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FRED
08-16-07, 11:35 AM
http://www.itulip.com/images/Illiquid.swf

A Financial Market Crash is a Process, Not an Event

Liquidity dries up. Truth is revealed.

by Eric Janszen

A financial crash is not sudden, singular event. The way the Crash of 1929 is commonly misunderstood, the market crashed on Monday, October 31, 1929 and soup lines formed Tuesday.

A financial crash is a process lasting as long as a year, punctuated by a few notable grip-and-grin market events that make it into the history books. Underlying the process is the dissolution of a fallacious belief system that developed over a period of many years. Fallacies floated on an ocean of cheap credit. As the credit dries up, facts are revealed under the harsh light of reality.

Multiple fallacious beliefs now show under the light of evidence for all to see. The complicity of the ratings agencies in creating the housing bubble, while notable, is a minor revelation compared to the big three.

Financial Risk is Buried and Gone

False Belief: Risk spreading instruments disperse financial risk, creating greater financial market stability and resilience.

Fact: Underwriters, mostly investment banks, sold exotic credit derivatives and externalized the risk, dumping it mostly on foreign pension funds. Risk spreading instruments create Risk Pollution (http://www.itulip.com/riskpollution.htm), causing financial risk to disappear from sight for a time, where it concentrates in the weakest parts of the financial system only to reappear later like PCBs at Love Canal. The subprime mortgage market is the beginning of the discovery of hundreds of Credit Love Canals. A multi-trillion dollar Risk Pollution Superfund will have to be developed, at taxpayer expense, to clean up over ten years of Risk Pollution.

The Housing Bubble Collapse is Benign

False Belief: The Housing Bubble Correction (http://www.itulip.com/housingbubblecorrection.htm) will not seriously damage the economy.

Fact: Every aspect of the economy on which rising home prices depended, from the market for mortgages to furniture to autos, is in decline. The collapse of the housing bubble will cause a recession in the U.S. by Q4 2007 (http://itulip.com/forums/showthread.php?p=3899#post3899).

Deficits Don't Matter

False Belief: Deficits don't matter. An economy can be continuously stripped of its industrial capacity and its assets inflated and traded for profit continuously, and imports can be paid for with borrowed money forever.

Fact: No economy in history has ever survived long running large trade and fiscal deficits. The entire economy needs to be overhauled, from the tax system to the monetary system, to re-build capacity for capital formation, saving, and capital investment in productive industries. USA, Inc. (http://www.itulip.com/forums/showthread.php?p=7131#post7131) needs to be restructured.

There is very little that the Fed can do to stop the dissolution of fallacies process now that it is underway. Rate cuts will further weaken dollar and create even higher inflation, which is one of the causes of the crash. The Fed will keep the discount window open to prevent cascading debt defaults and bank failures.

Here's how it went down last time. You will notice a few parallels.
1929 Headlines (http://www.pbs.org/wgbh/amex/crash/sfeature/sf_headlines.html)
Wave of Buying Sweeps Over Market as Stocks Swing Upward

Radio Flashes High; General Motors and Steels Soar
By Laurence Stern

The atmosphere of doubt and caution which Wall Street in recent weeks has come to regard almost as habitual on Thursdays was swept away yesterday in a rush of buying...

Perhaps the market's own strength weighed as heavily with speculative minds as the logic of the situation, since the tape is the one institution Wall Street does not argue with. At any rate, the market appeared entirely confident from the opening gong. It was a firm, almost buoyant, opening, many initial transactions involving large blocks at sizable price advances...

The advance was one of the most vigorous of the year, amounting to a net gain of 6.97 points in the Dow Jones "average" of thirty representative industrial issues...

- The World, March 15, 1929

_____

Stocks Soar As Bank Aid Ends Fear of Money Panic
By W. A. Lyon

The stock market strode out from under the shadow of a panic in call money that so lately threatened, revived in all its old strength yesterday. Assured that the New York banks were ready with their boundless resources to prevent a money crisis, the public and the professional trader set out to repair the damage done to prices on Monday and the major part of Tuesday.

Stocks in the aggregate, though bucking a 15 per cent rate for loans, enjoyed the greatest advance they have known in a single day in the last two years. Not even the surging bull markets of the memorable year 1928 saw such a day of heavy buying.

- New York Herald Tribune, March 28, 1929

_____

Banker Says Boom Will Run Into 1930

That at least a part of the great amount of money in the securities market may represent temporary employment of funds eventually finding their way into business uses, and that the prosperity of the present business cycle will probably not end in 1929, is the belief expressed by the J. Henry Schroder Banking Corporation in the quarterly review of the London house of Schroder.

- The World, March 30, 1929

_____

Public Liquidation Spurred by Bears, Hits Low Market Scare Orders From All Over Country Halt Ticker an Hour in Feverish Day
By Laurence Stern

With speculative nerves rubbed raw under the persistent hammering of bearish traders, a renewed wave of public liquidation swept over the stock market yesterday, depressing prices severely and hopelessly clogging the quotation ticker...
...To the majority of the market's followers, who now must be counted in millions, the most significant aspect of the decline is that it has carried the average level of the list to a lower point than was reached on Oct. 4 in the sharp break that climaxed a month of gradual recession.

This raises a pertinent question, whether the bull movement of the last five years has definitely given way to a liquidating market...

-The World, October 20, 1929

_____

Brokers Believe Worst Is Over and Recommend Buying of Real Bargains

Wall Street in looking over the wreckage of the week, has come generally to the opinion that high grade investment issues can be bought now, without fear of a drastic decline. There is some difference of opinion as to whether not the correction must go further, but everyone realizes that the worst is over, and that there are bargains for those who are willing to buy conservatively and live through the immediate irregularity.

-New York Herald Tribune, October 27, 1929

_____

Gigantic Bank Pool Pledged To Avert Disaster as Second Big Crash Stuns Wall Street
Largest Financial Powers in the City Meet After Day of Hysterical Liquidation Sinking Prices Below Thursday's
By Laurence Stern

After the stock market had come crashing down again in a veritable deluge of forced and hysterical liquidation, word sped through the financial district last evening that the largest banks in the city were prepared to exert their organized power this morning to prevent further disaster.

Arrangements described as "fully adequate" were completed at a conference at the offices of J. P. Morgan & Co. at Broad and Wall Streets...

Although no formal statement was issued, it was the consensus of those at the meeting that the worst of the liquidation is over and that a natural demand for investment stocks now available on the bargain counter should go far toward an immediate restoration of trading stability.

-The World, October 29, 1929

_____

Stocks Up in Strong Rally; Rockefellers Big Buyers; Exchanges Close 2-1/2 Days
By Ferdinand Lundberg

Revived by spontaneous investment buying and declarations of large extra cash dividends by leading companies, and free of the delirium that has recently gripped share owners, the stock market yesterday received a fresh start and scored a record comeback. Volume on the Stock Exchange totaled 10,727,320 shares, the third largest day on record.

The high spot of the day from a stock market viewpoint was the statement by John D. Rockefeller that there was no need to destroy values and that he and his son, John D. Rockefeller Jr., had been heavy buyers of stocks for investment in the last few days, and would continue to buy at present prices...

-- New York Herald Tribune, October 31, 1929

_____

Very Prosperous Year Is Forecast
Guenther Analyzes the Report of Mellon Covering 1929

That 1930 may be a very prosperous year, industrially and otherwise, without the peak conditions that made 1929 and exceptional year for business prosperity, is an observation made by Louis Guenther, publisher of the Financial World, in a statement based upon Secretary Mellon's fiscal report...
"To grow too fast is often unhealthy because of the suddenness with which a readjustment must be met. By far and large the country would be better off were further progress made along more normal lines...

Fortunately, we have returned to a more normal mind in appraising prospects. We are not looking for the Midas touch on everything to which we turn. That makes us more satisfied with normal incomes and normal profit returns."

-The World, December 15, 1929



The 2007 version of the story, in video, with humor!


<object height="350" width="425">

<embed src="http://www.youtube.com/v/KfqrrhwWirY" type="application/x-shockwave-flash" wmode="transparent" height="350" width="425"></object>

But the process is not done. We are still in the early stages. Not until Q1 2008 are we likely to see the main event.

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Andreuccio
08-16-07, 01:11 PM
I'm rivetted. How does it end?

Seriously, I remember hearing that people who held onto their stocks instead of selling in the panic ended up doing okay. Is that true? How did the Rockefellers do on their buys in late October?

FRED
08-16-07, 01:24 PM
I'm rivetted. How does it end?

Seriously, I remember hearing that people who held onto their stocks instead of selling in the panic ended up doing okay. Is that true? How did the Rockefellers do on their buys in late October?

Depends on your time frame.

Jim Nickerson
08-16-07, 01:29 PM
I'm rivetted. How does it end?

Seriously, I remember hearing that people who held onto their stocks instead of selling in the panic ended up doing okay. Is that true? How did the Rockefellers do on their buys in late October?

If you are referencing the 1987 debacle, go to stockcharts.com or bigcharts.com and look at the long term charts for DJI and SPX to see the shape of the recovery.

c1ue
08-16-07, 01:35 PM
Seriously, I remember hearing that people who held onto their stocks instead of selling in the panic ended up doing okay. Is that true? How did the Rockefellers do on their buys in late October?

If you mean held onto stocks for 25 years, then yes.

According to wiki: http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929

the Dow recovered to pre-1929 level in 1954.

But this does not include about 57% inflation - even with the deflation of the Great Depression years.

So actual purchasing power equivalent recovery was not until pretty much the 1960s.

I don't know about you, but its hard to sit on the goose egg for 30+ years.

Andreuccio
08-16-07, 01:49 PM
Here's the money quote from the Wikipedia article:

"Anyone who bought stocks in mid-1929 and held on to them saw most of his adult life pass by before getting back to even."

FRED
08-16-07, 02:11 PM
Here's the money quote from the Wikipedia article:

"Anyone who bought stocks in mid-1929 and held on to them saw most of his adult life pass by before getting back to even."

I don't believe that includes survival bias.

Our dot com portfolio (http://www.itulip.com/compare.htm), purchased near the top of the dot com bubble was off 85% last we checked. Some, like ebay and amazon, went on to be big stocks. However, many of the companies in our portfolio went out of business.

bill
08-16-07, 07:10 PM
http://www.itulip.com/images/Illiquid.swf




A Financial Market Crash is a Process, Not an Event

Liquidity dries up. Truth is revealed.

A financial crash is not sudden, singular event. The way the Crash of 1929 is commonly misunderstood, the market crashed on Monday, October 31, 1929 and soup lines formed Tuesday.

A financial crash is a process lasting as much as a year, punctuated by a few notable grip-and-grin market events that make it into the history books. Underlying the process is the dissolution of a fallacious belief system that developed over a period of many years. Fallacies floated on an ocean of cheap credit. As the credit dries up, facts are revealed under the harsh light of reality.

Multiple fallacious beliefs now show under the light of evidence for all to see. The complicity of the ratings agencies in creating the housing bubble, while notable, is a minor revelation compared to the big three.

Financial Risk is Buried and Gone

False Belief: Risk spreading instruments disperse financial risk, creating greater financial market stability and resilience.

Fact: Underwriters, mostly investment banks, sold exotic credit derivatives and externalized the risk, dumping it mostly on foreign pension funds. Risk spreading instruments create Risk Pollution (http://www.itulip.com/riskpollution.htm), causing financial risk to disappear from sight for a time, where it concentrates in the weakest parts of the financial system only to reappear later like PCBs at Love Canal. The subprime mortgage market is the beginning of the discovery of hundreds of Credit Love Canals. A multi-trillion dollar Risk Pollution Superfund will have to be developed, at taxpayer expense, to clean up over ten years of Risk Pollution.

The Housing Bubble Collapse is Benign

False Belief: The Housing Bubble Correction (http://www.itulip.com/housingbubblecorrection.htm) will not seriously damage the economy.

Fact: Every aspect of the economy on which rising home prices depended, from the market for mortgages to furniture to autos, is in decline. The collapse of the housing bubble will cause a recession in the U.S. by Q4 2007 (http://itulip.com/forums/showthread.php?p=3899#post3899).

Deficits Don't Matter

False Belief: Deficits don't matter. An economy can be continuously stripped of its industrial capacity and its assets inflated and traded for profit continuously, and imports can be paid for with borrowed money forever.

Fact: No economy in history has ever survived long running large trade and fiscal deficits. The entire economy needs to be overhauled, from the tax system to the monetary system, to re-build capacity for capital formation, saving, and capital investment in productive industries. USA, Inc. (http://www.itulip.com/forums/showthread.php?p=7131#post7131) needs to be restructured.

There is very little that the Fed can do to stop the dissolution of fallacies process now that it is underway. Rate cuts will further weaken dollar and create even higher inflation, which is one of the causes of the crash. The Fed will keep the discount window open to prevent cascading debt defaults and bank failures.




Well put together EJ, I hope the day traders read it over and over and wake up to smell the real cycle their in.

Many US public assets and resources will have to be sold off (or use of PPP) just to maintain a some what orderly cycle down. At some future point America will be described as on sale, resulting from years of dollar down and asset restructuring. It will get to a point were we will be priced as a global market competitor as foreigners flood the place establishing a 3<SUP>rd</SUP> world labor pool for factories. For housing it will go something like this “Get your Immigration Visa and Title at the close”.



I can’t wait to read iTulip day trader members response to the first bounce, it should be similar as below. Next couple weeks?


Brokers Believe Worst Is Over and Recommend Buying of Real Bargains

Wall Street in looking over the wreckage of the week, has come generally to the opinion that high grade investment issues can be bought now, without fear of a drastic decline. There is some difference of opinion as to whether not the correction must go further, but everyone realizes that the worst is over, and that there are bargains for those who are willing to buy conservatively and live through the immediate irregularity.

-New York Herald Tribune, October 27, 1929





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c1ue
08-16-07, 09:41 PM
Our dot com portfolio (http://www.itulip.com/compare.htm), purchased near the top of the dot com bubble was off 85% last we checked. Some, like ebay and amazon, went on to be big stocks. However, many of the companies in our portfolio went out of business.

Speaking of short opportunities, the latest jump by Amazon sure looked like a slam dunk short/put buy to me.

Perhaps someone can explain their business model to me; I've never understood how any company that ate so much capital with so little ROI, ridiculous P/E, etc could be at $70+/share.

Talk about selling at a loss but making it up in volume.

Mostly what Amazon seems good at is putting out new initiatives which look good - whether it is enabling internet stores a la Ebay and 'Long Tail', or Amazon payment a la Paypal, or selling excess computer time/capacity a la Akamai, or any of a number of other initiatives.

I've made some good money on them by bottom fishing at $12 given a rising market tide, but sold out before the latest earnings report as the buy was giving me the shakes.

Anyone?

tree
08-17-07, 06:41 PM
Funny, reading these headines from 1929 as in the other room a triumphant Cramer on TV touts stocks to young'uns on his show Friday night Aug. 17...My grandfather lost a lot in the Crash, I'm told, and never bought stocks again...luckily he remained well employed..."Shouldn't you be buying companies on the cheap?" Cramer is asking...

Spartacus
08-17-07, 08:02 PM
On a day when the financial markets were in question and we would expect to see a flight to safety,

the Dow dropped 300/13000
Gold dropped 40/660

Silver?

Charles Mackay
08-17-07, 08:25 PM
It's great to hear EJ's distilled analysis again ...like in the old days.

And yes, what a great thing to remember ....the time these things take to play out. I remember a quote by someone who lived thru the 1929 crash era saying:

"nothing changed, it was a slow motion event and life went on just like normal. UNTIL THE BOTTOM and a decade afterwards."
----
But, will things be different now with a 100% fiat world? Or, as Dr. Michael Hudson informs, does the fact that we are living in a 99% FIRE economy make it very similar?

Jim Nickerson
08-18-07, 02:41 PM
Fred posted Eric's "Market Crash" commentary late Thursday morning--~ 48 hours it's been up.

It has drawn 17,111 views, which from what I can determine is way more certainly than anything else posted in the same time-frame.

I also noted just now there are 24,876 Currently Active Users, which I think may be the most users ever online.

What all this suggests to me is there is a lot of nervousness amongst investors.

It sure would be nice if some of them would post remarks regarding what are their concerns.

GRG55
08-18-07, 07:33 PM
What all this suggests to me is there is a lot of nervousness amongst investors.

It sure would be nice if some of them would post remarks regarding what are their concerns.

Concerns? Here's a few of mine:

That the coming economic contraction falls disproportionately on people who did not partake and derived no benefit from the credit bubble insanity. For example the vaporising of administered pension plan assets and the loss of future compounding of same will never be recovered, so someone's gonna take a haircut.
That the caps on Fannie and Freddie will be lifted - nothing like rewarding the wrong behaviour.
That the Fed continues to bail out the most politically influential imprudent lenders - the troubled hedge funds may be allowed to expire, but Chuck "Dancin' Fool" Prince over at Citi is in the too big-to-let-fail category. As Martin Mayer pointed out it's the lender who can't afford not to be repaid that threatens the system.
That elected officials succumb to inevitable voter pressure and squander tax dollars on a futile and very public hunt for scapegoats. I feel nauseous just thinking about the hearings.
That the trauma from the credit implosion and subsequent political and economic fallout causes the USA to re-discover it's natural Wilsonian tendency to isolationism. I am no fan of recent amplified militarism, but if you want to imagine a world without US influence just have a look at Darfur (I am not a US citizen).
That the voters will turn to their government looking for security at a time of great uncertainty, as they did after 9/11, and the official response is yet more authoritarian curbs on personal liberty in the "land of the free".

johngaltfla
08-19-07, 08:35 AM
The one difference between now and "then" is that we were not the world's largest debtor in the history of capitalism.

There will be no choice but to inflate the dollar beyond the point of no return, yet it will do no good.

Weimarica, here we come.

Charles Mackay
08-19-07, 07:13 PM
Fred posted Eric's "Market Crash" commentary late Thursday morning--~ 48 hours it's been up.

It has drawn 17,111 views, which from what I can determine is way more certainly than anything else posted in the same time-frame.

I also noted just now there are 24,876 Currently Active Users, which I think may be the most users ever online.

What all this suggests to me is there is a lot of nervousness amongst investors.

It sure would be nice if some of them would post remarks regarding what are their concerns.


Jim, did you see the crash in T Bill rates? ... from 5% to 3.7% in the last few weeks. And then the run on banks (Countrywide) and the run on hedge funds. It appears that the fear is insolvency and default. I think the switch from risk taking to hoarding is in full gear... as well as it should be with 80 million aging boomers.

Jim Nickerson
08-19-07, 08:13 PM
Jim, did you see the crash in T Bill rates? ... from 5% to 3.7% in the last few weeks. And then the run on banks (Countrywide) and the run on hedge funds. It appears that the fear is insolvency and default. I think the switch from risk taking to hoarding is in full gear... as well as it should be with 80 million aging boomers.

Yes, I watch, or try to watch, a lot of markets, and through good luck have not suffered much in the way of losses in the past month--but I have lost some. It just struck me that the increased numbers online here at iTulip and reading EJ's note on "Crash" that was getting a helluva lot of hits was prompted by something going on in the investment world.

My assumption was there suddenly was a lot of fear amongst investors--which might have no validity at all.

No FNG's seem to have taken up my invitation to comment on their concerns, so perhaps there are no greater concerns now than usual, though I doubt it.

Incidentally, Charles MacKay, is that your real name or the name of the same guy Tet quotes in all his signatures?

GRG55
08-20-07, 08:32 AM
Jim: From the market behaviour in Asia and Europe today it would appear that fear is still some distance from convincingly trumping greed. However, the need for cash last week was rather acute. There are reports that some European banks were calling borrowers last week asking them to kindly advance their next monthly mortgage payment by a few days.

nksantabarbara
08-20-07, 06:21 PM
This may be a little off topic but what I cannot figure out is why nobody is complaining about the obvious insider trading on Thursday by those who knew about the discount window rate cut in advance. It is the only reason why the market could have moved up 300 point to finish about even on Thursday. For those of us who were short the S&P thru VIX options and wanted to cash in our hedges on Thursday or Friday, it was a major blow (not to mention that Schwab shut down right in the middle of the day when the moment shifted so there was no way to cash out your options). It seems obvious that the SEC should look into who bought all those financial company shares once word got out to push the market up so suddenly. And it is amazing that Bernanke and the Fed would manipulate the market by choosing options day to ruin all those short positions - wonder who was long or who had written all those S&P puts.

jk
08-20-07, 08:33 PM
And it is amazing that Bernanke and the Fed would manipulate the market by choosing options day to ruin all those short positions
greenspan did the same thing. i forget the date.

Charles Mackay
08-21-07, 01:01 PM
This may be a little off topic but what I cannot figure out is why nobody is complaining about the obvious insider trading on Thursday by those who knew about the discount window rate cut in advance. It is the only reason why the market could have moved up 300 point to finish about even on Thursday. For those of us who were short the S&P thru VIX options and wanted to cash in our hedges on Thursday or Friday, it was a major blow (not to mention that Schwab shut down right in the middle of the day when the moment shifted so there was no way to cash out your options). It seems obvious that the SEC should look into who bought all those financial company shares once word got out to push the market up so suddenly. And it is amazing that Bernanke and the Fed would manipulate the market by choosing options day to ruin all those short positions - wonder who was long or who had written all those S&P puts.

Welcome to a world run by Henry Paulson types... you can forget transparency and oversight until the TEOTWAWKI ... Did you see that they just made shorting on down ticks legal again last week? That rule was put into effect during the last TEOTWAWKI event in the 30's. :eek:

bill
08-22-07, 10:23 AM
Rumour or?

http://www.forbes.com/markets/feeds/afx/2007/08/21/afx4039427.html


AFX News Limited
WALL STREET OUTLOOK down on talk large US bank filed for Chapter 11 protection
08.21.07, 10:43 AM ET

LONDON (Thomson Financial) - Wall Street is now expected to open lower amid widespread talk that a major US investment bank has filed for Chapter 11 protection, although dealers have dismissed the talk.
'We've heard vague talk a US investment bank is in trouble,' one dealer said.
Another said he had heard that a banking group has filed for Chapter 11 protection, but pointed out that any such news would be on the SEC website.
'I don't believe it for a moment.'
Even so, the rumours are unsettling market watchers and US futures moved lower, he said.
S&P futures -- which stop trading 15 minutes before the S&P 500 index opens -- closed down 3.9 points, or 0.27 pct. Earlier, futures had indicated a higher open.
deborah.hyde@thomson.com
dlh/lce

FRED
09-15-07, 10:30 PM
Where are we in the crash process?


Run on the bank: 1896

http://www.itulip.com/images/bankrun1896.jpg


Run on the bank: 1914

http://www.itulip.com/images/bankrun1914.jpg


Run on the bank: 1933

http://www.itulip.com/images/bankrun1933.jpg


Run on the bank: 2007

http://www.itulip.com/images/bankrun2007.jpg

Fifth Day of Christmas? (http://www.itulip.com/forums/showthread.php?p=5198#post5198)

GRG55
10-09-07, 12:51 AM
Another brick in the wall?
Basel regulators believe crisis far from over
Fri Oct 5, 2007 9:12am EDT
By Thomas Atkins
ZURICH, Oct 5 (Reuters) - The global credit crisis is far from over and may come in waves, a source close to the Basel Committee on Banking Supervision said on Friday.

Regulators from around the world will meet next week to discuss what the source described as the "hard-core liquidity crisis" which has forced central banks to inject billions of dollars in emergency liquidity into the banking system.

But the source, who declined to be named, said the Basel Committee was unlikely even to discuss suggestions that central banks should become market makers of last resort when liquidity dries up, saying such an idea is out of the question.

Stock markets have hit record highs in recent days due to optimism that the worst of the credit crisis may be over, while primary U.S. bond markets and some loan markets have revived following the Federal Reserve's interest rate cut on Sept. 18.

But regulators on the Basel Committee are less optimistic as they gather in the Swiss city. "In banking and in supervisory circles, this crisis is far from over," said the source. "This crisis may unfold itself in waves."
The Committee will put the liquidity crisis, in which banks have been largely unwilling to lend to each another, at the top of its agenda, the source said.

"Liquidity hasn't played a big role so far but now we can see that we have a hard-core liquidity crisis," said the source. "This is something that has very rarely happened before ... where banks don't trust each other."
Liquidity -- or lack of it -- is one of the top risks for banking institutions, but rulebooks such as the international Basel II accord which the Committee drew up have focused instead on capital requirements.


STRESS TEST
Committee deliberations are unlikely to result in proposals for a new liquidity risk charge -- which would force banks to set aside more emergency cash -- but rather in guidelines or "soft regulations" on how to cope with crises, the source said.

"The core of the issue is stress testing and contingency plans," the source said.

The source said Committee members were unlikely even to debate suggestions by some private-sector bankers that central banks become market makers of last resort for illiquid assets to keep the wheels of international finance turning.

"This is out of the question. This is something the market wants but at the current time there is no debate on this," the source said.
"If any central bank opened this possibility, they would be flooded, literally flooded, with hundreds of billions in asset backed commercial paper," the source said. "This would be a classical case of bailing out the speculators."

The global credit crisis that developed in August was triggered by defaults on U.S. mortgage debt that had been extensively repackaged and sold as asset backed securities to institutions, including hedge funds, around the world.

Regulators have been torn between ensuring that markets keep working by providing emergency liquidity, and the risk that this will simply inflate another market bubble following the equities boom of the late 1990s and the property boom of this decade.

They are also anxious to avoid "moral hazard" in which investors, shielded from risk by official bailouts, are encouraged to behave increasingly recklessly.

Link to article:
http://www.reuters.com/article/bondsNews/idUSL0564880620071005

Jim Nickerson
10-09-07, 01:19 AM
Another brick in the wall?
Basel regulators believe crisis far from over
Fri Oct 5, 2007 9:12am EDT
By Thomas Atkins
ZURICH, Oct 5 (Reuters) - The global credit crisis is far from over and may come in waves, a source close to the Basel Committee on Banking Supervision said on Friday.

Regulators from around the world will meet next week to discuss what the source described as the "hard-core liquidity crisis" which has forced central banks to inject billions of dollars in emergency liquidity into the banking system.



Nice find, GR.

Below in what John Hussman, PhD, writes about "injecting liquidity" into the banking system. http://hussmanfunds.com/wmc/wmc071008.htm

<!--************************************************** *******--><!--*******************CONTENT *******************************--><!--************************************************** **********-->October 8, 2007
The Bag Will Not Inflate, And Liquidity Will Not Be Flowing
John P. Hussman, Ph.D.
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As expected, the Fed entered $28 billion of repurchases on Thursday to roll over existing repos that were due on that day. The Fed did not “add” or “inject” reserves to the banking system, nor has any amount of overall reserves been added in recent weeks. There have been no “permanent” open market operations, and “temporary” ones have been pure rollovers of existing repos. Aside from $3 billion that banks briefly borrowed from the Fed a few weeks ago, the Fed has not “added liquidity” through the discount window either. The total amount borrowed by the banking system through the discount window fell to just $202 million last week. Meanwhile, the total reserves of the banking system remain about $45 billion, nearly all of which represents temporary repurchase agreements that are continuously rolled over as they become due.

Fed Open Market Operations: http://www.ny.frb.org/markets/openmarket.html (http://www.ny.frb.org/markets/openmarket.html)
Total Discount Window Borrowings: http://research.stlouisfed.org/fred2/data/TOTBORR.txt (http://research.stlouisfed.org/fred2/data/TOTBORR.txt)
Total Bank Reserves: http://research.stlouisfed.org/fred2/data/TRARR.txt (http://research.stlouisfed.org/fred2/data/TRARR.txt)

Roughly $30 billion of repos will roll over this Thursday; $24 billion of 7 day repos from last week, and another $6 billion in 14 day repos from the week before.

The reason all of this is worth noting is because investors are putting so much false hope on the notion that the Fed is “injecting” all sorts of “liquidity” into the markets. Analysts discuss this as fact, when they evidently have not even looked at the facts. They literally make things up and present their claims as truth. At one particular moment last week, a guest on one of the CNBC morning programs spoke authoritatively about the enormous amount of liquidity the Fed is pumping into the economy, and how “all that liquidity has to go someplace, and a lot of it is finding its way into the stock market.” At that point I stopped watching out of the instinctive will to live.

My immediate objection to that statement, of course, is that there is no liquidity being “injected” at all. The Fed certainly has a psychological effect on investors, provides coordinating signals to banks, manages an interest rate on a very stable $40-$45 billion pool of reserves through its “temporary” open market operations, facilitates the predictable issuance of $30-$50 billion annually of currency in circulation through its “permanent” open market operations, and even has a useful role to play in providing temporary liquidity in the face of seasonal factors (most notably, the year-2000 turn). But the Fed does not provide meaningful amounts of ongoing liquidity to the $6.3 trillion banking system (the quantity of loans has literally zero relationship with the small, stable pool of bank reserves, which has been falling since the early 1990's). Nor does the Fed control the $13.8 trillion U.S. economy. Foreign purchases of U.S. Treasuries outweigh the Fed's actions many, many times over.

My second objection is that the stock market is not some balloon into which money “flows into” or “out of.” Every purchase is matched by a sale. Every sale is matched by a purchase. Stock prices move because the buyer is more eager than the seller or vice versa. A purchase doesn't put money “into” the market, nor does a sale take money “out.” Even in the case of new issues, the proceeds go to the issuing company. Money “on the sidelines” stays on the sidelines. Stocks, bonds, commercial paper and currency simply change hands between Ricky, Mickey and Nicky. There is no stock market balloon holding all the money that people invest. There are only certificates traded between people at prices on which they mutually agree from day to day.

You can count on the fact that if you save $100, somebody, somewhere in the world ends up acquiring $100 worth of tangible investment goods or services. This is a well-known economic identity, and you can prove it. Even if you save $100 by stuffing it under your mattress, it must be the case that total spending has fallen short of total output by that $100, in which case we know that somebody has involuntarily accumulated $100 in “inventory investment.” Even if your $100 went “into” the stock market, the fact is that your $100 immediately went “out” of the stock market in the hands of the seller, and then to someone else, and someone else, until your $100 eventually made it into the hands of someone who used it to buy (or in the case of inventory investment, accumulate) real goods and services.

You know how flight safety demonstrations always include the phrase “even though the bag will not inflate, oxygen will be flowing”? Well the same is not true of “Fed liquidity” and the stock market. There is no bag that inflates, and if you look at the data, no liquidity is flowing either.

The stock market has advanced in recent weeks on very dull volume and relatively tepid breadth. This type of action is typically associated with short-squeezes and a backing-off of sellers, without robust underlying demand. If you look at the dull price-volume behavior, the trailing breadth in the recent rally, and the growing divergences between the major indices and other market internals, it is not clear that buyers are particularly eager.
JN emphasis

I am way too ignorant to sort out just what is the truth about the relationships of CB's and the liquidity issues. Does anyone know the truth and care to put it forth?



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