ECONOMIC BLUES: ROBERT BORASAGE

THE ECONOMIST: POSTCARDS FROM THE LEDGE

Check out the front cover of this week’s Economist. The have a picture of Mao wearing a Santa hat. How appropriate. Read on:

A CREDIT crunch, a liquidity squeeze, a subprime meltdown—the shape-shifting menace that has vexed the world in 2007 has been all these things. But now it looks like becoming a banking crisis as well. The grievous experience of two centuries of financial busts is that when the banking system is in difficulties the mess spreads. Straitened banks lend less, sucking money out of the economy. In rich countries that threatens to tie down companies and give ailing housing markets a kicking. The data barely show it yet, but the financial malaise could yet be aggravated by a broader economic malaise.

Back in October it briefly seemed as if the summer’s turmoil was abating. But a month later investors’ confidence took a giddying turn as the weakening American housing market jeopardised the banks’ capital. In December the leading central banks acted together to jolt the money markets into life. On December 18th the European Central Bank lent almost €350 billion ($500 billion) to tide banks over the new year. And yet most fear-meters, including, crucially, the price banks have to pay for funds (see chart), still register chronic anxiety.

This raises two broad questions. How gravely will the economy suffer? And what will become of the financial innovation that promised so much, but has proved so treacherous?

DOWN, DOWN DOWN THE ECONOMY GOES (AP)

Economic growth in October through December is expected to have slowed to a pace of just 1.5 percent or less. Gross domestic product measures the value of all goods and services produced within the United States.

“The economy is slowing down so fast this quarter you can see the skid marks as it slams on the brakes,” said Stuart Hoffman, chief economist at PNC Financial Services Group.

The big worry is that individuals will cut back on their spending and throw the economy into a recession. Former Federal Reserve Chairman Alan Greenspan and others say the odds of that happening have grown this year. Greenspan recently warned that the economy is “getting close to stall speed.”

To rescue the economy, Fed Chairman Ben Bernanke and his colleagues have sliced a key interest rate three times this year; those moves dropped that key rate down to 4.25 percent, a two-year low. Still, Bernanke has been criticized for not moving more quickly and aggressively to deal with the problems.

The collapse of the once high-flying housing market, a mortgage meltdown and a painful credit crunch, have propelled home foreclosures to record numbers. The problems have forced banks and other financial companies to rack up multibillion-dollar losses, have unnerved Wall Street and have the Bush administration and the Democrat-controlled Congress accusing each other of not doing enough to stem the crisis and scrambling for solutions to curb the fallout.

Credit problems have made it harder for people to get financing to buy a home, aggravating the housing slump. The inventory of unsold homes continues to pile up, forcing builders to cut back even deeper on construction projects. Home foreclosures and late payments are expected to get worse. The troubles in housing are expected to drag on well into next year, acting as a weight on national economic activity.

CHINA’s INVESTMENT STRATEGY

China bought a $5 Billion dollar stake in Morgan Stanley. What’s going on? The Australian reports:

THE Chinese Government has brilliantly exploited the greed inspired US sub-prime crisis to build a strong case against the predicted increase in protectionism against sovereign wealth funds.

After all, surely it will be hard for the isolationists in the US Congress to mount a case against the Chinese Investment Corporation after it has come to the rescue of key Wall Street firms.

Wall Street will also form a powerful ally for China and Middle East firms when, as sure as night follows day, the protectionist howls begin to grow as they did not so long ago when CNOOC, the Chinese oil major, had the temerity to bid for a mid rank US oil company.

China now has a 9.9 per cent stake in Morgan Stanley after last night’s $US5 billion ($5.8 billion) equity injection after the firm unveiled a $US9.9 billion write-down to push its fourth quarter loss to $US3.6 billion.

It also owns a chunk of Bear Stearns and in more tranquil days a $US3 billion investment bought it 10 per cent of buyout firm Blackstone.

The Singapore Government has acquired a $US10 billion stake in Swiss based UBS and Abu Dhabi came to Citigroup’s rescue with a $US 7.5 billion investment.

If ever the transfer of power from West to East was more apparent it is through deals like these, which appropriately enough came via Wall Street’s penchant for blowing itself up through lax risk controls and outright greed.

In Morgan’s case it was a $US14 billion bet on the CDO market which, if all went well, would have netted the firm a $US2 billion profit, but instead ended with a $US 7 billion loss.

That is some sort of disaster.

The China Investment Corp has just allocated $US67 billion to invest in offshore equities.

Australian Finance Minister Lindsay Tanner, a free market advocate who in years past has urged the scrapping of foreign investment controls, now says he is having second thoughts because of the political impact of, say, China bidding for BHP Billiton.

This year China has invested $US29.2 billion outside the country compared to “just “ $21.5 billion invested by foreigners, marking the first time the flows have reversed.

Bear takes $859 million 4Q hit

Investment News: The Bear Stearns Cos. Inc. posted its first quarterly loss in the company’s 84-year history.

NY TIMES: Bear Stearns Loss Presages More Turmoil

Bear Stearns reported its first quarterly loss ever, stung by the mortgage crisis that has swept markets across the globe.

Banks line up for Fed credit auction

Ninety-three banks bid in the central bank’s short-term credit auction on Monday, according to the Fed.

Compare this to last summer when the Fed offered money and there were few takers because they could get it cheaper on the Street. Not no more.