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Tuesday, October 21, 2008

News and Links for Tuesday ... 'Pouring Water Into an Empty Sponge' Edition

About one-third of the S&P 500 reports earnings this week. Yesterday we saw euphoria and I thought it interesting that the major indices went up with oil prices. Today, oil prices are down, and stocks across the board slid at the open. Clearly, fears about the economy remain. Here are some things I'm reading today ...

Robert Reich observes that the bailout plans, for all their trillions of dollars spent, are like "pouring water into an dry sponge." he says:

Nothing will come out of it because Wall Street is so deep in debt that the banks are using the extra money to improve their balance sheets. They're hoarding it because their true balance sheets -- considering the off-balance sheet vehicles they created over the past several years -- are in such rotten shape.
Mr. Reich also says:
The underlying problem isn't a liquidity problem. As I've noted elsewhere, the problem is that lenders and investors don't trust they'll get their money back because no one trusts that the numbers that purport to value securities are anything but wishful thinking. The trouble, in a nutshell, is that the financial entrepreneurship of recent years -- the derivatives, credit default swaps, collateralized debt instruments, and so on -- has undermined all notion of true value.
With that "empty sponge" visual firmly in mind, we now read that the government has come up with yet another brand-spankin' new way to loan out more of your money in Federal Reserve announces the creation of the Money Market Investor Funding Facility (MMIFF)

Elsewhere, Brad Setzer is scaring the bejeezus out of me. He thinks we may be heading for the end of Bretton Woods 2. That, in case you don't know, is the global financial accord that set up the US and US dollar as the world's top dogs. Apparently, after the recent financial fiascos, Europe wants a new lead dog, and it ain't us. Setzer writes:

And rather than ending with a whimper, Bretton Woods 2 may end with a bang.

In some sense Bretton Woods 2 has been on life support for a while now. China’s recent export growth has depended far more on Europe than on the US. US demand for non-oil imports peaked in 2006. One irony of the past year is that the US was borrowing far more from China that it was buying from China. Campaign rhetoric that the US was paying for Saudi oil with funds borrowed from China isn’t far off – though it leaves out the fact that the US also borrows from
Saudi Arabia to pay for Venezuelan, Mexican and Nigerian oil.

In other news, in case you thought the U.S. was alone in suffering declining home prices, you'll be "happy" to know there are seven countries in worse shape than us ...

You can read more on that story (with more cool charts) at the International Monetary Fund.

You probably know that I love history. Mike Panzer over at "Financial Armageddon" (catchy name) looks at The Pain on Main. He refers to a story by Nick Turse which talks about how, during the Great Depression, writers associated with the Federal Writers' Project interviewed 10,000 Americans to get oral histories of their times. I thought this next part was very interesting ...

"One thing likely to strike you about its narratives from our last spectacular economic meltdown was how many of the speakers didn't distinguish between the 1920s and the 1930s, between, that is, "the roaring twenties" of the "Jazz Age" and the Great Depression era. For lots of them, it was all tough times. As Banks wrote in her introduction: "For most of the people in this book, the Depression was not the singular event it appears in retrospect. It was one more hardship in lives made difficult by immigration, world war, and work in low-paying industries before the regulation of wages and hours. Though they spoke of living through bad times, those interviewed by the Federal Writers seldom mentioned the Depression itself."

Panzer then draws some interesting parallels to today. It's all worth a read.

Infrastructure: Nation's physical plant another crisis for next president
As if the next president won't have enough on his plate — with the collapse of the financial markets, two foreign wars, persistent security threats and a host of other concerns — America's infrastructure is collapsing.

The civil engineers association gave the country a "D" on its 2005 infrastructure Report Card. It called for a $1.6 trillion five-year improvement program.


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