From Naked Capitalism….

Let’s see, Bloomberg said yesterday that the Federal government had committed $7.4 trillion to lending facilities and guarantees. The total is now $8.2 trillion thanks to new programs announced today to aid borrowing by consumers, small businesses, and homeowners.

This modesty on the part policy makers is getting disgusting. Since people seem to be pulling numbers out of their hats, why are the numbers they keep pulling out just under a trillion? Why is no one out there promising a trillion dollar fix for a problem? What makes a trillion dollars too much to spend fixing a problem, but we can promise hundreds of billions of dollars every day?

From the Telegraph….

With retailers struggling to find credit and ordinary Russians being forced to change their spending, a vast lake of undrunk vodka is accumulating in distilleries across Russia.

Official statistics indicate a collapse in demand for vodka over the past two months. November inventories of unsold vodka stock have risen to 82 million litres, a 600 per cent increase from 2007, according to the National Alcohol Association.

This is a good thing. It might help cut down the alcohol related mortality that plagues Russia. Alcohol related mortality is a significant contributer to Russia’s demographic problems.

On the other hand, the same economic problems that keep the Russians from drinking are also going to cut down on the number of Russians willing to have children. So I overall Russia’s demographic problems are likely to get worse.

From the Naked Capitalist…

The Federal government has said that it is willing to lend or backstop up to $7.4 trillion to get the credit markets moving again. This figure comes from Bloomberg as a tally of all the commitment ALREADY made. Note that many of these have not been drawn down, hence the Fed’s and Treasury’s balance sheet have not (yet) expanded correspondingly. And some of these are in the form of guarantees, such as $1.4 trillion by the FDIC. Note the Bloomberg article fails to provide a tidy table showing how it came up with this figure. Critics will argue that the mixing of guarantees and borrowing facilities is an apples and oranges comparison, but the flip side is that the guarantees are treated by the authorities as a cost-free exercise, which is also incorrect.

From later on in the same post….

US debt to GDP stood at 350%. as of March 31, 2008. There are some items that are arguably overstated (lines of credit are included at their full amount, but second and third mortgages not included, and perhaps most important, contingent exposures like AIG’s credit default swap guarantees). It isn’t unreasonable to assume they net out.

The Fed’s proposed intervention is a bit more than half of GDP. However, note it (and the Treasury) has already made, and will continue to make, considerable commitments to non-US parties. AIG., for instance, has over $300 billion in CDS exposures in guarantees that permit European banks to evade minimum capital requirements (and AIG also has other, substantial non-US exposures). Similarly, the most likely cause of a Citi meltdown would be withdrawals of uninsured deposits, which were primarily overseas. Moreover, the Fed has also provided considerable indirect support to non-US entities via providing unlimited dollar swap lines to other central banks.

That is a long winded way of saying that not all of that $7.4 trillion applies to exposures that fall in the 350% debt to GDP figure cited above. Just to pick a number, say $6 trillion of the total goes to US debt. The US debt was $49 trillion. The Fed can commit less than 1/8 of the outstanding debt to solve the problem

As a nation we owe more then we can ever afford to pay. This comes from growing debt faster then GDP for many years. There are only to ways out of this mess. We can inflate our way out or we can allow many people to default. There is no third choice.

As for me, I prefer the default option to the massive inflation. At least under the default option there is a chance that the people who caused this mess will suffer more then those who played it straight. By contrast, massive inflation will benefit those with heavy debt and wipe out those who tried to save.

Given that the US is a democracy and a net debtor nation, I have no doubt about which solution this nation will chose in the end.

It was bad.

Check out Felix Salmon, Naked Capitalism, and Calculated Risk.

Edit: Marco Man worth checking out as well.

I been watching this Citi over the weekend. It seemed like things were merrily heading towards the government giving them a ton of money to solve all their problems. Then all the sudden everything went haywire.

Read this article from CNBC and you can get an idea of how fast things changed. Two updates on one article is hardly normal.

Naked Capitalism has more. Though I must say I take strong exception to this…

But the real problem is more basic. Why does the Administration need to be fair? This is a one-off, emergency measure. The fact that it is worrying about other banks demanding the same deal suggests the terms are not sufficiently punitive to Citi management (note the stress on the impact on the key actors). But even if it is not as nasty as it ought to be to Citi, people in power have the right to be capricious. Citi is unique on so many dimensions that it is easy to argue that a deal for Citi need not apply to anyone else.

I think that the idea that people in power have the right to be capricious is more harmful then Citi’s collapse could ever be.

Edit: Forgot to put the link in. Fixed now.

From the Wall Street Journal….

An unexpected drop in U.S. electricity consumption has utility companies worried that the trend isn’t a byproduct of the economic downturn, and could reflect a permanent shift in consumption that will require sweeping change in their industry.

Numbers are trickling in from several large utilities that show shrinking power use by households and businesses in pockets across the country. Utilities have long counted on sales growth of 1% to 2% annually in the U.S., and they created complex operating and expansion plans to meet the needs of a growing population.

“We’re in a period where growth is going to be challenged,” says Jim Rogers, chief executive of Duke Energy Corp. in Charlotte, N.C.

So who cares right? Everyone has problems. But these problems are going to be your problems. Cut your energy usage in an effort to save money? Does not matter. From later on in the article….

Utilities are taking a hard look at the way they set rates and generate profits. Many companies are embracing a new rate design based on “decoupling,” in which they set prices aimed at covering the basic costs of delivery, with sales above that level being gravy. Regulators have resisted the change in some places, because it typically means that consumers using little energy pay somewhat higher rates.

But it could be worse. We could live in Ukraine.

From the New York Times…

That collapse began a steady decline in Citigroup shares that snowballed this week as speculation grew that the bank might require a government bailout, a forced merger that would crush common equity holders, or an ouster of Mr. Pandit.

In the last five days alone, more than half of Citigroup’s market value was vaporized, and investors and analysts intensified calls for the bank to find ways to lift its stock price, including splitting the company, selling pieces or selling itself outright.

“They don’t have the sovereign wealth funds or other big investors to turn to anymore,” said William Fitzpatrick, an equity analyst for Optique Capital Management. “There are two remaining options: a federally forced merger or nationalization.”

A forced merger with who? Doesn’t everybody realize that Citigroup is the largest financial services organization in the world? How can they solve Citigroup’s underlying problems by merging them with someone who is smaller?

All this crazy talk surrounding Citi is making me think that John Hempton was close to the truth with his crazy little conspiracy theory.

From Naked Capitalism…..

But one thing that continues to surprise me is the frequency with which the US in 2007-2008 is being compared to the US of 1929-1930. I’ve mentioned in passing that China is in the position that the US occupied in the late 1920s: a massive manufacturer that was generating large trade surpluses, to the point where the imbalance was destablizing (under a gold standard, the US was sucking the metal out of its trade partners; the modern analogy is China’s massive foreign exchange reserves). And as the US was the epicenter of the Great Depression, we cannot be certain of the trajectory of this economic crisis until we have a sense of how bad things are getting in China and how good its policy responses are.

Reader Michael has been e-mailing me from time to time with not-pretty sightings on China’s responses to the downturn. This post from Michael Pettis tells us that China appears to be trying to keep its exports up, which is eerily parallel to what the US did in the Great Depression.

The point is good one. The Michale Pettis post that she links to is interesting. The conclusions that Michale Pettis and herself draw is all wrong.

Keynesian economics has never been able to solve the problem of overcapacity. Japan could not do in 90’s. The US could not do it in the 70’s. Nobody has ever been able to use Keynes ideas to solve any problem successfully. Yet his ideas it is still held out as the solution to the problem of overcapacity on the belief that everyone else did not properly follow Keynes ideas.

From dshort.com…

Over the 80-year period since 1928, the average volatility in the Dow is about 1.8%. There have been only 66 days when the intraday volatility exceeded 8%. That’s right — 66 out of over 20,300 market days. If they were evenly spread, that would be about one 8% plus volatility day every 14.5 months.

Here’s the amazing and rather disturbing part . . .

Sixteen of them have occurred since September 29th — two in the past five days. The Crash of 1929 had only eight. Another thirty followed during the ten-year Great Depression. Four were clustered around the Crash of 1987. Only two happened during the nasty 2000-2002 bear.

The current bear market has had a record-breaking nine consecutive days of 8% plus volatility (October 6 through the 16th). Second place goes to the Crash of 1929, with eight super-volatile days spread over a 14 market-day period (10/23/29 to 11/13/29).

A lot of people are given false hope by the sharp drops coupled with sharp upswings. They think that if they wait long enough, everything will go back to the way it was before. I wonder how long it is going to take before the majority of Americans realize that they have lost a lot of money they are never going to get back no matter how long they wait.