Inflation/Deflation Watch

More graphs coming...

Geithner's Plan

Geithner's Plan to resolve the banking problem is getting not so good reviews: Paul Krugman doesn't like it; Yves Smith doesn't like it; Calculated Risk doesn't like it; but Brad DeLong likes it - somewhat.

Are the banks insolvent or are they having a short term liquidity problem? It seems we need an answer to this question...


Geithner's Faustian bargain: - A guest post by Swedish Lex, this will get you in the right mental framework before reading the other opinions.

Geithner's Toxic Asset Plan: - Calculated Risk gives a very short description of the plan.

Despair over financial policy: - Paul Krugman - "It’s exactly the plan that was widely analyzed — and found wanting — a couple of weeks ago."...

More on the bank plan: - Paul Krugman - "Why was I so quick to condemn the Geithner plan? Because it’s not new; it’s just another version of an idea that keeps coming up and keeps being refuted. It’s basically a thinly disguised version of the same plan Henry Paulson announced way back in September."...

The Geithner Plan FAQ: - Brad DeLong answers some questions about the Geithner plan in this Q&A style post.

Brad DeLong's defense of Geithner: - Paul Krugman - "Brad gives it the old college try. But he shies away, I think, from the central issue: the non-recourse loans financing 85 percent of the purchases."...

Private Public Partnership Details Emerging: - Yves Smith at Naked Capitalism weighs in against the plan too.

Fed Statement: We're going to buy long term Treasuries

The Fed announced today that it will buy up to 300 billion of long term treasuries over the next six months (full text here). Here's two articles that are pertinent to the Feds statement:


A bit more to worry about; foreign demand for long-term Treasuries has faded: - Brad Sester at Follow the Money. As the trade deficit narrows, surplus countries have less dollars to recycle into the U.S. at exactly the same time the U.S. needs more financing.

Caution On Quantitative Easing (QE):- Karl Denninger at The Market Ticker. This is a pretty scary scenario...

Back to the Stimulus and Deficits Reality

A lot of people believe that if we could just get the banks to quite hoarding and start lending then we'll be off to the races again. While fixing the banks is important, vital, it is not the silver bullet "solution". Don't forget that a large part of the financial industry was obliterated - the "shadow banking system", which isn't coming back soon. That was a huge chunk of lending that will have to be replaced by something new. Also, and most important, GDP growth via borrowed money was yesterday's paradigm, and a big reason we're in this mess.

Another problem we're going to have is the output gap, the difference between potential GDP and actual GDP. The idea behind the stimulus package is for the government to (borrow and) spend and make up the difference, mitigating the ravages of a declining GDP. This may pose a serious problem if what is really in store is a demand re balance to a lower level - as Michael Pettis describes:

There is a real need for an adjustment in consumption in the US, and I don’t think it makes sense for the US to attempt to replace excess household consumption with excess government consumption. One way or the other the US, along with China and most other countries that have contributed to one side or the other of the global imbalances, is going to have to accept a demand contraction.

Optimism Abounds at the White House - Tim Duy sees the economy in free fall and doesn't think the stimulus is big enough: "I grow increasingly fearful that the pace of economic deterioration will leave the US economy in a much deeper hole than this Administration expected, swallowing the stimulus package."


Wolf Versus Pettis on US Stimulus, Fiscal Deficit - Martin Wolf comes to two conclusions: the stimulus needs to be much bigger; and the government will need to run huge deficits for a very long time.

Financially Engineering Prosperity

They Tried to Outsmart Wall Street - A story of the confluence of physics and Wall Street: exact science and finance. The NYT article is a short narrative of the emergence of physicists into the world of finance:

They are known as “quants” because they do quantitative finance. Seduced by a vision of mathematical elegance underlying some of the messiest of human activities, they apply skills they once hoped to use to untangle string theory or the nervous system to making money.

The chronicle of the CPDO -"A breakthrough in Synthetic Credit Investments"

ABN AMRO - The Introduction:

ABN AMRO is pleased to present Surf 100 – Constant Proportion Debt Obligation (CPDO)

Surf 100 is designed to have a stable rating with a high likelihood of “cashing-in” into an investment with no further credit risk for the investor until maturity and all scheduled coupons.

Surf 100 aims to pay high coupons by taking leveraged exposure to a basket of credit indices. Surf 100 utilizes variable leverage in order to control risk.

Surf 100 is a new form of synthetic credit investment that carries a AAA/Aaa rating from S&P and Moody’s on both principal and coupons.

CitiGroup - The Sales Pitch:

The newly launched CPDO products offer an impressive 200bp above Libor on a AAA rated instrument. This return even if on a leveraged strategy is sufficient [to] provoke the curiosity of even the most suspicious investor. One would, in principle, wonder how on earth a AAA-rated product can earn so much spread. We have even been joking that in this product a A-rated asset...is levered up by 15 times and then seems magically to turn into a AAA-rated asset paying 200bp! - page 5

Ooops, Computer glitch?

ABN Amro issued a few securities, which Moody's rated triple-A. But when Moody's went back to double-check its calculations, it found a bug in the computer code used to generate that rating. When the bug was fixed, it turned out that the securities in question should have been rated four notches lower. But what happened? Moody's never rerated the securities in question, and indeed it continued to give triple-A ratings to new, almost identical, securities.

The Obituary:

Moody's Investors Service has downgraded 20 constant proportion debt obligations (CPDOs) to various levels of "junk" ratings as this week's credit market downturn pushed them closer to cashing out at a 90 percent loss.

England and Eurozone Perspective

While we fret about what to do with Citi, BoA and other "too big to fail" banks, England and the eurozone are having their problems too. Here are a few short articles to get a perspective from across the Atlantic.

Bank injection means we are all monetarists now - David Smith explains the latest in the Bank of England's experiment with quantitative easing.

Thanks to the Bank it's a crisis; in the eurozone it's a total catastrophe - Ambrose Evans-Pritchard, in a somewhat agitated state, gives a short sketch of the dire situtation and concludes that it is good to have a central bank that can print money.

Europe in Reverse - Joschka Fischer describes some of the EU's "flaws and limitations" in dealing with the economic crisis (catastrophe).

Bank Nationalization

Alan Blinder at the NYT wrote a piece: "Nationalize? Hey, Not So Fast", that is getting some response from NakedCapitalism and Paul Krugman.

Nationalize? Hey, Not So Fast - Alan Blinder

An Amazingly Disingenuous Piece by Alan Blinder on Bank Nationalization - NakedCapitalism

Anti-Nationalization Arguments - Paul Krugman