A commenter on Marginal Revolution quoted the ECB's actual release, which included:
"The objective of this programme is to address the malfunctioning of securities markets."
Pause... Does that ring a bell with anyone? TARP? "Firesale prices?" Bernanke: September 23, 2008:
"banks will have a basis for valuing those assets and will not have to use fire-sale prices. Their capital will not be unreasonably marked down."
Europe is making the same assumption that our Fed and Treasury made back in late 2008 - that the market was screwing up and not properly recognizing valuations. Why is it that when assets aren't priced as governments wish they were priced that it means the securities markets are malfunctioning? As I commented on Marginal Revolution: we, in the USA, already watched this show - and guess what - it wasn't malfunctioning securities markets at all! It wasn't temporarily depressed prices (LIQUIDITY PROBLEM) - it was that the assets really weren't worth as much as people previously thought (SOLVENCY PROBLEM!). Really - we did EXACTLY this in the US, but didn't learn anything from it, apparently. Just ask Fannie Mae.
Greece's debt isn't mispriced due to a malfunctioning securities market or because evil speculators are manipulating it. It's priced as it is because Greece is insolvent and people KNOW that.
Marginal Revolution commenter MoneyDemandBlog notes:
"Greece is Europe's Freddie Mac. Both are insolvent entities with a strong implicit guarantee. Both will require new regular subsidies needed to preserve the fiction of going concern."
That's a good starting analogy - but it's even worse than that. At least in the US some people will want to prolong the farce of Fannie and Freddie under the guise of propping up housing prices. Europe, however, is likely to fall into a sort of Tragedy of the Commons problem, where when the other nations see that they are paying for Greece's excesses, they aren't going to like it very much. The "responsible" Germans won't want to subsidize the fact that, as a friend of mine put it last week:
"The Greeks would rather kill each other in the streets than work and pay taxes."
We may see something similar here in the US when our states that are in over their fiscal heads have to figure out what to do. Bailouts from our government may result in a wildfire-like spreading of moral hazard, where no state feels they need to balance their budget, and everyone expects handouts from Uncle Sugar...
extend and pretend... wait and see.
-KD
11 comments:
Why is that only financial blogs are allowed to tell the truth? Main Stream Media is nothing more than misleading propaganda
any comments on gs news today.... Daily trading net revenue was $25 million or higher in all of the first quarter’s 63 trading days, New York-based Goldman Sachs reported in a filing with the U.S. Securities and Exchange... “This is the first time we have reported zero trading lossdays in a quarter,” Samuel Robinson, a Goldman Sachs spokesman,said in an e-mail. “We believe it shows the strength of our customer franchise and risk management.”... i love the customer fanchise part
Grueling and onerous work being a financial blogger in these nutty times, but maybe the moderator is happy to have the work.
Anyway, Europe just got approved for a massive cash-out refi and the world is good again.
The market was in suspended animation today, acting a little tired and punch-drunk after the last few trading sessions...
I can tell you this regarding market sentiment. There is universal conviction and clarity about the lack of conviction and clarity.
Funny side-note regarding fragmented market structure:
Many times over the weekend the media coverage of the crash of May 6 involved financial newscasters showing charts of stocks that had "funny prints" of a penny or a dollar - but,but,but
the charts they put up weren't the charts from the exchanges where the stocks printed funny
The lady shows a PG chart that had an intraday low of 57$ or so and she's saying "here you see PG traded down to 40 dollars...." This happened many times.
I'll stand by my opinion that the NYSE had it right, even though they are taking heat for not taking trades at the peak of the volatility. In my eyes it was the responsible thing to do, rather than allowing false information to enter the marketplace.
Kudos on your recent coverage KD, you've been getting some good props from some of the guys down at the CME..
KD
I completely agree. What the governments dont get is that the provided liquidity is supposed to expand the window with which you are able to fix solvency. It still requires that you actually tackle the SOLVENCY issue, whether throuhg the deleveraging of the system, amortization of asset value losses or reallocating capital to productive assets.
Instead it seems like governemnts are all willing to take step A) pushing more money into the system, without ever doing anything about B).
It completely frightens me that no government seems to be able to grasp this. Instead of cutting deficits or allowing home values to come back to normal they just extend the window endlessly.
What Jon said!
The Euro is acting horribly. After a bounce to around 1.31 this morning, it has given up almost 4 big numbers and is now trading close to the lows of last week.
Jon, GYC - i think it's clear that the plan in the US is to restore the solvency in the banks by extending and pretending for long enough, combined with ZIRP, for the banks to make back the BILLIONS by trading, to cover the losses they will eventually have to write off.
see, that's just the thing - the government WANTS them to make all this money trading.. the government NEEDS them to make all this money trading!
Ron Burgundy ad for TARP like plans:
"Massive Bailouts: 60% of the time, they work every time!"
KD,
I actually wrote about this today. With no measurable inflation (no jobs, no wage growth, no pricing power etc) the central banks CAN print trillions and not have to face inflation, at least right now. Of course one could argue (I do) that keeping asset prices up with all this cash IS inflation (but not a CPI killer). I think after the summer we will see the next panic button get hit.
KD.
extend and pretend works.
Just look at the early '80s when money-center banks were technicaly insolvent due to defaulted third world loans.
Johm Hempton had very good arguments on why E&P works for US banks -- loan spreads are positive and as long as the yield curve stays steep, banks can earn their way ot of trouble.
fundamentalist - yeah - it works if you prolong the bubble long enough! but look how much it will cost us to prolong the bubble! (See: FNM, FRE) - it's WAY more than the cost of just recognizing the bad debts up front. and the eventual reckoning is much worse too.
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