Japanese Finance Minister Shoichi Nakagawa said he is set to make the proposal at the Group of Seven meeting of finance and central bank officials that he is attending in Washington."Japan would like to see what it can do to work with other countries to ensure ample capital supply," he said on nationally televised NHK news.He did not give details of the plan. But he said Japan's experience in dealing with its bad debt crisis in the 1990s may offer lessons for the other G-7 nations.He said he hopes to tell others how Japan injected public money into banks at that time to bolster their capital after the so-called bubble economy of soaring land and stock prices burst and banks got stuck with mountains of bad debt.His comments come at a time when Washington, which is implementing a $700 billion bailout, mainly to buy bad mortgages and mortgage-related securities from banks and financial institutions, may also need to inject capital in them and take partial ownership.Britain is moving to pour cash into troubled banks in exchange for stakes in them -- a partial nationalization. In Iceland, the government now has control of all three of the country's major banks as it struggles to contain the troubles there.Japan's proposal will call for setting up a cooperative scheme through the International Monetary Fund to dole out emergency lending to nations whose financial systems run out of cash, The Nikkei, Japan's top business daily, reported in its Friday's editions, without citing sources.China and Middle Eastern nations will also be asked to contribute money to the fund, the report said, in an effort to prevent the further spread of the global fallout from the U.S. credit crisis.
"Japan would like to see what it can do to work with other countries to ensure ample capital supply," he said on nationally televised NHK news.
He did not give details of the plan. But he said Japan's experience in dealing with its bad debt crisis in the 1990s may offer lessons for the other G-7 nations.
He said he hopes to tell others how Japan injected public money into banks at that time to bolster their capital after the so-called bubble economy of soaring land and stock prices burst and banks got stuck with mountains of bad debt.
His comments come at a time when Washington, which is implementing a $700 billion bailout, mainly to buy bad mortgages and mortgage-related securities from banks and financial institutions, may also need to inject capital in them and take partial ownership.
Britain is moving to pour cash into troubled banks in exchange for stakes in them -- a partial nationalization. In Iceland, the government now has control of all three of the country's major banks as it struggles to contain the troubles there.
Japan's proposal will call for setting up a cooperative scheme through the International Monetary Fund to dole out emergency lending to nations whose financial systems run out of cash, The Nikkei, Japan's top business daily, reported in its Friday's editions, without citing sources.
China and Middle Eastern nations will also be asked to contribute money to the fund, the report said, in an effort to prevent the further spread of the global fallout from the U.S. credit crisis.
The G7 should seriously consider Dr. Doom's prescription:
Another rapid round of policy rate cuts of the order of at least 150 basis points on average globally; a temporary blanket guarantee of all deposits while a triage between insolvent financial institutions that need to be shut down and distressed but solvent institutions that need to be partially nationalized with injections of public capital is made; a rapid reduction of the debt burden of insolvent households preceded by a temporary freeze on all foreclosures; massive and unlimited provision of liquidity to solvent financial institutions; public provision of credit to the solvent parts of the corporate sector to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses; a massive direct government fiscal stimulus packages that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local government; a rapid resolution of the banking problems via triage, public recapitalization of financial institutions and reduction of the debt burden of distressed households and borrowers; an agreement between lender and creditor countries running current account surpluses and borrowing, and debtor countries running current account deficits to maintain an orderly financing of deficits and a recycling of the surpluses of creditors to avoid a disorderly adjustment of such imbalances.
And I would add that they should guarantee all interbank lending and criminally prosecute the CEO of any major bank that continues to hoard cash!
This last recommendation is draconian but as Bloomberg reports, the value of U.S. and European high risk, high-yield loans fell to a record low as banks tried to sell holdings of the debt.
Markit LCDX, a benchmark credit-default swap index used to hedge against losses on U.S. leveraged loans, which falls as credit risk increases, dropped 2.5 percentage points to a mid- price of 82.75 percent of face value, paring an earlier decline to 82, according to Goldman Sachs Group Inc. The Markit iTraxx LevX index of European loans fell 2 to 86.5, Deutsche Bank AG prices show. Prices of leveraged loans tumbled on concern that banks and hedge funds are being forced to sell assets in the wake of the collapse of Iceland's banks this week and the failure of Lehman Brothers Holdings Inc. in New York. Rapid declines in the value of loans will make it more expensive for companies to raise capital. ``Selling pressure is likely to continue as nobody really knows how many more loans are going to be dumped on the market,'' said Robert Jaeger, a high-yield debt analyst at Societe Generale SA in London. Loan prices fell yesterday as Iceland took control of Kaupthing Bank hf, the nation's biggest lender, completing the nationalization of the country's top three banks. The seizure came as brokers sent details of loans used to fund leveraged buyouts for sale to investors and traders, according to four people who saw the lists. ``We are seeing the continued forced selling of leveraged loans across Europe,'' said Raja Visweswaran, a London-based trader at Asteri Capital Ltd. ``There is no credit-specific news out today, this is more the sign of a systemic meltdown.''
Markit LCDX, a benchmark credit-default swap index used to hedge against losses on U.S. leveraged loans, which falls as credit risk increases, dropped 2.5 percentage points to a mid- price of 82.75 percent of face value, paring an earlier decline to 82, according to Goldman Sachs Group Inc. The Markit iTraxx LevX index of European loans fell 2 to 86.5, Deutsche Bank AG prices show.
Prices of leveraged loans tumbled on concern that banks and hedge funds are being forced to sell assets in the wake of the collapse of Iceland's banks this week and the failure of Lehman Brothers Holdings Inc. in New York. Rapid declines in the value of loans will make it more expensive for companies to raise capital.
``Selling pressure is likely to continue as nobody really knows how many more loans are going to be dumped on the market,'' said Robert Jaeger, a high-yield debt analyst at Societe Generale SA in London.
Loan prices fell yesterday as Iceland took control of Kaupthing Bank hf, the nation's biggest lender, completing the nationalization of the country's top three banks. The seizure came as brokers sent details of loans used to fund leveraged buyouts for sale to investors and traders, according to four people who saw the lists.
``We are seeing the continued forced selling of leveraged loans across Europe,'' said Raja Visweswaran, a London-based trader at Asteri Capital Ltd. ``There is no credit-specific news out today, this is more the sign of a systemic meltdown.''
Meanwhile, currency markets were reeling today as the Canadian dollar suffered its biggest decline since 1971 as oil prices fell below $80 for the first time in a year and copper headed for its biggest weekly drop in more than 20 years on concern that the deepening financial crisis will push the global economy into a recession.
Now CNBC reports that "radical measures" may be in the wings:
With the legislation’s main mechanism—an auction system to purchase bad mortgage-based securities—still weeks away from implementation, Paulson may have to inject capital into any number of financial institutions—even non-depository ones like investment banks, insurers and hedge funds. “I don't wish to spread alarm on the line people but the big issue confronting the market is I'm afraid the health and sustainability of Morgan Stanley and Goldman Sachs," Hugh Hendry, Partner and CIO at Eclectica, told CNBC. "It is unimaginable that they can be allowed to go, I suspect that they will be nationalized at some point today or over the weekend," he add. Some say the Emergency Economic Stabilization Act of 2008’s vague language gives Paulson almost unlimited power to intervene. “He’s free to just strike deals, to do special deals,” says Lawrence White, a former White House economist and savings and loan regulator, who adds Congress was aware of the powers being given to Paulson and thus pressed hard for an oversight board. Like the auction process, however, that board has yet to be set up, and with developments in the financial markets moving much faster than the Washington bureaucracy it might not be long before Paulson takes action.
With the legislation’s main mechanism—an auction system to purchase bad mortgage-based securities—still weeks away from implementation, Paulson may have to inject capital into any number of financial institutions—even non-depository ones like investment banks, insurers and hedge funds.
“I don't wish to spread alarm on the line people but the big issue confronting the market is I'm afraid the health and sustainability of Morgan Stanley and Goldman Sachs," Hugh Hendry, Partner and CIO at Eclectica, told CNBC. "It is unimaginable that they can be allowed to go, I suspect that they will be nationalized at some point today or over the weekend," he add.
Some say the Emergency Economic Stabilization Act of 2008’s vague language gives Paulson almost unlimited power to intervene.
“He’s free to just strike deals, to do special deals,” says Lawrence White, a former White House economist and savings and loan regulator, who adds Congress was aware of the powers being given to Paulson and thus pressed hard for an oversight board.
Like the auction process, however, that board has yet to be set up, and with developments in the financial markets moving much faster than the Washington bureaucracy it might not be long before Paulson takes action.
Not everyone wants G7 action or any type of action. Legendary investor Jim Rogers prefers that G7 officials "do nothing", but Ken Rogoff thinks that policy makers need to "get ahead of the turmoil". Meanwhile Roubini told Bloomberg that if policy makers do not act, he sees risks of a severe global depression.
Time is running out fast. If they do not restore confidence in the financial system, we are starring at Armageddon.
Confidence is the key here. I urge you to take the time to watch Charlie Rose's excellent interview with former Fed Chairman Paul Volcker (click here to watch the entire interview).
Volcker goes at lengths to discuss the importance of restoring confidence. He understands how left to their own devices, the savageness of "animal spirits" can destroy the financial system.
A few things Voclker said in that interview caught my attention. First, how did the credit derivative market mushroom to $62 trillion to cover $10 trillion in loans? (Remember CDO Squared and Cubed?!?!?)
Second, Volcker referred to the 1933 banking crisis and how President Roosevelt restored confidence in the banking system by proclaiming "these banks are safe to do business with". And little by little, people started doing business with a few banks and the system got going again.
Finally, I got an email telling me that this is the buying opportunity of a lifetime. One person wrote me the following:
As Junius Morgan (JP's father) said: "Remember, my son, that any man who is a bear on the future of this country will go broke.Nathaniel Rothschild: "The time to buy is when there is blood on the street, even if it's your own blood."Time for long-termmoney to go to work!
As Junius Morgan (JP's father) said: "Remember, my son, that any man who is a bear on the future of this country will go broke.
Nathaniel Rothschild: "The time to buy is when there is blood on the street, even if it's your own blood."
Time for long-termmoney to go to work!
But as I read this I recalled Keynes' famous statement that "markets can stay irrational longer than you can stay solvent."
My father who has practiced clinical psychiatry for over 40 years, and continues to do so at the tender age of 76, told me he likes Keynes' warning because he always said "if you are not prepared for the unthinkable and the unbelievable, you are bound for a rude awakening."
Sound advice from a man who has seen a lot of crazy things in his career but none as crazy as what is going on in the financial markets these days.
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