Can one of the board economics gurus put this in plain speak for me? (1 Viewer)

[bclemms]

The public debt, taking into account the Social Security and Gov't trust funds surpluses, is just over $5 trillion. By percentage of gross domestic product, it's about 36%. Some countries that are in worse shape debt-wise than the US: Norway, Sweden, UK, Brazil, Netherlands, Switzerland, Canada (64% of GPD) and 57 other ones.

To be fair, the Government owes social security and medicare nearly $50 trillion bucks by the year 2040. Include this into the statistics and we don't look as statistically healthy. Also something to consider is the current rate of spending we are going to increase our total debt by another $1 trillion this year alone.

Where did you get the $5 trillion dollar number? Everywhere I read it is $9 trillion and $59 trillion after Social Security and Medicare are factored in.

Also now that the growth has slowed the GDP should decrease or stay the same. Statistically we will be much worse off. We are the greatest economic country in the history of the world, there is no reason we should be running a 36% public debt anyway.

 

[Surviving Saint]

Don't worry, MCain, Hillary or Obama will fix everything

 

[TDH]

We are the greatest economic country in the history of the world,

I think our real wealth was in all our natural resources and we've just about exhausted that.

 

[Pure Energy]

Here's my layman understanding of it (keep in mind I've had a few to drink as I write this):

In addition to injecting liquidity by lowering interest rates the Fed is attempting to inject more liquidity through this mechanism. It's a TAF or Term Auction Facility. It allows a lending institution to transfer assets on its balance sheet for cash. In other words, cash for mortgage backed securities. If you want to learn more about TAFs here you go:
http://www.federalreserve.gov/monetarypolicy/taf.htm

I think it's a precursor to another Fed rate cut rate of 50 to 75 basis points (who knows, maybe a full 100) by the end of the month. Whooo Hooo for those of us with large HELOCs.

 

[Furor]

Where did you get the $5 trillion dollar number? Everywhere I read it is $9 trillion and $59 trillion after Social Security and Medicare are factored in.

http://zfacts.com/p/461.html

It's scary to see how fast it's rising though. The amount borrowed has grown by $6M while I've been typing this.

I agree, the 36% ratio is a bit high, but we will always carry some debt. This credit crisis is a lot worse and has farther reaching impacts than anyone imagined. We seem to be in a crazy cycle in which every reaction has an unintended consequence, and we won't be in the clear until all the really bad subprime credit is flushed out of the market. That will probably be another 5 years from now. I'm staying in the stock market though, and buying more.

 

[St.Ryan]

I think our real wealth was in all our natural resources and we've just about exhausted that.

Last time I checked, we were like 90% of the world's service exports, so we'll be fine. For as much as everyone says we're lazy...we're actually pretty hard workers.

Edit: Not even close. I went and looked at the numbers for 2005 and we're still #1 by a huge margin, accounting for about 15% of the world's service exports. The next closest is Germany who represents about 8%.

 

[dapperdan]

I'll take a stab at it.

Yesterday, Bill Gross, Chairman of PIMCO, was on CNBC and talked about essentially a spread trade for the Fed. Being the Fed, it's a two-step process: Step 1) sell Treasury Bonds from their balance sheet, Step 2) use the proceeds to purchase mortgage bonds, specifically 30 year mortgage bonds.

Gross specifically mentioned in the CNBC interview that it might take up to $100 Billion. My guess is that Gross mentioning of $100 B and the $100 B the Fed is raising announced in the story is no coincidence. Just guessing, but Gross simply going on CNBC yesterday, hours before this story came out, was probably coordinated with the Fed, with Gross was acting as an intermediary for the Fed. He's obviously got the street cred.

A huge problem right now is the spread that developed this week between the 30 year AAA mortgage securities versus take your pick between 10 Yr and 30 Yr Treasuries. It was the worst 3-4 days in the mortgage markets in over 20 years as far as a rise in mortgage rates, but Treasuries were largely unscathed.

The Fed is trying to quell an out and out panic in the mortgage backed securities market. There is no other way to describe the market action in the mortgage backed securities market other than to describe it as complete panic this week. If we were comparing this week in the mortgage-securities markets with the stock market, the comparison would be on the order of October 1987. That's how bad it was this week.

My guess is that the above story is a part of a larger story of the Fed selling Treasuries from their balance sheet; with the economic weakness being reported there should be decent demand for those bonds, and then taking those proceeds and directly entering the mortgage markets to purchase mortgage backed bonds. Bottom line, if my thinking is correct, is that the Fed is going to act as a market maker for mortgage backed securities. This is something that is defintely needed right now.

 

[Sabine]

.... If we were comparing this week in the mortgage-securities markets with the stock market, the comparison would be on the order of October 1987. That's how bad it was this week....

Funny, as I was reading through this thread, scenes from that exact month were running through my head. I had just moved to Austin from East Texas, and I was stunned at the number of foreclosed homes here. Sure, that was going on back home too - I had brought a couple of foreclosed properties there - but I had no grasp of just how bad it was in other places. Many neighborhoods, especially in the suburbs, were saturated with foreclosed homes. Around that time, it looked like on average that 1 in 3 homes had a foreclosure sticker on a window or garage door. In places it was an entire culdesac or block. Driving through Chalmette a few months ago reminded me of that. Of course, there wasn't the damage level, but there were strings of abandoned homes with broken / boarded up windows and overgrown yards. It was ghostly, and the number of displaced and financially crushed families it represented was inescapable and chilling.
While Austin does not look like that now, that same scene is playing itself out again in many other parts of the country.

This is something that is defintely needed right now.

If the subject funds help, that's great. How much is it likely to help? Is this the equivalent of putting a Band-Aid on an slit jugular?

 

[dapperdan]

I forgot to mention it in the above reply, but the Fed will have to be purchasing mortgages from both Freddie and Fannie; both agencies need to reliquify their balance sheets and prepare for the higher conforming loan limits. So the Fed will be buying mortgages from Freddie and Fannie, there is no question that that's where a significant chunk of change is going.

 

[dapperdan]

If the subject funds help, that's great. How much is it likely to help? Is this the equivalent of putting a Band-Aid on an slit jugular?

no, a $100 Billion is a big help. That's the upper end of the range Bill Gross put on it in yesterday's interview, although before it's over, I think the amount the Fed is going to have to come to market with is going to be more in the $250 B range in treasury/mortgage swaps. That's just a hunch on my part, we'll have to see how bad things get. But $100 Billion should definitely help. It's more than just a band-aid.

 

[Saint by the Bay]

So dapperdan if I'm understanding you right this is actually a good thing? I was thinking of it as creating more debt but from the way your explaining it it's actually not about the Fed borrowing money to lend to the banks which was how I thought it was.

 

[dapperdan]

So dapperdan if I'm understanding you right this is actually a good thing? I was thinking of it as creating more debt but from the way your explaining it it's actually not about the Fed borrowing money to lend to the banks which was how I thought it was.

If I'm understanding correctly what I believe the Fed is going to do with this, yes, I believe it's a good thing.

I think it's more about swapping debt, and then also buying mortgage debt that's on the books at Fannie, Freddie and providing a way for the banks to sell off the mortgages they've got on their balance sheets. It does create liquidity for the banks, but right now the banks need the money. To my way of thinking, it's much more targeted, much more of what we actually need.

As it stands, if the Fed tries to solve the liquidity issues by lowering Fed funds rates, for example, the money is simply going into commodities, it's not going where the Fed wants it to go, imo. I was squawking about the Fed not lowering Fed Funds last summer, but right now, the evidence is that lowering Fed Funds is not helping the situation, it's actually hurting the situation.

The current paradox is that the world is seemingly awash in dollars; but the banks don't have any money to lend. This program, it seems to me, is a much more rational way of getting money where it needs to go to address the liquidty crunch; and hopefully it also means that the Fed won't use such blunt monetary instruments where the money released by the Fed simply ends up in the oil market or gold market, for example. The Fed really needs to use a more targeted approach.

It's a tightrope though. The more the Fed buys these mortgage backed securities, the tougher it becomes for the market to value the securities properly. And the risk is, as the Fed buys these mortgages, common sense would dictate that the banks holding these mortgages are going to sell the Fed the lowest quality mortgages that the Fed will accept. For example, if a bank is holding two pools of mortgages, pool A with an average credit score of 660 and pool B with an average credit score of 710, and the Fed is willing to buy pool A, you better believe the bank is going to dump pool A.

 

[threexcharm]

Don't worry, MCain, Hillary or Obama will fix everything

Oh God. Factor them in with Congress and the Senate......

How do we sleep at night?

Joe

 

[dtc]

Funny, as I was reading through this thread, scenes from that exact month were running through my head. I had just moved to Austin from East Texas, and I was stunned at the number of foreclosed homes here. Sure, that was going on back home too - I had brought a couple of foreclosed properties there - but I had no grasp of just how bad it was in other places. Many neighborhoods, especially in the suburbs, were saturated with foreclosed homes. Around that time, it looked like on average that 1 in 3 homes had a foreclosure sticker on a window or garage door. In places it was an entire culdesac or block. Driving through Chalmette a few months ago reminded me of that. Of course, there wasn't the damage level, but there were strings of abandoned homes with broken / boarded up windows and overgrown yards. It was ghostly, and the number of displaced and financially crushed families it represented was inescapable and chilling.
While Austin does not look like that now, that same scene is playing itself out again in many other parts of the country.

If the subject funds help, that's great. How much is it likely to help? Is this the equivalent of putting a Band-Aid on an slit jugular?

Funny, but I moved there at exactly the same time. I sold a ton of stock and bought a condo that had been originally listed for 269 for 106k and moved in about 3 wks before the stock market crapped. After the crunch, my girlfriend and I bought another unit next door for 98k and leased it out hoping it would all come back. We sold one about 3 yrs later for 189 and another 10yrs later sold the other one for 360. Enfield was very, very good to me!

 

[dapperdan]

As a follow up, this news came out today. The talk on CNBC is that the total package could total up to $200 B.
http://www.thestreet.com/story/10407163/1/fed-liquidity-plan-boosts-stocks.html

The new Term Securities Lending Facility will lend Treasury securities for 28 days in exchange for collateral including debt and residential-mortgage-backed securities from government-sponsored entities Fannie Mae (FNM - Cramer's Take - Stockpickr) and Freddie Mac (FRE - Cramer's Take - Stockpickr), along with nonagency AAA/Aaa-rated private-label residential mortgage-backed securities.

Additionally, the Federal Open Market Committee, the policymaking arm of the Fed, has authorized an increase in its existing currency swaps with the European Central Bank and the Swiss National Bank.

The move comes on the heels of the Fed's decision last week to inject an added $140 billion in short-term credit and to take on difficult-to-sell asset-backed paper as collateral.