’29 = ’08 ?

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1929crash "As for Wall Street, Mr. McCain blamed the meltdown on “unbridled corruption and greed.” He called for a commission to find out what happened and propose solutions. His diagnosis and his cure are misguided. The crisis on Wall Street is fundamentally a failure to do the things that temper, detect and punish corruption and greed. It was a failure to police the markets, to enforce rules, to heed and sound warnings and expose questionable products and practices.

The regulatory failure is rooted in a markets-are-good-government-is-bad ideology that has been ascendant as long as Mr. McCain has been in Washington and championed by his own party. If Mr. McCain adheres to some other belief system, we would like to hear about it."  Editorial   NY Times

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End of the world?  End of days?   The Manhattan Syndrome?  Soup kitchens coming?  Swan diving Wall Street grubbies?  Ragnarok?  The Rapture on the way?  A chicken in very few pots?

It looks bad folks, really, really bad.  Show me the way to go home.  Show me….

pl

http://www.nytimes.com/2008/09/17/opinion/17wed1.html?em

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68 Responses to ’29 = ’08 ?

  1. Interesting how the federal fisc is open to Wall Street. The choice could have been made to directly attack the housing crisis by having actual homeowners mortgages (not mortgages held by investors that do not have the property as a primary residence) assigned to FHS and controlling the interest rates in such a way as to prevent misuse. Of course the real issue is not the housing market, that is just the reason stated because housing finance, particularly second trusts, were used to finance consumer spending. The actual problem has been caused not just by regulatory failure, but the failure of the legal and accounting professions because they authorized all the off-the-books transactions, derivatives, auction rate securities, CDO’s, hedge fund operations and other things which clearly prevented the basic standard of on the record statement of the fairly stated financial situation of many wall street firms. Looks like Morgan Stanley is next up for going down the tube. FED’s announcement of an additional $180B injection just indicates that the cash drawer is open and now the DEMS add their two cents by walking away and indicating that they will have an early Congressional recess. Time for a coherent political philosophy and I suggest throw the ins OUT!

  2. SubKommander Dred says:

    Pat;
    Yes, it does look bad. I’m not terribly surprised about these events, however. Ponzi schemes usually end badly. And Finance, Insurance and Real Estate over the past 8 years has been the mother of all Ponzi schemes. FIRE sale, anyone?
    SubKommander Dred

  3. David Habakkuk says:

    If there is one economist who has been consistently right about the way all this was likely to play out it is Nouriel Roubini, the New York University professor who runs RGE Monitor.
    Following the takeover of Fannie and Freddie, Roubini produced a post entitled ‘Comrades Bush, Paulson and Bernanke Welcome You to the USSRA (United Socialist State Republic of America)’:
    Concluding the post, Roubini stresses the role of ideological blinkers — in a way directly parallel to arguments repeatedly made on this blog about the distorting effects of such blinkers on U.S. foreign policy:
    ‘Like scores of evangelists and hypocrites and moralists who spew and praise family values and pretend to be holier than thou and are then regularly caught cheating or cross dressing or found to be perverts these Bush hypocrites who spewed for years the glory of unfettered wild west laissez faire jungle capitalism (and never believed in any sensible and appropriate regulation and supervision of financial markets) allowed the biggest debt bubble ever to fester without any control, have caused the biggest financial crisis since the Great Depression and are now forced to perform the biggest government intervention and nationalizations in the recent history of humanity, all for the benefit of the rich and the well connected. So Comrades Bush and Paulson and Bernanke will rightly pass to the history books as a troika of Bolsheviks who turned the USA into the USSRA. Fanatic zealots of any religion are always pests that cause havoc and destruction with their inflexible fanaticism; but they usually don’t run the biggest economy in the world. But these laissez faire voodoo-economics zealots in charge of the USA have now caused the biggest financial crisis since the Great Depression and the nastiest economic crisis in decades. So let them be shamed in public for their hypocrisy and zealotry that has caused so much financial and economic damage.’
    (See http://www.rgemonitor.com/roubini-monitor/253529/comrades_bush_paulson_and_bernanke_welcome_you_to_the_ussra_united_socialist_state_republic_of_america.)

  4. J says:

    Colonel,
    these ‘bailouts’ now going on, are nothing more than the transferring of corporate losses to the taxpayers.

  5. lina says:

    There’s no short term quick fix. None. Climbing out will be painful and expensive. Others can talk about the regulatory failures that contributed to the current debacle. I’m more focused on the future.
    America has created no new industry since the mid-90s. The reason the economy boomed in the Clinton years was the “digital revolution.” Bill Clinton gets credit for it because it happened on his watch. Since 2000, the American economy has been based on people suing each other and selling each other houses (footnote Tom Friedman). Half of that is now gone.
    America needs new industry. The answer: environmental technology. If the U.S. government gets behind the concept of “saving the planet” it will be the catalyst for all manner of new industrial innovation, and it will cause the next economic boom.
    It won’t happen in a McCain-Palin drill-drill-drill administration.
    It has a chance of happening in an Obama administration.

  6. GSD says:

    So, does this financial collapse officially usher in the end of the Ronald Reagan/Gordon Gecko, greed is good, let the markets decide era?
    -GSD
    As I have said elsewhere, my liberal big government just bailed out your conservative free market.

  7. Farmer Don says:

    Col. Lang,
    Just reality calling to USA.
    All can be adjusted.
    Spend the same on Military as other countries.
    Live in same size houses as other countries.
    Elect leaders that are policy wonks, as in other countries.
    Drive less and smaller cars like other countries.
    Buy less junk for self like people in other countries.
    Drink more expensive booze like in other countries.
    Smoke more expensive cigs like in other countries.
    Eat out less like in other countries.
    Don’t get a loan without 25% down like in other countries.
    Listen to the news about what is happening in the world, just like other countries.
    Worry less about sports and more about education, like other countries.
    Don’t have military bases around the world like other countries.
    The list goes on and on. Sounds terrible, but is just living with in your means.

  8. Duncan Kinder says:

    Getting elementary medical procedures such as colonoscopies and – less clearly but still arguably – chest CAT scans is always a good idea; and maintaining one’s health is always valuable.
    So getting such matters tended to now remains a good investment.

  9. Mike Martin, Yorktown, VA says:

    Let’s view this as a national trauma that COULD and SHOULD cause our nation to reflect on:
    – the morality and ethics we currently have in our economic world, and
    – the type of government we’ve brought on ourselves and what we want to see in the future.

  10. Drongo says:

    Have we nothing to fear but fear itself? Assuredly not. It is not the apocalypse. The world will continue whirling through space and history will continue lurching forward into the future. This crisis is merely a readjustment affecting most drastically mainly in the USA and UK where the main source of economic growth over the past three or more decades has been the production of debt by the finance industry rather than the manufacture of real things as in Germany and China and Korea and Japan. The likelihood of the crisis was long ago evident – ever since Bretton Woods post war system was terminated by Nixon, and Reagan and Thatcher decided the future lay in unregulated banking and insurance etc. America in particular has been living on borrowed money and gradually, piece by piece, the family silver is being sold off to Arabs and Chinese and Europeans (e.g. Barclays buying the best part of Lehmans). The worry is that this is (another?) step towards the decline and fall of the American “empire”. Less Sic semper tyrannis, more sic transit gloria mundi. Ozymandias….Perhaps the comparison, though, should not be with the fall of the Roman Empire, but the fall of the Roman Republic. As the constitution of the consular and senatorial res publica was subverted and by-passed by the warlords like Sulla and Pompey and Caesar, and finally “saved” and transformed by Augustus, so perhaps some American Octavian may appear as saviour and benefactor, father of the fatherland, commander in chief, emperor; a great leader who will “save” the constitution of the republic, restore around the globe the hegemony of the Great Nation and guarrantee bread and circuses for the masses.

  11. Dave of Maryland says:

    This is not bad! Not yet! You want bad, think of this:
    Suppose you are a small shopkeeper on a side street in Berlin. Suppose the year is 1916. The war is two years old. It is eating you alive. Already so many young boys have died, and for what? When, you ask yourself, will the good times of two years ago return? When? You have a son. He’s just turned 16. What will his future be? You are suddenly fearful.
    But the war goes on & then ends horribly. It’s now late 1918 & all the young boys are dead & gone. Including yours. The past two years, watching him grow up, complete school & then go into the army to a fate he could not escape, was a living nightmare.
    But now that peace has come, will things get better? No. There is a revolution. It is put down. An escapist, libertine, vapid, horrid culture arises. Then comes inflation & savings are ruined. You’re not yet back on your feet when the Depression comes & there are no jobs. A vulgar Austrian rabble-rouser & his thugs are suddenly in the streets…
    So think again of that lonely man, on that lonely day in a pub on a side street in Berlin in 1916. When would the “good days” of 1914 return? Only two years before?
    Not in 1919. Not in 1933. Not in 1945 with the entire city in ruins.
    Not until the mid 1960’s. In other words, not in your lifetime. Not in your children’s lifetime. When the “good times” finally return, your grandchildren are old.
    And that was only if you lived in the “lucky” west side of town. For those on the other side of town, life did not return to “normal” until the 1990’s! All because the Kaiser, long dead & gone, made a foolish decision on a foolish day many years earlier. If he knew what the outcome would be!
    I first had this nightmare in 2005. I still have it.

  12. Harper says:

    Yes, it is really, really, really bad. It is the entire system, one gigantic bubble, that has burst, not this or that individual bank or insurance company or hedge fund. The solution is really not mysterious. Under the US Constitution, you can put the whole mess through bankruptcy reorganization. Write off all the purely speculative debt, or at least set it aside for sorting out. Do what FDR did in March 1933. Send auditors to all the chartered commercial banks, and see which ones are solvent, which ones can be saved, and which ones are hopeless. Capitalize the banks by investing in real economic recovery–rebuild rail, water systems, energy (nuclear), hospitals, schools. Build our way out of the collapse, rebuild a genuine productive tax revenue base. It will take several generations to correct the folly of the past thirty years of deregulation, unbridled free trade, globalization, outsourcing, and the rest. In the meantime, wars are just too expensive to even consider, under the austerity conditions we are going to have to go through.
    History is always the best judge of what works and what doesn’t. When you look back at the periods of real economic recovery, going back to Hamilton, the World War II mobe, etc. you see how we always build our way out of a financial catastrophe, and never bail out the banks at the expense of taxpayers. Our Constitution says the general welfare comes first, and never mentions the obligation to bail out parasites. Congress needs a good kick in the ass to do their job. Bush, Paulson, Bernanke, never even consulted with the Congress. Bush never called Congressional leaders to the White House to confer on how to deal with the biggest crisis in memory. Instead, they brought in the very Wall Street parasites who created the mess, and they came demanding blood and flesh.

  13. Fred says:

    “In this present crisis, government is not the solution to our problem; government is the problem. ”
    Ronald Reagan, 1st inaugural address. http://www.reaganlibrary.com/reagan/speeches/first.asp
    This is the logical result of the Reagan revolution. Ideology has prevailed over experience.
    Pat, to quote a truly great American : “The only thing we have to fear, is fear itself…”
    It is high time the citizens of this country put down the Buds and fantasy football papers and spend a few hours fulfilling their first obligation as a citizen, get informed, accurately, about what is happening. Turn off the buzzword ‘new’ programs and do a little work. Then get involved in selecting your representatives in the ‘government of the people’.

  14. bstr says:

    The editorial from the NYT is correct. It is impossible to eliminate corruption and greed (the McSame policy.)One only eliminates the conditions of being human by elimination of humans. One tries to police, to fence in, to regulate behavior. That is about a much as can be done. There will always be inequality and the best evaluation one can make of a given society is its treatment of those among them having few resources. Regulation does not have to mean shackles for the ambitious. It can mean as little as concern for the upkeep of the playing field.

  15. Clifford Kiracofe says:

    Economic security is fundamental to national security and thus to the “General Welfare” of this republic. George Washington emphasized this in his Farewell Address.
    National strategy/national security policy must include economic security along with diplomatic, political, psychological, and military components.
    The White House and Congress have betrayed the American people. Ideology, corruption and the like account for this. It is not a matter of political parties as BOTH are corrupt and incompetent. Perhaps they can learn and be educated. But certainly not by more Neocons, “free-marketers,” Ayn Randians, Armegeddonists, Dominionists, and assorted other wierdo cults loose in this land and often found in “high places.”
    Will the American people through the machinery of THEIR government exercise THEIR SOVEREIGN powers over economic matters? Or will the cosmopolitan international financiers and other transnational economic forces continue to subvert and exploit this republic under the guise of so-called “globalization” and whatever other slogans they can muster and cycle through their “news” media propaganda transmission belts?
    Our NATIONAL problem and challenge, involving the COMMON fate of some 300 million US CITIZENS, is not limited to the stock market or commodity market manipulation. At a minimum, we need to focus on the real/physical economy, re-industrialize, massively invest in infrastructure, and grow and protect our NATIONAL capital markets. And what about those unsustainable twin deficits: budget and current account? What about our present unnecessary and costly wars and systemic military Keynesianism?
    This is a tall order as current US national strategy appears as some delusional variant of 19th century Mackinder-ism complete with exotic and narcissistic geopolitical fantasies.
    Like Pogo says, the real problem is us, it is here within our national boundaries, it is NOT is some Third World sewer like Waziristan filled with some hundreds of psychopathic takfiri terrorists.

  16. VietnamVet says:

    Nouriel Roubini calls the neo-Republicans “fanatic zealots”. Paul Krugman called them “radicals”. Both are economy professors. The Iraq invasion and fighting never ending Holy Wars is crazy. Bullying nuclear Russia is frightening. Fanatic radicals control the GOP. To keep in power they lie and spin, and hold the American voter in total contempt.
    The USA can recover from this disaster but it will take rational leadership. The American Century is over. It is time to rebuild the Republic based on the foundation that we have certain unalienable Rights, that among these are life, Liberty and the pursuit of Happiness.

  17. Eric Dönges says:

    I think what some of you that are arguing the banks shouldn’t be bailed out are missing is that banking is based on confidence – the confidence that you’re not going to loose the money you have in your bank account. If that confidence is lost (which it surely will be if several major banks collapse, taking peoples’ life savings with them), people will want to all withdraw their money at the same time, completely wrecking the entire banking system, even those banks that, without the run, could weather the crisis without any outside intervention. You would effectively pull the rug out from under the economy. And since this is the U.S., we’re talking of the worldwide economy. The last time this happened it wasn’t pretty, and it would probably be a lot worse if it happened again.
    While I agree that bailing out the banks in a way that rewards the shareholders of the failed banks is a terminally wrong idea (but as far as I am aware, this has not been the case in the latest round of bailouts), so is letting the entire banking system simply collapse.

  18. Ormolov says:

    Yes. Bad. Major dislocation. Suffering ahead. Getting worse.
    But then what? Are we going to leave this same political class in charge to repeat its mistakes, as we did after the 1987 fiasco? Or will this be our twice-in-a-century opportunity to use cataclysmic change to our advantage?
    I for one say let all these institutions fail. Smart money tells me on the radio every day that covering AIG’s debt, and everyone else’s too, is at best a 50/50 proposition, which means there’s an equal chance that we’re just burning up any real capital we have covering the losses of all this imaginary fake capital. Why not let it all fail? Nobody truly liked this system. Even the financial piranhas who brought on this mess with their greed and lack of foresight didn’t like the system. They struggled against it and forced loopholes into it and bought the regulators and starved them of operating budgets.
    Let’s start over, shall we? Instead of focusing on how to minimize the dislocations, let’s burn these crops in the fields and plow the ashes under. Neither Obama nor McCain is up for this job quite yet. They are still beholden to the money-men, of course. But what about six months down the road, when we’re much worse off and we’re still trying to turn 2009 into 2006? Bush will be vacationing in Paraguay and Cheney will be Oil Overlord CEO of Dutch Shell, but we’ll still be here chasing our nostalgia.
    INSTEAD, let’s completely re-think the financial and corporate landscape. Let’s limit the powers of the wealthy to do this to us again, just as we did during the New Deal. Let’s begin a whole new WPA of biotech, clean energy, local farming, etc. The ideas are out there, ready to be implemented. It has always been inertia and the obstruction of vested interests that have kept them from happening. But now, there is no inertia in free-fall, and we can overcome the obstruction of these interests, handicapped as they are by the exposure of their bankrupt policies.
    I’m sure the window is rather narrow, but it will widen as the financial crises spread. We can end our wars, reform our economy, employ our citizens, and save the climate if we just take the step.
    If not… well, at least the climate will gain a slight advantage from a loss in productivity. Although we may be stuck with dirty old technologies, there will be that many fewer smokestacks in China and Ohio destroying our atmosphere.

  19. Oh it’s probably bad.
    However I’m with Farmer Don. Do exactly what he says and we’ll be all right.
    The military part of it will really make the politicians and Wall Street scream, but it’s quite doable and very sensible.
    Col. Lang, re soup kitchens – soup kitchens have been with us all along. The food banks have been under terrible strain this year. Cupboards bare. New people lining up. Middle class people live in their cars in specially marked parking lots in Southern California, while holding down jobs that pay for food and gas (but no health insurance or housing). The poor live in Hoovervilles (Bushvilles?) beneath bridges in Riverside County.
    Sharon Astyk at Casaubon’s Book blog has been warning of this and other crises for quite some time. I have been following her suggestions for storing food staples, and we’ll be buying a large water drum in case of earthquake. Many folks in Houston would have appreciated 55 gallons of home-stored water this past week. Have a back-up plan for water and power if the public utilities get interrupted. Our authorities can no longer be trusted to keep the cogs turning efficiently.
    Investing in gardening and emergency equipment, and energy efficiency around the home, is another prudent way to spend your money right now. Your choice: keep it in the bank at negative interest, or put it into hoes, seeds, hand-cranked flashlights and such? If things get really bad and people need to grow their own food to survive, what do you think the price of rakes and spades will do?
    My children and I put together a home-made solar oven as a “fun” project. A solar oven may have to feed us one of these days. Plans are easily available on the internet. Our city house has a large lot with a stream; we don’t have food plants in but the children are learning gardening at school and we’re ready to start raising pumpkins, sweet potatoes, fava beans, kale and other survival food.
    Above all, don’t panic!

  20. Curious says:

    http://www.marketwatch.com/news/story/fundwatch-money-market-funds-see/story.aspx?guid={E322BE61-F830-4B58-94D8-C207E14714D3}&dist=hpts
    Money funds see record $90 billion one-day drop
    Putnam closes fund; Columbia, Dreyfus act to save $1 a share net asset value
    Putnam said that the run on its fund made it unable to keep the afloat. “Constraints on liquidity in money market instruments created the risk that in order to process redemptions, the fund would realize losses in selling its portfolio securities,” it said in a statement. “The Trustees determined to close the fund to ensure equitable treatment of all fund shareholders.”
    The statement did not say when shareholders will receive their money, nor did it say whether the payouts would maintain the fund’s $1 a share net asset value.
    ——-
    Remember that nosebleeder cash infusion that causes global commodity price spike?
    They are doing it again, except twice as large now. So expect crazy inflation from $250B cash being injected into the global system.
    fun fun fun ….
    http://www.bloomberg.com/apps/news?pid=20601080&sid=asIS6b3aIbDo&refer=asia
    The Federal Reserve almost quadrupled the amount of dollars central banks can auction around the world to $247 billion in a coordinated bid to ease the worst crisis facing financial markets since the aftermath of the 1929 Wall Street crash.
    The Fed increased the amount of dollars that the European Central Bank, the Bank of Japan and other counterparts can offer from $67 billion “to address the continued elevated pressures in U.S. dollar short-term funding markets.” The Bank of England, the Bank of Canada and the Swiss National Bank also participated. Several of them lent funds in their own currencies as well with the Fed adding a record $105 billion in temporary reserves.

  21. Curious says:

    And they were talking smack against the russian? Do they have enough money to play against Russian sovereign funds? utterly laughable. people were shorting FTSE like the biggest party on earth in the past few days. Easiest money to make in the planet.
    http://globaleconomicanalysis.blogspot.com/2008/09/britain-bans-short-selling-citing.html
    Britain Bans Short-Selling Citing ‘Extreme’ Market Climate
    UK Poised To Crash
    Banning short selling is an act of pure desperation guaranteed to fail. Short term, I do not know what the market will do, but if shorts are squeezed out an air pocket below will form just as happened in the US with share prices of Fannie Mae (FNM) Freddie Mac(FRE).
    The simple fact of the matter is that short sellers add liquidity to the market. Barring bankruptcy, shorts have to cover at some point. Also short selling is a necessary function of market makers.

  22. Curious says:

    See FTSE chart
    http://uk.finance.yahoo.com/q/bc?s=^FTSE&t=3m&l=on&z=m&q=l&c=

  23. JoeC says:

    Lina –
    Don’t hold your breath for a US “ET” industrial revolution. China is already moving past the US with innovative advanced coal technology with carbon capture and sequestration, having much deeper engineering talent and hands on knowledge in this area. I know of one very innovative US technology R&D company in this “space” that has their entire research staff in Shanghai – with only a small front office in the Bay Area. Another smart, innovative (and small) US company has developed joint venture teams in China to develop and deploy innovative energy technology including wind power in China – and are now bringing their China partners into the North American market. I also see projects deploying new energy technology go from idea to commercial production in less than two years in China that would probably take a decade in north America. With facts like these “on the ground” I don’t think “ET” will save us. We don’t have the talent and we can’t move fast enough to lead in this area. We do however have some small smart companies that have demonstrated that working with China can be a “win-win” situation for both sides, but inevitably much/most of the equipment manufacturing will be in China. smart

  24. VictoriousShed says:

    In the midst of the tumult I can hear cackling and even shouts of joy from certain presumably patriotic citizens.
    How long before the chorus for elimination of social programs and the dreaded entitlements tunes up? “An up or down vote: destroy your country or do what we say?” This is not to be a partisan call, of course – both alleged sides of the USA political class are generally behind the movement of money upwards and the losses downwards, like it or not.
    Current events provide an excellent background for radical change. Who will benefit from it?
    Ultimately what scares me the most is best summarized by song lyrics:
    “Everybody’s singing with their hand on their heart / About deeds done in the darkest hour / That’s just the sort of catchy little melody / To get you singing in the showers.”
    (DPA MacManus)

  25. John Howley says:

    No new taxes and cheap credit helped to keep American voters fat and happy during the disastrous (and still not finished) Iraq war.
    We re-elected Bush we wuz so happy!
    After Bush, we will pay. Like a hangover.

  26. Cieran says:

    It’s bad, but it points the way to good.
    I’m with Farmer Don completely on this, and if we’d all adhere to his wisdom, we could kiss CDO’s and MBS’s and SIV’s and GSE’s goodbye and get back to doing what we ought to, namely living as informed citizens of that great experiment called America.
    As the saying goes, “if you can’t be a good example, then you’ll have to serve as a horrible warning”. Americans used to enjoy behaving as the former — it’s high time we stopped serving as the latter instead.

  27. lina says:

    JoeC: I disagree that we don’t have the talent. Currently we don’t have “the will.” If Obama wins the election, wait and see who comes out of the woodwork with new innovation. Algae-based fuel anyone? Go talk to Van Jones. We could probably retro-fit every home in America with solar energy for the cost of two months in Iraq.

  28. taters says:

    From Krugman
    [..]
    The real answer to the current problem would, of course, have been to take preventive action before we reached this point. Even leaving aside the obvious need to regulate the shadow banking system — if institutions need to be rescued like banks, they should be regulated like banks — why were we so unprepared for this latest shock? When Bear went under, many people talked about the need for a mechanism for “orderly liquidation” of failing investment banks. Well, that was six months ago. Where’s the mechanism?
    And so here we are, with Mr. Paulson apparently feeling that playing Russian roulette with the U.S. financial system was his best option. Yikes. [..]
    http://www.nytimes.com/2008/09/15/opinion/15krugman.html?pagewanted=print
    Well yes, it is always easier to keep the horse in the barn.
    Despite his personal woes, I thought Eliot Spitzer was one helluva of an AG for the state of NY and he performed an incredibly valuable service for all of us during his tenure – keeping his eye on Wall Street.
    In the past, I have been lukewarm to Sen. Obama – however I much prefer him over Sen. McCain.
    And I’ve been warming up to the junior senator from IL. One reason? I like Sen. Obama’a plan for my state of Michigan.
    http://my.barackobama.com/page/content/mieconevents
    And Gene Sperling, whom Bill Clinton referred to as the “MVP” of his admin. has signed on as an advisor.
    He and Wes Clark were two big reasons I was a Hillary supporter.
    http://en.wikipedia.org/wiki/Gene_Sperling

  29. Paul says:

    Now we know what Bush was doing while hiding under the bed.
    He trotted out his slave, Paulson, to ferret opinion with the congress about a new Resolution Trust. The details of the scheme have not yet been dislosed but it basically amounts to the government buying the “bad debt” of banks to restore “confidence” so they can resume business as usual.
    The RTC involved something in the order of a $400 Billion problem. The present “crisis of confidence” (theft, in my view) liability is unknown but it is far greater than a half a trillion dollars.
    This is no more than a “get out of jail free” card by Bush to his Republican friends.
    Ordinary people who pay the bulk of taxes in this country would underwrite this scheme. These ordinary Americans cannot get the time of day from the government.
    Socialism for the rich? You bet it is.
    Bailing out AIG was bad enough; this new ploy is idiotic and should be dismissed out of hand.
    Shame on us if Republicans regain any position of governance after November 4. A major league bloodletting is needed on Wall Street.

  30. Kevin says:

    Abolish the private central bank and their kabalistic paper money alchemy.
    Ever read Faust?

  31. alnval says:

    Col. Lang:
    This economic crisis although familiar in the context of 1929, is also strangely similar to the economic crisis faced by post WWII Great Britain.
    Almost bankrupt by the war, faced with an untenable trade imbalance, the cost of continuing military committments, forced to negotiate a loan from a foreign government (the US) which would no longer put it on the tab, difficulty in stablizing its currency and unable to increase domestic production without reducing domestic consumption by continuing wartime rationing, Britain finally got real relief as a beneficiary of the Marshall Plan.
    Granted they did a lot of nationalizing but the Attlee government presumably did it out of conviction and not necessity. One wonders, however, given their economic circumstances (and our own) whether conviction was really necessary.

  32. Curious says:

    They keep bailing out big banks and their buddies while consistently burning people via inflation. Thus persistent slowing economy. They think investment banking is the actual goose that created the golden eggs, instead of average folks.
    The RTC is basically “bailing out the rich agency” (cheap money to help liquidate those funny papers)
    I mean you dont see, mortgage resolution agency or small business task force do you?
    So basically, it’s more of the same.
    They are trying to save the inverted pyramid by keep patching the top heavy scheme by using federal budget.
    btw, Condi tries to pick a fight with the Russian again. Which is amazing. Still under the illusion she can save Shakaasvili. Russia in the meantime is working with Turkey. (no more free passage into the black sea. Shakaasvili will gasp for air in a few months)

  33. Bobo says:

    If history is any lesson this will take a long time to work out of the system. What happened over the past week happened in 1929 and it took 10+ years to work itself out.
    Now that our Service Economy has been laid bare how many people will be walking the streets looking for work and stopping at Soup Kitchems for nourishment over the next year or so. If you listen to Roubini it will be worse.
    My hats off to Henry Paulson for standing up and doing a few things versus Bernanke who has been at the printing press urging it to go faster.
    Who knows whats going to happen but it does not look good.
    Our politicians are doing their best to pass the buck and go home early so they can pass it again. That is not out of charecter.
    Cash is King, stuff as much as you can under the mattress so you can sleep better.

  34. Patrick Lang says:

    All
    It seems that the choices are:
    – Let the whole credit bubble collapse as the markets resolve the matter through liquidations. This will create a massive deflationary situation with accompanying high unemployment. The pain will go on for years. Some of you think pain is good in and of itself or that the United States should be punished for its evident lack of virtue. I do not.
    – An “RTC” kind of institution. This would be much bigger than the last one. Where would the money come from to capitalize this beast? The US Government directly? This would mean a massive creation of yet more fiat money, a great deal of inflation at least initially, probably followed by vast deflation when THAT bubble bursts. The old “RTC” had a lot of real assets that it took over and over a period of years converted them into cash with which it sorted out the problem. These banks and other financial whore houses possess some real assets out of which something could be made eventually, but a great of the rotten paper is just the effluvia of the nocternal emissions of 30 or 40 somethingish little pricks in expensive suits. You remember them. – the lords of the universe. This rotten paper has no value. The loss would simply have to be absorbed, ultimately by you and me (if you are American). We are talking trillions folks, trillions.
    Make your choice folks. Make your choice. Am I angry? Yes. I am angry, but my wife says that I have been angry for a long time.
    This comment does not give you an open season license for vulgarity of the kind that I just used. pl

  35. R Whitman says:

    While the US Government is busy nationalizing companies, I wish they would get some profitable ones for a change. How about nationalizing the US holdings of such foreign owned firms as Shell, BP and Citgo. For an encore we can then start on those formerly US companies that moved their headquarters to Bermuda to lower their US taxes. Tyco, Nabors and Haliburton come to mind. Profits from these operations should offset the losses at AIG, Fannie Mae, Freddy Mac and Bear Steans(GM and Ford to be added shortly).

  36. Trever says:

    Col. Lang,
    What’s your take if someone conducted a false flag/terrorist operation- it would seem the conditions would be ideal. The cynic in me initially considered domestic actors but came to realize foreign elements who have no stake in, or don’t care about, our system more likely. Certainly domestic disorder or a natural disaster would most likely knock us to the floor but I can’t help but wonder what would happen if…
    Trever

  37. I don’t think “America deserves to be punished…”
    I do wonder however, if this crisis might not have the silver lining of forcing us to consume less and reorganize in ways that will improve energy efficiency and reduce energy consumption, which will help our environmental problems immensely. The economic system as set up is not sustainable in the long term. There’s enough for all of us; we may have to reorder our priorities however.
    Also: perhaps in crisis our society will reach into its reserves of self-reliance and service to community and become more cohesive.
    I have weathered all kinds of personal hard times, and some hard times that were related to larger political storms. I believe we humans can work through these latest troubles and use them for our moral and spiritual development.
    I’m just an old-fashioned American optimist.

  38. rjj [(rees jones-jones) not the same poster as rj)] says:

    This comment does not give you an open season license for vulgarity of the kind that I just used.

    Perish the thought.
    This is from a May broadcast of “This American Life.” Can’t link directly to the audio file.
    The Giant Pool of Money
    Most people have probably already heard it.

  39. euclidcreek says:

    Mr. Stress writes:
    last night I dreamt I was standing in a line
    a line like they had in 1929
    John Brim
    “Tough Times”
    recorded early 1950’s

  40. Curious says:

    If I were to fix the mess:
    1. that AIG, and fannie mae?
    well those are big enough to save housing for folks and insure the rest. Rudimentary insurance and investment companies. The rest are just computer system and transaction. Banking institutions, who cares. Unplug the computer and write new program.
    2. pick one or two the healthiest bank and hold on to it.
    3. then set the world on fire. Burn down every thing. And I mean every single investment banks there is.
    no RTC, no bail out, no public money without transparency. Like any sensible capitalist, if I suppose to spend money on something, I want to know absolutely inside out what I am buying.
    no funny paper, no backdoor dealing I don’t know of, no secret dealing, no old boys network hanky panky.
    4. naturally the calamity will slows down the world economy tremendously (nearly crashing) but I am confidence, if we gonna bail out something, then we should bail out something that we know perfectly well what it is that we are bailing out.
    so only very healthy companies will survive this, one with very healthy balance book worthy of loan.
    5. The rest will end up in yard sale. The healthy company will buy out the junks.
    incidentally, this is the VERY advice IMF is giving to every other countries that ask bailing out.
    IMF basically says: FU. let the market sort it out. Liquidate everything that can’t function without making profit.

    btw, if it is RTC.
    I want everything touched by tax payer money be put online. The information should be public. This way shaddy accounting and bad investment would be exposed. I bet none of them dare asking for money this way.

  41. Cieran says:

    Graywolf:
    The regulators didn’t do their job.
    Who are the regulators?
    Government bureaucrats.
    Lets put more (like health care) in the hands of these pencil neck drones?

    You might want to check your watch, and see if it’s set to the year “2008”.
    What we’ve learned since 2001 is that any and all federal government employees are expected to swear loyalty to the policies of the Bush administration, under penalty of losing their jobs (and pensions, etc.).
    The list of agencies involved is long and distinguished (e.g., try googling “Lurita Doan”) , and said list even includes the Department of Justice (ever hear of Monica Goodling or Alberto Gonzales?) DOJ is not supposed to be politicized, but since 2001, it has been.
    Regardless of what you may think, it’s not the federal employees who are asleep at the wheel here — it’s the top-level political appointees who decide the implementation of policy in this millenium. And you were referring to this millenium, weren’t you?
    The vast majority of federal employees are hard-working citizens who care about this country enough to roll up their sleeves and work directly on its behalf.
    And you owe them an apology.

  42. Andy says:

    Perhaps there is another way. I am a layman at economics, but some smart people have pointed me to this.

  43. Cieran says:

    Colonel:
    Am I angry? Yes. I am angry, but my wife says that I have been angry for a long time.
    You should be angry, and you should be joined in that anger by any other citizens who live responsibly within their means and who actually work for a living (as opposed to making money via the rigging of speculative games).
    The path forward is bleak, but the ruin that lies before us today is only part of the problem. The rest of the mess lies in the future, as we (and our children, and their children) pay back these awful debts due for the wild parties of speculative excess (that we weren’t invited to), and with a currency debauched by inflation to add insult to the economic injury.
    Those of us who chose to live within our means and to perform real work towards building a better world are once again being handed the handles of the mops that will be needed to clean up the messes of those who didn’t play according to the rules.
    Anger is an eminently reasonable response to such treatment.

  44. Buzz Meeks says:

    I am heartened to see the strongly progressive comments and suggestions posted here to cure the land of the toxic curse of rethuglism.
    When I was a kid I read some of Ayn Rand’s hokum after watching Gary Cooper and Patrica Neal in Fountainhead on the Late night movie show. I always thought her writings were similar to Gulliver’s Travels; a satire on craven conservative scum with the inventors and heroes being progressives from a New Deal mold.
    Unfortunately, but not surprisingly, the neo-cons took her seriously and their interpretation of her screeds has brought these results implemented by St.Ronnie the Drooler.
    The GOP, the party that wrecked America; America’s Fifth Column;Israel Firsters. Take your pick or invent new ones to inject into the campaign dialogue.It doesn’t look Obama isn’t going to do it.
    Buzz Meeks

  45. McGee says:

    In 2007, after watching the Dow Jones Industrial Average rise from a post-9/11 low of around 7600 in March 2003 (the time of the Iraq invasion) to over 12000, I thought it might be interesting to take a look at which of the Dow Jones 30 were responsible for this to me inexplicable increase. Based on the economic indicators I saw in my everyday life the economy then and now was far from booming and at best flat. What I found was that ALL of the increases during this period were in the financial services and defence spending sectors of the DJ 30 – the consumer and general industrial sectors were all flat or significantly down. So for the past 5 years the Bush/Cheney economic boom has been precariously balanced on a two-legged stool, one leg of which just collapsed. Makes for a lovely conundrum for the Dems if they do get into office and choose to end the folly in Iraq, no?

  46. Dana Jones says:

    Am I angry? Yes. I am angry, but my wife says that I have been angry for a long time.
    Yes, but are you angry enough to fight for holding those responsible to account? We not only need to fix this, we need to punish those that got us into this mess in the first place. We need to hold the Bush administration ACCOUNTABLE. They need to be tried and if found guilty of high crimes, punished just like any other criminal in this country. If not, well, we might as well just BURN the Declaration of Independence, and the Constitution on National TeeVee.
    We CAN NOT let this gang of thieves and crooks just walk away from the mess they have created. Will someone, somewhere, somehow call out for justice? Oh God, we cannot let them get away with wreaking this (sadly, formerly) Great Country. We just cannot. Will the People ever wake up from the dream that they have been in for the past 8 years? Hello, its turned into a nightmare and you are awake! WAKE UP!
    Sadly, I feel pretty hopeless. I feel that McCain will be selected, and things will just keep getting worse, and worse, and worse…

  47. Patrick Lang says:

    Buzz
    Progressive? Hey!! I consider the neocons to be leftists. pl

  48. zanzibar says:

    Pat
    I understand your anger. Many of us feel it. Especially since this was all predicted and many, many people who kept warning about it were just laughed off the stage. Entire blogs were spawned chronicling the approaching tsunami. Anyone that wanted to know had the information. Yet it was not prevented.
    This too shall pass! But…will we learn anything or just repeat it as we have been doing for the past few decades.
    Whether we use asset liquidation or currency debasement our standard of living will decline. All we are doing is addressing the symptom not the cause.
    We know that none of our politicians will choose the direct pain of liquidation, so we can be certain that they’ll use currency debasement. Printing is a lot easier and the helicopters have already started taking off. Paulson is not going to bankrupt his retirement plan. And Barney Frank and Chuck Schumer who have never met a taxpayer bailout of Wall Street they didn’t like are all for RTC2. Note that both played a significant role in the GSE debacle. Harry Reid at least admits he has no clue and says he will look to the guys who have played defense with the same playbook that got us into the mess for the right answers! I am surprised no one’s asking GreenScam – probably the single most culpable person in all of this. They’ll treat the symptoms in the short term. We know what it will look like – those who took outsized risks and bet the farm will still get to run the farm and keep the loot. They’ll throw a sop to those among us citizens who got into the greed is good theme and speculated on homes we could never afford by reducing our mortgage balances without any penalties. As usual those that were prudent will pay the most – ensuring that in the next go around there will be even more of us who will join the party. And believe me that next go around will be just round the corner.
    What I am pessimistic about however is if we as a nation will ever address the causes. Or by the time we get down to it some generations hence if it will even matter as the rest of the world would have passed us by.
    I think what we have seen in the financial realm over the past few decades is mirrored in other areas. Our lack of interest in history and first principles. Common sense to temper the shining “new” theories with “scientific” labels. To recap for some with short memories, in 1980 financials represented only 6% of the capitalization weight of the S&P 500. Last year they were nearly a quarter and represented a third of the earnings. So an old staid business that intermediated capital became the large core of the US economy in over 2 decades. IMO, the 80s marked a sea change in attitudes that provided the underpinnings for what we have seen since. Prior to the 80s our capital markets were known for integrity (although Nixon sealed the deal on a fiat currency). Financial statements of publicly traded companies were trusted. Balance sheets were deemed important and built to be like Ft. Knox and the notion of meeting Wall Street quarterly estimates was not the gospel. Business performance was known to follow a rhythm of going up and down. Only a small fraction of corporate debt was rated “junk” and there many US corporations with AAA rated debt. Then came the 80s with the Reagan Revolution and supply side economics that took debt into the stratosphere and glorified greed and spending. With Gordon Gecko as the icon the swashbuckling pirates – Mike Milken, Ivan Boesky, Carl Icahn, et al, in the name of increasing shareholder value came upon a formula of asset stripping and substitution with debt. Milken was the first guy to receive an annual wage package of a billion dollars. Then came the 87 crash and Greenspan’s first of many bailouts. Of course Boesky and Milken did do time. We then moved to the next boom time and the S&L shenanigans. Once again regulatory forbearance and leverage created a real estate and credit boom that ended in disaster. There was a good amount of corruption in this scandal with some notables being Neil Bush and Silverado and John McCain and the Keating 5. Some 700 thrifts were closed and the taxpayer wound up paying something like $200 billion. Every time Wall Street coughed Greenspan coughed up. By the time we hit 2000 Glass-Steagall was repealed thanks to Phil Gramm, Bob Rubin and Bill Clinton. We were off to the races. We had the epic “new paradigm” dotcom stock market bubble followed by the “Housing ATM” and “securitization” bubble. In each case standards became more lax. Monetary policy was relaxed and prudence rules were removed. Financial institutions essentially became gigantic leveraged hedge funds. Wall Street paid out hundreds of billions in bonuses based on sham “accounting profits”. Lehman paid its managers $5.7 billion in bonus in 2007. The whole edifice has now toppled from its own weight and all the accounting gimmicks. And here we are using the same playbook and the same plays. Nothing learned. No accountability. Socializing all the losses with more and more debt.
    We are now moving dodgy assets and losses on to the taxpayer balance sheet. The Fed is monetizing funds for these large bailouts. Real incomes for Americans have remained stagnant for years. Our savings rate is now negative. We are dependent on our competitors to finance our day to day operations. Both political parties have failed. After all this chicanery by our elected and business elites our citizenry have yet to demand our Congress do our business – restoring rules of prudence and transparency in our financial affairs. Investing our taxes on infrastructure here at home. Why?

  49. taters says:

    It will take the same kind of thinking and action that FDR and his team took. Not necessarily the same ideas although I do see a need for an aggressive public works admin. We are seeing the results of the unfettered machinations of the right and it ain’t pretty.
    I really like Sperling’s idea of creating a new investor class – consisting of middle income and the working poor. And it would be good for the market.
    I can hear the cries of SOCIALISM! already by the naysayers. I guess it’s OK to bail out corporations but screw the people.
    This Sperling piece is from 2003 – however it is every bit as relevant now.
    I agree with those upstream that sacrifices need to be made – with a profound change in thinking.
    Gene Sperling, regarding a universal 401k via the ‘evil’ DLC..
    [..] To that end, here’s an idea that is bold and simple: a program of universal 401(k) accounts that would help all Americans build a better future for themselves and their children.
    Here’s how it would work: Middle-income and working poor families, who often fall through the cracks in our wealth creation and retirement savings systems, would be given the opportunity to open new tax-deferred retirement savings accounts. They would be eligible for up to $1,000 in matching funds for savings they contributed, provided through refundable tax credits. For low-income families, the government could provide a 2-1 match; for more moderate-income families, it could be a 1-1 match. Under this plan, a family eligible for a 2-1 match could accumulate a nest egg of $190,000 simply by contributing $500 a year for 40 years, assuming a 5 percent rate of return. [..]
    [..] One of the main reasons that so many Americans lack significant investments, beyond the fact that it takes nearly all of what many families earn to live, is that our system for encouraging savings and wealth creation is completely upside-down. Because the only tool our nation employs to encourage savings is tax deductibility, the more you earn, the easier we make it to save; the more you struggle to make ends meet, the more we tell you, you’re on your own.
    For instance, if you and your spouse make $500,000 a year and are in the 35 percent tax bracket, you get an initial 35-cent tax break for every dollar you save, which expands as the dollar accumulates interest without being taxed. If you make $50,000 and are in the 15 percent bracket, you start with 15 cents in tax breaks on every dollar saved; but if you are a hard-working family of four making $25,000, and one of the 33 million tax filers who do not make enough to owe income taxes, you get nothing — not a penny’s inducement to save.
    As a result, of the $125 billion in revenue the government forgoes each year to subsidize tax-deferred savings vehicles, only 2.1 percent goes to the bottom 40 percent of workers. [..]
    Sperling also states:
    Democrats should support this progressive universal pension as an addition to Social Security’s guaranteed benefit structure. Republicans should accept it as a chance to promote individual savings.
    And he closes with:
    Finally, implementing a universal 401(k) should not require increasing taxes or driving up the deficit. Democrats could simply argue for funding this effort by transferring to it a portion of the recent tax cuts for dividends, capital gains, and complete estate tax repeal. This would force the right question for America’s investor class into the policy debate: Do we want to direct $100 billion a year to reward a handful of already wealthy investors, or do we want to promote an agenda to help 100 million more Americans become new or stronger members of the investor and wealth-creation class?
    http://www.dlc.org/ndol_ci.cfm?kaid=125&subid=164&contentid=251789
    I won’t be surprised if we hear of something similar being touted by someone like Sen. Jim Webb or Sen. Obama soon. It would have been a hallmark of Hillary Clinton’s admin.
    Moderate Republicans and conservatives should not fear this. Nor should anyone for that matter. (A universal 401k) It really isn’t – by any stretch – something from the realm of the far left.

  50. Cold War Zoomie says:

    Some of you think pain is good in and of itself…
    There needs to be enough pain to force us to change our ways. That’s perfectly natural. Soup kitchens and massive unemployment is way too much – that’s killing the patient.
    We need just enough pain to turn us back into a saving nation. But here’s the rub – if we save too much we then turn into 1990s Japan where there was not enough *spending!*
    This new and improved RTC plan makes me sick. Intellectually, I accept that it is probably the right thing to do – spread the “punishment” out as much as possible so we don’t need soup kitchens. Emotionally, it makes me sick because I just know all these Wall Street types and their enablers are going to walk away from this mess when they should be drawn and quartered in the streets.
    I get less angry and less passionate as the years pass. No more screaming and throwing things at the TV. I’m just a leaf floating down the river that eventually opens into the sea, where I’ll finally disintegrate.
    Now that’s a happy thought for starting one’s day!

  51. dlb says:

    They’re all just winging it at this point. Regardless of what our betters do a wildly overbuilt system will shed parts and eventually settle back into something resembling stability.

  52. Got A Watch says:

    Col., this crisis has been happening since last June, and the roots go back 10 years or more. If they had taken the correct actions, and forced a real mark-to-market for financial fantasies then (last Aug, say), we would have had a sharp recession starting back then, and be looking ahead to a recovery soon.
    Instead, crony capitalists attempted to maintain the emperor had clothes until this week. This only makes the ultimate outcome much worse – decades of Depression.
    The real terrorists are your financial “elites”, they have done much more damage to America than Al Qaida ever could. The essence of the American capital system is credibility, and they have recklessly blown that now.
    These measures will fail, like interventions always do, and taxpayers will pick up the tab for financial genius gone amok.
    Last year I posted a comment here that the limits of American empire had been financially exceeded, and decline was ahead.
    Well, that day has arrived. We have seen this week the total debt of the USA doubled, tripled, or quadrupled, no one knows for sure the final tab.
    If there is no money to finance a global military presence, that part of the economy, inherently economically unproductive at the best of times, will have to shrink to reflect the new reality.
    The days of America spending more on military functions than all other nations are over. The American economy has hit the debt wall at flank speed.
    Somewhere in a cave, OBL is laughing.

  53. Cold War Zoomie says:

    We always look back to the Great Depression for signs of the coming doom.
    Maybe we should be looking at 1990s Japan instead?
    The first public awareness of the seriousness of Japan’s banking problems emerged publicly with the failure of a number of small financial institutions in 1995, most notably the Jusen (housing) finance companies. The Jusen were created in the mid-1970s as subsidiaries of banks, securities firms, and life insurance companies. They provided household credit and, in the 1980s, turned to real estate finance. The Jusen collapsed with the downturn in the economy, especially hard-hit by the drop in the real estate property market.
    The initial failure of Jusen and some small banks in the mid 1990s led to questions about whether the banks would be bailed out by the government and, if so, who would ultimately assume the losses and bear responsibility. Insolvent banks initially were merged with another healthy private bank (a practice known as the convoy system) and, in 1995, 685 billion yen of public funds where used for this purpose. This was the first major public bailout of a financial institution in Japan.
    Because of a lack of explicit burden sharing rule when insolvent financial institutions fail, this injection only came after severe disagreements among the Ministry of Finance, the Ministry of Agriculture, Forestry and Fishery, and private banks. These internal disputes prevented a more decisive solution of the nonperforming loans problem and ultimately led, by the end of 1997, to the second phase of the banking crisis with the failures of much larger financial institutions, most notably the Hokkaido Takushoku bank and Yamaichi Securities.
    By November 1997 Japan was on the edge of financial panic (Cargill, Hutchison, and Ito 2000). In order to prevent a full-blown financial crisis, the government provided a total of 1.8 trillion yen to 21 financial institutions in the form of preferred shares and subordinated debt. The long-term credit bank (LTCB) and the Nippon Credit Bank also were nationalized in 1998. These public rescue measures were not sufficient, however, and the government injected another 7.5 billion yen into 15 banks in March
    1999. These monies, combined with extensive guarantees of deposits and a strengthened deposit insurance system for assisted mergers, helped stem the crisis.

    The Japanese Great Stagnation

  54. Unlike me, the London Banker is extremely pessimistic:
    http://londonbanker.blogspot.com/2008/09/unitary-federal-reserve.html
    But the solution is obvious.
    Restore the rule of law in this country.

  55. The tent cities have been here for some time and are growing:
    http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/09/19/BA4L130L2E.DTL
    Soup kitchens reporting lines out the door; food banks hurting for donations.

  56. JohnS says:

    Stephen Roach, former chief economist of Morgan Stanley, now chairman of its Asian operations. Roach thinks our U.S. economic crisis is rooted in sustained over-consumption (ie: shifting from income to asset-based saving):
    “Never mind a seemingly chronic shortfall of income generation, with real disposable personal income growth averaging just 3.2% over the same period. American consumers no longer felt they had to save the old-fashioned way – they drew down incomebased saving rates to zero for the first time since the Great Depression. And why not? After all, they had uncovered the alchemy of a new asset-based saving strategy – first out of equities in the latter half of the 1990s and then out of housing in the first half of the current decade…..
    That enabled income-short American consumers not only to squander income-based saving but also to push consumption up to a record 72% of real GDP in 2007….And, of course, they went on a record debt binge to pull it off. Household sector indebtedness surged to 133% of disposable personal income by year-end 2007 – up over 40 percentage points from debt loads of 90% prevailing just a decade earlier. It was the height of folly. Yet the longer it lasted, the more it became deeply ingrained in the American psyche. And now it is finally over.”
    He also noted that 1980’s era Japan produced property and stock market bubbles that burst in the early 1990s. Their mess was also complicated by a banking crisis and excess corporate debt. Today Japan is still struggling back.
    Roach prescribed this in a March 2008 NY Times op-ed:
    “Like their counterparts in Japan in the 1990s, American authorities may be deluding themselves into believing they can forestall the endgame of post-bubble adjustments. Government aid is being aimed, mistakenly, at maintaining unsustainably high rates of personal consumption. Yet that’s precisely what got the United States into this mess in the first place — pushing down the savings rate, fostering a huge trade deficit and stretching consumers to take on an untenable amount of debt.
    A more effective strategy would be to try to tilt the economy away from consumption and toward exports and long-needed investments in infrastructure.
    That won’t be easy to achieve. Such a shift in the mix of the economy will require export-friendly measures like a weaker dollar and increased consumption by the rest of the world, which would strengthen demand for American-made goods. Fiscal initiatives should be directed at laying the groundwork for future growth, especially by upgrading the nation’s antiquated highways, bridges and ports.
    That’s not to say Washington shouldn’t help the innocent victims of the bubble’s aftermath — especially lower- and middle-income families. But the emphasis should be on providing income support for those who have been blindsided by this credit crisis rather than on rekindling excess spending by overextended consumers.
    By focusing on exports and on infrastructure spending, we might be able to limit the recession. Such an approach might also set the stage for a more balanced and sustainable economic upturn in the next cycle. A stimulus package aimed at exports and infrastructure investment would be an important step in that direction.

  57. Curious says:

    tic-toc,
    the market trust is severely damaged. It’s a new game now. (Tho’ they still think they are in charge and can control the market. Few weeks from now, everything will come back with a vengeance.)
    The market is bigger than US government by now. Intervention can only work when every big guys (ie. China/Russia/Middle east) are playing along. Which they won’t. They are going to save their asset first, instead of trusting Bush.
    http://www.nakedcapitalism.com/2008/09/ban-on-short-selling-will-hurt-rather.html
    Last I looked when I was short a stock the broker borrowed the stock (yes, Virgina you do get a borrow) and sold it. They then had cash.
    That cash was not available to me – it was pledged to whoever provided the stock to remove or reduce the risk that the stock won’t be returned.
    That means it is generally available to the broker (who will generally lend me the stock from their inventory or margin or prime broker clients).
    Now there are a few hundred billion of short-sales out there. Probably more than normal – but a lot in almost all markets.
    And those short sales produce cash balances of a few hundred billion, most of which are available to Wall Street brokers.
    If you ban short-selling those balances will taken away from Wall Street brokers.
    That would be rather unpleasant. Last I looked the debt market was skittish and was hardly going to replace that money.
    So I conclude that the SEC in their “infinite wisdom” are going to stick the knife into Wall Street and bankrupt the lot of them. For political optics. So they can be seen to be doing something about short-selling.
    ———
    http://www.nakedcapitalism.com/2008/09/us-to-implement-temporary-backstop-to.html
    Oh boy, bye bye the US AAA rating (at some point, not due specifically to this move, but from the philosophy it represents) and the dollar. The financial markets are simply too large for the US taxpayer to stand behind them all, but that isn’t going to prevent the authorities from trying. And like the Term Auction Facilty, expect it to be some time before this “temporary” guarantee is reversed.

  58. Curious says:

    The country is NOT solvent anymore. We just wait for bankruptcy.
    (count down until first government debt default. Let’s have another war and spike the oil price. Iran, Russia, Venezuela, … whoever else. Maybe we can out compete against Chinese and Russian cash to get that oil after the war fails)
    http://www.bloomberg.com/apps/news?pid=20601087&sid=a.kAXACVdHTI&refer=home
    U.S. Debt May Grow $1 Trillion on Rescue, Barclays’ Pond Says
    Sept. 19 (Bloomberg) — The U.S. may have to borrow an extra $700 billion to $1 trillion to fund the biggest rescue of the financial system since the Great Depression, according to Barclays Capital Inc.’s Michael Pond.
    Federal takeovers of Fannie Mae, Freddie Mac, and American International Group Inc.; the central bank’s expansion of lending to financial firms; and a slowing economy will add $455 billion to the Treasury’s borrowing needs, the New York-based interest-rate strategist estimated. Pond said Treasury Secretary Henry Paulson’s plan to rid banks of “hundreds of billions” of troubled assets would bring the amount to $700 billion assuming the plan costs $200 billion.

  59. Curious says:

    BAM,…
    and the Russian get what they want. Cash talks, everybody else walks.
    And this is only the beginning of financial crisis.
    (btw, If the entire DC doesn’t run in panic and start house cleaning, all corruption, lobbyists, group interests, etc., the country will go down.)
    http://www.kommersant.com/p-13253/Russian_U.S._relations/
    Rice Acknowledges Georgian Attack
    U.S. Secretary of State Condoleezza Rice has acknowledged that Georgia attacked South Ossetia, speaking on Russian-American relations at the German Marshall Fund in Washington. The speech was much awaited, even though its content was known in advance.
    Rice harshly criticized Russian domestic and foreign policy, saying that the country was becoming “increasingly authoritarian at home and aggressive abroad.” She characterized Russia as “on a one-way path to self-imposed isolation and international irrelevance.” But she did acknowledge Georgia’s role in the recent Caucasus conflict. “The Georgian government launched a major military operation into Tskhinvali and other areas of that separatist region,” she said. “Regrettably, several Russian peacekeepers were killed in the fighting.”

  60. Mad Dogs says:

    You remember that ol’ adage: “If you are not part of the solution, you are part of the problem”?
    In this instance, I’m thinking it needs updating: “If you are part of the solution, you are part of the problem”.
    Paulson, Bernanke, Gramm et al. When the Foxes are rebuilding the Henhouse, it is time to get the lipstick out and pretend one is a pig.

  61. kao-hsien-chih says:

    There is, for all the talk of Japan’s “oversaving” vs. US “overspending,” very strong analogue between the Japanese financial crisis and the US financial crisis. Both were driven by bad loans undermining the stability of the financial order. In both cases, much of the bad loans were “politically” motivated–that is, the financial and business leaders in league with the governing parties/factions pushed through revisions of regulations that allowed the well-connected corporations to skirt the regulatory mechanisms. In so doing, massive wealth was generated through essentially speculative process, but most of it collapsed, with enormous collateral on other segments of economy and society.
    One curious irony, that had been recognized by Smith, Marx, Hayek, and Stigler (a diverse group of very sharp economists over two centuries) but forgotten by their modern day descendants, is that market can hardly ever be “free” because business interests don’t want it to be. “Free” market, after all, is unpredictable and dangerous to their bottom line. They want to capture the market and distort it to their advantage–and the government often becomes their accomplice. I don’t think the modern day Republican Party is necessarily a pro free market party: they are pro-business party, and they are happy to undermine the workings of the market for their allies. In economics as well as in foreign policy, they are right wing Bolsheviks, the pro-business communists. And today, we are starting to see the results of their handywork.

  62. Paul says:

    It looks like Bush wants to stampede the Congress into a quick fix with the bailout. This is a complicated matter that cannot be fixed in a month or two. It will take serious investigation to find the cause and effect of this disaster. Rushing only sweeps it under the rug.
    If it is to be fixed, it had better be at the hand of a body independent of Wall Street. The present captains of industry should not be allowed to grade their own papers. There exists non-affiliated expertise in the country to thoroughly study and understand the systemic failures. The Justice Department must be part of the fixing team to insure that NO criminal escapes punishment. Judgments and restitution for theft can and should be sought from every participating criminal or liar. If it is not properly fixed, it will be repeated in ten or fifteen years. The loudmouths on places like CNBC should also be brought to justice for the known falsehoods they repeat to an unsuspecting public.
    Cleaning up the mess will result in increased taxes – why not, where will the money come from? That imbecile representative from Missouri, Roy Blunt, says a fix can be made without raising taxes. Is he nuts? It may not be politically expedient to talk about raising taxes, but the situation calls for realism. Have we finally learned our lesson about free markets and trickle down?
    The United States should seriously consider the advisability of continued membership in the WTO. That scheme has been gamed (against the United States) by every member nation. Corporations have been enriched at the expense of common people. Thanks to the WTO, we no longer have an industrial base; instead we have a nation of burger-flippers. Forget all that WTO crap about a “rising tide”.

  63. Curious says:

    “ … the government ultimately recovered all of the money it spent to recapitalize the banks through sales of the non-performing assets. The World Bank’s definitive “Banking Crisis Database,” however, puts the net cost at a still high 4% of gross domestic product.
    Posted by: anonymous | 19 September 2008 at 03:42 PM
    US gdp is about $13,8T
    4% of that is about $500B
    That’s about how much Treasury has spent so far!
    (start from Bear Stern on to Lehman, various cash injections, buying AIG, etc)
    And the root cause hasn’t even been discussed yet (those SIV!) They are just shoveling it around the system. (eg Fed reserve taking them as collateral)
    We still don’t know how much exactly Freddie/Fannie + AIG are going to cost tax payer beyond the initial buy out.
    And then they want to buy all those SIV. I’d say somewhere around 8%. (Korea and Asia had their economy collapsing around 17-20%)

  64. Curious says:

    There is, for all the talk of Japan’s “oversaving” vs. US “overspending,” very strong analogue between the Japanese financial crisis and the US financial crisis. Both were driven by bad loans undermining the stability of the financial order.
    Posted by: kao-hsien-chih | 19 September 2008 at 05:30 PM

    big differences:
    1. The japanese didn’t borrow outside money to buy all those real estate. We borrow external money (China, Japan) to build those houses.
    2. Japan federal budget was in surplus to the mountain, with gigantic national reserve. They can afford bailing out everybody (and still experiencing “deflation”
    we on the other hand have massive twin deficit. Government bail out pretty much means begging for China and Japan to pay the money we can’t pay them. We can’t afford spending $800-$1T bailing out the banking system.
    Remember with this crisis, economy will slow down as a result of credit crunch. So tax income will be lower and budget deficit will spike (It’s already $400+B with Iraq war etc)
    add 300+/year for bailing out banks? We are talking about $800+B deficit per year
    Tell me, who exactly will buy the treasury we print? Do you think China will keep buying those treasury? So they have $3Trillion in reserve instead of $2Trillion?
    The number is mind boggling, we already spend several hundred billions bailing out banks since Bear Stern. And nothing changes.
    upcoming:
    – financial result from Q3-4 will hammer stock market
    – slowing economy will kill holiday shopping.
    These two alone will make sure stock remain trending down.
    And how much of those SIV is tied to stock? nevermind housing price that is affected by slowing economy?

  65. kao-hsien-chih says:

    Curious,
    Actually, Japanese national budget was running staggering debts continuously starting in 1980s and soaring in 1990s. Indeed, one of the biggest economic problems in Japan in 1990s and 2000s has been the staggering weight of the national debt–which, iirc (there’s good chance I don’t) was the highest in the world until recently, relative to GDP–and Japan’s GDP is pretty big. You might be confusing gov’t deficit and trade deficit and the linkage between the two is not straightforward. While “Japan” has a lot of foreign exchange reserves, it’s really dollar- (and other foreign currency) denominated assets held by Japan’s central bank (as well as many non-gov’t entities), so not exactly “surplus” either and it didn’t exactly help with the solvency of the Japanese banks, several of which went bankrupt and led to a massive and very painful financial restructuring in 1990s.
    The bottom line is that the analogue between Japan and US crises are surprisingly similar, brought on by the pro-business communists taking over the government and using its resources to undermine the free market.

  66. kao-hsien-chih says:

    To back up my numbers, although at risk of getting off topic a bit, if you were to look at the figures at econstats.com, you will see that the Japanese gov’t debt is over one quadrillion yen, or about twice Japan’s annual GDP. It’s the highest in the Western world. US gov’t debt is only about half the GDP.
    Of course, much of Japan’s debt was incurred after the financial collapse–it started growing rapidly (at 10% per year clip, relative to GDP) since 1992. But, even before that, Japan was one of more indebted industrialized countries in the world. (always over 50% of GDP)

  67. Clifford Kiracofe says:

    Per oil:
    “Most people – including virtually all mainstream press reporters – believe that it is the price of futures contracts that is used as a benchmark. In fact, it is the reported “spot” market price of “dated” Brent/BFOE (see below) cargo transactions that constitutes the direct and indirect benchmark for most global oil transactions. The massively traded ICE Futures Europe Brent/BFOE Crude Oil contract is merely a financial bet on these underlying prices, and these financial contracts are settled in cash, not oil.
    “For many years, the production of the Brent oil field has been in decline, and the production of other North Sea oil fields has therefore been amalgamated with it to ensure a sufficient number of transactions to give a credible benchmark price.
    “We now see four fields – Brent, Forties, Oseberg and Ekofisk (“BFOE”) – together supplying the BFOE “Brent” contract whereby 600,000 barrel “cargoes” of these qualities of oil may be bought and sold forward for eventual physical delivery.
    ….
    Sitting on this base of physical trading is an off-exchange complex of price risk consisting of the simple forward BFOE contracts themselves, a host of derivative contracts, and an increasing number of “structured finance” transactions. It is estimated that in total, some $260 billion was recently invested in oil markets one way and another, and this pool of funds was superimposed as an inverted pyramid of risk on this relatively tiny base of physical crude oil.”
    http://www.atimes.com/atimes/Global_Economy/JI19Dj02.html

  68. Curious says:

    Posted by: kao-hsien-chih | 20 September 2008 at 03:19 AM
    Japan didn’t start accumulating massive budget deficit until late 90’s
    http://elainemeinelsupkis.typepad.com/money_matters/images/2008/02/25/picture_21_2.png

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