China and US Try to Make Trade Progress to Save Global Economy …

dgriffith401.wordpress.com12/16/11

“The one thing that we can be certain of, among all the uncertainties, is that the global economic recession caused by the international financial crisis will be chronic,” he was quoted as saying by the official Xinhua news …

How The U.S. Is Quickly Becoming A Third World Country (Part 1 …

seekingalpha.com11/22/11

… 3rd world status. Economic data indicate a harsh reality that obviates mainstream political debate. The evidence suggests that, without fundamental reforms, the U.S. will become a post industrial neo-3rd-world country by 2032. … According to the Economic Policy Institute, the U.S. trade deficit with China alone caused a loss of 2.8 million U.S. jobs since 2001. Falling Real Wages and Household Incomes. Workers earning more dollars are actually poorer in terms of …

Major financial crises have occurred many times in the United States, and the one in 1929 wasn’t the first, and the present one won’t be the last.

The earliest one on record was in 1792, and there were several crises in the 19th century and also in the 1980′s

In short, recession cycles should be understood to be a normal part of living in a world of inexact balances, one in which there is an attempt to balance supply and demand.

The present world-wide economic crisis, which was caused by the United States wasn’t simply a result of unexpectedly large losses in subprime mortgages or because many of those loans were securitized in complex bonds.

In retrospect, it would seem that the major contributor to the collapse, was what are known as repurchase agreements, which are commonly known as repos.

A repo is a form of short-term borrowing for dealers in government securities. The dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day.

For the party selling the security, and agreeing to repurchase it in the future it is a repo, and for the party on the other end of the transaction, the one who is buying the security and agreeing to sell in the future, it is a reverse repurchase agreement.

Repos are classified as a money-market instrument and they are usually used to raise short-term capital and the Fed uses repos to manage the aggregate reserves of the banking system.

The size of the repo market continually varies so it’s impossible to state its actual size, but it’s generally thought to hover around the $10 trillion mark at any given time.

Banks rely heavily on repro loans, and what caused the collapse of Bear Stearns and Lehman Brothers, was that the repo market panicked because of rising doubts about subprime securities, and loans suddenly became more expensive, or totally unavailable.

So What Can Be Done?

The Obama administration has a plan to protect the country and the world from the next financial crisis, and it can basically be divided into three parts.

1) Stiffer Capital Requirements

Some banks and other financial institutions would be considered too important to fail, because their collapse would pose a threat to the country’s financial stability.

Citigroup, Bank of America, Goldman Sachs and similar institutions would I imagine, be on the government’s most protected species list.

The companies on the list would face stiffer capital requirements in the form of shareholders’ investment, with the idea being that greater capital would provide a larger buffer against losses and a crises.

It might be of interest to note however, that at the time of writing that none of America’s biggest banks are any longer in the top three world-wide.

The top three banks in the world by market capitalization are;

1) Industrial and Commercial Bank of China
2) China Construction Bank
3) Bank of China

Citibank and Bank of America are not even on the list of the top twenty.

Two Canadian banks, Royal Bank of Canada (RY) and Toronto-Dominion Bank (TD) have recently made it to the list.

Australia also has two banks listed, and in addition to the Chinese banks, the importance of emerging markets is confirmed by the presence of Itau Unibanco Banco Multiplo (ITU) and Banco Bradesco (BBD).

The problem with the administration’s protected species plan, is that the very largest financial institutions in America, would effectively become protected and pampered wards of the state and they would most likely squeeze out the smallest ones and lenders would compensate by raising their interest rates or by only lending to the safest borrowers.

2) The Policing Of Unethical Lending Practices

The administration foresees the creation of a Consumer Financial Protection Agency that would police what appear to be unethical lending practices, and ensure that loan documents for mortgages, auto loans and other types of consumer credit are comprehensible.

* The Securities and Exchange Commission would still retain power over the stock markets.

3) Changing The Rules

Financial firms that issue securitized bonds such as bundles of mortgages, auto loans and other credits, would be required to hold 5% of the bonds themselves, the thinking being that this would cause sellers to examine loans more carefully.

In early 2007, when the problems of subprime mortgages and repos first emerged, few if any regulators foresaw the coming meltdown, so the question needs to be asked, “should we trust government regulators instead of bankers, traders and money managers?”.

Due to their past failings, it would seem that we shouldn’t.

The dangers of overregulation should generally not be ignored or minimalized, but especially so in the U.S. whose economy is anchored on risk-taking and expansion.

We don’t yet know exactly what will cause the next financial crisis in the U.S. but its roots are already clearly foreseeable.

By 2019, the U.S. federal debt is expected to be $11 trillion and right now, the Chinese, who are presently supporting the U.S. economy are already preparing a retreat from the dollar.

China has now called for the creation of a new currency to eventually replace the dollar as the world’s standard, and is proposing, if not demanding, a sweeping overhaul of global finance that truly reflects the developing nations’ growing unhappiness with America’s role in the world economy.

If China decides to pull the plug, which is increasingly likely, we will soon understand what caused America’s upcoming financial collapse, but many will say that they didn’t see it coming.

Related posts:

1. Watchdog- “Causes Of Financial Crisis Have Not Been Addressed”.
2. A Meltdown Of The Euro Will Be Far Far Worse Than The Banking Crisis
3. Ten US Banks Needs A Total Of $75 Billion

The Mortgage Bankers Association’s index of applications to purchase a home or to refinance a loan rose by 21% to 876.9 for the week ending March 13, taking it to its highest figure for two months and the group’s refinancing gauge jumped by 30% percent and the purchase index gained 1.5%.

The U.S. jobless rate rose to 8.1% in February as employers reduced payrolls by 651,000, and people that lost their jobs or are worried about losing them won’t be rushing to take out mortgages, and would- be buyers are also having difficulties obtaining mortgages because lenders have tightened their lending criteria.

The Fed is attempting to lower interest rates by reducing the supply of outstanding mortgage bonds, by boosting their prices and by lowering yields, and U.S. central bankers have announced their intention to buy up to an additional $750 billion of mortgage-backed securities from Fannie Mae, Freddie Mac and Ginnie Mae, in order to support home lending.

The Mortgage Bankers Association says that mortgage delinquencies increased to a seasonally adjusted 7.88% of all loans in the fourth quarter, which is the highest number since record keeping was started in 1972, and the number of loans in foreclosure rose to 3.30% which is also an all-time high.

The Fed’s plan to buy additional mortgage bonds is now expected to increase its purchasing commitment to as much as $1.25 trillion.

Related posts:

1. U.S. Fixed Mortgage Rates Continue To Drop
2. Are Low Interest Rates The Same As Tax Cuts?
3. As Mortgage Rates Come Down The Barriers Go Up

For the plan to work the government will need to borrow in order to invest in things such as new business projects, credit for purchases of new cars, homes and appliances and if it can’t get the money then companies and households will be unable do their supposed part, which would be to spend the economy out of its present mess.

Former Federal Reserve Governor Lyle Gramley had this to say, “We’re going to get limited benefit from the stimulus program unless people can finance their normal operations and we really haven’t seen any breakthrough yet in the credit logjam”.

Investors are seeking a 5.2 percentage-point premium over U.S. Treasuries to buy bonds being sold by companies with investment- grade ratings which is over five times the level that it was two years ago and the rate on jumbo mortgages is 6.91 percent, almost 1% higher than at the start of 2007.

Christopher Whalen, who is the managing director of ‘Institutional Risk Analytics said in an interview yesterday,

“If banks can’t move mortgages off their books, then we have a problem. We will see credit availability much lower” than in past generations. We have got to fix the financial system and if we don’t deal with this, we will not get anything else done”

Stuart Eizenstat, who is a former deputy Treasury secretary in the Clinton administration said,

“The government will in effect put a floor under those assets. If the value goes up, the investor gets the benefit. If the value goes down, the government picks up that, but it’s much less of an immediate expenditure than you would have if you purchased them. Guarantees may also play a role for investments banks intend to hold to maturity”

Furthermore, many would be investors also remain unconvinced that the government is moving in the right direction.

“It will be a bad decision for a hedge fund to invest in these illiquid assets. You’ll end up running into the same problems as the banks and the hedge fund industry is suffering as it is already” announced Kenneth Windheim who is the chief investment officer of ‘Strategic Fixed Income LLC’, that manages $1.7 billion in assets and invests with hedge funds.

The financial rescue needs to “create an improving credit market to ensure that the stimulus works”, said Bruce Kasman who is the chief economist at ‘JPMorgan Chase & Co.’ in New York and is a former Fed researcher.

Another possibility that officials and regulators have suggested is the setting up of a government-funded “bad bank” that would buy up most if not all of the toxic debt but New York Senator Charles Schumer said that it would be “very expensive and cost as much as $4 trillion, and risked setting values for the securities so low that every other bank would go bankrupt”.

Related posts:

1. Timothy Geithner Announces His ‘Wish List’.
2. Two New Plans Announced To Help Homebuyers
3. As Stocks Advanced The Number Of Defaulting Homebuyers Rose By 50%

How big is $9.7 trillion?

To put it into perspective, it’s enough to pay off more than 90% of the nation’s home mortgages or enough to send a $1,430 check to every man, woman and child alive in the entire world!

Over the course of the last two years ‘The Federal Reserve, Treasury Department’ and ‘Federal Deposit Insurance Corporation’ have either lent or spent close to $3 trillion and they have pledged to provide up to $5.7 trillion more.

The ‘Troubled Asset Relief Program’ (TAR) which was approved four months ago was granted $700 billion and since then an additional $168 billion in tax cuts and rebates have been approved.

So who will get the other $8 trillion?

· Well none of the names have been disclosed, but the money will supposedly be used for lending programs and guarantees, all of which will be under the authority of the Fed and the FDIC.

The Treasury postponed a planned announcement about new guarantees for illiquid assets to insure against losses without taking them off banks’ balance sheets and said that the announcement will only be made after the Senate votes on the stimulus package.

The Fed said on Friday, February 2009, that it will delay the start of a $200 billion program called the ‘Term Asset-Backed Securities Loan Facility’ (TALF) which is intended to revive the market for securities that are based on consumer loans for credit-cards, automobiles and students.

When Congress approved TARP on Oct. 3 2008, both Fed Chairman Ben S. Bernanke and Henry Paulson who was then Treasury Secretary accepted the need for transparency and oversight but so far the Federal Reserve has refused to disclose loan recipients or reveal the collateral that they are getting!

Related posts:

1. The Economic Stimulus Package Approved By The Senate.
2. The Fiscal Stimulus Package Of 2009 Was A Failure
3. Is Inflation Beginning To Raise Its Ugly Head!