Just like the Japanese banking problem the LTCM is mostly an issue of names and numbers in computers. The connection to real economy is thin. It is often and mistakenly asserted that the stock market crash of '29 caused the depression. It wasn't the crash, rather it was the reaction of people, officials and authorities to it that created a hysterical environment in which foot shooting became the norm. The FED was the main culprit. They engaged in interest rate tightening in order to protect the dollar. There were a collection of similar panic actions taken that actually caused an economy that was already recessing in the farm sector in '27 to be exacerbated into something far worse. 10% stock market margins encouraged excessive public speculation. The tower of gambling was built on a narrow base. When the tower fell the base disappeared. People tried to protect their money by pulling it out of banks. That process discovered that the leveraged prosperity of the '20s was hollow. The stock market downtrended for 3 years until 1932. When it bottomed from a peak of 387 the DOW read 32. In 3 years the Dow regained most of what it had lost in one of the greatest bull markets of all time. You don't hear about that in text books. You only hear about the glorious move to socialism that pretended to solve the country's problems.
The LTCM thing is similar in certain ways, but profoundly different in the important ones. The encumberment of $1 trillion is a media made extrapolation. Maybe there is a direct encumberment of $60 billion. The issue facing the NY Fed during the third week of August was to what extent would financial panic caused by position dumping institutions cause others to act as though it were '29 all over again? The Fed can't take the risk of big trouble, not because they are so concerned about the implied illiquidity of a mass of unwinding derivatives, but because they would have to disbalance a fine-tuning they are conducting as part of the charade of monetary discipline. If they have to bail out big banks, it means they will have to create money and make special loans, all of which could cause panic to develop in foreign countries, not to mention the same here. I have no quarrel with what they did. If they had taken other action earlier this year, there wouldn't have been the sturm und drang situation in the first place. This is exactly what they were intending in their even keel policy. The problem is that the construction of such a policy isn't possible. That's why free markets must determine the price of money. Not pretenders to knowledge. The FED only needs to keep money growing at the rate of productivity and let the markets go wherever they want. They will anyway.
The $500 billion on both sides is answered in this way. Who is on the other side of those trades? The clearing corporation? The Japanese? The brokerages and banks? Then they must be benefiting or hurting. You don't hear a word from the beneficiaries. Except for the Japanese they all are in the domestic arena, so X loses to Y. Names and numbers shift in bank accounts. There is no loss of value, just the false money of leverage. So what? It is real economy that is important not the shadowing of the financial world. There is no question that the bull market and the sophisticated application of computers and telecommunications has enabled individuals to try to steal from themselves. It has become a house of cards to a certain extent and it needs correction. But the situation is no where near the '20s thing. At worst it is more like '37 or '62, not '87.
The proof that the "losses" are chimeral is seen through experience. We've had many tumultous market occurrences that have left no memory. Who remembers the horrendous 21% interest rates of '80 or the 26% unemployment of '82? Fewer every day. Who lost? Indeterminate. Who cares? No one. Who learned? Few, if any. Santayana was wrong. History has no lesson to teach. You conclude as much wrong as right about what you think happened in history. It didn't happen that way. As you get closer and closer to what happened, you discover that you can't find anything happening. It's all in people's minds. Well, I guess that's trivially true. So no amount of information will determine actual dollar losses. Thus there is no loss! (FED burns billions in old dollar bills daily).
The NY rumor mill is in high gear so you can expect there will be more earthshaking aftershock non-events. The banks will have to report quarterly losses for their part in the risk-free gambling. Hey, we all know about non-recourse loans in real estate, don't we? The real issues are being masked by this debt and leverage nonsense. The real issues are what I've spent many hours discussing on this and the "Is this the Bottom for Gold" thread. Those issues have the power to create real economy trouble. They are indirectly connected, but the derivatives thing can force the FED to do all the wrong things to enable the trouble to get in high gear. That is the issue, not whether some large amount of pseudo-money is shifting around. |
