I Think I’m Turning Japanese, I Really Think So

Posted on November 25th, 2008 in Daily Mortgage/Housing News - The Real Story, Daily Stock Market / Economic News - The Real Story, Mr Mortgage's Personal Opinions/Research

The quantitative easing game is on.  When you step back and think about this logically, it all makes sense and is quite simple really.  What did we learn from Japan? They lost a decade but they did not lose their entire financial system and throw their nation into Armageddon and chaos.

The Japanese experience looks to be the Fed and Treasury play book.  It is the lesser of all evils. Hey, if it only costs a decade or two but some point in the future the nation pulls out of this mess, then game won. Remember, even though we will be weak, everyone will likely remain much weaker.

The banks have the same game plan, which is why they are not lending.  They know that if they rein in the lending, de-lever and raise cash the firm will be around 10-years from now.  When the storm passes they can poke their heads out and rebuild.  At least they are in business. This same strategy is being deployed at the smart hedgefunds and has been for some time – just live to fight another day.

The shame is that since Subprime started blowing a gasket in Dec 2006 through just a few months ago, the company line was to deny this problem existed and call it ‘contained’.  For a year and a half I was reading very smart people warning of this very outcome. But they were all called ‘alarmists and fear mongers’.  Heck, Peter Schiff was laughed off CNBC more times than I can count. Nouriel Roubini was called a quack until very recently.

There was plenty that could have been done to prevent it from going this far over the past year and a half.  Now it is likely too late and all of us are going to pay for this for a long, long time. This is depressing – no pun intended. -Best Mr Mortgage

Fed Commits $800 Billion More to Unfreeze Lending

By Scott Lanman and Dawn Kopecki

Nov. 25 (Bloomberg) — The Federal Reserve took two new steps to unfreeze credit for homebuyers, consumers and small businesses, committing up to $800 billion.

The central bank will purchase as much as $600 billion of debt issued or backed by government-chartered housing-finance companies. It will also set up a $200 billion program to support consumer and small-business loans, the Fed said in statements today in Washington.

With today’s announcement, the central bank is starting to use some of the unorthodox policy tools that Chairman Ben S. Bernanke outlined as a Fed governor six years ago. Policy makers hope the initiatives will bring down the interest rates on mortgages and consumer loans, offsetting the withdrawal of private-sector financing.

“They’re trying to put funds into the system, trying to unfreeze these markets,” said William Poole, the former St. Louis Fed president, in an interview with Bloomberg Television. “Clearly, the Fed and the Treasury are beginning to take a large amount of credit risk.”

The Fed will purchase up to $100 billion in direct debt of Fannie Mae, Freddie Mac and Federal Home Loan Banks after the yield premiums on those securities jumped. It will also buy up to $500 billion of mortgage-backed securities issued by Fannie, Freddie and Ginnie Mae, a government agency that insures bonds.

Source: Bloomberg – Fed Commits $800 Billion More to Unfreeze Lending

QUANTITATIVE EASING

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Quantitative easing was a tool of monetary policy that the Bank of Japan used to fight deflation in the early 2000s.

The BOJ had been maintaining short-term interest rates at close to their minimum attainable zero values since 1999. More recently, the BOJ has also been flooding commercial banks with excess liquidity to promote private lending, leaving commercial banks with large stocks of excess reserves, and therefore little risk of a liquidity shortage.[1]

The BOJ accomplished this by buying much more government bonds than would be required to set the interest rate to zero. It also bought asset-backed securities, equities and extended the terms of its commercial paper purchasing operation. [2]

14 Responses to “I Think I’m Turning Japanese, I Really Think So”

  1. We do look to be going down the exact same path as Japan in the early 1990’s. A couple little differences await us, though. We dont produce all that much that the rest of the world wants and the rest of the world is in recession now anyway. Japan had the opposite situation when it’s credit bubble burst in 1990. So where does that leave us?

  2. the balance in paymets will come due some day

    what will the C-Comms want in return = MASSAGGEE

    The Govt & Wall St. Shills have it all wrong.

    It’s not CONSUMPTION that needs to be restored but SOUND MONEY – what the FED & TREASURY is doing is immoral and will be punished by the masses.

  3. i know it sounds like crazy talk, and it most likely will never happen, but i just a gut feeling that a reloution/civil war of some sort, is coming in the not so far future….. it sure seems it may even be necessary , imo, as the people have been screwed by its government and i cant believe the anger doesnt just build and boil over from this point forward

  4. peterb

    If you want to see a bubble chart look at Japan’s national debt post asset crash, so I guess we are headed down the same road. Apparently we are not bashful about spending so expect a lot of cement to be poured on useless government projects. They will let the autos go and then spend 20x that to create the same number of lower paying jobs which are lower tax bracket…. That would mean for every dollar spent, there would be less in tax returned to the gov.

  5. Don’t count on a revolution. Who are you going to revolt against? Clearly, not our gov’t. The gov’t doesn’t call the shots. Are you going to revolt against our financial system?

    Ron Paul has been trying to do that for years. Your revolution will be laughed at.

  6. OD.. the revolution already started! The consumer is in control.. is’s 70% consumer based economy! wake up.. a lot of us already have!

  7. There is no need to worry about quantitative easing even if the liquidity produced is not sterilised and hence results in ‘printing money’.
    The Fed will not permit the normal measures of money supply to grow in a way that could even begin threaten surge in inflation. Long before that they would take back the liquidity (sterilise) For now we are likely to need it to avoid deflation and ensure banks are not constrained when they wish to lend.

    This what the Fed should have done in the early 30s (along with fiscal expansion from government….they did the opposite).

    If there was no such monetary action, a fiscal squeeze and increase trade controls, then some of these doomster commentators might have the start of an argument.

    Mr M. Please put up the link to the Bernanke paper

  8. I’ve been reading and watching all the media about the bailout and how we are all screwed for the next couple of years. I had agreed with everything that was said and I believed the doomed outcome for our economy.

    That was until just recently. Let me run this by Mr. M and the rest of the folks here. Isn’t the world different now? Specifically, the Berlin wall is down and we have the BRIK countries who all have capitalism economies. This is tremendous. Everyone I shocked about how our debt is growing out of control. But, wait a minute. Everything grows larger over time. This of a cup of coffee you bought in 1980 vs. a cup of coffee you would buy today. The price went up. So too has our debt. It should GROW. We are not just the U.S. anymore but a global economy.

    I also hear things like “we don’t produce anything” and therefore were are screwed. We do produce things but the U.S. has evolved to a service economy, which is a reflection of a sophisticated labor force. We have Dr., Consultants, Tax and accounting professionals and I hate to say it bankers. All much more higher educated then a person in China building a toy for a 2 year old.

    The U.S. is an economic powerhouse. Other countries come to us for things that no other country has.

    So, relax people and give all of us a break on the doom and gloom thing. We ran the debt up before and we managed to get it under control. The same will happen again.

  9. On Tuesday Morning On the Boldson (Paulson) speech. He said the government will do anything it can to ease the borrowing so that people could finance their daily expenses. I REPEAT. “ease the borrowing so that people could finance their daily expenses”

    My question is, why do people need to borrow money to pay their daily expenses? Why do i need to loan money to buy food, gas and pay the cell phone bill??? Is paying for food and gas out of the paycheck/checking account/pocket cash is a bed thing. So the lucky have access to credit cards to pay for gas at 10% APR. The unlucky/deadbeats/poor credit got to payday advance and pays 200% interest to pay for bills….

    Why don’t the government get people to pay their bills from their money! Stop borrowing to spend. If you don’t have the money don’t buy it. Market is behaving normally when credit is contracting, but government is trying to mess with the natural forces….

  10. You’ve been on-the-money with your out-of-the-money commentary Mr. M. I quote you here in a recent Potomac essay:

    http://thepotomacjournal.com/np-NormanBall2.htm

    Here’s to being able to turn positive again at some point in our natural lives.

    nb

  11. There will be no revolution or revolt. The masses were fed “American Idol” and “Dancing With The Stars” and didn’t even realize the Constitution was being shredded by the Executive Branch. They’ll come up with a bigger stimulus rebate next year so everyone can have a 56″ HDTV in their tent or cardboard box with brand new programming (all in glorious digital bandwidth) to blow our minds and keep us numb.

  12. Well, since you’re (we’re) turning Japanese, here’s what we are in for:

    I think I’m turning Japanese
    I really think so

    No sex, no drugs, no wine, no women
    No fun, no sin, no you, no wonder it’s dark
    Everyone around me is a total stranger
    Everyone avoids me like a Psyclone Ranger
    Everyone…

    That’s why I’m turning Japanese…

    – Fortunately, this will not happen. We will refuse to feel Fleckenstein’s “enormous amount of pain for everybody” and BAIL, bail, bail. And if that doesn’t work, we will bail some more.

    It’s not so difficult.

    JAllen

  13. Japan was, and is, a nation of savers. We aren’t. The problem isn’t debt, per se. It’s that debt has been rising faster than income, which is unsustainable. The mortgage crisis is only a “for instance” of what happens. Adding more is nuts. Not only is it not going to work, it’s going to blow up the economy.

  14. We passed Japan’s model about 10 miles ago.

    The Treasury said they are going to dump money into companies directly (hoping they hire and not hoard like the banks did).

    Good Luck

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