Alan Greenspan calls this a "once in a century" liquidity crisis. - 3-Aug-2008 - Generational Dynamics

Says that the "big surprise" is the "impressive" American economy holding up rather well.

One of the reasons, of course, is that fact that when the crisis began, just about a year ago, the non-financial corporate sector was in exceptionally good shape.

The balance sheets were such that borrowing requirements were minimal, and indeed they've weathered, very significantly, much of what has created huge problems in the financial system, and only recently are they beginning to feel the pressures.

Related Articles

Deflation vs Inflation
The spectre of deflation forces a historic change in economic theory: Economists are shocked that the fight against inflation is over.... (8-Nov-2008)

What's coming next: Understanding the deflationary spiral: Why are the dollar and the yen getting stronger, while the euro is getting weaker?... (27-Oct-2008)

Roubini: The situation is "sheer panic," as hundreds of hedge funds are going bust: Policy makers may need to close markets for one or two weeks.... (24-Oct-2008)

There's never before been a day like this on Wall Street.: Possible exception: One of the days just before or after the 1929 crash.... (11-Oct-2008)

Ben Bernanke's Great Historic Experiment is at the brink: Desperation sets in as credit markets continue to seize up.... (25-Sep-2008)

Government promises to buy bad debt to end the credit crisis: Stock markets stage huge comeback as giddy investors pile in.... (19-Sep-2008)

Web site readers express sadness, anxiety and anger: It's beginning to sink in.... (18-Sep-2008)

Another stunning and historic bailout: Fannie Mae and Freddie Mac: Giddy investors are popping the champagne corks.... (9-Sep-2008)

Long-term negative market trends asserting themselves strongly: Stock and commodities prices plummet as worldwide foreclosures and recessions worsen.... (5-Sep-2008)

Money supply contracts dramatically, as credit markets continue to seize up.: Former IMF chief: Worst of global financial crisis is yet to come.... (24-Aug-2008)

As commodities plummet worldwide, the meaning is unclear.: We speculate on some possibilities.... (11-Aug-2008)

Alan Greenspan calls this a "once in a century" liquidity crisis.: Says that the "big surprise" is the "impressive" American economy... (3-Aug-2008)

More questions from readers on finance and investing: Anxious readers wonder what's going on, what to do next.... (18-Jul-2008)

Pundits and analysts are baffled by the market's performance: They have some interesting fantasies, as well.... (10-Jul-2008)

Questions from readers on finance and investing: On fraud, the FDIC, China, and other subjects.... (23-Jun-2008)

Royal Bank of Scotland issues global stock crash alert: "A very nasty period is soon to be upon us - be prepared,"... (18-Jun-2008)

Ben Bernanke is still the "Man without Agony": What was he thinking?... (11-Jun-2008)

A clearer explanation of credit default swaps.: How credit default swaps (CDSs) present a systemic risk to the global financial system... (4-Jun-2008)

WSJ's page one story on Bernanke's Princeton "Bubble Laboratory" is almost incoherent: So is Thursday's speech on bubbles by Fed Governor Frederic S. Mishkin.... (18-May-2008)

Brilliant Nobel Prize winners in Economics blame credit bubble on "the news": Meanwhile, the deflationary spiral is in progress, but hyperinflation is not.... (27-Apr-08)

Investment bank UBS is now "writing down" clients' auction rate securities: From individual investors to tech firms, people are losing their money.... (29-Mar-08)

Both consumer and commercial credit is disappearing as deflationary spiral accelerates: Wall Street markets plummet 3% on Tuesday, as service sector contracts sharply.... (6-Feb-08)

Will hyper-inflation make the dollar worthless (like the Weimar republic)?: I've gotten this question several times this week from web site readers,... (21-Dec-07)

Questions and answers about the "credit crunch": What's going on, and what you can do about it.... (6-Dec-07)

Understanding deflation: Why there's less money in the world today than a month ago.: As the markets continue to fall, the Fed is increasingly in a big bind.... (10-Sep-07)

Bernanke's historic experiment takes center stage: An assessment of where we are and where we're going.... (27-Aug-07)

Ben Bernanke's Great Historic Experiment: Bernanke doesn't believe that bubbles exist. His Fed policy will now test his core beliefs.... (18-Aug-07)

Japan's real estate crash may finally end after 16 years: To see where America is going, look what happened in Japan.... (20-Feb-07)

This week's financial data points to trend back toward deflation.: Several inflationary indicators are down for June... (17-Jul-04)

The problem, unfortunately, is that the financial system has gone a whole year now -- we've had huge amounts of liquidity engendered by central banks, and it's getting increasingly evident that this is a once in a century type of phenomenon.

It is not the standard liquidity crises that we have seen in the past. It's verging on the issue of solvency, and the reason we know this is basically we have seen that only when -- For example in Britain, when Northern Rock was bailed out with sovereign credit that the system stabilized. And we had a very major problem prior to the Bear Stearns bailout, but once sovereign credit was substituted for their credit, that too stabilized.

But, it's very clear from the spreads that we see in Libor, OIS and credit default swaps for the financials, that we have not gotten closure yet. And it's going to take a while.

It's essentially, fundamentally the price of homes in the United States which are of course determining what the equity is in homes here, and therefore, what the ultimate collateral of the mortgage-backed securities is, pretty much around the world.

And we're still no where near the bottom of the home price thing, and we're looking for that as the critical statistic that will create a balance fundamentally in the economy.

And until then, I hope we can get a sufficiently stable stock market because there is the fundamental source of capital from which we get the ability to recapitalize a goodly part of the financial system, which surely needs it."

At this point, CNBC anchor Maria Bartiromo made a typically CNBC-like airhead remark: "And that's built on confidence." Like so many other people, including supposedly brilliant Nobel prize winning economists and central bankers, Bartiromo believes that fundamentals are irrelevant to the stock market, and all that matters is that investors have to just BELIEVE that everything's ok, and thing's will be ok.

Greenspan understands that the problem is much more serious. We're in a massive deflationary spiral that leaves less money in the world each day than there was the day before.

And by saying that "this is a once in a century type of phenomenon," he's acknowledging that it's comparable to the 1930s Great Depression, though it's unclear to me whether or not he yet understands that it's WORSE than the Great Depression.

However, he provides an explanation for one thing that's been puzzling me: Why has the deflationary spiral affected only financial services firms? It's true that investment banks and hedge funds were most heavily invested in near-worthless CDOs and other mortgage backed securities, but there should have at least a few casualties in other industries.

He says that non-financial firms have solid balance sheets, and didn't need to borrow. That's still puzzling, because financial firms also had solid balance sheets prior to the credit crisis that began a year ago.

At any rate, he expects other firms to be hit hard now, and we only have to look at General Motors, whose stock is at 1950s levels and which is close to bankruptcy, to see what he means.

Second quarter corporate earnings

Every week or two I post the table of S&P 500 average corporate earnings growth estimates, based on figures from CNBC Earnings Central supplied by Thomson Reuters.

A fall in earnings estimates means an increase of price/earnings ratios estimates. Here's the Friday's version of the graphic that appears on the bottom of the home page of this web site:

S&P 500 Price/Earnings ratio and S&P 500-stock Index as of 1-Aug-2008. (Source: MarketGauge ® by DataView, LLC)

It now looks as if a new trend has been established. For two years, investors had been tuning their buy/sell algorithms to maintain price/earnings ratios (also called "valuations") of almost exactly 18. But now they've re-tuned their computer software to target valuations around 21.

This is a startling development, since it means investors are really brain-dead about what's going on.

But it also means that the stock market is (21/18)-1 = 17% higher than it would have been if investors hadn't made that algorithmic adjustment. That is, the Dow Industrials would have been around 9700 if it hadn't been for this adjustment.

I'd have to guess that investors are VERY nervous about this situation. After living with P/E = 18 for two years, being at P/E = 21 in the current environment would have to be considered very high risk even by the most oblivious investors.

Fraud accusations for UBS and Citibank

Cuomo has already brought the same charges against UBS AG, and as I wrote last month, there's a "smoking gun" memo that provides solid evidence.

The banks are charged with having "repeatedly and persistently committed fraud" by falsely representing to customers that auction-rate debt was safe, liquid and the equivalent of cash.

As I've said many times, there's no doubt that massive fraud has occurred on Wall Street because of the circumstantial evidence.

The banks, ratings agencies and bond insurers who all colluded to give AAA ratings to near-worthless CDOs and other mortgage-backed securities might claim that they didn't realize what would happen in 2002, or 2003, or 2004, or 2005, or perhaps even 2006. But there can be no question that they knew, or should have known, in 2007 that their valuation models were broken. And yet, the rate of abuses actually INCREASED in 2007.

In fact, I would argue that by the time 2007 came around, financial professionals no longer even cared about their investors or about honesty or about who got screwed. If you look at all the actions and statements by financial executives in 2007, vastly many of which have turned out to be disastrously wrong, you can see that they all had one and only one purpose: Preserving their fat bonuses, fees and commissions, irrespective of honesty or professionalism.

The accusations of fraud directed at Citi and UBS are related to auction rate securities, but we should expect to see many more such accusations, related to ARSs and also to mortgage-backed CDOs and other securities.

Accounting rule postponed a year

Banks accused of fraud may have the perfect defense: "The regulators told me to commit fraud."

As we discussed recently with regard to the latest of Merrill Lynch's repeated asset writedowns, financial institutions have been postponing as long as possible having to admit that they have near-worthless assets in their portfolios. Not admitting it is fraud, because investors in the bank are fooled into thinking that the bank is worth more than it actually is worth.

But fraud should be perfectly ok if everyone is doing it, and if government officials tell you to do it, shouldn't it?

The FASB rule change says that it's perfectly ok to continue perpetrating fraud for another year.

That should give Citi and UBS a perfect defense - the regulators are urging banks to continue committing fraud. Quite honestly, I don't see what possible justification Cuomo has for charging Citi and UBS with fraud, when fraud is the current standard. Why should they be singled out for selective prosecution when everybody's doing the same thing and regulators are encouraging everyone to do the same thing.

It was New York Insurance Superintendent Eric Dinallo who spent several months earlier this year helping the banks and "monoline" bond insurance to collude to commit fraud. One of the major banks involved was Citi.

Now how on earth could Citi possibly be guilty in New York of any similar fraud, if the New York Insurance Superintendent was openly and publicly helping Citi to conspire to commit fraud. Shouldn't Dinallo himself be charged with conspiring to commit fraud? There's hardly any doubt that he did it -- just read any business newspaper in February or March and see for yourself.

And, not surprisingly, Citi was the major proponent of postponing the FASB rule, so that they could continue to mislead investors about the value of their portfolio.

Generational Dynamics Web Log for 3-Aug-2008
Alan Greenspan calls this a "once in a century" liquidity crisis.

Second quarter corporate earnings

Fraud accusations for UBS and Citibank

Accounting rule postponed a year

Web Log Pages

	Generational Dynamics
	Forecasting America's Destiny ... and the World's

\| HOME \| WEB LOG \| COUNTRY WIKI \| COMMENT \| FORUM \| DOWNLOADS \| ABOUT \|

Generational Dynamics Web Log for 3-Aug-2008 Alan Greenspan calls this a "once in a century" liquidity crisis.

Second quarter corporate earnings

Fraud accusations for UBS and Citibank

Accounting rule postponed a year

Web Log Pages

Generational Dynamics Web Log for 3-Aug-2008
Alan Greenspan calls this a "once in a century" liquidity crisis.