices in commercial real estate were as reckless as those in residential real estate.
Sixth, it is possible that some large regional or even national bank that is very exposed to mortgages, residential and commercial, will go bankrupt. Thus some big banks may join the 200 plus subprime lenders that have gone bankrupt.
Already Countrywide - an institution that was more likely insolvent than illiquid - has been bailed out with public money via a $55 billion loan from the FHLB system, a semi-public system of funding of mortgage lenders.
hundreds of billions of dollars of leveraged loans are now stuck on the balance sheet of financial institutions at values well below par (currently about 90 cents on the dollar but soon much lower).
Eighth, once a severe recession is underway a massive wave of corporate defaults will take place
Ninth, the "shadow banking system" (as defined by the PIMCO folks) or more precisely the "shadow financial system" (as it is composed by non-bank financial institutions) will soon get into serious trouble. This shadow financial system is composed of financial institutions that - like banks - borrow short and in liquid forms and lend or invest long in more illiquid assets. This system includes: SIVs, conduits, money market funds, monolines, investment banks, hedge funds and other non-bank financial institutions
Tenth, stock markets in the US and abroad will start pricing a severe US recession - rather than a mild recession
Eleventh, the worsening credit crunch that is affecting most credit markets and credit derivative markets will lead to a dry-up of liquidity in a variety of financial markets
Twelfth, a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue leading to a cascading and mounting cycle of losses and further credit contraction.
Total losses in the financial system will add up to more than $1 trillion and the economic recession will become deeper, more protracted and severe.
In this meltdown scenario US and global financial markets will experience their most severe crisis in the last quarter of a century.
Can the Fed and other financial officials avoid this nightmare scenario that keeps them awake at night?
I will argue - in my next article - that one should be pessimistic about the ability of policy and financial authorities to manage and contain a crisis of this magnitude; thus, one should be prepared for the worst, i.e. a systemic financial crisis.
On Friday I was in Davos in a panel on the "Ups and Downs of EMU" where ECB head Trichet, Italian Economy Minister Tremont,
America's economy risks mother of all meltdowns
The Credit Crisis is Simply Getting Worse
Goldman Sachs CFO David Viniar warned yesterday that some key mortgage bond insurers could collapse. Viniar, speaking at a CSFB conference, said credit markets are trading as if we are in a "worst recession"; and there is a "total disconnect between the equities market and the credit market." (The Bill King Report)
The credit markets have gone from bad to worse. There's almost no trading being done in the $2 trillion Collateralized Debt Obligation (CDO) markets. Perfectly good bank loans are trading at discounts of between 10-20% to par,
Let's take a look at a few graphs from www.markit.com.
The "spread" is the difference you pay, typically over LIBOR (or the London InterBank Offered Rate). LIBOR is the most important interest rate in the world, as massive amounts of debt are set according to it. Let's say you are an AAA-rated borrower. Last summer you might have been paying as little as 3.84 basis points over LIBOR. If LIBOR was at 5%, you would be paying 5.0384%. There was very little premium for what was considered risk-free money.
Today you are paying as much as 1.89% more. Granted, 3-month LIBOR is now at 3.10, down 2.16% over the last six months, due to aggressive Fed, Bank of England, and ECB (European Central Bank) action. Thus your net cost of funding is the same, but only if you are AAA.
There are hundreds of billions of dollars of Leveraged Buy Outs (LBOs) that were done last year that are still on the various lending banks books, which they thought they were going to be able to sell to investors. However, the price of risk has risen and no one is willing to take the loans at anywhere close to the original rates the banks committed to. I talked with one major investment banking executive this week, and they are having to cut back on the loans they are currently making, and tighten credit standards, as they now have to carry those old loans at very low rates on their books.
Goldman Sachs now estimates that the total loss in the mortgage security world will total $400 billion (this includes more than just subprime mortgages),
2007 in USA: 95,000 new jobs per month, down from 175,000 in 2006.
The trigger for the Fed action was the move on Friday by Fitch to strip the US monoline insurer AMBAC of its `AAA' rating,
"I'm not predicting the collapse of the financial system."
han varnar för att EMU är en rigid struktur som kommer att skapa olösliga spänningar.
... the fate of global bond insurers and the $2,400bn of debt they guarantee.
Ambac, one of the biggest bond insurers, or so-called monolines, was downgraded
George Soros säger i en intervju att världen står inför den värsta finansiella krisen sedan andra världskriget och att USA hotas av en recession.
Enligt anmälan i The Economist (10/10 1987) är
The next banking crisis on the way
The story of the upcoming world crash is hidden in plain sight. Even mayor Bloomberg has jumped in the gloom and doom bandwagon: a global economic downturn was looming, triggered by the "lunacy" of public debt, he declared last month. Meanwhile denial continues. Although nearly 70% of the Americans do fear a recession, the possibility of a major crisis is not considered.
We have 600 trillion in world liabilities plus more than a 400 trillion-derivatives neutron bomb, all of which will go off when the Westerners (from EU and US) will no longer be able to borrow. The credit crisis could be just beginning according to, the Calcutta-born Australian Satyajit Das , a derivatives specialist who speaks of nearly $500tn.
The article can also be read at her own blog
The Next Dominos: Junk Bond And Counterparty Risk
A perfect economic environment allowed the alchemists in structured finance to apply massive amounts of leverage on low quality, securitized mortgages
Over the past decade, the exponential growth of credit derivatives has created unprecedented amounts of financial leverage on corporate credit.
The amount of outstanding corporate credit and leverage applied to it dwarfs the market for subprime mortgages. As such, the consequences of a problem in this arena may be far more severe than what happened in subprime. If we are going to experience the downside of another economic cycle, we may be in for a painful ride.
One way of thinking about the CDS market is that of a huge, new insurance industry whose providers reserve nothing for future losses. Imagine what would happen if $45 trillion worth of insurance policies experienced an actuarial average of 5% losses and no one had $2.25 trillion sitting around to foot the bill!
The Second Domino: "High"-Yield Bonds
The anatomy of the high-yield bubble started with a virtuous cycle. When both the markets and the economy were strong, investors paid little attention to risk. The more investors assumed risk, the more they received rewards. Companies seized the opportunity to obtain inexpensive financing and issued paper to the market on attractive terms. As leverage increased, private equity buyers drove up asset values. Higher asset values enhanced collateral and allowed companies to borrow more or refinance their way out of trouble. Without defaults, creditors were willing to lend on ever more egregious terms. As the cycle grew stronger, buyers received less compensation for the risks they assumed.