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Watch this great video taken from the site of ACLU (American Civil Liberties Union). It’s a very relevant and scary take on what we might be trending towards if we don’t stop the Big Brother-esque gathering of personal information NOW.

http://www.aclu.org/pizza/images/screen.swf

 

 

Campaign to put a stop to this! Don’t let this happen in your country.

RESIST!

Most of us feel that auditors should indeed be worried now. After all, none seem to have been raising any alarms over the extent of bad loans accumulated by major financial institutions, or over risks that banks exposed themselves to through entering into derivatives contracts they claimed they understood but did not. And now many hold auditors at least partially responsible for the ensuing debacle.

For some audit firms, the time of reckoning seems to be approaching fast. However the degree of their concern over legal action will depend on where the firms are operating, and global or US-based firms are at greatest risk of coming under close scrutiny in the courts of law.

Read the rest of this entry »

Searching for various opinions and predictions about the end of this recession, I came across the blog called Angry Bear, written by a number of US economists, some of them PhDs, which I found interesting hence I am going to quote heavily from it.

In this article, the author writes his prediction about the end of this recession in the US:

Read the rest of this entry »

The euphoria of earlier this week, which followed an announcement of the UK bailout by Gordon Brown, has seemingly finished – as it was feared to. Shares have yet again collapsed. Asia showed probably the worst results today, with the Nikkei dropping 11% on the 16th October. As I am writing this, the FTSE has fallen below 4,000 again. And Dow will be perilously close to its 8,000 mark.

Shifting sands: Investor sentiment, similar to voter sentiment, is a funny thing. Markets are driven by it, same as elections are won on the strength of popular feeling. However stock market sentiment is also fickle and impermanent, and prone to wild swings especially in troubled times such as now. We are nowhere close to being out of the woods yet. In the weeks to come, there will be significant market volatility, and the market will trend downwards. Perhaps my fears of FTSE at 3,000 have yet to be realised.

Credit crunch biting hard: Interbank lending is still pretty frozen, although short term rates have fallen a little – with banks still not keen to do any longer term lending. Despite all government intentions and declarations, banks cannot be forced to start lending against their will if they do not have confidence in their financial partners. Somebody compared this to “asking water to flow upstream” – just is not going to happen. The impact of this has already spilt out into the real economy: businesses are finding it very hard to refinance their existing loans. This will have a negative impact on the whole economy, reducing business activity and forcing some to cease trading altogether.

Recession: What is driving the stock markets plunges at this very moment are investors realising that we are heading full steam into a global recession – and the existing bailout funds will not be enough to prevent it. A lot of government money is being pumped into the banking system – yet as long as investors think we are heading for a recession, they will keep on selling, and the money will keep on burning up and vanishing into the bottomless pit. It’s a vicious circle which under the current financial system, only restored consumer confidence can stop – and we just are not getting any positive economic news for this to happen. Read the rest of this entry »

The UK Government has now unveiled the plans for a £37bn bailout for key British banks, as the BBC reports today.

Terms of the UK Bailout: The key features is that the Royal Bank of Scotland (RBS), Lloyds and HBOS will get cash injections of £20bn for RBS and £17bn between the two latter banks. This money will be used to recapitalise these banks, ie strengthen their reserves in order to withstand financial turmoil and market volatility we are facing at present. However in return the Government is effectively part-nationalising these three banks by taking a large or controlling share in them as these banks sell its shares to the Government in exchange for money.

The objective of part-nationalisation, apart from taking more control in the banks’s affairs now, is to also get income back to the Government and the UK taxpayer once the banking system does recover and shares go up in value.

Banks management changing: On the strength of this effective humiliation, the heads of RBS (Fred Goodwin and Tom McKillop) and HBOS (Andy Hornby and Lord Dennis Stevenson) are resigning, stepping down, or retiring. The UK Government is keen to see proven people with strong and relevant industry experience step into their shoes.

Banking bonuses curbed: One of the conditions of the UK Bailout is that there will be no bonuses to senior executives this year, and a move towards paying bonuses in shares not in cash in future years. However these restrictions do not impact those banks that are not part of today’s headline £37bn bailout proposal.

Barclays route: Barclays has opted to raise the money it needs without Government’s help. It needs £6.5bn. It seems that one of the reasons Barclays is trying to make it on its own, apart from avoiding the humiliation of the bailout, is that it will remain free to set banking bonuses as it sees fit.

US v UK Bailout compared: There are some distinctions between the US and the UK Bailout proposals. Some are driven by the fact the two banking systems have different features – for instance, in the US there are many more banks in existence making individual targeted action possibly more difficult to achieve. Read the rest of this entry »

I don’t have any answers. And today, I feel the weight of fear and uncertainty over the impact of the Global Meltdown on people closest to me. The government measures do not seem to be working to stop the systemic panic that has taken hold of everyone. Markets are in freefall across the globe.

Lehman’s CDS settlement: Part of the reason’s for today stock market crash is the fear surrounding the need to settle Credit Default swap (CDS) protection on Lehman Brothers’ debt. This is due to happen today. The size of financial contracts under settlement is $400bn.

CDSs are a type of financial insurance policy (loosely speaking) written by a financial institution to protect the holder against the risk of a specified party (in this case, Lehman Brothers) going bust. Now that Lehmans is bankrupt, the holder will want this policy paying out. If the payout does not happen, the holder of the policy is at massive risk as it does not get the money it was counting on. The payout might also not happen if the writers of the policy do not have enough cash to pay all obligations. If things go sour, this will impact banks which have so far not been in the spotlight being the writers of these contracts, or the holders of these contracts – such as JPMorganChase.

There is uncertainty that this settlement can take place today, given the state of world’s markets and absence of liquidity. If it goes wrong, this might kick off a further chain reaction of negative events. 

Gloomy thoughts of the day: Going back to the economy, here is what I fear might happen – and I do feel quite negative today – we can check how close or far off the mark I was later this year:

  • Lower limit of indices: Only 2 days ago I speculated (at home) that FTSE 100 will stop before crashing through the 4000 psychological barrier. This has already taken place – it’s trading below 4000 – so the reality is worse than my fears. So should FTSE 1000 at 3000 be the limit?
  • Markets shut down for weeks: We have already seen Iceland and Russian markets closed. Will US and UK and other major stock markets follow suit in an effort to curb panic?
  • Sweeping reforms: There might be major reforms taking place in the economy and finance. I cannot discount the possibility of drastic steps such as freezing all savings as reforms are carried out. Your money might not be safe wherever it’s held. Our Governments have guaranteed savings so far – but will they be able to stand by that guarantee? I fear they could abandon it if they really had to.
  • Pensions and Investments: Any stock-market reliant savings held in funds, have already lost a massive chunk of their value. My own savings held in funds are down 25%. People close to retirement are going to struggle to live on what is left. Savings are not safe wherever they are. If there is something akin to a currency reform, then all savings can be taken away anyway as part of that. How much faith do we have in the Government’s guarantee on existing deposits? I would not trust it 100%.
  • More bank failures: I am sure we’ll see a few more of these, causing problems with existing savings lost or frozen
  • Recession: Fears deepen about entering a major recession akin to the Great Depression of the 1930ies. The IMF is speculating this might last until the end of 2009. Could it be longer? Could it be years of hardship for people who worked for decades on end to secure their future?
  • People take to the streets: Wouldn’t you – if things got very bad? It’s the likes of you and I who can topple governments, if we are truly p*ssed off.

Because at this stage, no-one seems to really know what to do next.

 

Copyright 2008 by CuriouslyInspired

Yesterday was a very, very bad day on European stock exchanges, with key indices sliding down massively. To give some examples – UK’s FTSE 100 down 7.8% (the largest fall since 1987’s crisis), France’s CAC 40 down 9%, Germany’s DAX down over 7%, Russia’s RTS down over 19% resulting in Russian stock markets being shut down today again. Asian markets were also sharply down. There are more market casualties – Fortis (a Dutch-Belgian bank) and Hypo Real Estate (a German bank) – and seeking urgent rescue either through cash injections or a quick merger.

Iceland continues to struggle under the weight of its massive banking crisis, trying to avoid national bankruptcy, with the second largest bank Landsbanki now being nationalised – this is in addition to Glitnir about which I wrote recently. Thus, this week the US economic calamities have been demonstrated to well and truly impact global markets – not that we have doubted this earlier.

Cause of the panic: The European stock market slide is attributed to the lack of a coordinated economic front amongst EU’s governments which does nothing to restore confidence in the system at the time when emerging economic data is implying that US is entering a recession. US’s recession will impact the world’s economy due to its global nature. European governments are pursuing their goals in isolation and cannot have seen the depth of the crisis we are about to enter. According to this article, we are staring into the abyss of a systemic collapse, with markets at risk of closure. One recommendation is for the European central bank to lower its interest rate immediately and start acting like the lender of last resort to companies in trouble. Lowering the rate of interest should kick off inflation, one side effect of which will be to reduce the real value of outstanding debt, making debt obligations easier to bear.

UK is also showing deteriorating economic figures, prompting statements that it too is now technically in recession. Meanwhile, European countries are introducing their own measures to address the credit crisis and resulting stock market plunges, but there is no overall agreed policy. This must be reflective of a panic that set in amongst governments, each trying to protect their own skin in the eyes of the very concerned electorate by introducing quick measures. Divided, they stand. Read the rest of this entry »

There’s lots of hot debate at present as to why the US Government is supporting the Bailout plan in its current format. The people I’ve chatted to over the past few days all strongly disapprove of the plan. We keep coming back to the same question: why is the Bailout progressing in its current shape and form, whilst there seem to be alternative proposals out there – which are not being publicly debated?

Pressure for any solution: I put an opinion forward that there was pressure to adopt a solution, any solution, because the world economy is in unchartered territory (an unprecedented mess), economists don’t know what policies to adopt that work best in this situation, and there is panic in governments from not knowing who to turn to. Quick action of sorts is seen as better than inaction.

Merits of inaction: Inaction might have its merits, although it is an election loser in the USA. I wrote at length recently about why absence of any Bailout might actually be an option (a very painful one, indeed, possibly an equivalent of entering another Great Depression) – compared to a lengthy, expensive, painful, AND untested solution of the Great US Bailout.

Theory on Government paying off financiers: More interesting speculative thoughts as to why the US Government might be keen to rush into the Paulson plan was presented by Dandelion Salad on the 2nd of October. Quoting them –

What is happening is that the Bush administration is engineering a massive raid on the Federal treasury to pay off the people within the financial industry who have been operating the housing scam because the politicians told them to do it. This is hush money.

The people in the financial institutions who are getting the money will be passing it on to the big banks that leveraged their criminal lending practices. The giant sucking sound you hear is almost a trillion dollars of future taxpayer earnings going into the vaults of the nations’s biggest banks, such as Citibank, Bank of America, and—the pet bank of the Rockefeller family—J.P. Morgan Chase. Much will also go into the vaults of foreign investors such as the Bank of China.

A scary thought, isn’t it? I don’t think this is exactly the whole story of what is happening, but read the whole article – it’s a pretty interesting read.

Further slump in US stock markets: As a closing thought, a comment about current stock markets. Despite the Bailout plan being adopted in the US on Friday, US markets actually closed lower last week than they started on Friday, having temporarity risen during the day.

The newest shares slump reflects fears that the $700bn Bailout package might not be sufficient to provide enough liquidity in the markets to prevent a US recession. In economic speak, “expectations of the Bill being passed were already incorporated into stock markets” so once the Bill was adopted, the market looked to new information to respond to – and this came in the shape of rising unemployment figures.

Whatever happens next, we’ll have to try and keep a cool head, tighten our belts and ride out this storm. There are no miracle pills to take that might make this landing any softer.

 

Copyright 2008 by CuriouslyInspired

I stumbled across a great article this morning which explains very well how Central banks (the Fed, the Bank of England, etc) operate on the money markets to inject liquidity into the system in order to stabilise it. This prompted me to consider the bigger question why money and credit is important in an economy.

Central banks and monetary policy: Typically Central banks aspire to maintain a certain target interest rate, and tighten credit (reduce it) when rates are too low, or increase the money supply when the rate is too high when rates are too high. This does not mean printing money: purely issuing notes and coins without reference to economic conditions can and does lead to inflation which, when excessive, is very damaging to the economy (it is outside the scope of this note to consider what is deemed “excessive” or what drives inflation in the first place, although some degree of inflation seems inevitable and healthy). Instead Central banks buy or sell short term Treasury bonds to primary banks (the likes of Goldman Sachs) to manipulate liquidity.

Central banks thus influence available credit through its dealings with primary banks and not small regional banks. If primary banks ceased to exist, e.g. if they went bust, Central banks would lose this existing tool of influencing available total money in the economy.   Read the rest of this entry »

Yesterday, the US Senate backed the financial bail-out bill amounting to $700bn (£380bn). The essence of the plan is to buy up bad debts in order to try and stabilise financial markets through restoring confidence that no other institutions will collapse as the result of existing debts. The ultimate objective is to to keep banks lending – so that the global credit crunch does not take an even stronger hold and completely paralyze the economy.

In order to become effective, the Houe of Representatives have to approve the bill as well. Earlier, this bill failed to pass the House of Representatives vote. Since this first failure, extra modifications were added to make it more palatable to the public, such as additional guarantees of the amount of savings US will guarantee, and tax breaks for smaller businesses to encourage the economy.

At the next hurdle, the bill might still be rejected. There is of course pressure (or strong encouragement) from President Bush and both presidential candidates for it to be passed, which might sway the vote to some extent. But what could the outcomes be of the bill being (a) passed – or (b) rejected – on the markets in the longer term?

Bill passed: The US government will effectively become the owner of devalued assets of the financial firms, rescuing the latter from the mess they were responsible for in the first place. 2 side effects might occur:

  • Whilst the bailout might create greater confidence in the markets of no more imminent banking failures, the US state will be saddled with a huge amount of non-performing (but not completely worthless) assets and hence some degree of increase in its budget deficit. This increase will be particularly large if the US housing market slumps further, making these assets even less valuable. The increase in budget deficit will filter through into the real ecomony and might trigger interest rate rises, deterioration of the economic climate and a deepening of the recession which is already starting to take hold in the US. The recession can be quite protracted and painful as the government might resort to helping banks further, even the technically bankrupt ones (kind of like keeping a dead patient on a life support machine for the sake of preserving appearances). This brings to mind a parallel with the protracted recession in Japan in the nineties where (to the best of my knowledge) the government’s continuous intervention to prop up firms just prolonged the economy’s problems.
  • The bailout reinforces the perception that banks can behave totally irresponsibly and take any unjustified risks, since they will be rescued nevertheless. So the problem will occur again in future – because no-one ever learns! And we will pay for it again.

Damned if you do?…

Bill not passed: The crisis of confidence will resume but magnified many-fold. There will almost certainly be more high profile bankruptcies. The impact and the shock of it will be severe and harsh with wide ranging negative ecomonic implications for the US and the world alike, and it is bound to be very challenging on the people living through it, with an increase in unemployment just for starters. The global credit crunch will squeeze everyone even more strongly.

A part of me keeps coming back to this thought though – in this case, although the resulting downturn will undoubtedly be very severe, maybe it will not be as prolonged? Maybe with careful macroeconomic management after all the bankruptcies have happened, the US economy will actually have solid foundations on which to build long term recovery?

The collapse of the financial system might be a price too high to pay for this though.

Damned if you don’t, then.

 

I welcome people’s feedback and comments on the above.

Copyright 2008 by CuriouslyInspired

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