Archive for the ‘credit’ Category

Taking their chances on the wall of debt

29 July 2011

This morning’s surprise news is that, after last night’s fiasco in which House Speaker John Boehner could not round up enough votes for his own deficit reduction plan, 10-year Treasury bond prices are not only not down, they’re actually up, by a good bit. Interest rates on Treasuries, which move in the opposite direction as T-bond prices, are down 10 basis points to 2.84% (as of 11:14 a.m.). What gives?

Well, for one, the bond market may not have been expecting much from Boehner. The media had already been saying that he’s a much-weakened House Speaker, after watching his failure to rein in his Tea Party faithless. And any House Republican plan would likely be dead on arrival in the Senate anyway.

Another possibility is that as it becomes more likely that the government bumps up against the current debt ceiling on Aug. 2, that counterintuitively, T-bonds might actually be seen as safer, as Chris Isidore writes in CNNMoney. Why? Because the single biggest actor on the U.S. economic stage, the federal government, would be officially dysfunctional, even more so than it is now. Today through Aug. 1, at least, the government can meet all of its financial obligations. If Aug. 2 is indeed D-Day, then on Aug. 2 the government becomes a deadbeat, at least to somebody. And quite likely, it would not be T-bondholders. This assumes that (1) the government would still be allowed to issue more debt in order to pay off its maturing debt and (2) the Treasury would prioritize the interest on that maturing debt above its other obligations. As notes on NPR this morning, most commentators seem to agree that it is in the national interest to not stiff any of our bondholders, as an actual default would surely cause interest rates to skyrocket. If Aug. 2 is the beginning of Treasury triage time, then the government would more likely stiff someone else, like government employees (please please start with members of Congress!) and government claimants who lack political clout (i.e., not seniors or the military). This creates a lot of chaos, as people don’t know when they’ll be paid, which makes them less likely to spend or repay money and creates pressure on credit markets. In sum, the market reaction may just be the usual “flight to safety” that occurs when markets think conditions are about to get worse and also more chaotic. This would be consistent with the beating that stocks have been taking lately.

It may also be that the bond market is reacting to other news, like the dreadful GDP figures that just came out today. Real GDP in the second quarter grew just 1.3% (worse than the consensus forecast of 1.8%), and first quarter growth was revised drastically downward to 0.4% (from 1.9%). These numbers are “growth recession” territory (where the economy grows but not fast enough to generate enough jobs to keep unemployment from rising), consistent with the rise in unemployment (from 9.0% to 9.2%) over the last few months. As with the debt-ceiling brinkmanship, these new signs of economic weakness are a plausible reason to pull money out of stocks and put it into Treasury bonds.

But why Treasury bonds, you ask, and not another safe haven? The simple answer seems to be that there are woefully few alternatives. As Isidore puts it:

‘U.S. Treasuries are such a massive market — about $9.8 trillion — that they dwarf the markets of other so-called “safe havens” such as gold, top-rated corporate debt or the bonds of other countries with AAA ratings.’

So worldwide investors still like their chances on the wall of debt that is U.S. Treasuries.

P.S. Richard Thompson’s duet partner here is not Linda Thompson, but Christine Collister.

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Symbiotic twin killings

11 June 2009

What caused the crisis?  It seems like most of the plausible answers I’ve heard come down to one of two basic explanations:

(1) “We were living beyond our means” — Congressman Dan Maffei (D-NY), in a WRVO Community Forum in Syracuse last week that included, um, me.  Sounded very reasonable coming from Congressman Maffei, less so coming from stockbroker/ investment advisor/ author Peter Schiff on the other night’s “Daily Show”, probably because of the diametrically opposite policy prescriptions the two draw.  Maffei backs the stimulus bill and wants to see the economy recover as soon as possible; Schiff is an adherent of the Austrian school and thinks a good old bloodletting (oops, “liquidation” or “correction”) is just what the doctor ordered.  Either way, this explanation has a lot going for it, as it explains the rash of subprime mortgage borrowing, home equity loans, maxed-out credit cards, etc.

(2) A “global savings glut” led to stock and housing bubbles, which finally burst — Fed Chairman Ben Bernanke, Nobel economist / NYT columnist Paul Krugman.  The idea here is that while we spendthrift Americans were running up huge debts, people in other countries, notably China and Japan, as well as the minority of wealthy Americans with high savings rates, had large pools of savings seeking a good risk-adjusted return.   And they invested much of it here, in Treasury bonds, thereby keeping U.S. interest rates low; in the stock market, reinflating the late 1990s bubble; in the corporate bond market, lowering rates on all bonds, even junk bonds; and in real estate, largely through securitized collections of other people’s mortgages.  (By some accounts, demand created its own supply of mortgage-backed securities — after the 2001 stock debacle, investors were looking for an alternative to stocks and thought real estate looked promising.)  A particular problem here seems to be that many investors opted for wildly risky investment vehicles, like investing in “diverse” portfolios of dodgy mortgages or blindly handing their money over to a Bernie Madoff or a Robert Allen Stanford, without realizing they were risky.

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Credit crunch update

21 February 2009

The “credit crunch” was at the heart of the media coverage of the financial crisis as it came to a crescendo last fall, but I haven’t heard much about it lately.  From what I do hear, the credit markets have loosened up quite a bit, with the big exception of mortgage loans that once got repackaged as securities.  Seems nobody wants to buy mortgage-backed securities (new or old) anymore, which is more than understandable.  I don’t either.

John Authers of the Financial Times recently noted that the commercial paper market, whose tightening last fall was evident in a big spike in interest rates, has eased considerably, as has the market for corporate bonds:

‘… there is evidence that banks’ problems may have been ring-fenced for the short-term. As Mark Lapolla of Sixth Man Research in California points out, use of the Federal Reserve’s commercial paper facility, for making short-term loans to companies, has dropped in the past few weeks, so businesses are finding other sources of finance. Large companies are issuing bonds after months when this was impossible.’

Authers seems to think the risk of a systemic collapse is now past:

‘The market believes that financial stocks could go to zero without damaging the rest of the economy. They are down 28 per cent for the year while no other sector is down more than 12 per cent.’

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Stat of the day: AAA ratings

10 February 2009

This one floored me:

“In January 2008, there were 12 triple A-rated companies in the world. At the same time, there were 64,000 structured finance instruments, such as collateralised debt obligations, rated triple A.”

— Goldman Sachs Chief Executive Lloyd Blankfein in The Financial Times, 9 Feb. 2009

Finance imitates baseball:  AAA is now bush league.

Nationalize it, mon

10 February 2009

petertoshThe sticking point in the lingering credit crunch seems to be the remaining toxic assets (or dodgy assets, as the Brits call them) on the balance sheets of so many banks, especially the big problem banks that are getting government bailouts or are in line for them.

The sticking point in the policy question of how to remove those toxic assets as an obstacle to normal financial intermediation seems to be valuation, i.e., as Winston Churchill is said to have put it, a matter of haggling over the price.   No small haggle, this.   It’s often said that there is no market for these assets, and that appears to be true in the sense that there seems to be an unbridgeable gulf between what banks say those assets are worth (97 cents on the dollar?) and what they’ll fetch on the open market (38 cents on the dollar?  The numbers are from a New York Times article, 2 Feb. 2009, and refer to a particular mortgage-backed bond.  A division of Standard & Poor’s estimated the bond’s value at 87 cents or 53 cents under a less optimistic scenario. )  Treasury Secretary Tim Geithner’s plan for the remaining $350 billion of last fall’s bank bailout is due to be unveiled Tuesday, and advance word is that it calls for the Treasury to buy up a lot of those toxic assets and quarantine them in a “bad bank.”

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What’s going on vis-a-vis the Visa

11 January 2009

ned_flandersTo many, the nation’s credit card debt seems a perfect symbol of America’s bubble economy.  Business Week even speculated this past fall that credit cards might follow housing as the next meltdown in our financial system. It seems logical enough:  just as securitized subprime mortgages wreaked financial havoc, revolving credit-card loans are almost inherently subprime, as credit cards are easy to get, charge high interest rates, and have much higher default rates than regular bank loans.  And a good deal of credit-card debt has also been securitized into collateralized debt obligations and other such lipstick-on-a-pig formulations.  Some of them may still even carry bogus AAA ratings.

Business Week‘s article has a graphic that indicates that the amount of bad credit card debt that banks had to charge off was steady at about 25% from 2001 to 2007 and then shot up in 2008, to an estimated 40%, and is projected to go to 90% in 2009.  A Jan. 1 article from Reuters echoes the gloomy assessment, saying that U.S. credit card companies are anticipating possibly their worst year ever.

By the most recent measure, for Nov. 2008, total revolving credit-card debt in the U.S. was just under $1 trillion — granted, less than 10% of total mortgage debt and about 7% of GDP — but, like gas prices, credit-card bills are among the most visible reminders of one’s personal finances.  And according to the Federal Reserve, nearly half of consumers have some credit-card debt, which averages $2,200.   (Those numbers are from at least a year ago; very likely they’ve since gone up.)

My hunch is that in tough times, an unpaid credit-card balance weighs on a person a lot more heavily, even if that person is still gainfully employed.  So credit-card debt could be a major inhibitor of consumer spending, and yet another rock in the ongoing economic landslide.

College, credit, crunch

3 January 2009

A recession should tip the scales in favor of attending college, yes?  It’s part of every Econ 101 course:  the opportunity cost of attending college includes the income you’d making at whatever job you’d be working at otherwise.  So as career opportunities fail to knock, college or grad school looks like a much better option, yes?

Well sure, except you still have to pay for it.  And that seems to be a lot harder than it was a year or two ago.  And that’s apart from the smaller pool of savings for college, thanks to the $6.9 trillion lost in the U.S. stock market in 2008 and the 1.9 million jobs lost in 2008.  I’m thinking in particular of the tightening of the markets for student loans and credit cards.  Colleges and credit card companies have had something of a symbiotic relationship for years, as this New York Times article describes.

Excessive credit card debt seems to have been a major part of the bubble that just burst (and may still have some bursting to go), so it might not even be a good thing if banks were to relax their current credit-card standards.  But a broadening of federal student loan and grant programs might be a sensible investment in human capital, as part of the forthcoming stimulus package.

Credit Crunch: the board game

24 December 2008

From The Economist.

Funny stuff, and looks like you can actually play it if you take the time to print out all the pdf’s.