[NYTr] Crashing Economy: Emergency measures loom as Bush buys time

[All the News That Doesn't Fit]

The Telegraph - Jan 7, 2008
http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=A1YourView&xml=/money/2008/01/07/ccview107.xml


Emergency measures loom as Bush hauls out the PPT

Bush Can Buy Time As Property Bubble Bursts

By Ambrose Evans-Pritchard 

Bears beware. The New Deal of 2008 is in the works.

The US Treasury is about to shower households with rebate cheques
to head off a full-blown slump and save the Bush presidency.

On Friday Mr Bush convened the so-called Plunge Protection Team for
its first known meeting in the Oval Office. The black-arts unit --
officially the President's Working Group on Financial Markets --
was created after the 1987 crash.

It appears to have powers to support the markets in a crisis with
a host of instruments, mostly through buying futures contracts on
the stock indexes (DOW, S&P 500, NASDAQ, and Russell) and key credit
levers. And it has the means to fry "short" traders in the hottest
of oils.

The team is led by Treasury chief Hank Paulson, ex-Goldman Sachs,
a man with a nose for market psychology, and includes Fed chairman
Ben Bernanke and the key exchange regulators.

Judging by a well-briefed report in the Washington Post, a mood of
deep alarm has taken hold in the upper echelons of the administration.
"What everyone's looking at is what is the fastest way to get money
out there," said a Bush aide.

Emergency measures are now clearly on the agenda, apparently
consisting of a mix of tax cuts for businesses and bungs for
consumers. Fiscal action all too appropriate, regrettably.

We face a version of Keynes' "extreme liquidity preference" in the
1930s -- banks are hoarding money, and the main credit arteries of
the financial system remain blocked after five months.

"In terms of any stimulus package, we're considering all options,"
said Mr Bush. This should be interesting to watch. The president
is not one for half measures. He has already shown in Iraq and on
biofuels that he will pursue policies a l'outrance once he gets the
bit between his teeth.

The only question is what the president can manage to push through
a Democrat Congress.

The Plunge Protection Team -- long kept secret -- was last mobilised
to calm the markets after 9/11. It then went into hibernation during
the long boom.

Mr Paulson reactivated it last year, asking the staff to examine
"systemic risk posed by hedge funds and derivatives, and the
government's ability to respond to a financial crisis", he said.

It seems he failed to spot the immediate threat from mortgage
securities and the implosion of the commercial paper market. But
never mind.

The White House certainly has grounds for alarm. The global picture
is darkening by the day. The Baltic Dry Index has been falling hard
for seven weeks, signalling a downturn in bulk shipments. Singapore's
economy contracted 3.2 percent in the final quarter of last year,
led by a slump in electronics and semiconductors.

The Tokyo bourse kicked off with the worst New Year slide in more
than half a century as the Seven Samurai exporters buckled. The
Topix is down 24 percent from its peak. If Japan and Singapore are
stalling, it is a fair bet that China's efforts to tighten credit
are starting to bite. Asia is not going to rescue us. On the contrary.

Keep an eye on Japan, still the world's top creditor by far, with
$3 trillion in net foreign assets. The Bank of Japan has been the
biggest single source of liquidity for the global asset boom over
the last five years. An army of investors -- Japanese insurers,
pension funds, housewives, and hedge funds borrowing at near zero
rates in Tokyo -- have sprayed money across the Antipodes, South
Africa, Brazil, Turkey, Iceland, Latvia, the US commercial paper
market, and the City of London.

The Japanese are now bringing the money home, as they always do
when the cycle turns. The yen has risen 13 percent against the
dollar and 12 percent against sterling since the summer. We are
witnessing the long-feared unwind of the "carry trade," valued by
BNP Paribas in all its forms at $1.4 trillion.

The US data is now relentlessly grim. Unemployment jumped from 4.7
percent to 5 percent -- or 7.7 million -- in December, the biggest
one-month rise since the dot-com bust and clear evidence that the
housing crunch has spread to the real economy.

"At this point the debate is not about a soft land or hard landing;
it is about how hard the hard landing will be," said Nouriel Roubini,
professor of economics at New York University.

"Financial losses and defaults are spreading from sub-prime to
near-prime and prime mortgages, to commercial real estate loans,
to auto loans, credit cards, and student loans, and sharply rising
default rates on corporate bonds. A severe systemic financial crisis
cannot be ruled out. This will be a much worse recession than the
mild ones in 1990-91 and 2001," he said.

Sovereign wealth funds stand ready to rescue banks, as they have
already rescued Citigroup and UBS. But as Moody's pointed out this
week, the estimated $2,500 billion in lost wealth from the US house
price crash is more than the entire net worth of all the sovereign
wealth funds in the world.

Add fresh losses as the property bubbles pop in Britain, Ireland,
Australia, Spain, Greece, The Netherlands, Scandinavia, and Eastern
Europe, as they surely must unless central banks opt for inflation
(which would annihilate bonds instead, with equal damage), and you
can discount $1,500 billion in further attrition.

Not even a Bush New Deal can hold back the post-bubble tide that
is drawing in across the globe. What it can do is buy time. Fortunately
for America -- and the world -- the US budget deficit is a healthy
1.2 percent of GDP ($163 billion). Washington has the wherewithal
to fund a fiscal blitz.

Britain has no such luxury. Our deficit is 3 percent of GDP at the
top of the cycle. Gordon Brown has shut the Keynesian door.