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Tuesday, September 23, 2008


credit crisis loss estimates still growing -- part 5

i referred to the average cost of financial system bailouts earlier, implying that america should expect something on the order of a $3tn need, and have also kept tabs on the top estimates for eventual damage. but -- as may make sense as the crisis deepens -- the upside estimates for cost and damage are growing.

yves smith notes a new milestone.

Treasury Secretary Henry Paulson's $700 billion plan to buy devalued assets from financial companies is ``a joke'' because it doesn't go far enough to calm markets, said Kenichi Ohmae, president of Business Breakthrough Inc.

Ohmae, nicknamed ``Mr. Strategy'' during his 23 years as a McKinsey & Co. partner, called for a $5 trillion ``international facility'' to be made available to financial institutions. The system could be modeled on one used by Sweden during its banking crisis in the early 1990s, he said.

now i think we've gotten to realistic estimates of what this could cost. the fact that ohmae notes the need for a coordinated global fundraising across many savings-rich countries implies his recognition that, should the united states try it alone, the consequences for the dollar will be catastrophic -- indeed, the bailout would be worse than the depression it was meant to avoid. even like this, the pressure on the dollar would be considerable.

UPDATE: marc faber concurs.

``The $700 billion is really nothing,'' Faber said in a television interview. ``The treasury is just giving out this figure when the end figure may be $5 trillion.''...

``The decline in home prices of 20 percent is a relatively minor decline so far and it has created so many problems,'' Faber added. ``The US is in much worse shape'' than Japan was when its stock market crash ushered in a decade-long slump in 1990.

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I was a bit disappointed at how vague the summary of Ohmae's $5 trillion "liquidity facility" was.

We already have liquidity facilities (TAF, etc) that keep on growing to match the demand -- don't we need a solvency facility??

Also I wonder if the $5 trillion is really an apples to apples comparison with past loss estimates (such as Roubini's $1-2 trillion)... same list of countries? same types of losses? etc. Roubini long ago estimated much more than $2 trillion in losses when declines in broader asset prices (not just financial system) are considered as well.

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