PCG, Foreign Bailouts, and the Economy

PCG reported the following:

Morgan Stanley just posted its first quarterly loss ever—a whopping $3.59 billion…However, the most revealing statement as to its deteriorating financial condition was Morgan Stanley’s announcement that it went cap in hand to the Chinese government for a bailout. The China Investment Corporation, a state-owned investment fund, will purchase almost 10 percent of Morgan Stanley. More revealing yet is the fact that Morgan Stanley is paying the Chinese fund annual interest of 9 percent on its investment.

But Morgan Stanley is not alone. Citigroup, another of America’s largest banks, recently had to pay 11 percent interest to attract a state-owned United Arab Emirates investment fund to come to the rescue after multi-billion dollar losses. Then, analysts called the 11 percent interest a “loan-shark” rate. Nine percent, although better, is still in that category.

If America’s most prestigious financial institutions are in trouble—forced to borrow from foreign governments as well as pay exorbitant rates—what does that portend for the rest of the economy?

Here is a somewhat related news item:

Twenty billion dollars here, $20bn there, and a lush half-trillion from the European Central Bank at give-away rates for Christmas. Buckets of liquidity are being splashed over the North Atlantic banking system, so far with meagre or fleeting effects.

As the credit paralysis stretches through its fifth month, a chorus of economists has begun to warn that the world’s central banks are fighting the wrong war, and perhaps risk a policy error of epochal proportions.

Liquidity doesn’t do anything in this situation,” says Anna Schwartz, the doyenne of US monetarism and life-time student (with Milton Friedman) of the Great Depression.

“It cannot deal with the underlying fear that lots of firms are going bankrupt. The banks and the hedge funds have not fully acknowledged who is in trouble. That is the critical issue,” she adds…

New York’s Federal Reserve chief Tim Geithner echoed the words, warning of an “adverse self-reinforcing dynamic”, banker-speak for a downward spiral. The Fed has broken decades of practice by inviting all US depositary banks to its lending window, bringing dodgy mortgage securities as collateral.

Quietly, insiders are perusing an obscure paper by Fed staffers David Small and Jim Clouse. It explores what can be done under the Federal Reserve Act when all else fails…

Citigroup, Merrill Lynch, UBS, HSBC and others have stepped forward to reveal their losses. At some point, enough of the dirty linen will be on the line to let markets discern the shape of the debacle. We are not there yet.

Goldman Sachs caused shock last month when it predicted that total crunch losses would reach $500bn, leading to a $2 trillion contraction in lending as bank multiples kick into reverse. This already seems humdrum…

The International Monetary Fund still predicts blistering global growth of 5 per cent next year. If so, markets should roar back to life in January, as though the crunch were but a nightmare. There again, the credit soufflé may be hard to raise a second time.


Comments by COGwriter

I suspect that while things are precarious, and that there may be a downturn, that 2008 will not be the year that the economy truly tanks.  Also, the Great Tribulation Will Not Begin in 2008 (nor will Ronald Weinland be proven correct about 2008 being the time of some of the “thunders”).

But increasing dependence on the Chinese and Arabs, while helpful now, is not that way to truly solve the worlds’ economic problems.

Recall the following curse from the Bible:

The alien who is among you shall rise higher and higher above you, and you shall come down lower and lower.  He shall lend to you, but you shall not lend to him; he shall be the head, and you shall be the tail.  Moreover all these curses shall come upon you and pursue and overtake you, until you are destroyed, because you did not obey the voice of the LORD your God, to keep His commandments and His statutes which He commanded you (Deuteronomy 28:43-45).

…the foreigner who comes from a far land, would say, when they see the plagues of that land and the sicknesses which the LORD has laid on it: ‘The whole land is brimstone, salt, and burning; it is not sown, nor does it bear, nor does any grass grow there, like the overthrow of Sodom and Gomorrah, Admah, and Zeboim, which the LORD overthrew in His anger and His wrath.’  “All nations would say, ‘Why has the LORD done so to this land? What does the heat of this great anger mean?’  “Then people would say: ‘Because they have forsaken the covenant of the LORD God of their fathers…’ ” (Deuteronomy 29:22-25).

An article of possibly related interest may be The Ten Commandments Reflect Love, Breaking them is Evil.

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