Asia and Europe call for joint action on markets

[Coventina]

Source: International Herald-Tribune

HONG KONG: Heads of state from across Asia and Europe called for a coordinated response to the global financial crisis in a two-day conference in Beijing, an event that underlined China's growing role as a diplomatic counterweight to the United States.

But the leaders fell short of offering specific solutions to the current economic troubles, which have shown no signs of slowing. On Sunday, the central bank of South Korea, where stock markets and the currency have been plunging, said that it would hold an unscheduled monetary policy meeting Monday morning, Reuters reported.

The bank, which gave no other details about the meeting, is under pressure to cut interest rates for the second time this month. Top government financial officials met Sunday with President Lee Myung Bak and agreed on "the need to stabilize market interest rates and to provide sufficient liquidity to avoid corporate bankruptcy," Reuters quoted a senior presidential economic policy aide, Bahk Byoung Won, as saying.

In the difficult balance between preserving financial innovation and ensuring adequate regulation to prevent crises, the presidents, prime ministers and other leaders assembled in Beijing tilted toward more regulation in their meetings Friday and Saturday. A joint statement issued at the conference did not suggest how to accomplish this, but it said "necessary and timely measures should be taken."



Read more: http://www.iht.com/articles/2008/10/26/business/summit.php

[ayeshahaqqiqa]

1. A question from someone not well versed in economics

OK,I understand why the US markets tanked--it had to do with housing loans. But how exactly has that effected banks world wide? Were the risky loan insurances sold to international banks as something more valuable than they were? Where were the bank regulators in those other countries to stop their banks from investing in risky schemes? Or is the international banking collapse based on something else?

[WriteDown]

2. As far as Europe is concerned....

mortgages were just as inflated as they were in the US. Houses in England and Spain make places like NYC and San Fran look downright reasonable.

[Coventina]

3. Same in Asia, particularly China.

Although I don't think the bubble was quite as big.

[ayeshahaqqiqa]

9. Ah!

So the housing bubble was world wide, along with the shaky financing and stuff. Thanks for the explanation!

[Demeter]

19. It's More a Credit Bubble, But It Was Going Around

[Demeter]

4. The US Shadow Banks Made Massive Amounts of Loans

securitized them (a form of packaging and marketing) and sold them to EVERYONE all over the world, with all kinds of claims that they were as good as cash, and just as liquid, etc, etc. This fraudulent scheme unravelled when people couldn't keep up their mortgage, car, credit card payments due to job loss, disaster, or just never having the resources to begin with, although they got the loans anyway.

We papered the earth with funny money, in other words. And the "financiers" took their cut off the top and got very very wealthy. So other nations, like Iceland, for example, decided to do the same thing. And now it's all melting like snow in August.

Now the whole world is afloat in bad loans, bad securities based on these loans, and to add insult to injury, bad quasi-insurance policies (called credit-default swaps, derivatives, and other non-descriptive titles) where somebody made a bet that something bad would happen, and somebody else (like AIG or Lehman Bros.) took that bet, but never had enough in the pot to cover these bets when everything went wrong.

The ensuing chaos froze up the flow of credit in the markets, so business, which depends so much on loans for everyday costs, since cashflow doesn't do the trick, and nobody funds anything out of receipts or profits (that's so 19th century!) anymore, business came to a screeching halt.

Banks who couldn't pay their creditors went under, depositors panicked and made runs on other banks out of fear, and we're off to the races to see which nation hits Depression first.

What is a Shadow Bank, you ask? GE is a shadow bank. GM is a shadow bank. The 5 late, once great investment banks were shadow banks. Everybody wanted to get out of production with its materials, labor and tax costs, and into finance, where the profits were high and the costs minimal (because being a financier meant no warranties, no returns, no repairs).

Turns out though, the shadow banks are forced to buy back their fraudulent securities, if the customer has a big enough stick, or rework the mortgages, or go to jail, or go out of business.

30 years of madness are quickly being undone, with our Fed REserve banks and Tresury SEcretary making futile gestures, akin to pumping blood transfusions into a body with its head cut off....


There's a lot more to this. We discuss it on the Stock Market Watch daily posting in LBN, and the Weekend Economists, in the Editorials and Other Articles section on the weekends...

If you read this far, hope to see you there!

[WriteDown]

5. Spoken like someone....

Who has not been across the pond in a decade. They had identical conditions there.

[Demeter]

6. I Concentrate on the US By Choice

Unfortunately, the US Business schools contaminated the world, just as the US bank "securities" did.
And I did mention Iceland, who took it a whole step farther than any other nation.

And it's been 2+ decades since I crossed the pond. A case of Life happening while one makes plans...

[WriteDown]

7. I wouldn't necessarily say...

that the US business schools contaminated the world. Greed is pretty universal. So is the tendency for people to buy much more than they can afford. Life does happen. No doubt about that.

[brentspeak]

14. I would say that U.S. business schools have certainly helped contaminate the world

The doctrine of greed is pretty universal within American business school curricula, though it wasn't always the case in the past - say, prior to 1975.

Your statement regarding "the tendency for people to buy much more than they can afford" is an already tired old trope in the current debate concerning the worldwide financial collapse; the average working person is not responsible for the gross-scale malfeasance committed by members of the global banking system.

[ayeshahaqqiqa]

8. Are you, perhaps, Paul Krugman?

No, you're better! You did an excellent job answering my question and having it make sense to me. THANKS!

[Demeter]

10. Krugman's Explanation Would Be Oriented Differently

this is very much an "outside looking in" view.

[readmoreoften]

11. It is not the inflation of global property causing the crisis. That's so simple that its incorrect.

Although it's true that property is likely inflated in Europe, that's not what's causing the crisis. It's the old irrational exuberance at the heart of it.

Simply put: banks and corporations used mortgage debt as security for investments that were tantamount to gambling based on money that "could exist in the future" if a house continued to gain profit. In other words--and to seriously simplify a problem that even experts are trying to wrap their heads around--companies and banks made bets based on what the value of your house would be in the future (say, 30 years for a 30 year mortgage) if the market kept expanding reasonably. When a person defaults on their mortgage, then the bet is called in and that imaginary money doesn't exist anymore.

So now, let's say you were calculating profits for your company based on the idea that a certain reasonable percentage of your imaginary mortgage-based money would come to fruition, and you used that imaginary future profit to leverage other debt or swap it out for other investments. If thousands of businesses do this to one another, then no one knows who really has money and who only has imaginary money. This creates a paranoid state. Who has the money? How much money even really exists?

To make things worse: many banks discover that they are either puffed up by imaginary money or have given loans to other banks or businesses who are puffed up by imaginary money. The banks respond by holding onto all the money they do have because they're afraid they won't get it back if they loan it out. When the banks don't give money out, then businesses who aren't even involved in all this nonsense start to fail because they can't get the upfront money to buy what they need to stay afloat while they're waiting for invoiced customers to pay up. So now real businesses are hit. So are all the businesses that catered to banks and businesses that went under: airlines/resorts, jewelers, restaurants, etc. This means more people lose their jobs, which cause more foreclosures, which cause more of the fake fantasy economy to be exposed for what it is. AND, in addition to this, property values in general decline, which means even people who are not losing their jobs and pay their bills, etc, are now losing value in their houses. Some of those people are now getting upside-down on loans because of the general economy. This means that, at worst, they're stuck where they are. And because the banks aren't giving out money, there aren't enough new buyers qualified to purchase these cheaper homes because no one wants to lend.

So that's a simplistic version. It's basically a downward spiral caused by speculation and irrational exuberance. So these economic problems are much much bigger than actual housing issues per se.

You might say "well why can't the fed just print more money?" Well, when they do that, currency itself becomes devalued and it purchases less against other currency. If the dollar were to, say, drop by 25%, then products from China and Japan go up in price 25%.

In a spiritual sense "we're all interconnected" and in many ways, those who ran the economy like sociopaths are now taking us all down. That's how I look at it anyway.

[ayeshahaqqiqa]

12. thanks for all this detail

Now I understand better what is going on.

[Demeter]

16. Good Summary!

[Odin2005]

13. IMO most finance is the creation of faux wealth while doing no useful work.

The financial "industry" is a giant Ponzi scheme making nothing but fake money the super-rich can then turn into real assets leaving everyone else with worthless paper.

[Demeter]

15. We Are In Complete Agreement There

And yet, people are buying the products all the time...believing in the sizzle, getting bitten by the mousetrap under the bait.

[Odin2005]

18. It seems that there are always people that think you can get something for nothing.

That's what disgusts me about the glorification of investment and the stock market. As far as I'm concerned earnings from stock market investments is theft from labor, the people that actually do useful work and create wealth. The Investor Class is nothing but a bunch of parasites.

[WriteDown]

22. You can't possibly be serious....

Investment is a vital part of any economy. So you would rather all companies be private?

[readmoreoften]

21. I think, in fact, that's the definition of finance.

It often even applies in non-profit settings.

[unkachuck]

20. is this correct?

....wall street and the shadow investment banks were making, bundling and selling these shakey mortgages world-wide to suckers and each other with the assumption housing values would never go down....

....then they would issue unbacked credit default swap side-bet insurance to each other that if the housing market collapsed they would all be covered....

....so the ones making the mortgages, selling the mortgages, insuring the mortgages were the recipients of the side-bet insurance if the housing market failed....so the incentive was by some, to crash the market, collect the side-bet and leave the others holding the bag....

....is this what happened?

[jazzjunkysue]

17. Too bad they didn't call for joint action on B*, 8 years ago....

Will someone please overthrow us if McCain rigs the election??!!??!!