Transcript Day 14 PPT

International Trade
Global Economics
ECON 15576125
Dr. Andrew L. H. Parkes
“An Economic Understanding for use in Business”
Day 14
卜安吉
From Paul Krugman’s Blog
October 25, 2008, 2:52 pm
 Big
rescue money
 http://krugman.blogs.nytimes.com/

Via Yves Smith, an important article in FT
Alphaville about the inadequacy of the
bailout so far: despite the big-sounding
numbers, financial institutions are losing
capital faster than governments are
putting it in.
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Paul with Oliver Blanchard Head of
the IMF
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Paul’s comments
I’d add a couple more data points: Japan’s bank
bailout in 1998 was more than $500 billion, in an
economy whose dollar GDP was only about 1/4
that of the United States today. Do the math.
And the just-announced IMF loan to Iceland is
$2.1 billion — that’s for a country with only
300,000 people. Both of these numbers seem to
suggest that an eventual outlay of $2 trillion is in
the realm of possibility.
 Just saying.

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Asset losses vs. Bank Capital
The following graph is Bloomberg’s chart of the day and has
been reproduced by Paul Kedrosky on his blog, Infectious
Greed. Kedrosky writes:
The following more or less supports what some have
been saying for a while — that major banks in the U.S.
and the U.K. will end up being entirely nationalized
before this crisis is over — but it’s still a striking way of
looking at the data. The gist: Government
recapitalization and other fund-raising has largely been in
service of banks’ prior subprime losses, while corporate
and consumer loans are just starting to hit bank balance
sheets. It won’t take much to tip banks over
into insolvency again.
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Losing control
The following is a singularly arresting chart:
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FT or http://ftalphaville.ft.com/
This is frightening stuff. Not least because the Fed’s own balance sheet is not looking
healthy. Via Brad Setser at the CFR, here’s Paul Swartz’s latest graph:
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The Dow 30 – The Past year
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Comparison to Japan’s crisis

The balance sheet is likely to
grow further too. Jan Hatzius,
Goldman’s chief economist has
pointed out that during the
Japanese credit crisis of the
1990s, the Bank of Japan ended
up with a balance sheet
equivalent to 30 per cent of GDP.
The Fed’s is currently 12 per cent.
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Excess Reserves Calculation



And on Wednesday the Fed made this announcement:
The Federal Reserve Board on Wednesday announced
that it will alter the formula used to determine the
interest rate paid to depository institutions on excess
balances.
Previously, the rate on excess balances had been set as
the lowest federal funds rate target established by the
Federal Open Market Committee (FOMC) in effect during
the reserve maintenance period minus 75 basis
points. Under the new formula, the rate on excess
balances will be set equal to the lowest FOMC target rate
in effect during the reserve maintenance period less 35
basis points. This change will become effective for the
maintenance periods beginning Thursday, October 23.
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
Which is an admission, basically, that the Fed lost
control of the Federal Funds Rate. And if that
needed proving, take a look at the graph from the
New York Fed:
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Markets Plunge Despite Hint of
Rate Cut

This is the definition of a BEAR market!
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