Sunday, December 06, 2009

Where is the economy headed?

Dubai's debt problems have many people asking whether the world economy is in for another downturn.

The Dubai crisis is related to the current downtrend in the commercial real estate market. We don't hear much about this in the mainstream news, which seems to be concentrating more on "good" economic news.

However, we have to remember there are still a lot problems there are still "on the books." For example, in the U.S. monthly mortgage rate hikes (resets) will begin climbing again in 2010. The resets will peak near the end of 2011 when the amount reset due to adjustable rate mortgages will exceed the level of sub-prime resets in late 2008.

Unfortunately a lot of the conditions that caused the economic meltdown of 2007-8 are also "resetting" as well. The higher end of the equities market is still largely unregulated and risk-taking is now back in style among the remaining big banks.

No lessons about risk seemed to have been learned because the people now in charge of financial institutions were all saved by the government and all of them have fattened bank accounts after giving themselves big bonuses.

They know that they can take risks because it makes them wealthier in the short-term, and when the cards fall, the government will step in to protect their interests.

Now getting back to commercial real estate, the cards are already starting to fall. There appears to be a lot of hidden debt out there. Much more than is declared publicly. I'm not making this up as it was the IMF chief who brought up the subject of this debt. Many corporations have been hiding the debt with accounting tricks in hopes that the financial environment will change.

However, this debt is now forcing its way to the surface. The Dubai debacle is just the first sign of this problem.

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Thursday, November 20, 2008

Keiser and Jones on economy

Economist Max Keiser talks on the Alex Jones radio talk show about the most recent economic news.

Some items talked about are Iran's conversion of its reserves to gold, the problems of US auto makers in obtaining overseas parts, a Dow 3000 bottom, Hank Paulson and China.

Max Keiser on Alex Jones (1 of 3)

Max Keiser on Alex Jones (2 of 3)

Max Keiser on Alex Jones (3 of 3)

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Thursday, October 23, 2008

Nouriel Roubini: Hedge fund could vanish Darwin-style

In a speech before hedge fund managers in London today economics professor Nouriel Roubini predicted a run on hedge funds that could result in 30 percent of the hedge fund assets disappearing in a "fairly Darwinian manner."

The impact on the stocks could be so severe that the market would have to be closed for a week or more.

Roubini predicted the current crash in 2006.

He predicts the worse recession in 40 years that will last at least 24 months in the United States. Roubini sees a vicious cycle occurring between the financial sector and the "real economy." Because of the tsunami of mortgage foreclosures, he suggests that the government help homeowners as they did during the Great Depression.

He sees a 40 percent drop in home prices, which would be worse than the Great Depression. And he thinks at least $3 trillion will be needed in bailouts to prevent a systemic banking failure.

Nouriel Roubini on Bloomberg TV

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Asia, Europe tackle credit meltdown in Beijing

Asian and European leaders will discuss a response to the financial crisis at the 43-nation, Asia-Europe Meeting, a summit that opens Friday in Beijing.

European Union members are calling for "unprecedented" coordination between nations to tackle the global financial meltdown.


Europe, Asia leaders in Beijing for finance talks
International Herald Tribune - 2 hours ago
AP BEIJING: Leaders of Europe and Asia gathered in Beijing on Thursday ahead of a summit expected to focus on a response to the global financial meltdown.
Barroso says crisis needs significant coordination
Asian leaders to discuss crisis Straits Times

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Tuesday, October 21, 2008

Sarkozy, Barroso call for action at European Parliament

French President Nicolas Sarkozy and European Commission President Jose Manuel Barroso pushed for prompt action to the financial crisis at the European Parliament in Strasbourg on Tuesday.

Sarkozy is calling for a European Union summit ahead of global talks to address the problem.

BBC News

HIGHLIGHTS-France's Sarkozy at European Parliament
Reuters - 1 hour ago
STRASBOURG, France, Oct 21 (Reuters) - The following are comments by French President Nicolas Sarkozy at the European Parliament in Strasbourg on Tuesday.
Sarkozy: Europe should consider sovereign funds International Herald Tribune
Sarkozy calls for EU summit ahead of global finance talks AFP

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Monday, October 20, 2008

Comment:: Banks lining up for bailout

Well it seems that all types of banks are lining up to for a piece of the government's $250 billion nationalization plan, according to Treasury Secretary Henry Paulson. Many analysts believe there are many more banks out there in trouble and that the administration will eventually have to ask for more bailout money.

Economist Nouriel Roubini said that probably the government will have to at least double the current amount for bank recapitalization.

On the bright side, Federal Reserve chief Ben Bernanke endorsed a new economic stimulus plan to help jump start the economy. The Bush administration already disbursed about $100 billion to tax filers this year in hopes they would spend the money and generate more production. However, one has to think that a smart person at this time would be putting the extra money into savings for a bit of future security. Indeed President George W. Bush bluntly called on Americans to quickly spend their stimulus checks once they received them. It's just part of the consumerism world view that caused this mess in the first place.

Venture capital down

A newly released DLA Piper survey of technology and venture capital executives indicates that 66 percent of technology companies are reducing revenue forecasts. A National Venture Capital Association and PriceWaterhouseCoopers report shows a drop in venture capital deals during the third quarter.

Venture capital investment fell 7 percent to $7.1 billion in the third quarter, compared with $7.7 billion during the second quarter, according to data from Thomson Reuters. During the third quarter, 907 deals were closed, compared to 1,033 deals for the second quarter of the year. The amount of financing going to early start-ups raising their first rounds of funding dropped to its lowest level since 2004.

United Press International

Lots of banks interested in bailout - Paulson - 1 hour ago
By Tami Luhby, senior writer NEW YORK ( -- Banks of all sizes are interested in a piece of the federal government's $250 billion fund to recapitalize financial institutions, Treasury Secretary Henry Paulson said Monday.
Paulson outlines $250B capital injection plan
UPDATE 3-US Treasury urges banks to deploy new govt capital Reuters

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Sunday, October 19, 2008

South Korea moves to prop up economy

South Korea announced Sunday it will guarantee $100 billion of foreign debt and supply $30 billion to troubled banks and exporters.

The government has blamed the foreign press for stirring up fears in the country, which has been one of Asian countries hardest hit by the financial crisis. The South Korean stock market has lost 38 percent of its value and the currency, the won, has been battered harder than any other on world markets.

South Korea to Guarantee Foreign Debt
Washington Post - 4 hours ago
By Blaine Harden TOKYO, Oct. 19 -- To shore up a tumbling stock market and a troubled currency, South Korea announced Sunday it would guarantee $100 billion of foreign debt and supply $30 billion to banks and exporters in urgent need of dollars.
S. Korea Backs $100 Billion in Debt to Calm Markets (Update2) Bloomberg
S.Korea to guarantee banks' foreign currency debts The Associated Press

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Tuesday, October 14, 2008

Bank nationalization could worsen inflation

US President George W. Bush's $250 billion plan to nationalize banks will infuse money into the system and could trigger an increase in inflation.

The trend indicates that probably much more money will be needed in the future, so the money supply will continue to grow at a rapid rate as debt climbs. Interest rates will likely be kept low further putting pressure on inflation.

In the end, at least $1 trillion in additional money may be needed to prevent widespread bank failure through nationalization i.e., by shares in failing financial institutions. The law of supply and demand suggests that when money floods into the system, prices rise.

Inflation may actually ease in the short run as oil prices have dropped on fears that the slowing economy will decrease demand for petroleum. However, oil-producing countries have been hit hard and are likely to decrease production to lessen the impact on their own economies. This should stabilize oil prices.

Times Online

Bush Defends Bank Nationalization
Washington Post, United States - 3 hours ago
The government's $250 billion direct investment into banks in essence forces nine of the largest to accept what amounts to a partial nationalization. ...
US Follows Europe in Partial Bank Nationalizations Spiegel Online
Burst of optimism and a record rally Chicago Tribune

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Wednesday, October 08, 2008

Comment: Do bailouts actually prolong downturns?

There is probably no better historical example to examine this question as the Great Depression, when the government intervened for more than a decade trying to prop up the financial system.

Although the Great Depression is generally seen as starting at the stock market crash of 1929 from at least 1929, small banks and farms had been floundering severely. However, it was not until 1931, when the government started a massive bailout program with the National Credit Corporation (NCC) that things started going downhill very quickly.

In 1932, the NCC was replaced with the Reconstruction Finance Corporation (RFC) and things continued to spiral downward reaching the lowest point during the Depression in 1933.

Yet, the RFC continued its bailout program mostly unsuccessfully until America's entry into World War II, generally seen as the point when shortly afterward the Depression ended completely. During the war, the RFC continued to operate giving out $2 billion a year. From 1932 until 1941, the RFC gave out $9.465 billion, a lot of money in those days.

When the war started, the government drafted many of the employed workers, and hired and trained large numbers of unskilled workers, at its own expense, to work in wartime factories. These policies together with rationing and a greater worker discipline helped the country work out of the lingering unemployment that still plagued the country. The stock market did not recover its pre-crash position though until 1954.

Some groups of economists, like those of the Austrian School, who believe that government intervention only prolonged the problems in the economy. Others, like the Monetarists, believe the Federal Reserve did not act quickly and strongly enough to address the crisis.

During the Depression, the Fed followed a deflationary strategy that kept interest rates high. The current Fed chief, Ben Bernanke, believes more in an low interest rate strategy, an attempt to ease credit, but in effect putting upward pressure on inflation.

Bernanke's views may account for today's cut in interest rates, another attempt by the government to bend over backward in accommodating the credit markets. However, as with the Great Depression, it is impossible to deny that easy credit is responsible for the current economic crisis.

Attempts at propping up the easy credit market, then, only reinforce the causative factors according to one school of thought.

The fact that the stock markets have not reacted positively to the torrent of government measures aimed at propping up the easy credit system probably indicates some doubt over the policy.

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