Is it 2008 again or is it something else?

It all began around now in 2007 with the Bear Stearns conference call about the lousy fixed income market and sub-prime mortgage problems, government-caused but the banks were willing players while the getting was good. Shortly thereafter in 2008 Bear was gone, then Merrill, and oil went to $147 a barrel, which itself was nuts and unsustainable. (We recall Goldman and others said $200 oil was just around the corner, probably talking their book.) Then AIG cratered and got a bailout, then the government’s idiotic decision to let Lehman fail, then world credit markets seized up. In the background was a murky risk that turned a bad situation into a catastrophe, the roughly $60 trillion in Credit Default Swaps that ceased to hedge anything when counterparty institutions vanished from the face of the earth.

Today it’s China that’s the problem. Its slow growth and industrial overcapacity have oil at $40 (and maybe heading for $20). The big China banks have a lot of bad loans that they haven’t written off, as we’ve discussed at length (eg, here and here). Certainly the numbers are a multiple of official estimates. But so what? China’s loan issues seem to us first-generation bad banking (inflated collateral values, crony deals, bad audits, simple stuff).

Proposed Action Plan: use enormous central government borrowing capacity to refinance provincial debt, take the corporate write-offs, put in capital from the $3.6 trillion in forex reserves, restructure and merge companies in whatever the China equivalent of Chapter 11 is, and move on. We can’t understand why this is particularly bad for the US. The US is primarily a service economy. Industrial commodities 15% price slide in the last 8 months makes imports cheaper for the US and Europe. Industrial exporters like Caterpillar have already taken big hits. Technology continues to boom in unprecedented ways, making everything cheaper and faster. So what’s up with a 1000 point loss in the Dow in a week? Others are asking that question too.

Why then a panic that feels a lot like 2008 from time to time? (Single name CDS’s are apparently half what they were then.) Maybe China’s 260% of GDP debt is too hard to fix. Maybe the overcapacity in China has been underestimated by an order of magnitude. So what? It’s not our problem. Of course, as with CDS’s in 2008, perhaps the hedge fund industry of today has cooked up instruments that can cause just as much mischief. There’s either a big unknown out there that we just can’t see at present, or Fox Business and CNBC can return to showing commercials in the NYSE’s last trading hour. We’ll know more perhaps when Shanghai and Shenzhen open on Monday.

One Response to “Is it 2008 again or is it something else?”

  1. feeble mind Says:

    Some incoherent random thoughts:

    Yes. One wonders if this financial panic is “the big one”? Will this be the time that China pulls the lever for the fix and nothing happens?

    How long can China print money to keep the plates spinning? How much borrowing is it going to take?

    And then what?

    It has never been explained to me how an incompetent government (and all governments are incompetent) intervening in a financial crisis by borrowing and printing money is a good thing?

    Let the markets sort themselves out and let the chips fall where they may, it always worked in the past.

    As for the USA, perhaps it is true that cheapened imports from China is a net plus as opposed to the crushing our exports through devaluation? I dunno. I also don’t know the ripple effect of the Chinese crash on the US economy. Perhaps the effect is more than we imagine?

    As for the US stock market, it had . . . what? Tripled in value from it’s post 2008 crash low until the recent correction? Meanwhile, how much has the economy grown in the last 7 years? 2% per year? Did that kind of growth justify a doubling or tripling of stock value? I dunno. I am just an impecunious peasant. Seems like too much though. But here’s the thing, if one can’t make money in the stock market where can one invest their money and earn a decent return with interest rates so low? That’s a huge problem.

    I do know that panic is contagious, and that markets always over react, and that with great volatility comes great opportunity.

    However, whiteknuckle rides are never fun.

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