First the equities than the treasuries.

Good night Irene.

I don’t know how we don’t see global deflation at this point.

On her show this morning she says she wants McCain to show America his team to address the financial panic: Romney (why not Forbes?) and Giuliani were mentioned as prime members to restore confidence and show that the perpetrators, if they have broken laws, will be prosecuted, as he promised at the Wisconsin rally yesterday.

She remarked that this comment received the greatest reaction from the crowd: any mention of bipartisanship allowed us to hear the crickets in the grass.

As we have said:
McCain should also come out and say specifically what he will do and what the W Administration should do in its last months: e.g. immediate tax cut to below 20% to help businesses, along with a matching 20% cut in government spending, with the explanation that the American people should be allowed to keep more of their money during such a panic and not be sending it to bureaucrats with a socialist economy.

and greed is going to get us out of this. Not more government! We need to change the incentives in the economy. Not only should the banks be recapitalized, but the economy needs to be recapitalized! We need big cuts in the marginal rates on all capital, like capital gains, business capital gains, corporate taxes, repatriated taxes, death taxes, dividend taxes, business expensing and the top rate on income. All these rates must be cut to create the greed that will get us out of this mess.

that the auctions to set the prices and start the unwinding of the Lehman CDS’s were going to be today, CDS’s on $400b of debt. Might that have something to do with the market tanking?

As I said in these pages over a year ago in a heated arguement with Neil Stevens, we are on the precipice of worldwide deflation, which will either be of the good or bad variety. I can elaborate further, but I am probably still banned.

classes are really into it, a fascination which I suspect will cease should Barack Obama be elected president.

I have put up a blurb on the Depression at The Minority Report

Check it out and feel free to join our open thread on money matters. Vent to your heart’s content!

But farther out the curve, Treasury securities are mostly flat to lower. In some cases, yield spreads between Treasuries and swap interest rates at equivalent points on the yield curve have become negative.

I’m a bit confused. Which parameters do you usually use to gauge inflation/deflation possibilities?

I checked treasury yield curve, the curve has actually steepened considerably as the short end is pulled down to near zero and long end(1,2, 5+ years) is relatively flat. A steep yield curve generally means inflationary pressure in the long run. If you were talking about libor-swap spread, I believe that curve is very skewed at the moment, no firm conclusion should be drawn from it. It’s kind of funny some talking heads are touting the idea of ‘super inflation’. I actually tend to agree to some degree. The market is very volatile. Two months from now, we may indeed need to worry about ‘super inflation’ as tremedous US dollar capital inflow artificially boosted by safe heaven seekers may simply evaporate overnight.

On the other hand, there’s also a possibility of deflation if the global economy dips deep into recession, and the saving/borrowing habit of American consumers have a fundamental change as a result of this crisis.

I won’t rule either possiblity out.

I checked treasury yield curve, the curve has actually steepened considerably as the short end is pulled down to near zero and long end(1,2, 5+ years) is relatively flat. A steep yield curve generally means inflationary pressure in the long run. If you were talking about libor-swap spread, I believe that curve is very skewed at the moment, no firm conclusion should be drawn from it. It’s kind of funny some talking heads are touting the idea of ‘super inflation’. I actually tend to agree to some degree. The market is very volatile. Two months from now, we may indeed need to worry about ‘super inflation’ as tremedous US dollar capital inflow artificially boosted by safe heaven seekers may simply evaporate overnight.

On the other hand, there’s also a possibility of deflation if the global economy dips deep into recession, and the saving/borrowing habit of American consumers have a fundamental change as a result of this crisis.

I won’t rule either possiblity out

Crisis! We need to change the incentives in the economy to boost investment and economic activity. Look at this article by Jonah Goldberg
We can’t increase government any larger to cover this crisis without permanently crippling our economy. We need to cut taxes across the board on capital. On capital gains, dividends, business capital gains, business expensing, the death tax, the top rate, repatriated taxes, etc. Those taxes are egregious anyway, but getting them out of the way can boost economic activity and the stock market. Relying on the Fed to cut rates to the level they were that precipitated this crisis will have no effect. We need fiscal policy that changes incentives!

believes the man behind the curtain any longer (or what liabilities another banker is holding). Another bailout, regardless of size isn’t going to solve this – at best it will offer temporary respite. Don’t expect a solution as long as the same folks (Dodd, Frank, Schumer, Obama) who were instrumental in causing this – are removed from the solution. Perhaps hauling a few Senators off in handcuffs from the Capitol building (along with a few CEO’s) will give the markets some sense of closure.

I would have more sympathy for the bankers if the LTCM crash hadn’t occurred. How many times can you use the excuse that “the models didn’t forecast the international contagion between banks” and still keep a straight face? When the market started to unravel at the speed of internet, the underlying assumptions to the financial models became invalid (just like during LTCM). Only this time it’s larger and more severe.

No now we are adrift in an unknown sea, firing cannons filled with taxpayer bailout money blindly into the darkness.

This too will fail.

Any further efforts will fail until we make changes to the underlying problems that caused this mess. Congress needs radically changes (a majority of members sent packing, future limitations to policy areas it can be allowed to tinker in). Additionally, dozens and dozens of banks and financial institutions need to fail.

It’s going to be dark for quite some time. It’s time to have faith in something besides government and the markets.

With the government intervention in the subprime market, the entire financial market will no longer function with an “invisible hand”. The principle has been broken and we are now witnessing

The global market that nolonger corrects itself.

This means that we are now forced to save every segment of the entire financial market, and that is based on our earlier solution, i.e., bailout.

If the government follows every trail of market distress (as the market crash as a trickling effect), we will end up into a so-called “government-controlled” market, a main component of Eastern European socialism.

Sadly, the Democrat-controlled Congress and the Democrat-influenced Bush Administration will be too “proud” to admit their mistakes.

The Democrats’ solution has never solved the problem (the lack of capability of the people to pay their mortgages). Same problem exists.

Funny, McCain proposal, if scrutinized, is more correct: Backing up the people, not the financial institutions. It’s not “pseudo-socialism”, it’s populism necessary in a time of financial crisis.

The markets aren’t making any sense because of the large forces being brought to bear on all sides. The market as a whole was overleveraged because the financials were overleveraged and real estate prices were decoupled from reality. So it wants a major contraction because the leveraged effect that raises profits is now raising loses instead. Counter-balancing that, the fed, and a good chunk of the world markets, are trying to undo the credit freeze. This tends to want to drive the market up. Half the financial advisers are saying sit tight, this too shall pass; the other half are screaming the sky is falling. The ever (un)reliable MSM is touting the sky is falling advisers because they believe that will help Obama win the election. That scares people and they sell. Some big money financiers smell the opportunity to buy really cheap because when others panic there is usually a good opportunity to make money if you have the cash. There are so many of these conflicting forces that no rational mind can figure out what is going to happen next, and there are no mathematical models to go to in place of that rational mind.

So what we are down to is faith: faith in the free market economy, faith in our fellow Americans to hold up their end of the bargain and work to support their families, faith in Congress, faith in our financial leaders, faith in the President and his advisors, faith that God will see us safely through to the other side. Of course, most of these have been under constant attack for the last 30-50 years and aren’t doing particularly well at the moment for the population at large. Right now I’m down to faith in just three on that list, one of which is wavering, and the other of which the ones I’ve lost faith in seem to be intent on killing. This is the sort of crisis we need a Ronald Reagan for. Not because he was smart enough to solve it; he’d be the first to tell you he wasn’t. But because he’d still give the same answer he did after the “great” crash of 87: “the markets go up, the markets go down,” and then he’d shrug his shoulders and smile. And as he did that, our faith in all of the above would return, and we’d get through it, just like we did in 1987.

Hey there blackhedd! Long time no blog. Listen, I have two questions for you, and I hope you take the time to answer them.

First, I’ve read that prices, including prices on oil and food have begun to nudge downward. The decline in the price of crude oil has been particularly noticeable, and I’m beginning to see that at the pump (I’m paying under $3.40 per gallon for the first time in a long time). Could all this be a sign of the deflation of which you speak? If so, couldn’t that be at least a mixed blessing for the low-income people, and people with fixed incomes?

Second, how are you doing? I know you’re one of those financial types who’ve been taking it on the chin recently, and I just wondered how you personally were holding up. Ordinarily I don’t care much about the Wall Street / big business crowd, especially during times like these, but I’d be very disappointed if you ended up flying off the top of a building somewhere. Those “postcards from the ledge” blogs you wrote a couple weeks ago kind of had me worried.

Hey, if you ever need to get away from it all, come down to Louisiana. Some crawfish, po boys, some hot boudin balls, and some LSU football might be just what you need. Take care man.

I was taught that the yield curve for US Treasuries represents the riskless rate across the range of maturities.

Basically, the treasury yield curve should be the lowest interest rate obtainable for each maturity. Your saying that there are now instruments trading at rates LOWER than treasuries indicates to me a loss of confidence in the US as a borrower.

You might check to see either which country or countries are connected to the swaps you describe. Doing so will give a clue as to the new center of “riskless” finance.

Maybe somebody here can tell me Im crazy.

I dont understand what we are doing that is different from what Japan did. The 700 bill plus the Trillion in Fed added liquidity is essentially a money gift, no? For simple sake, lets say we are buying something that is worth 1 dollar and are paying 100 for it, knowing full well its worth a dollar. We are giving the financials free money. Isnt this what they did in Japan? The only difference I can see is that in America, we are doing it at an earler stage then when they did it in Japan.

Didnt this stategy create a liquidity trap in Japan? Why are we following it?