Soros: This Is Act 2 of the Crisis

I’ve been interested in Soros ever since reading “The Alchemy of Finance” in the early ’90s and an even bigger fan since seeing him speak at the “Secretary’s Open Forum” at the U.S. Department of State in 2003.  The following is a clear, concise, and up-to-date explanation of his main theories and their implications for financial markets and their participants and regulators.

This Is “Act 2″ of the Crisis
George Soros
2010-6-14

In the week following the bankruptcy of Lehman Brothers on Sept. 15, 2008 — global financial markets actually broke down, and by the end of the week, they had to be put on artificial life support. The life support consisted of substituting sovereign credit for the credit of financial institutions, which ceased to be acceptable to counterparties.

As Mervyn King of the Bank of England brilliantly explained, the authorities had to do in the short term the exact opposite of what was needed in the long term: they had to pump in a lot of credit to make up for the credit that disappeared, and thereby reinforce the excess credit and leverage that had caused the crisis in the first place. Only in the longer term, when the crisis had subsided, could they drain the credit and re-establish macroeconomic balance.

This required a delicate two-phase maneuver just as when a car is skidding. First you have to turn the car into the direction of the skid and only when you have regained control can you correct course.

The first phase of the maneuver has been successfully accomplished — a collapse has been averted. In retrospect, the temporary breakdown of the financial system seems like a bad dream. There are people in the financial institutions that survived who would like nothing better than to forget it and carry on with business as usual. This was evident in their massive lobbying effort to protect their interests in the Financial Reform Act that just came out of Congress. But the collapse of the financial system as we know it is real, and the crisis is far from over.

Indeed, we have just entered Act II of the drama, when financial markets started losing confidence in the credibility of sovereign debt.  Greece and the euro have taken center stage, but the effects are liable to be felt worldwide.

Couple of Good Roubini and Einhorn Articles

As some of you know, Nouriel Roubini and David Einhorn are, IMHO, two of the best minds in their fields and I’ve been posting some of their stuff on here since at least 2006 (list of posts here).  Here are their latest articles:

Jeff Bezos’ & Amazon’s Big “Tell”

(Why do I single out Bezos here?  Because responsibility goes to the top and Bezos is the Founder, Chairman, CEO, and President of Amazon.)

2009-7-23 UPDATE: See bottom of this post.

I wasn’t going to comment on the recnt (and ironic) Jeff Bezos debacle, but yesterday a commenter on Cringly’s blog said: “Amazon has destroyed their business in one careless stroke. Once you lose the public trust, you never get it back.”

Although I think “destroyed” and “never” are too strong words, I share the sentiment, especially the part about violating trust (for example, violate my trust once and you’re out, with little chance of reinstatement).

Why is “destroyed” too strong a word?

Because, probably enough of Amazon’s customers don’t know or care about Bezos’ Orwellian, jack-booted thug maneuver or are not thoughtful enough to understand why it’s such a big deal.

Most of the people who do care might somehow punish Amazon a little, such as by going on a temporary buyer’s strike or writing a negative blog post (like this one), but they will probably come back to big bro Bezos and his website that knows more about you than you may know yourself.  The more you use Amazon, the more it learns about you, of course.  It’s the same, with Google, NetFlix, your credit/debit card purchases, mobile phone and location data, RFID chipped cards and passports, but all that’s another story. Reminds me, though, see this interesting Wired UK article: “The new hidden persuaders.”

So, why is this debacle so interesting?

New Plan Ties College Loan Payments to Income

This is an important article for anyone who has student loan debt. The more your debt, and lower your imcome, the more important the article.

The new repayment option — the Income Based Repayment (IBR) plan — went into effect on July 1, 2009. It limits what borrowers have to pay to “15% of the difference between their gross income and 150% of federal poverty guidelines.”

What exactly that means, is up to your lender to determine, as I understand it. But it does appear that payments can be as low as $0.00. That’s bad, because interest accrues and is added to the outstanding balance, but it’s good because after borrowers “make payments on loans” for 25 years, the balance is forgiven.  (But what does “make payments on loans” mean?  What if those “payments” are $0.00?)

Bottom line is that everyone who feels burdened by their student loans should read this article, and its links, and figure out if this new plan is something for them. If it is, take action.

Problem is, how to figure all this stuff out? It may be so important, and complicated, that some people might want/need professional advice. That’s actually something I’ve long been interested in, but it’s been low on the priority list compared with my other projects. I would love to hear from any of you with the relevant knowledge, experience, and drive to setup a web- and phone-based business providing student loan consulting (in partnership with me). I’ve already got a good domain name: StudentLoanConsulting.com. I guess I could always sell or license that name as well. If you’re interested in any of this, just contact me.

Now on to the article:

Ten Principles for a Black Swan-proof World

A year and a half ago, Nouriel Roubini gave us his recipe for financial meltdown, The Twelve Steps to Financial Disaster, each of which unfolded in sequence. Now Nassim Nicholas Taleb gives us his “Ten Steps for a Black Swan-proof World” (below).

Roubini’s steps were the inevitable outcome of a flawed system. Sadly, perhaps, Taleb’s steps are not inevitable.

Additional reading:

• Selected Roubini articles on this blog
• Nouriel Roubini’s Global EconoMonitor blog
• Nassim Nicholas Taleb’s Fooled by Randomness blog

Now on to the article:

Article: The Quiet Coup

A long, but interesting and important article.

The Quiet Coup
By Simon Johnson
2009-05
The Atlantic

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

One thing you learn rather quickly when working at the International Monetary Fund is that…

First Post From the USA and First Post From the New MacBook

Just time for a quickie:

1. NYT: Bailout Plan: $2.5 Trillion and a Strong U.S. Hand
2. NYT Graphic: The Government’s $8.8 Trillion Bailout Tab
3. Nouriel Roubini: Treasury’s Financial Stability Plan: Will It Work?
4. Nouriel Roubini: It Is Time to Nationalize Insolvent Banking Systems
5. Video and My Comments: Obama and Henrietta Hughes at Town Hall Meeting

UPDATE: Two additional articles:

1. NYT: Stopping a Financial Crisis, the Swedish Way
   (September 2008)
2. Matthew Richardson and Nouriel Roubini: Nationalize the Banks! We’re all Swedes Now (current)

Gearing up for Obama-Rama-Palooza in DC

Yesterday, sitting here in Sweden and emailing my friends back home in Washington, DC, is when the adrenaline-pumping excitement really hit me (for the second time — this was the first).

We are at:

1. The end of a dark era that spread fear, turned “us” against “them,” and “we” into “me.”
2. And the beginning of a new era!

While I know it won’t be easy, I believe Obama and his team represent the best — by far — that we could hope for right now.  It’s a tough job, and I know it’s not possible to please everyone inside America, let alone also outside America, but I believe he can/will do better than any of the others could have.

Barack Obama Wins, We Win! Acceptance Speech Video and Transcript

(Note: the screenshot above is from this morning. Since then, the Obama margin has increased. See The New York Times interactive election map and Big Board for the latest. You can toggle the map to any of the past four presidential elections. There are also links to speeches, polls, and more.)

My hope in USA is restored; we are not scared anymore. Fear, bullying and “me, me, me” loses. Courage, cooperation, and “we, we, we” wins. Thank you is all I can say. Thank you, Barack Obama. Thank you, world! Be the change!

Video of Obama’s acceptance speech:

• BBC
• New York Times

Did it bring tears to your eyes the way it did mine?
Yes, we can! That message is global; it’s for all of us.

Here is my uncut reaction video and below is the transcript of Obama’s speech. Here is how Washington DC voted.  Update: Fast forward to my January 2009 blog post: Gearing up for Obama-Rama-Palooza in DC.

Update: See the comments at the bottom of this post.  So far…

Bailout “Hope Rally” = Eye of the Storm

(just time for a quick, somewhat unpolished update)

What I mean by “hope rally” is the rally off a (bear-market) low that is driven by the hope that some specified thing (the Bailout legislation in this case) is going to make everything all better. That is never the case, of course, otherwise it would be called the start of a new bull market.  Also, in the current situation, it’s almost certainly (effectively certainly) too early (time and price) in the bear market for a new bull market to start.

That’s why I make the eye of the hurricane analogy, because any “Bailout Reprieve” will (almost certainly) be only temporary.

Last week’s…

Nouriel Roubini’s Latest – Must Read

(NOTE: There are many more NR articles on this blog, going back to 2006, just use the search box at the top of the right-hand sidebar (or click here).  Here’s one from January.  I have been writing about the coming crisis myself since 2004, when I sold my co-op in DC and started renting, and also started liquidating my other real estate investments.  The asset and credit bubbles were obvious to all who had their eyes open and thought for themselves.  Sadly, most people do not think for themselves, maybe that’s why we have the term sheeple.)

The US and global financial crisis is becoming much more severe in spite of the Treasury rescue plan. The risk of a total systemic meltdown is now as high as ever

The next step of this panic could become the mother of all bank runs…

By Nouriel Roubini
2008-9-29

It is obvious that the current financial crisis is becoming more severe in spite of the Treasury rescue plan (or maybe because of it as this plan it totally flawed). The severe strains in financial markets (money markets, credit markets, stock markets, CDS and derivative markets) are becoming more severe rather than less severe in spite of the nuclear option (after the Fannie and Freddie $200 billion bazooka bailout failed to restore confidence) of a $700 billion package: interbank spreads are widening (TED spread, swap spreads, Libo-OIS spread) and are at level never seen before; credit spreads (such as junk bond yield spreads relative to Treasuries are widening to new peaks; short-term Treasury yields are going back to near zero levels as there is flight to safety; CDS spread for financial institutions are rising to extreme levels (Morgan Stanley ones at 1200 last week) as the ban on shorting of financial stock has moved the pressures on financial firms to the CDS market; and stock markets around the world have reacted very negatively to this rescue package (US market are down about 3% this morning at their opening).

Let me explain now in more detail why we are now back to the risk of a total systemic financial meltdown…

USA Bailout: So, How Much Is $700+ Billion, Anyway? And What Would Sweden Do?

UPDATE #1: See the comments to this post for updated numbers and links.

UPDATE #2: See updates and articles on my 2009-2-12 blog post. Also see this New York Times graphic: The tab is now $8.8 trillion, equivalent to the second largest economy in the world, behind USA at $13+ trillion.

The chart above shows the world’s largest economies (measured by GDP), ranked by size.  Assuming the US bailout is only $700 billion, the bailout is larger than all the economies highlighted in yellow.

Note: The bailout is actually already well over $950 billion if you count $150 billion stimulus package (checks to individual tax payers this spring), Bear Stearns, FannieMae, FreddieMac, and AIG.  If you add in the cost to bail out insured bank depositors and all the others who are lining up, it’s going to be well over $1 trillion. But let’s just call it $700-$800 billion for now.  How much is that?

As shown on the chart above (Wikipedia page here), it’s about the size of the Dutch economy, the 15th largest economy in the world (it shows as #16 on the list because the list counts the EU as #1). That’s a lot of “coffee”!

Remember, GDP (the “economy”) is the total value of ALL goods and services produced by ALL people and entities in a country in a year. All that money, down the drain.  Well, not actually down the drain, but into the pockets of those who profited on the way up (privatize the profits) and will profit and/or not lose as much on the way down (socialize the losses).  Nice.  Ok, I better nip that rant in the bud ’cause I gotta hop in a minute.

Real quick, lets say the bailout cost climbs to $1 trillion, how much is that? Larger than Mexican, Australian, and South Korean economies, getting close to the size of Inda’s and not far from Rusia, Brazil, and Canada.

Yeah, it’s that big…

The End of an Era

Just a quick post to note today’s taxpayer bailout of Fannie Mae and Freddie Mac, which was inevitable given the system of corruption, which has been discussed on this blog since its inception over four years ago, such as in this April 2004 post, where I said:

What we have here is the greed-fed denial of a flawed system whereby real estate sales people, mortgage brokers, appraisers, Fannie Mae, Freddie Mac, and investment banks are driven to originate volume, earn their fees, and pass off the risk to others. It’s a great game in a booming market, but after markets boom there is another phase that ain’t so pretty.

One day this will unwind and besides creating some surprised and upside-down homeowners and burnt bond and asset-backed securities investors there could easily be enough carnage to carry beyond Capitol Hill and to U.S. taxpayers. Could even be enough to make the S&L crisis of the ‘80’s look like child’s play.

The man who said it best, and who thinks and articulates most clearly, is Nouriel Roubini:

What Happens Next to Fannie and Freddie?

Insolvency of the Fannie and Freddie Predicted Two Years Ago. What Happens Next? Or How to Avoid the “Mother of All Bailouts”
By Nouriel Roubini
2008-7-11

A pretty good article from Nouriel Roubini. A choice quote below, then on to the article.

“Privatizing profits and socializing” losses may dominate the policy outcome. Financial institutions love a system where they gamble recklessly, pocket the profits in good times and let the fisc (taxpayer) pay the bill when their reckless behavior triggers a financial crisis; this is socialism for the rich. That is why you already hear the whole Wall Street Greek chorus moaning for a bailout of the GSEs.

“Must Read” Article And PDF

This essay is a “must read,” which is a phrase I can’t remember the last time I used. It’s 15 pages and I can’t even give it a proper introduction, you simply must read it, IMHO. And then ideally do something. I leave it to you to decide what. Here is the link to an introductory article on the NYT website, where you can find other links. And here is a link to the essay by Erik Camayd-Freixas.

Some excerpts and then on to the article:

Who Will Tell the People?

Who Will Tell the People?
By Thomas Friedman
2008-5-4
New York Times

Traveling the country these past five months while writing a book, I’ve had my own opportunity to take the pulse, far from the campaign crowds. My own totally unscientific polling has left me feeling that if there is one overwhelming hunger in our country today it’s this: People want to do nation-building. They really do. But they want to do nation-building in America.

They are not only tired of nation-building in Iraq and in Afghanistan, with so little to show for it. They sense something deeper — that we’re just not that strong anymore. We’re borrowing money to shore up our banks from city-states called Dubai and Singapore. Our generals regularly tell us that Iran is subverting our efforts in Iraq, but they do nothing about it because we have no leverage — as long as our forces are pinned down in Baghdad and our economy is pinned to Middle East oil.

The Numbers Racket: Why The Economy Is Worse Than We Know

The Numbers Racket: Why The Economy Is Worse Than We Know
By Kevin Phillips
13 May 2008
Harper’s Magazine

If Washington’s harping on weapons of mass destruction was essential to buoy public support for the invasion of Iraq, the use of deceptive statistics has played its own vital role in convincing many Americans that the U.S. economy is stronger, fairer, more productive, more dominant, and richer with opportunity than it actually is.

The corruption has tainted the very measures that most shape public perception of the economy-the monthly Consumer Price Index (CPI), which serves as the chief bellwether of inflation; the quarterly Gross Domestic Product (GDP), which tracks the U.S. economy’s overall growth; and the monthly unemployment figure, which for the general public is perhaps the most vivid indicator of economic health or infirmity. Not only do governments, businesses, and individuals use these yardsticks in their decision-making but minor revisions in the data can mean major changes in household circumstances-inflation measurements help determine interest rates, federal interest payments on the national debt, and cost-of-living increases for wages, pensions, and Social Security benefits. And, of course, our statistics have political consequences too. An administration is helped when it can mouth banalities about price levels being “anchored” as food and energy costs begin to soar.

Health Care Costs in America

An interesting article from the NYT.

What I don’t understand is why people aren’t alarmed, shocked, and spurred into action by all this. I mean, for a long time it’s been clear that the American “healthcare” system is broken from the citizen’s perspective and works great from the special interests’ perspective.

The existing system needs to be scrapped and rebuilt from the ground up, but that’s not going to happen until people stand up for each other instead of only caring about themselves.

In America, we’ve got 48 million uninsured people and millions and millions more “insured” people who “have” insurance, but can’t afford to actually get the healthcare they need. Both of those groups of people clearly should be standing up, even marching on Washington.

One reason why that isn’t happening is that they can’t afford to do that because they are basically slaves to the system and can’t afford anything except their slave quarters, slave food, and slave clothes. And even that can be taken away in the blink of eye by the boss, so people keep their mouthes shut, keep slaving away, thankful master doesn’t beat (fire) them today. That’s a pretty strong analogy, and exaggerated for effect, but it’s a sad state of affairs and nobody seems to be doing anything about it.

But what about all the millions of people who are cozy and content? Why do they not care about the others? If they care, why don’t they do something? I don’t understand it. Actually, I think I do understand, but I don’t like it. It’s a negative cycle and it needs to be turned around into a positive cycle.

Ok, enough on this topic that really gets me heated up. Now on to the article. The comments in [brackets] are mine. The bolding is mine.