Irish Economy and Budget Watch / / /Emergency Budget Announced for April 7th

Auditor #9 wrote:

ibis is making sense in my mind when he says that the liquidity injection is used to keep the bank running from day to day and ward off panic rushes, that bugbear of fractional reserve banking. This is one form of liquidity injection though and I think it happened in the case of Northern Rock - the debts were honourable just they ran into that ceiling which underwrites the fractional reserve system. This isn't so abnormal at all once those debts are honourable and there are deposits in the bank.

Youngdan is talking about a different situation - correct me please if I'm wrong in all this. Fanny and Fred hold mortgages now that are 1:80 leveraged I believe - Bear Stearns was 1:33 so the chances are that a lot of that debt could have been a really bad gamble. We have the image of a bank and pawn shop and now a betting shop. I think what youngdan is talking about is that there is nothing behind some of these loans the way there is something behind your deposit in a pawn shop; instead, the goon next door in the betting shop (bond holder) put a lot of money on an outsider but it looked like a good bet because it was property but that bet went rotten on him yet the Fed is going to give him most of his money anyway. I say most because the Fed is not propping up all banks in this situation.

I believe the mortgage packages that caused all this shite are called "collateralised debt obligations" and "structured investment vehicles" - high interest loans given to people who don't pay their bills but if they happen to do so then there is a high return. The mortgage is part of a package and is bet on on the stockmarket. How it got this way is really the question but it is obviously a radical departure from traditional banking.

There's a very good chance a lot of European banks are infected too.

Partly, I think we're also talking about slightly different situations - the current US situation versus the ECB injection last year. Mostly, though, I'm only disagreeing with youngdan on one very particular point, which is the idea that when the ECB injects €300bn, that €300bn goes to someone (or several someones) as a direct result, and is simultaneously taken out of our pockets - in other words, that the liquidity injection, as well as being what it says on the tin, is also a huge and deliberate act of theft, of transfer of that €300bn from the pockets of ordinary joes to the wealthy beneficiaries.

I don't argue with the fact that some people make a profit out of the situation, through a wide variety of mechanisms - there is virtually no money market movement out of which someone does not profit - but with youngdan's rather puzzling assertion that you can simply say "look, €300bn in, has to go somewhere, stands to reason someone gets it". As far as I can see (and I appreciate I will cause offence) that's where youngdan suddenly stops using his brain (and his undoubted knowledge) and lets his paranoia take over.

I feel about it much the same way I feel about Anthony Coughlan and the EU - I don't doubt for a moment the man's knowledge, or his sincerity - it's just that as far as I can see there comes a moment when he leaps suddenly off the law library shelves and down the rabbit hole. It seems a common failing, and makes me wonder exactly where my own mind declutches, if it does.

Ibis, while correct, it has nothing to do with what is being discussed. The goon made a bet that went sour and now the Fed is coming with a bag of freshly printed and he is going to get a fistfull of dollars. Heads I win-tail you lose.

This is the Fannie situation to serve as an example. A bank makes many loans and ties them in a bundle. Fannie buys the bundle and gives the bank the money. The bank lends out and ties these new loans into another bundle and Fannie buys them and the process continues until now where Fannie has 5 trillion dollars of bundled mortages in it's safe.

Maybe what isn't clear to everyone is where did Fannie get 5 trillion to buy these bundles. They sold bonds in the market and by so doing borrowed the 5 trillion to give to the banks. The interest and principle to pay off these Fannie bonds would come from the income earned from the bundled mortages. The problem arose when mortage default rates rose and the income stream fell. The Fannie bonds began to loose value as the possibility of default rose.

Lately the income stream fell below what was necessary.. Without a bailout these bonds faced default and the price would be much lower. The government gauranteed the bonds and the initial payment rushed over to Fannie was 100 billion. So today the holders of the Fannie bonds are 100 billion richer and the Treasury is 100 billion poorer. This will keep the payment of the bonds at 100% face value for a time. However the income stream from the bundles is likely to continue to fall and the Treasury will be sending another 100 billion over soon. The final cost is subject to debate and will be known in time but I reckon 3 trillion.

If there had been no bailout the Fannie Bonds would assume their true value. The Treasury would not be down 3 trillion and the Fannie bond holders would not have their losses covered by the taxpayer.

That is why it is theft.

**youngdan posted above

In the case of the CDOs and SIVs - propping them up equals putting money in their pockets pure and simple. The guy backed the horse, the horse fell, the guy should lose his money but he doesn't. The upshot of a cash injection is roughly what youngdan says (I'm thinking that it might not be as inflationary as he suspects but that's my own theory) and it mightn't at all be above suspicion that some of these gamblers were favoured by the Fed. This might have happened with the ECB injection too.

In your example of the ECB injection to monetarise illiquidity in an effort to stave off bank runs and panic then there is the problem with the market where a similar thing can happen where the likes of Soros can make gambles, bring the bank share price low, have the country prop it up then buy the shares again cheaply to sell them again later. Isn't that possible?

Inflation is a rise in the total amount of money. Rising prices is the result of inflation. The money supply can be increased by central banks but it is also is increased by regular banks because the can lend out more than they take in in deposits. This is known as reserve requirement and over here it is an outlandish 10%. So if 100 is deposited they must hold 10 bucks and lend 90. This 90 can be deposited by the borrower in another bank and that bank can then lend 81 dollars to another guy. In theory the 100 dollars can become a total of 1000 dollars and this too figures in to the inflation.

This is very important as it is what is meant when lads talk of a deflationary spiral. As money is defaulted out of existance it causes the chain reaction to reverse. I think Ireland especially and the world in general is caught in
this trap now.

This evening the Federal Reserve says it will lend by taking shares as collatoral. What they are trying to do is 2 things. Add liquidity to stop the deflation and to create an artificial buyer of stock to try to prevent a stock market wipeout tomorrow.

Anything could happen here but there will be nothing seen like the next few days. Tonight the metals are falling and deflation is raging. The Federal Reserve could cut the fed funds rate by a huge chop but it is low to begin with. Interest rates could skyrocket tomorrow it the Treasuries sell off.

My prediction for tomorrow is, excitment

Auditor #9 wrote:

**youngdan posted above

In the case of the CDOs and SIVs - propping them up equals putting money in their pockets pure and simple. The guy backed the horse, the horse fell, the guy should lose his money but he doesn't. The upshot of a cash injection is roughly what youngdan says (I'm thinking that it might not be as inflationary as he suspects but that's my own theory) and it mightn't at all be above suspicion that some of these gamblers were favoured by the Fed. This might have happened with the ECB injection too.

In your example of the ECB injection to monetarise illiquidity in an effort to stave off bank runs and panic then there is the problem with the market where a similar thing can happen where the likes of Soros can make gambles, bring the bank share price low, have the country prop it up then buy the shares again cheaply to sell them again later. Isn't that possible?

It's certainly what was happening with, for example, the currency speculation against the punt. Literally, the government was spending taxpayers' money propping up the currency, and the speculators were skimming that money out of the pool and putting it into their pockets.

However, it isn't really possible for speculators to destroy something like the income stream from mortgages - that requires a wider, systemic failure of people to pay. So the two cases there are not alike.

I also take youngdan's point, although, as I say, I think it's a different situation from the 2007 ECB injection. Say we create a bond against your mortgage of €500,000 - we sell that, and your mortgage payments are supposed to cover the interest and principal on it. So it's a safe bet - right up until the moment you start to default on your payments. Suddenly our bond isn't worth €500K, but a whole lot less. If I'm holding the bond at the time, something I thought was worth €500K isn't any more - it's worth, say, €100K. I fall into a deep depression. The government bailout happens when the government says "OK, we'll cover the gap", and give me the difference - €400K (maybe somewhat less, but enough to make me a functional human being again).

Simplistic, I know, but you can see the workings pretty clearly. If I sold the bond when it was at that low point, then I've lost €400K, and whoever bought it has made €400K - off the taxpayer, because that's where the government got the money from. If I didn't sell it, then while I haven't made a profit, I haven't lost €400K - the taxpayer has.

This is what youngdan categorises as theft, because the money is taken from the taxpayer and used to cover other people's losses. The question is - why do it? Why not just say "toughski shitski" and let me go to the wall? The answer depends on one main factor - what's the alternative? Mass repossessions, bank sales of property at low low prices, forcing property prices down? Which in turn will push yet further people into negative equity, bankruptcy and default, producing yet further bond troubles?

If I'm small enough that me going down the tubes isn't going to have any systemic effects, the government will let me go down without a murmur. If I'm big - and they don't come much bigger than Fannie and Freddy - they simply can't afford to.

Governments do this to prevent the systemic effects ripping through the whole economy and producing a depression. It's been pointed out elsewhere that when a lot of your best consumers are in negative equity, they don't spend. That lack of spending depresses the economy, which increases unemployment, etc etc. In other words, the government is reckoning that the bailout now is going to cost punters less than what the alternative - collapse - will cost them.

If you like, then, what governments are doing is theft, but theft of much the same kind as when the captain of your ship makes you give up your clothes to help plug a hole in the hull. To use a more classic analogy, this is modern Danegeld, the payment that kings made to buy off roving hordes of Vikings. They extracted that money from their subjects - and while it was theft, the alternative was Vikings. Danegeld payments weren't universally popular either - plenty of people objected to them, and paid only under threat of force (or, indeed, after the use of force).

Now, if the majority of people didn't use the modern banking system, didn't avail of the credit, etc, then it would be fair to characterise such a bailout as outright theft - but then, we wouldn't have the problem in the first place. As it is, this is part of the price we pay for turning ourselves into consumer/business units, and for opening up the whole banking system to the masses, as opposed to only the people in 3-piece suits and a fob watch - when the system gets the shakes, we have to pay an extra premium to keep it stable. It's the price of cheap credit - nothing is ever really cheap in the long run.

And yes, the injection of a lot of government money into the system (which the government has created by virtue of being the government) is also going to increase inflation, because there's more money in the system. You can also, as youngdan is doing, characterise that as theft - and you can also characterise it as the price you sometimes have to pay for the system we have. Same thing with computers - mainframes can be made bulletproof, rock stable, but they're not easy to use and there isn't ever going to be one on every desktop. PCs, on the other hand, are cheap, and user-friendly, and every so often they lock up and lose you half a day's work - and that's the price you pay.

Quote :

The question is - why do it? Why not just say "toughski shitski" and let me go to the wall? The answer depends on one main factor - what's the alternative? Mass repossessions, bank sales of property at low low prices, forcing property prices down? Which in turn will push yet further people into negative equity, bankruptcy and default, producing yet further bond troubles?

This is possibly the answer to it - harsh but the way it should be, sorry - very Darwinian in the end, the weak failing and going to the wall. If you are concerned that there might be a petrification of the market look no further than Squire here or Seabchan on p.ie - they and others like them would possibly behave as predators on the bones of wreck of the ruined market and perhaps they'd behave a little saner with charging interest on their property or to whom they'd lend or sell or perhaps they'd change the property to give it a grade of a higher standard.

There was huge irresponsibility in lending practices which led directly to a classic asset bubble and it could have been managed better. So far we seem to have escaped the worst of it here ....

The currency fight is as I've said a different situation altogether. It happens everyday amongst speculators. It is rare though when the government steps in to try to strenghen a currency. If they lose and they usually do the taxpayer loses money.

Today the Fed, ECB and B of England all injected cash into the system to prevent it from seizing up. If necessary reread the bit posted by Ibis on the Fed Funds Rate as it is likely to be in the news tomorrow. This rate is the interest rate banks charge one another when borrowing funds for a day. They have to do this is they fall below the reserve requirement mentioned earlier. The Federal Reserve sets this rate and the Discount Rate. These two are the only interest rates the Fed controls. It is more correct to say that The Fed sets the Fed Funds TARGET Rate which is 2%. It was at 2.1% but when cash was scarse it jumped to 6%. What the Fed does is they go into the market place and buys treasury bills and the cash is put into circulation by giving it to the people who they bought the bills off. This cash was enough to push the Fed Funds Rate down to the 2% target area. The amount needed to accomplish this was 75 billion. This is not a permanent thing as these bill will be sold back and the 75 billion cash paid for them will be removed from the money supply. This is not theft like the bailout situation and they should not be confused.

That is a decent explaination of the Fannie situation and we will look at why the government bailed them later

Auditor #9 wrote:

Quote :

The question is - why do it? Why not just say "toughski shitski" and let me go to the wall? The answer depends on one main factor - what's the alternative? Mass repossessions, bank sales of property at low low prices, forcing property prices down? Which in turn will push yet further people into negative equity, bankruptcy and default, producing yet further bond troubles?

This is possibly the answer to it - harsh but the way it should be, sorry - very Darwinian in the end, the weak failing and going to the wall. If you are concerned that there might be a petrification of the market look no further than Squire here or Seabchan on p.ie - they and others like them would possibly behave as predators on the bones of wreck of the ruined market and perhaps they'd behave a little saner with charging interest on their property or to whom they'd lend or sell or perhaps they'd change the property to give it a grade of a higher standard.

There was huge irresponsibility in lending practices which led directly to a classic asset bubble and it could have been managed better. So far we seem to have escaped the worst of it here ....

We are fortunate, it seems, in being a "relatively undeveloped market" for sub-prime mortgages. It does seem a pity, by the way, that they don't actually call "sub-prime mortgages" simply "dodgy mortgages" - although I can understand why they don't. Still, it gives me a certain pleasure to read the financial news while mentally replacing "sub-prime" with "dodgy", as in this enthusiastic report form last year:

"Sub-prime Dodgy lending is gradually gaining momentum in many Western European markets. Just as dodgy lending in the UK followed the US, so Western Europe is slowly following the UK. Many countries have significantly deregulated their financial markets, which make a more competitive and sophisticated lending market possible. For example, Ireland is fast becoming a more competitive dodgy lending market."

For "which make a more competitive and sophisticated lending market possible" read "makes it possible to lend to people who have little hope of paying us back, to whom we will lend at really high rates" - or in other words, loan sharking.

Sub prime mortgages etc. explained

https://www.youtube.com/watch?v=mzJmTCYmo9g

ibis wrote:

"Sub-prime Dodgy lending is gradually gaining momentum in many Western European markets. Just as dodgy lending in the UK followed the US, so Western Europe is slowly following the UK. Many countries have significantly deregulated their financial markets, which make a more competitive and sophisticated lending market possible. For example, Ireland is fast becoming a more competitive dodgy lending market."

For "which make a more competitive and sophisticated lending market possible" read "makes it possible to lend to people who have little hope of paying us back, to whom we will lend at really high rates" - or in other words, loan sharking.

Yes it's loan sharking - exactly. Should this be allowed?? Poland I believe have a cap on the amount of interest you're allowed to bleed out of another man's pound or dollar of flesh which is regulation. Your "dodgy loans" could equally be seen in terms of "dodgy lenders"; these loans are at 12% or around there and they have to be because it involves potentially high risk customers.

It might be the case that when these mortgages are taken on by the company which takes over the failed bank which owns them, the mortgages could be restructured or the terms shifted so as to allow these customers to pay them back. I don't know if this is happening that much though.

So what do you think of this market system without regulation and visible handling? Is it a mistake, is it a market limit or a failure of the market system in this industry where an institution can lend at 12% and it's seen as progressive in some circles?

youngdan wrote:

I believe the whole system is going down

I agree.

kerrynorth on p.ie wrote:

Both the WSJ and the Limerick Leader (now there are two papers you never thought would be mentioned in the same sentence) are stating that the decision has been made by Dell to close the Limerick manufacturing facility with the loss of 3000 jobs. The Polish plant looks to indeed have been part of the strategy leading to the closure of Limerick as we had speculated here previously. The loss of the 3000 direct jobs and thousands more of indirect jobs will be nothing short of cathostrophic for the Mid-West region.

Dell have decided to close Limerick: WSJ

How many points will this news knock off the iseq? Did someone say that 1 in 5 jobs in the mid-west are related to the jobs in Dell?

ISEQ has broken through the 4000 barrier. It's now at 3964

A house on my road went on the market today with an AMV of €1 million. The last house sold on my road went for €1.6 million. If that isn't a sign of a crisis in the property market I don't know what is.

What road do you live on, the yellow brick road. Post a photo of that house if you can because it sounds like another 600000 should be taken off the price.

Auditor #9 wrote:

kerrynorth on p.ie wrote:

Both the WSJ and the Limerick Leader (now there are two papers you never thought would be mentioned in the same sentence) are stating that the decision has been made by Dell to close the Limerick manufacturing facility with the loss of 3000 jobs. The Polish plant looks to indeed have been part of the strategy leading to the closure of Limerick as we had speculated here previously. The loss of the 3000 direct jobs and thousands more of indirect jobs will be nothing short of cathostrophic for the Mid-West region.

Dell have decided to close Limerick: WSJ

How many points will this news knock off the iseq? Did someone say that 1 in 5 jobs in the mid-west are related to the jobs in Dell?

Someone was saying Dell, Intell and HP are about 35 % of GDP ??

cactus flower wrote:

Auditor #9 wrote:

kerrynorth on p.ie wrote:

Both the WSJ and the Limerick Leader (now there are two papers you never thought would be mentioned in the same sentence) are stating that the decision has been made by Dell to close the Limerick manufacturing facility with the loss of 3000 jobs. The Polish plant looks to indeed have been part of the strategy leading to the closure of Limerick as we had speculated here previously. The loss of the 3000 direct jobs and thousands more of indirect jobs will be nothing short of cathostrophic for the Mid-West region.

Dell have decided to close Limerick: WSJ

How many points will this news knock off the iseq? Did someone say that 1 in 5 jobs in the mid-west are related to the jobs in Dell?

Someone was saying Dell, Intell and HP are about 35 % of GDP ??

Mother of God - maybe Ard-Taoiseach could confirm that later.

Auditor #9 wrote:

cactus flower wrote:

Auditor #9 wrote:

kerrynorth on p.ie wrote:

Both the WSJ and the Limerick Leader (now there are two papers you never thought would be mentioned in the same sentence) are stating that the decision has been made by Dell to close the Limerick manufacturing facility with the loss of 3000 jobs. The Polish plant looks to indeed have been part of the strategy leading to the closure of Limerick as we had speculated here previously. The loss of the 3000 direct jobs and thousands more of indirect jobs will be nothing short of cathostrophic for the Mid-West region.

Dell have decided to close Limerick: WSJ

How many points will this news knock off the iseq? Did someone say that 1 in 5 jobs in the mid-west are related to the jobs in Dell?

Someone was saying Dell, Intell and HP are about 35 % of GDP ??

Mother of God - maybe Ard-Taoiseach could confirm that later.

I've had a look and found all kinds of figures from 10% - 35% - none of them good sources. Does any one know the answer to this ?

Will be interesting to see how the Important Irish Art auctions at the end of September and beginning of October hold up. They are after all the playground of the rich.

I know the galleries are struggling very badly at the moment.

johnfás wrote:

Will be interesting to see how the Important Irish Art auctions at the end of September and beginning of October hold up. They are after all the playground of the rich.

I know the galleries are struggling very badly at the moment.

I'd say it will be a buyers market. Oriental art is doing very well though.

So is anything with a Russian influence. They love their Andy Warhol Black Lenin lithographs.

You are guaranteed an absolute fortune if you read the Asian art market correctly. It is still very much in its embryonic phase but if you bought the right stuff you could get it now for a couple of hundred dollars and sell it in ten years for twenty million. No joke.

Did any regulator anywhere consider putting a cap or a limit on the amount that a financial institution's mortgage/loan book could be securitised, e.g. no more than 20%., or was everybody too busy making rich commissions out of the merry-go-round to bother caring? Too late now, I suppose.

The Lighthouse Keeper wrote:

Did any regulator anywhere consider putting a cap or a limit on the amount that a financial institution's mortgage/loan book could be securitised, e.g. no more than 20%., or was everybody too busy making rich commissions out of the merry-go-round to bother caring? Too late now, I suppose.

That's it. Doesn't someone have a few questions to answer about this one ? Who was the Minister for Finance then - Cowen?

Cowen has questions to answer for every ministry he put his dirty little hands on.

johnfás wrote:

So is anything with a Russian influence. They love their Andy Warhol Black Lenin lithographs.

You are guaranteed an absolute fortune if you read the Asian art market correctly. It is still very much in its embryonic phase but if you bought the right stuff you could get it now for a couple of hundred dollars and sell it in ten years for twenty million. No joke.

I take it you're talking about new art ? I had the pleasure of working in an Oriental art gallery some years back for a few months and sold a T'ang horse for the equivalent of ten years of my salary. Sadly no commission.