Never fear, noble bankers!  Just because you’ve fucked up our economy and taken our nation’s money to bail youselves out of the mess you made, that’s no reason not to celebrate this Christmas time with 20 billion dollars of bonuses.  God bless us, every one!!!

Once again with the caveat that I am most certainly not an economist, I will endevour to explain some of what is happening in markets right now in a way I hope makes sense to people.  I do this in part because I’ve been working to try to make things I’m learning over the months more accessible for those trying to figure out what’s going on.  Basically, I’d like to make things easier on people than they’ve been on me.  Also, I attempt this because I’ve overheard friends of mine discussing the Stock Market’s rise and fall as though they were indicators of anything accurate.  It isn’t, but that’s what we’ve largely been expected to believe.

In the particular case of this particular financial crisis, the number to watch is not the NASDAQ or the Dow.  It is the TED.  The who?  The T-bills to Euro-Dollar comparison rate.

In simplest terms, you can think of the TED as a benchmark of the willingness of banks to lend to other banks globally.  It’s based on a comparison between the current rate of interest on a Treasury Bill versus what’s known as the LIBOR, or London Inter-Bank Offered Rate (of interest, in other words).

The LIBOR is the rate at which banks typically lend to one another.  The TED is the difference between that rate and the T-Bills interest rate, which is considered to be a relatively stable benchmark.  As the TED goes up, things get bad.  Typically, the number hovers around 30 (or a 0.3% difference between the two).  Currently, it’s at around 465.  That basically means no bank is willing to lend to any other bank.  Until that number drops, our financial woes continue unabated, irrespective of the Dow’s current position.

So, that’s the bottom line of the TED and why we need to keep an eye on it.  As a basic explanation for why the rate is so high, think in terms of your own bank loans, like a mortgage.  I guess we’ll pretend the whole Subprime irresponsible lending thing never happened when we discuss this. . .

If you apply for a mortgage through FHA, you will be required to provide proof of employment because the bank would obviously like some proof that you will have the capital to pay back the mortgage.  If the amount of the mortgage relative to your income is fairly high or if you’re employment history is short, then there is a good chance you may now or in the near future have a problem repaying the loan.  If they give you a mortgage at all, the bank will probably enforce a higher interest rate on you.

The LIBOR works in roughly - very roughly - the same way.  It is the amount of interest imposed on a loan between banks.  In our current situation, there is a very good chance that some of the banks who have invested in risky enterprises may collapse.  And that’s a lot of banks, worldwide.  Moreover, those same banks are holding onto assets that might have otherwise been used like cash (like easily-tradeable capital) that are now worthless.  So, these banks have very little capital on hand to repay loans and are at risk of going belly-up before they’re done paying.

The relative risk of lending to these institutions has gone up dramatically.  At the same time, banks who might do the lending don’t necessarily want to be left with IOU’s instead of cash while they themselves are in danger of collapsing.  That’s still more incentive to raise rates.  Unfortunately, it now appears that rates have been raised to the point where no one can get a loan from anyone else.  Since lending between banks is the kernel from which most world economies draw capital, that means a frozen credit market equals a frozen economy.

So, there you go.  If you’d like to read more about the TED, you can check out this Wiki and this blog post, which I found to be quite instructive.

RochesterHompage.net has the video of George Bush’s address to the nation in the Rose Garden, updating us on the status of the recovery effort.  He announced what amounts to a three-point plan - if by plan, you mean flavour of the moment thinking - for unfreezing the credit crisis.  Among those plans and most striking to me is the plan to have the FDIC insure “most new debt” by insured banks.

He says that all his plans include “protections for the taxpayer,” but how is that possible when he’s also putting us on the hook for every failed loan?  Keep in mind Felix Salmon’s take on the current state of the capital investment plan, which is where the banks will doubtless be getting the money for the loans in the first place.

We’re living in scary times, my friends.

Late Update: Via TPM, here is a Post article that is of considerable granular detail about the bailout.  Looks like there’s actually a stipulation in the loan agreements that prevents banks from renegotiating golden parachutes, but leaves the golden parachutes that are already there alone.  Dandy.

McCain seems to be batting a 1000 on this financial crisis.  In the town hall “debate” of last night, he proposed buying up failed mortgages and “renegotiating” with the borrower on the value of the home as it is now.  Brad Delong gives us a rundown on why that’s such a bad idea.  In short, what McCain proposes to do is buy the bad debts from the banks that created them at face value, then become the banker to every bad debt borrower out there.

Apart from handing over billions of dollars to the irresponsible lenders, the problem with this that DeLong does not mention is that home prices are still falling.  So, the person who seems fine at the moment may be in trouble in a matter of months.  Meanwhile, it is the failing value of the homes that was the trigger for this whole mess in the first place.  The McCain plan does nothing to solve this problem and so seems to be treating the foot of a man with a broken leg.

Like most blogs, this blog often takes up space discussing the media, but I don’t like to think of this site as a media watchdog, particularly.  If the media is discussed, it’s often because in order to discuss the story adequately, the media’s role in it is necessary background.  I criticize local media even less because, frankly, I don’t pay attention to much of it.  Often on issues of national import, where a great opportunity lies to make those issues local, the opportunity is missed by a media culture that chooses to view Rochester as exceptional.

And if there’s one issue in particular where the local media adds no value - and in some cases, seems to have actively engaged in doing the Rochester public a disservice - it is the subprime lending crisis, which has now bloomed into the global credit crunch. This story has been out there for a year and a half, but you’d never know it by the local media coverage.

When the shit really started hitting the fan and the story became impossible not to cover about eight months or so ago, the story locally became about those people in California and elsewhere.  The D&C, in particular, ran stories claiming that because we don’t have the swings in real estate values other places had, we’d be just fine.  Rochester, we were told, was exceptional in that way.  We’re just a sleepy little town that the “Big Issues” don’t affect.  We’re not like California, heavens no!

When reports came out on how Rochester and Monroe County were being affected, the local media promptly reported that the report came out. . . .  no analysis, no deeper coverage, no exploration of the places affected by the Subprime foreclosure rate, just a report that the report happened.  No one noticed, for example, that foreclosure rates bloomed not only in the inner city (as is in keeping with the obliquely racist and classist narrative on the national level), but in the outlying suburbs as well, particularly on the east side.  It might have been illuminating to Rochestarians to know that it wasn’t just a poor people problem, it wasn’t just a brown people problem.  It might have prepared them for what’s come next if they’d known how big a problem this really was and is.

And now that the credit crisis has moved into a new and more malignant phase, freezing global credit markets and causing Wall Street to tumble, the story has moved to the Business section, where it can be once again ignored.  The direct line that could be traced from Medon, through JP Morgan Chase, through Avenida D, through - yes - California, and through Washington was never traced.  Best of all, this morning, the creme de la creme of benighted journalism steped in with the following doozie:

Markets oblivious to rate cut | democratandchronicle.com | Democrat and Chronicle

For the second consecutive day, the Federal Reserve took action in hopes of staving off a global financial collapse. And again U.S. financial markets failed to calm, extending losses for a sixth straight day while shrugging off a Fed-led, globally coordinated half-point cut in interest rates.

. . .

“The fundamental problem here is around expectations and around psychology,” said economist Kent Gardner, chief executive of the Center for Governmental Research in Rochester. “The interest rate cut will stimulate demand to some degree. They’re trying to calm the waters.”

Wow.  It’s the Markets that are oblivious, are they?

Imagine this: you go to Gentile’s Farm Market in Penfield and discover that they’ve sold out of corn.  They announce to you that, in order to sell more corn, they’ve reduced the price by half a percentage point.  You leave and wait till there’s more corn to buy.  And the next day, the D&C puts out an article proclaiming “Local Corn Consumers Oblivious to Corn Price Reduction.”

If there’s nothing to buy, the price doesn’t matter.  There’s a credit freeze sweeping the planet - banks are afraid to lend even to other banks, hence there is now or soon will be no credit for the rest of us.  It’s as simple as that.  Meanwhile, the rate cut is there to protect the *financial* markets, not Wall Street.  Normal lending and borrowing are not conducted on the Stock Market: stocks are sold on the Stock Market. ⁱ  Further, if companies are maintaining profits by holding investments - and many do - then those holdings may be now worthless and the stocks must necessarily fall in value.

But the local media has gone to such lengths to bury their collective heads - and our own - in the sand on this issue, it’s not difficult to imagine that they’re bound to be uninformed.  Local media continues to be noticeably absent on the issue, preferring instead to rebroadcast wire stories without the slightest context.  The crisis continues to be treated like just another Business Section non-issue that people don’t care about.

The D&C for it’s part has been studiously unwitted in its modicum of reporting and now, after years of supporting Republican candidates and swallowing Republican talking points, they remain true to type and adopt the same faux-Populist outrage as their Conservative political counterparts.  They now write headlines which seem to tremble with rage over the “oblivious” Wall Street.

There are no mysteries in the current crisis and no surprises.  All of this has been written on the wall for a long time, now, for those of us who cared to look.  What’s more, it’s been written on this blog, as I’ve done my best to try to report the goings on as they’ve happened.  I’m one guy with a day job and no real resources to speak of and as far as I can tell, I’m doing a vastly better job of reporting the issue than the entirety of Rochester media.  Prove me wrong, Ed.  I’m not saying I’m doing a great job - I’m not - I’m saying my half-assed job is embarrassing local media.

Notes:

1. Sheesh, I would have thought that fucking-a obvious. [↩]

There is no precedent for such a thing as this in our history.  The Federal Reserve, the Central European Bank and the central banks of Britain, China, Canada and Switzerland have all coordinated a collective rate drop of about a half percent on their prime rates.  This means that interest rates on loans from these central banks are lower by a half a percent, and since most business begins with banks borrowing from central banks, this means rate cuts across the board for most things which are not fixed-rate loans.

What effect will this have on markets?  Well, short term, it’s meant diddly shit.  The markets in Asia and the US plateaued breifly and continued their steep decline for a fifth day straight.  MSN Market Dispatches is reporting that the Dow has lost 1400 points in that time.  Yikes.

Long term, I don’t really see where this helps, either.  Sadly, this move has to be seen at least in part as a desperation move, not a decisive move in the right direction.  That’s because the problem with the credit market is not now nor has it ever been a question of interest rates.  It’s a question of liquid assets which no longer exist.  Lowering interest rates does nothing to stop that problem.  Until there is adequate liquidity in the markets, I’m afraid the problem will persist.

The Federal Reserve’s move to begin issuing commercial paper seems, to me, a far more sound decision.  That’s because commercial paper is what gets most businesses by their day-to-day operations, like paying employees.  The down side here is that they’ve requested 99 billion dollars to do this with, but that market is about 1.7 trillion dollars worth of trade.  That means someone’s going to lose out.

Still, if the Fed can maintain the workaday operations of our nation’s job engines, then what we’re seeing is really a massive investment opportunity in the making: after all, if the stock market continues to plumet, stocks bought cheaply in the next few days will be worth a barrel of monkeys come the upswing.  Let the stock markets dive.  We need to worry about monetary policy and banking liquidity at this point.

Update: Paul Krugman chimes in with far more salient points than I: basically, the rate for CP (commercial paper) is not tied to the Fed rate anyway, so it’s not going to do much good.  Why, then does he favour the move?  Lots of comments there asking the same question.

The Federal Reserve Bank has announced that it will be funding short term debt for businesses - commonly referred to as “commercial paper” - in order to free up capital.  What does this all mean?  Another sop for the rich?

Well, yes.  But they’re all sops to the rich, so get used to seeing that.  But the point in this case is that businesses often use short two- or three-day loans to pay their employees while they await the week’s returns on sales or whatever.  This market, like all lending markets, has begun to get a bit frozen over, and that means the potential of companies not being able to pay their employees and inevitably having to let some go.

The Fed is stepping in and - with a loan from the Treasury of some estimated 99 billion dollars - providing that short term lending vehicle to keep capital flowing to the people who are going to ultimately be the saviours of this crisis: American workers and consumers.

So, I grant that I don’t know all that much about economics.  But it seems like this is the sort of thing we want the government doing, at least temporarily.  I find it odd that companies need to use two-day loans to pay their bills, but I’m sure it’s all very technical.  And this doesn’t seem like the type of lending that’s going to lead to the government losing it’s shirt, since we’re talking about two-day loans of relatively small amounts.

But we’ll keep an eye on it.

Interesting news from Europe today.  It seems that most European nations do not quite have the robust deposit insurance that the United States government provides its citizens.  In fact, some only insure deposits up to a measly twenty thousand euros.

That was then, this is now.  Germany has announced it will be insuring all deposits of any amount.  That of course has people worried that the Germans - as the financial and banking powerhouse of the European Union - might know something the rest of us don’t.  Based on my reading of the article, it seems that the ripples of something really huge are beginning to show themselves in all quarters of the European Union.  France, Germany, Italy, the UK and Spain all seem to be bracing for a big fall.

See?  We do still have influence over world affairs.  sheesh.

Great news for all you rich people!  On the announcement of the bail out, the S&P Financials market soared 19%.  Just though you aught to know.

Four Fannie Mae execs resign.  Wall Street execs who created the Subprime mess in the first place tsk, tsk as usual