LILA RAJIVA: The Mind-Body Politic
Individuals Not Ideologies
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Fall-Out from Dubai World (Update)
I´ll try rounding up the reaction in the market and the punditry to Dubai World´s threat of default.
Two clarifications.
First: Dubai World´s problem is being referred to as a sovereign debt problem, but as far as I can understand, it´s not. The Dubai government is the 100% owner of Dubai World, which is itself a holding company. But, as William Buiter points out in the Financial Times, the Dubai government has only limited liability, just like any other limited liability company.
It wouldn´t have to reach into its pockets to make good any obligation unmet by Dubai World or its subsidiary Nakheel.
Second. The debt crisis is being referred to as a Black Swan. Again, this is inaccurate. A black swan is an unexpected event that doesn´t fit (and in fact upends) the prevailing paradigm. This debt crisis has been on the horizon for a while. And the announcement of the standstill in payment was obviously calculated to roil the markets as little as possible - being made during the Thanksgiving holidays, when the market is partially shut, and also at the start of Eid which lasts until December 6.
Update: With those caveats, I was going to try and list the banks and sectors that might be affected…but I found that Bob Wenzel´s site had already got a chart of Dubai World´s obligations to Nakheel Holdings from Izabella Kaminska at the Financial Times. You definitely need your coffee before you read this one.
However, the text below the chart, although just as abstruse, does make it clear that investors are not going to be able to get any blood out of the Dubai government.
“Investors should note, however, that the Government of Dubai does not guarantee any indebtedness or any other liability of Dubai World.”
Update: I should add here that while technically the government of Dubai is not responsible for the debt, it is implied everywhere that the safety of the debt derives from its backstopping by the government. The reaction of furious investors that Dubai would never be able to raise a penny again implies that default would taint the government and not simply the company.
Bernanke Declares Depression Over…
That’s it folks. Wrap it up. This here recession…correction…depress…oh whatever..is over. Time to go home. Put away your pens and paper, boys and girls.
Professor Bernanke says there’s going to be no test. Or there’s going to be just a take-home. Or better yet, you just get to write in and ask for whatever grade you want. Bob Rubin and Jamie Dimon get A’s, of course. The rest of you get good B’s…. No one fails. Ain’t life great?
Whew. That depression stuff was so, well, depressing. Glad it’s over.
Wasn’t so bad, after all, seeing as how it was the worse one in half-a-century and the sky was falling and we were all going to live in the Ozarks on canned peas and mackerel until we got raptured up… and really all that happened was some green paper got printed and we had a to listen to a lot of speeches in Barackistani (not quite as strange sounding a dialect as Bushlish but just as daft…) and then, bingo, everything’s back to normal again.
Yessir. The economy is healthy.
Except for jobs. No jobs.
What kind of recovery is that, you ask? It’s the new jobless, rocketing-inflation, trashed-currency, falling-house-price, bankrupt-government, kazillions-in-debt, trade-warring-with-China recovery - that’s what it is.
Glad you asked. Now you know…
Old Ground Hog Ben.Here’s the news clip:
“Gold futures climbed back above the $1,000-an-ounce mark on Tuesday, after upbeat U.S. economic reports and as Federal Reserve Chairman Ben Bernanke said the recession is likely over.
However, he and other Fed officials reiterated views that unemployment will remain high and economy stay weak well into next year, fueling expectations that the central bank will continue to provide ample liquidity. ”
More at Market Watch.
Paul Volcker Praises the Grace of Government
The Bureau of Economic Analysis released the Q1 ‘09 GDP numbers.
The annual rate of decline came in at the expected 6.1% (a decline of 6.3% in real GDP).
Calculated Risk has an optimistic assessment of the Q1 numbers.
The optimistic case rests on the following:
- Declining residential investment contributed more to the GDP slump in Q1′09 than in Q4 ‘08 and will likely come to an end by Q2′09, in keeping with its role as a leading indicator of recession.
- Simultaneously, the contributions of lagging indicators (like unemployment, declining investment in equipment & software, and declining non-residential investment) have increased.
- The over-weighting of lagging indicators in the decline of GDP signals the end of recession.
- Real personal consumption expenditure (PCE) was up in positive territory (2.2%) in Q1′09, where it was negative (4.3%) in Q4′08.
Mish Shedlock is less optimistic. He says that the Q1 ‘09 rise in PCE is either an outlier or temporary, and will be followed by another dip in 2010-11 and more trough for a few years.
Meanwhile, former Fed chairman Paul Volcker, head of Barack Obama’s economic team, thinks the economy is “leveling off,” according to this Bloomberg report.
Highlights of what Volcker is reported to have said:
- Bernanke is “doing a great job”
- the economy is functioning “by the grace of government intervention”
- a strong recovery is “going to take a while”
- “systemically important institutions” are going to be kept afloat
- the expansion of the Fed’s balance sheet to more than $2.2 trillion as of last week will likely lead to inflationary problems in 2-3 years, but not immediately
- Glass-Steagall (repealed in 1999) isn’t likely to be resuscitated but proprietary trading and commercial banking activity should be kept apart (Lila: how?)
- no regulation of hedge funds is likely but in the case of those that get too big capital requirements and a cap on leverage might be imposed (Lila: this is vague and opens the door to selective regulation)
- regulation of executive compensation isn’t likely but there could be a “quid pro quo” for federal aid. It would have to be a “culture of exchange” with Wall Street (Lila: more weasel words that allow for selective regulation).
Altogether, I thought Volcker’s comments were evasive, inadequate, and temporizing.
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