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Luskin: "the worst risks of the credit crisis have been averted"
Old 03-21-2008, 01:26 PM   #1
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Luskin: "the worst risks of the credit crisis have been averted"

Donald Luskin has another interesting column (not that he is always right, but his arguments are appealing and he sure knows how to catch my attention):

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As a result of what happened last week, I'm now convinced that the worst risks of the credit crisis have been averted. It's safe to dive in and buy risky assets and risky sectors again. And I'm convinced that my worst fears about inflation are now not going to materialize. It's time to bail on some of the inflation hedges I've been writing about here for years.
[...]

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So here's where it leaves us. We can never be certain, but it looks to like even though there will still be plenty of problems coming from the financial sector due to the sins of the past, the most horrific risks are off the table because the Fed has made it clear it will step in and keep the worst-case scenario from happening.

So it's time to buy all the stuff that everyone's been selling during the credit crisis. Junk bonds. Municipal bonds. The US dollar. Stocks. And yes, financial stocks.
The Worst Risks of the Credit Crisis Averted (J.P. Morgan Chase, Lehman, Merrill, Goldman Sachs, IBM,General Electric) at SmartMoney.com
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Old 03-21-2008, 01:35 PM   #2
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On the other hand, if you read mainstream economists who aren't trying to sell anything, such as Paul Krugman, they are not optimistic at all.
Krugman's column today in NY Times is rather alarming.
http://www.nytimes.com/2008/03/21/op...21krugman.html

"In fact, however, we were partying like it was 1929 — and now it’s 1930.

The financial crisis currently under way is basically an updated version of the wave of bank runs that swept the nation three generations ago. People aren’t pulling cash out of banks to put it in their mattresses — but they’re doing the modern equivalent, pulling their money out of the shadow banking system and putting it into Treasury bills. And the result, now as then, is a vicious circle of financial contraction.

Mr. Bernanke and his colleagues at the Fed are doing all they can to end that vicious circle. We can only hope that they succeed. Otherwise, the next few years will be very unpleasant — not another Great Depression, hopefully, but surely the worst slump we’ve seen in decades."
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Old 03-21-2008, 01:40 PM   #3
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Wow, comparing the present economy to 1929 is pretty drastic! I hope he overstated his case at least a little bit.
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Old 03-21-2008, 01:47 PM   #4
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I think that comparing a financial event to 1929 is like calling someone Hitler in a political debate (Godwin's Law). It is an attempt by the author to sensationalize events to the point that the cannot be productive debate.
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Old 03-21-2008, 01:51 PM   #5
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1929 wasn't anything special since the US has had depressions before that on a regular basis as well as financial panics for any number of speculative reasons. people moving out west correlates with some of these financial panics and economic downturns.

reason we hear 1929 and the depression that followed called the Great Depression is because it was the first one that was followed by the new media at the time. radio and film.

i usually don't agree with krugman, but he is right. brokerage accounts are just like bank accounts these days and what we are facing now is just as bad as 1929. and the core problems haven't been solved yet, just covered up for a few months. unless foreclosures start to slow down someone is going to have to repay the Fed, plus interest. and JPM buying bear stearns isn't set in stone yet, a lot of people don't want to do it
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Old 03-21-2008, 01:54 PM   #6
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Want2, I glanced at "Money" magazine, and they seem to be saying the same thing as Laskin.

Oldbabe, there is also an article in the NY Times today entitled, "Slump Moves from Wall Street To Main Street" by Peter S. Goodman.

Take your pick!
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Old 03-21-2008, 02:00 PM   #7
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I think that comparing a financial event to 1929 is like calling someone Hitler in a political debate (Godwin's Law). It is an attempt by the author to sensationalize events to the point that the cannot be productive debate.
Probably so, although I haven't known Krugman to be sensationalistic in the past.
From Economist.com today.
Credit crunch | Plugging holes | Economist.com

"And the bad news is far from finished. As foreclosures and falls in house prices accelerate, estimates of likely losses on mortgage-backed securities, now around $400 billion, are still rising. The credit contraction these losses will spawn has hardly started. Yet the economy is already in recession. That is not official, but the latest jobs figures, which showed private-sector employment falling in each of the past three months, leave little doubt that the economy is contracting. More mortgage losses will result as joblessness spawns foreclosures, along with higher defaults on everything from credit cards to corporate loans."
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Old 03-21-2008, 02:09 PM   #8
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I look at it this way. It will get better eventually. Now that could be decades but hey I like to be positive.
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Old 03-21-2008, 02:19 PM   #9
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I think that the Fed has shown that it is motivated to do whatever it takes to restore liquidity to the system. Importantly, the ECB and the Bank of England budged this week, so we may see a coordinated response byu all the major central banks. That alone doesn't restart the securitization and credit market machinery. But if investors know that the central banks are providing a floor, they will be more willing to step up and start putting some of their cash to work at today's very wide spreads.
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Old 03-21-2008, 02:19 PM   #10
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Wake me up when deleveraging is over. Luskin doesn't even acknowledge it in his piece. Terrible mistake, but that's as much as I would expect from this fellow.
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Old 03-21-2008, 02:45 PM   #11
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I think that the Fed has shown that it is motivated to do whatever it takes to restore liquidity to the system. Importantly, the ECB and the Bank of England budged this week, so we may see a coordinated response byu all the major central banks. That alone doesn't restart the securitization and credit market machinery. But if investors know that the central banks are providing a floor, they will be more willing to step up and start putting some of their cash to work at today's very wide spreads.
what if foreclosures double from this point? at some point the Fed may have to really bailout these guys since this emergency financing has to be repaid as some point. is everyone borrowing at the discount window to refi the loans they took out to make these mortgages?
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