Post Modern? Bank Run
The only thing we have to fear is fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.
Franklin D. Roosevelt 1932
My partner jokes that he has never seen me and Paul Krugman in the same place at the same time - so maybe we're the same guy. I'm not sure how I came to have so much common ground with the "liberal" economist, but our views of the unfolding of this crisis have been similar for some time. The Princeton economiser, buddy of Helicopter Ben Bernanke and Op-Ed Columnist for the New York Times wrote an editorial the other day calling the current phase of the credit crisis a "postmodern bank run."
What he meant is that in a panic over whose balance sheets they can trust, financial market players are pulling credit from each other and causing liquidity crises for institutions that might have actually muddled through this crisis had they had time to liquidate certain assets, raise capital etc. Although it may be debatable, several commentators have likewise commented that Lehman didn't have to go under.
Obviously, Krugman is spot on when one considers the collapse of AIG, the pummeling of Morgan Stanley and roughing up of even the hallowed Goldman Sachsin the last couple of days. We have moved from a credit crunch to a liquidity crisis, where leverage equals death - or at the very least dismemberment.
But what about those "old fashioned" bank runs? As you know, Noah and I have pulled no punches with our readers here on Urban Digs. I wrote a while ago about money market mutual funds "breaking the buck" (note that yesterday this issue returned) and at least in comments talked about moving money to a Fidelity muni money market fund months ago. (I figured muni funds couldn't own any toxic corporate paper and even a municipality that gets in trouble still has the power to tax. Plus I figured the vaunted Fidelity would make good if the $1.00 line in the sand were ever crossed, if only for reputational purposes.) But today I went a step further. I moved money above the FDIC insured amount out of Citibank into a local savings bank with very good capital ratios, that I know is a conservative lender. These guys are so conservative that when you move money into their bank they won't let you touch it for 30 days, as an anti-fraud measure. It's inconvenient to be sure, but as I left the bank it dawned on me that this kind of caution is exactly what I want from my bank these days. I had been thinking about doing this for months, really just to institute what I consider as a generally safe practice, but also due to the incredible credit mess.
This morning I talked to a friend who had just opened an account at Chase. He was moving money from a small bank that had received some negative press regarding its large exposure to GSE preferred stock. According to my buddy, the Chase branch was jammed and apparently most of the customers were doing exactly the same thing my friend was doing. In fact, they were running low on account opening packages. The man in the street isn't stupid and the natives are getting restless. We have seen what can happen when fear results in "frantic phone calls and mouse clicks, as financial players pull credit lines and try to unwind counterparty risk" as Krugman writes. But don't rule out the possibility of the little guy getting the same idea, especially if a Washington Mutual were to fail. Bloomberg News reported this afternoon that Wamu put itself on the block a couple of days ago.
Now I for one have never made money betting on the end of the world, and I believe that it is times like this when the Vix goes crazy and debt spreads go bonkers, which are usually great long-term buying opportunities. But having worked for a hedge fund, I also appreciate the need to hedge against the worse-case scenario. Be careful out there!
Posted by Anon
Thu Sep 18th, 2008 12:42 AM
You know, just to veer to the side a bit - let's talk about inflation.
Looking at the current situation, we are so very far from an inflationary environment it's staggering. If inflation is too much money chasing too few goods, how can anyone believe that evaporating cash and resultant hoarding is in any way anything but deflationary. Asset prices are cratering, the value of receivables has contracted, people are cutting consumption and the perceived value of assets is falling.
In my view inflation appears to.be behind us. Oil spiked, then sank. Ag commodities are off their highs. The inflation that's terrified everyone appears to have occurred already, driven by the credit bubble that killed the dollar, drove asset prices up, and has now exploded with monumental force. Even if the central banks print money, we won't get back to the levels of monetary value that existed at the peak of the bubble - not even close.
My point is that the central banks' printing money SOUNDS inflationary, but in actuality it's only going to partially offset the deflation that the economy will endure.
The only common thread is gold, which is up not because of actual inflation, but merely as a "safe haven" during times of chaos.
Curious to hear your and Noah's thoughts.
Posted by jeff
Thu Sep 18th, 2008 08:30 AM
Anon,
I have been arguing this point for months (with many vociferous detractors). You can't have a defaltionary asset spiral and inflation....unless you think the rest of the world goes untouched and the dollar tanks/commodities soar. I was wrong for a while, but continued to insist that if you think the US had dumb underwriting and excessive building/speculation your crazy to think the same wasn't going on around much of the world. I then chronicled evidence of this in India, China, Eastern Europe, UK, Spain, Ireland etc. These stock markets and economies have been getting destroyed among others. Destruction of wealth will be worldwide and the recovery will be slow and arduous. Many emerging markets with better savings rates have the potential to grow faster with lower inflation when the world eventually recovers, but it will take a while. (Korea seems to have learned from the Asian Contagion and although they will get hurt by export dependence they are probably in relatively better shape - but I am an amateur on the country so I would love feedback/critique) Oh by the way, Surprise! the petro countries (including Canada's tar sands projects) have grown expenses/costs nearly as quickly as oil prices have increased, the "correction" in oil is causing a cost squeeze. I hope they all saved some of the cash and didn't invest it all in skyscrapers and US private equity IPOs.
Posted by AL
Thu Sep 18th, 2008 11:20 AM
Jeff,
What is the problem with leaving money in WAMU if my money is FDIC insured? The are offering high interest. If they go under the gov sez I will get my money?
Is this not correct?
A
Posted by prague-noah
Thu Sep 18th, 2008 11:50 AM
anon - as you know by reading my pieces, I switched over to the deflation camp about, oh i dont know, 6-8 months ago...What I mean is, I thought that the fed might consider raising rates down the road if commodities didnt correct, which to me, would signify that global growth still was on fire and we could be importing inflationary pressures. That was my thinking in early/mid 2007. I started to get worried about deflation and less about inflation towards end of 2007, and in early 2008, totally switched to the very big problem of deflation; mainly credit/housing deflation.
clearly, if we define inflation as an expansion of credit/money supply and wages, we have none! But the inflation expectations that surged as a result of commodity inflation, for a time, worried me. Now the commodity bubble burst, global growth is clearly slowing, deflation is the problem. While gold is generally an inflation hedge, it does do well in deflation as well.
I own gold simply because I view it as money and a safe haven. Something that I think is ripe for this crisis. Yesterdays gold trade exemplified this. I often argued with a few of my contacts, you know who if you read this whose boyfriend is the shiny yellow metal, that gold WILL be traded as a commodity tied to all other commodities as an asset class, and that when the bubble burts, gold will be deleveraged just like oil, silver, etc..it did. but now the deleveraging seems over, and the chase is on. the other side of the argument my contact made.
The inflation we should worry about, is the inflation that is the end end result of all this stimulus and govt bailouts. its not over yet, and this is a worry for many years down the road, not in the next few years as we continue to battle forces of deflation.
how low will our dollar go? those who called for a sustainable dollar rally I think mis interpreted the bear market dollar rally as an adjustment to overpriced foreign currencies, which would be argued resulted from slowing foreign growth, which could then be argued as popping the commodity bubble. dollr strength certainly was not because our economy is strong! difference. we are in unchartered territory, and where we go from here is up in the air, as old rules may not apply.
I still will own my gold though. expect inflaton expectations to fall, and oil/gas to disconnect from precious metals at some point. At least that is where I stand right now, and that may very well change. I do NOT take one stance and stand by it no matter what. I adapt and will change a view if I see fit. If there is a fundamental principal I learned as a trader, it is to never get married to one way of thinking, one position and to learn to let a losing trade go if the world is clearly changing around you!
Posted by Colgin
Thu Sep 18th, 2008 03:29 PM
Guys, burtsing of the credit bubble and consequent reduction in asset prices of certain formerly wildly overpriced assets does not equal deflation. Could it lead to a deflationary spiral? Yes, it could; it is possible. But I think we are far away from that now. While I expect the value of my overvalued Manhatan apartment to be lower a year from now, I do not expect most good and services I consume to be lower and I am not hoarding cash in the expectation that I can get more for less later. In fact, I am still worried about the further debasement of the dollar (and the potential inflationary pressures that would cause) as a result of the inevitable Fed money printing in connection with our current Bailout Nation.
Posted by Anon
Thu Sep 18th, 2008 05:17 PM
Colgin - you are falling into the common trap that many others have as well, which is the belief that "if the Fed/central banks print money, we will definitely experience inflation" or hyperinflation, as even many folks believe.
Of course printing money is "inflationary", but it will only serve to partially offset deflation.
Here's why - the inflation/hyperinflation that so many are afraid of HAS ALREADY OCCURRED! We have already had 7 years of "too much money chasing too few goods", which was fueled by an enormous money supply consisting of monetary funds + CREDIT. That's right, we need to look at our standard definition of "money supply" and understand that in a credit-driven economy, it has to include credit. In Weimar Germany there was no credit, which is why so many people make the literal association of inflation and hyperinflation with central bank printing presses.
But credit is an enormous component of money supply (for purposes of our inflation discussion). This even stands up intuitively - it was all that cheap credit that drove asset prices up, including your NYC apartment. Now where is all that credit?
It's gone. *poof* What we've experienced is a contraction of money supply the likes of which we've never seen before.
So will the Fed's printing cause inflation? Doubtful. Will it offset deflation? Sure, somewhat. Think of the money supply as a bucket that just emptied out due to the credit crisis. Fed printing may cover the bottom of the bucket.
The inflation we have had was credit-driven, exacerbated by a weak dollar (which has firmed although is pulling back a bit), aggregate global demand for oil and agricultural/energy policy.
So I wouldn't make economic decisions assuming we're going to have double-digit inflation. We've already had it. This is a deflationary credit-contraction cycle. It's 1929 in the U.S., not 1933 in Germany.
Posted by Anon
Thu Sep 18th, 2008 05:23 PM
Sorry, 1923 Germany. But thank god it's not 1933 Germany either.
Posted by jeff
Thu Sep 18th, 2008 06:14 PM
Colgin,
I agree with Anon that money is being destroyed at a terrific rate and I think the risk of future inflation depends on whether we create too much money trying to fix it. By the way, they ain't making much more oil, iron ore, copper etc. and too much money + too many people in now freer nations chasing too few raw materials will come back easily when credit/consumption starts to recover. So i am with you on inflation risk in the future, but not now. However, what people are only just starting to realize is that this is in many ways a zero or near zero sum world, where credit creation can cause one country to grow faster for a while, until they catch down to the others etc. Innovation that creates more output is the only real growth, just having more consumers or giving them credit to buy stuff is in and of itself inflationary and self limiting in a limited resources world. That's why productivity and innovation are key. We are going to move to a world where the energy cost of producing items and the raw material costs become incredibly important and big winners will be those who can invent substitutes/productivity enhancements...the rest is just printing money. It also means that if the US does a swan dive (due to our imbalances) its actually better for us if everyone else does one too, it frees up world capacity...as crazy as that sounds. That said, on the way out of this cycle US credit creation will be restricted by de-leveraging and a fed that doesn't want to create another bubble.
Posted by jeff
Thu Sep 18th, 2008 06:18 PM
AL,
No problem leaving money with Wamu if you have less than $100k there as FDIC insurance will cover you up to that amount. That said from a practical standpoint getting at that money could be a short-term problem from a procedural/process standpoint, if not for the fact that a bankrupting of Wamu could bankrupt the rather piddly FDIC insurance fund. No doubt the government will step in to try to make sure people can get at their funds from a failing big bank, but to be safe I might keep some money at another bank or in a safe deposit box....don't bring it home if your robbed you won't be insured for it.
Posted by jeff
Thu Sep 18th, 2008 06:19 PM
AL,
No problem leaving money with Wamu if you have less than $100k there as FDIC insurance will cover you up to that amount. That said from a practical standpoint getting at that money could be a short-term problem from a procedural/process standpoint, if not for the fact that a bankrupting of Wamu could bankrupt the rather piddly FDIC insurance fund. No doubt the government will step in to try to make sure people can get at their funds from a failing big bank, but to be safe I might keep some money at another bank or in a safe deposit box....don't bring it home if your robbed you won't be insured for it.
Posted by Booty Juice
Thu Sep 18th, 2008 08:12 PM
I have a 5% CD with WaMu and couldn't care less if they go tits up.
My high yield CD with IndyMac was paid in full, principle and interest, within 10 days after they croaked.