Bailout Plan Threat to Dollar ?
Today’s most noteworthy MSM piece is this Bloomberg article, titled. Dollar May Get `Crushed’ as Traders Weigh Up Bailout.
Excerpt:
Treasury Secretary Henry Paulson’s plan to end the rout in U.S. financial markets may derail the dollar’s three-month rally as investors weigh the costs of the rescue.
The combination of spending $700 billion on soured mortgage-related assets and providing $400 billion to guarantee money-market mutual funds will boost U.S. borrowing as much as $1 trillion, according to Barclays Capital interest-rate strategist Michael Pond in New York. While the rescue may restore investor confidence to battered financial markets, traders will again focus on the twin budget and current-account deficits and negative real U.S. interest rates.
"As we get to the other side of this, the dollar will get crushed,” said John Taylor, chairman of New York-based International Foreign Exchange Concepts Inc., the world’s biggest currency hedge-fund firm, which manages about $15 billion. . .
"The downdraft on the dollar from the hit to the balance sheet of the U.S. government will dwarf the short-term gains from solving the banking crisis,” said David Woo, London-based global head of foreign-exchange strategy at Barclays, the third- biggest currency trader, according to a 2008 survey by Euromoney Institutional Investor Plc.
Warning: Your currency may be smaller than it appears in the mirror . . .
Source:
Dollar May Get `Crushed’ as Traders Weigh Up Bailout
Bo Nielsen and Anchalee Worrachate
Bloomberg, September 22, 2008
http://bloomberg.com/apps/news?pid=20601087&sid=arSYa87HCb9U&
September 22nd, 2008 at 7:18 am
The more I look at this plan, the crazier it seems to get. I especially worry when I hear the Democratic leadership talking about adding a few things, like ‘foreclosure prevention’ or CEO pay restrictions in compensation. After writing, for the first time in my life, to my representatives in Congress, I jotted down a summary for myself:
[With apologies to David Letterman]
Top Ten Reasons to Support The Treasury Bailout Plan (the Goldman Sachs Freedom Act?)
10. The best way to preserve the free market is to have one man in charge of it.
9. Eight years of Bush administration economic policy has worked so well that we need two more years
8. It is important to guarantee each citizen’s constitutional right to borrow
7. We needed to replace all the hedge funds that have blown up with one bigger one.
6. There are plenty of unemployed investment bankers who need a job
5. What’s good for Goldman Sachs is good for the country
4. Those earlier bailouts were good practice, but now we need to get serious
3. Freeing the banks to loan more will surely mean people will line up to borrow more.
2. The best way to restore confidence in a debt-plagued system is to… issue more debt
1. At least we don’t have to say ‘No one knows what to do’ anymore
Four that didn’t make my cut:
It’s been over two hundred years since we had a King, maybe we need to try that again
If you can’t make people borrow, you can make their representatives borrow.
We apparently haven’t been paying the banks enough fees lately
If borrowing a lot of money didn’t fix the problem, maybe borrowing a whole lot more will
September 22nd, 2008 at 7:19 am
Barry,
I have posted that this is only rational. If I were the Chinese, I would run, not walk, away from the dollar.
September 22nd, 2008 at 7:22 am
Pmorrisonfl.
Nicely done.
September 22nd, 2008 at 7:28 am
And the Academy Award for Best Pig Makeup and Costume goes to …
[fumbles with envelope] …
Congressional Democrats !!!
Christopher Dodd will accept the award on behalf of Charles Schumer, who is hiding under Hank Paulson’s desk.
September 22nd, 2008 at 7:32 am
Realy, it is not necessary to risk the dollar:
Apparently the problems with the financial institutions are only minimal, and if the US-taxpayers don´t make their unprecedented gift attractive enough, Wall Street does not want it:
…But Mr. Paulson said that he was concerned that imposing limits on the compensation of executives could discourage companies from participating in the program [!!!].
“If we design it so it’s punitive and so institutions aren’t going to participate, this won’t work the way we need it to work,” Mr. Paulson said on “Fox News Sunday.”
http://www.nytimes.com/2008/09/22/business/22paulson.html?pagewanted=2&_r=1&hp
September 22nd, 2008 at 7:34 am
“The combination of spending $700 billion on soured mortgage-related assets and providing $400 billion to guarantee money-market mutual funds will boost U.S. borrowing as much as $1 trillion,”
Again, the mortgage bailout is NOT a “$700B” plan. It is essentially an UNLIMITED plan – the MSM can’t seem to understand this. Emporer Paulsen would be able to spend trillions under this plan, with NO OVERSIGHT or LEGAL RECOURSE by the taxpayer.
He can “buy high” and “sell low” all day long, continually replenishing the account as long as the daily level does not go over $700B. Like a water heater that has a 700 gallon tank – but has 5,000 gallons run through it a year.This should make every American shudder. We could all be bankrupt under the plan, IF the dollar survives this week. dc
September 22nd, 2008 at 7:36 am
As I am about to head out the door to the salt mines, I see that England, France, and Germany are already red this morning. Well, another big news item evokes only a one day bounce (albeit big bounce)…
Perhaps the “devil is in the details” after all..
good luck trading today.
September 22nd, 2008 at 7:43 am
The rumor behind the dollar’s decline was that the US was going bankrupt because of all the bubbles.
Sell the news.
September 22nd, 2008 at 7:49 am
Facts: no one serious really disputes that some kind of rescue plan is necessary. We can either proceed as has happened so far on an ad hoc basis and as companies fail step up to the plate or we can go to the source of the problem which Paulson is doing. That’s the easy part. Then it gets difficult and as ever the devil is in the details. Some form of this plan is going to pass but there’s clearly no way Paulson is going to get a blank check and he shouldn’t. To take one contentious issue does anyone really think it equitable for say 750 billion of trash to be taken off Morgan Stanley and Mack walks away at the end of the year with his usual $25million. It’s neither politically or morally justifiable and it aint going to happen. My guess is the plan gets passed but in nowhere near the form Paulson and Wall St want. Now to the dollar. Of course it’s going to take a hit when we add another trillion or two to the public debt and the country moves sharply into recession. This is a surprise.
September 22nd, 2008 at 7:56 am
Douglas Watts | Sep 22, 2008 7:28:09 AM
I’ll leave others to judge whether you have a future on SNL, but aren’t you ignoring the fact that this mess is almost entirely the product of the Greenspan Fed and the conservative ideology which has been ascendant for the past eight years. Whatever happened to the ownership society, we haven’t heard that one lately.
September 22nd, 2008 at 8:20 am
Posted by: John(2) | Sep 22, 2008 7:56:02 AM
–
My point is that Congressional Democrats have the votes and power to craft virtually any bail-out plan they wish, or none at all, and to slice and dice Paulson’s proposal in anyway they wish. That is the benefit of being the majority party in Congress and controlling committee chairs. Thus far, Congressional Democrats seem strangely unaware that they are actually in control of the game and can make the rules. They are still acting as if they are the powerless minority.
Strange, it is, that.
Cheers.
September 22nd, 2008 at 8:25 am
We used to think the danger was Y2K. It turns out it’s Y2.008K
September 22nd, 2008 at 8:30 am
“If we design it so it’s punitive and so institutions aren’t going to participate, this won’t work the way we need it to work,” Mr. Paulson said on “Fox News Sunday.”
Good! DON’T PARTICIPATE. Leave them out! Get the $161 million back that Stan O’Neil scammed out of Merrill after he screwed the firm up.
September 22nd, 2008 at 8:32 am
http://www.tickerforum.org/cgi-ticker/akcs-www?post=62058
Way to Go Don, Mike and the long haired clown.
Schiff has been right on the dollar all along.
September 22nd, 2008 at 8:35 am
This another important item on Bloomberg
http://www.bloomberg.com/apps/news?pid=20601039&sid=arxBaDnXNMxY&refer=home
September 22nd, 2008 at 8:57 am
I could very easily be Cliff Asness here.
http://executivesuite.blogs.nytimes.com/2008/09/21/cliff-asness-is-mad-as-hell/
My wife was introduced to the movie Network by me, and I have heard the mad as hell many mornings recently when she and I review the early am business news on the computer…
But she, thankfully, doesn’t get mad at me.
September 22nd, 2008 at 9:17 am
Bruce,
You’re likely correct in your suggestion that the Chinese control the fate of the USD. As such, I find it highly unlikely that these moves have been put out there without having had a quiet word with China first.
September 22nd, 2008 at 9:48 am
I think the Dems should fight for some oversight but I disagree that they are in charge. Nobody is in charge of this mess because there is no transparency. Who knows what lurks on the balance sheets of banks and investment companies. Paulson has set himself up as the fall guy (does anyone think this will work?) and the Dems are intrigued by the possibility of skating by again. Ah politics.
The other factor here is that the proposal is so unlike anything we have ever done, most observers think that the problem is far greater than advertised. When Bill Kristol asnd Krugman sort of agree that this is not good, you have to scratch your head and say “no s—”.
September 22nd, 2008 at 9:56 am
This plan is so preposterously bad that Paulson’s resignation must be demanded immediately. It’s obvious he intends to grossly overpay for this bad paper but he doesn’t come out and say so because he knows that would mean rejection. If Congress passes this we must vote against every incumbent who supports it.
Less than ten days ago he assured everyone that the banking system is sound. Now he says we are days away from meltdown. The man is an incompetent liar.
September 22nd, 2008 at 9:57 am
congressional democrats or not, the fact is that spin is what controls congress. it is how easy it is to turn voters for or against a group of politicians based on their historical policies. that is why voters love rebates and hate taxes.
its ignorant of anyone to pin this on any one ideology when the fault is inherent in the ystem.
September 22nd, 2008 at 10:24 am
FWIW, 30 more no-shorts:
NYSE Broadens Short-Selling Ban to 30 More Stocks
We certainly don’t want Moody shorted because they are one of the founders of this feast. I didn’t realize that their shrinking stock price would endanger the entire economy.
September 22nd, 2008 at 10:31 am
The bailout bill threatens our form of government more than anything else.
September 22nd, 2008 at 10:37 am
By the way, all of this ridiculous talk about China running away from the dollar is ridiculous. China is broke. You’ll wake up one day and read it in the headlines and realize you believed all of the b.s. that Wall Street wanted you to believe.
September 22nd, 2008 at 10:38 am
The stock market’s down, even w/out short sellers. Hmm. Imagine the tsunami coming when folks realize short selling ‘aint the cause, it’s the effect.
On the other hand, credit default swaps on US debt are way up: http://www.bloomberg.com/apps/news?pid=20601039&sid=arxBaDnXNMxY&refer=home
At least we’ve still got nukes.
September 22nd, 2008 at 11:08 am
bdg123,
Well, I would take a little different take on your China is broke statement. China is an emerging country, and very poor. Granted. China has inherent problems just because they are communist. Granted. However, China is our main manufacturing hub for everything from car parts to t-shirts, and therefore they are definitely not broke.
Something as simple as taking dollars as they come in and swapping them for Euros and Yen would put enormous pressure on the USD..again, they should be seeing this for what it is….a huge debtor nation that has refused to take their medicine for 40 years.
Can’t happen to us? The British prior to about 1910 probably felt much the same.
September 22nd, 2008 at 11:54 am
China has in excess of $1 Trillion (w/ a “t”) worth of foreign reserves, mostly in dollar-denominated assets. (Check out The Economist web-site, or the back pages of its magazine for the latest figures.)
The last thing China wants is to see its dollars turn worthless, which can also be said of the rest of the creditor nations, like the Saudis and Japan.
Paulson’s plan therefore won’t immediately destroy the dollar–the dollar still carries a huge liquidity premium for its status as the international trade and reserve currency. Paulson’s plan, in fact, leverages the dollar’s international reserve currency status. It would not have been conceivable, for a country, e.g., like Argentina, to pull off this shell game without severely crimping the local economy. Paulson thinks (hopes) the strength of the dollar will carry him through.
International reserve currency status is closely tied to military might, specifically the power of a blue water navy to enforce contracts and keep trading lanes open. Like Bruce alluded to, sterling was the IRC until the British empire crumbled.
As I’ve said before, at least we’ve still got nukes. Or, maybe it should be, “at least we’ve still got nuclear-powered naval carrier groups.”
September 22nd, 2008 at 12:40 pm
guys,
aparently a deal was made with China. They will finance the bailout but they will get Taiwan.
http://www.moonofalabama.org/2008/09/selling-taiwan.html#comments
My guess: the chinese made a very good trade…
September 22nd, 2008 at 12:43 pm
Is Douglas Watts really Rick Davis? How’s it going there, Rick? Quite honestly, I would love to see Congress give Paulson the middle finger on just about everything, but the Dems are politically trapped on the bailout, just like on offshore drilling. I wish there were a way Congress could stall until after November 4, then we can all give the middle finger to Rick Davis…I mean Douglas Watts. Actually, let me give one to you now anyway.
Donkei – I agree on the nukes argument (meaning, that’s pretty much what we have going for ourselves), and partly on the Chinese not wanting to make their dollars worthless. I don’t think anyone wants a precipitous sell-off. But at some point, the Japanese, the Chinese, the Saudis, the Russians will figure out that we are trading for real manufactured goods and raw materials with the physical equivalent of toilet paper. Clyde Prestowitz figured the dollar was overvalued by 30% or more against the Asian currencies because of Japanese and Chinese central bank protection of the dollar, but we will not be able to rely on that indefinitely.
Enjoy your Republican free markets, everybody.
September 22nd, 2008 at 1:04 pm
Bruce,
That’s an amazing logical argument. Too bad it’s a logical fallacy. Watch and learn.
September 22nd, 2008 at 1:48 pm
CNBC sucks:
Agreed. What can’t go on forever, won’t. And it’ll eventually be hard to fuel nuclear-powered aircraft carriers with toilet paper.
September 22nd, 2008 at 2:50 pm
CNBC, the Dems are NOT trapped on the bailout — not these particulars. As I told my reps, if they vote for this, they lost my vote.
This is the Dems’ opportunity to step up. If they buy the Paulson F-150 at this point, they’re utter s*** in my book.
September 22nd, 2008 at 6:29 pm
I have to apologize to Douglas Watts. I looked at his blog and blogroll links, and while I am still not sure, I think I made a mistake in accusing him of being Rick Davis.
Here is my take as a former Republican, speaking to my new Democratic compatriots:
Will you people stop being so fussy? Geez, we have an election coming up. I remember all the progressives’ consternation about Barack’s shift on FISA…the man is trying to get elected, for Pete’s sake! Let’s get our people in power AND THEN worry about fixing things the right way. You have to play the game in politics – the people are too stupid.
Only when smart people (like most of the people on this blog) divide do Naval Academy flunkies and community college and tanning booth bimbos get the chance to rule the world.
September 24th, 2008 at 10:00 am
It all seems to technical for me but one thing is for sure: As long as the US dollar weakens we will be buying more from your country. I import goods from the US to Colombia and our Peso has gained against the US dollar. What is the logical thing to do? Buy more, buy currency to lock exchange rates, go on vacation to the US (its cheaper than going anywhere else) My point is that the US needs to look outside its borders. there is a lot of resources waiting to be spent in the US. This will surely balance things out.