"Just like a child wishing for a Wii or an Xbox on Christmas Day, the market was hoping for some sort of RTC [Resolution Trust Corp.] type of arrangement, and there it was underneath the Christmas tree," said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank. "It was the booster shot that the market was looking for," he added. "This was what we needed to happen, to remove those assets dwindling on balance sheets. And the short-sale rule, for the sector that it’s targeting, will also help near term." Marketwatch
“Virtually the only certainty in the current financial situation is there will be more problems ahead. Those who controlled the levers of economic and financial policy neglected their greatest responsibility, which was to ensure an orderly financial market and prevent exactly the sort of collapse that we are now seeing. This was a policy failure of massive proportions, not a natural disaster.”
….
While there is no simple path out of this crisis, it was a crisis that could have been easily avoided. If the Federal Reserve Board had acted to stem the growth of the housing bubble before it grew to such dangerous proportions, the country would not currently be facing a recession and the prospect of a financial collapse.”….
http://www.truthout.org/article/the-financial-meltdown-continues
1. Economic security is fundamental to national security.
2. The central bank of the United States, the “Federal” Reserve System should be a machine supporting and advancing the economic dimension of US national security.
3. This crisis raises the issue of the nature and role of the Fed. Should the Fed actually be federal and fully owned by the American public? Traditionally, some classes of shares of the Fed are owned by private banks who profit from their relationship to it and the monopoly powers it has gratis the American people and their Congress. The power to emit money is a SOVEREIGN power which under our Constitution belongs to the people through their Congress.
4. The propaganda about an “independent” central bank is nothing more than justification to hand the fate of the nation over to transnational cosmopolitian financial interests. The argument that the “independence” of the central bank makes it “above politics” is BS. By their nature, economic decisions are political which is why in the old days one refered to “political economy”.
5. The Federal Reserve System needs to be rethought and restructured and placed squarely in the service of this nation rather than in the service of transnational special interests.
The Fed could be placed directly under the Treasury Department and its chairman could take orders from and report to the Secretary of the Treasury, for example.
Other arrangements could be made but on the principle that the Federal Reserve System, our central bank, be fully integrated into the national security structure of the Federal government and subject to close direction ans supervision by the President and Congress.
Dean Baker asserts above that the crisis is solely the fault of the Fed. No, it is rather the fault of the Fed AND the Executive Branch AND Congress and ultimately the American people for lack of sufficient vigilance. Pogo is correct.
Colonel,
If the U.S. Treas. created its own money, this might be bearable. But the system of money creation has not changed. The private banking entity known as the Fed is making a killing on our nation’s banking woes. The Fed is creating this “money” out of thin air and using it to buy U.S. Treas. Notes and Bonds. The Treas. (i.e. U.S. taxpayer) are on the hook for these securities plus interest.
While it looks like the Fed is riding to our rescue, in fact it is doing a very brisk nefarious business. And as a result, our beloved U.S. is falling so far into “debt” that political independence is a thing of the past.
What this whole debacle is further showing is that our Treas. as merely a front for the Fed, and our country seems to be increasingly owned by a foreign central banking cartel. They will own all those houses at bargain prices. A form of Communism is being created in response to a manufactured crisis. Formally the assets will be owned by the state, but who controls the state?
Let’s all remember the words of Denis Healey, former British Defense Secretary and Secretary of the Exchequer: “World events do not occur by accident: They are made to happen, whether it is to do with national issues or commerce; and most of them are staged and managed by those who hold the purse strings.”
Right after stocks drop a lot in price is usually a good time to buy. I suspect that much of today’s buying is the result of that trading reflex. How it will turn out is something I can’t guess, but I’m sure it will be expensive for us, and lucrative for most of the perpetrators.
Don’t worry, though. McCain and Palin have it all figured out. Something to do with firing someone they’re not allowed to fire and construction bonds, apparently.
Pat
I am glad you expressed your anger with your post on the last thread. 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 pay 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 followed this with another 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 and transparency rules were removed. Financial institutions essentially became gigantic leveraged hedge funds. Wall Street paid out hundreds of billions in bonuses based on “accounting profits”. Lehman paid its managers $5.7 billion in bonus in 2007. The whole edifice has now toppled. And here we are using the same playbook and the same plays – more regulatory forbearance via even more lax accounting and taxpayer assuming losses. Nothing learned. No accountability. Socializing all the losses with more and more debt.
We are now moving dodgy assets on to the taxpayer balance sheet and covering losses with even more debt. 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?
All I got was a lump of coal.
Ugh.
The final vote on the madness of the US markets of the last few weeks will be with foreign lenders and governments. We don’t control our own financial fate anymore so guessing that the events of 9/11 did mark the effective psychological destruction of the real US national security, financial self-reliance and at least some independence. You can be sure that even now powerful financial enties are making sure that these events rsulting in taxpayer assumption of risk will be read as a GREEN GO-LIGHT to more shenanigans then ever. Interesting to me that the DEMS have essentially remained silent in the face of an unmitigated financial disaster. There is no way the next administration can begin to adjust to the misdeeds of the last 30 years by various Presidents. I think we can eliminate former Governors as having the mettle, experience, and knowledge to run the Country. It certainly does appear that insider knowledge and trading has been occuring throughout the last few weeks and that alone should be worth investigation by an SEC if it was competent.
The costs of this are being understated. Anyone who thinks that this is going to cost less than a trillion dollars is smoking something reeel goood.
I said something very similar in the runup to the Iraq invasion, but was in the minority of people who saw the pitfalls, not the majority who went along for the ride with Wolfowitz and Co. Btw, where is that Iraqi oil money that was going to pay for the reconstruction? Ah yes, ‘Fables of the Reconstruction.’
The same thing is going down here, and by that, I mean going down the memory hole. Our society’s collective consciousness is ‘constructed’ and forgotten day by day. There will be outrage, but in the end, this large rodent will be forced down the python’s throat. Whether or not we choke on it remains to be seen.
The truth is that the American people have been disenfranchised, and coerced by the media machine away from any popular remedies, such as a general strike.
The Col. posted a few days ago about the ‘connective tissue’ of our society, and I personally think this tissue was comity; while the seeds of today’s problems have many antecedents, I think the accelerated downfall of this country was brought on by the ‘Republican Revolution,’ of the mid 90s, which destroyed comity in the govt., and set the building on fire, hoping to get out with the silver in the chaos.
At least in the Japanese crash, there was some semblance of honor, which led at least some guilty executives and govt. officials to commit seppuku. The fact that our leaders today maintain a position diametrically opposite of seppuku means that honor is dead, and that they were running a ‘pump and dump’ all along.
Colonel,
This financial debacle befalling U.S. is one more reason to repeal the Federal Reserve Act of 1913 and dissolve the Fed. It’s long past time for the elected Congress to once again gain control from the non-elected private bankers. The U.S. was not created for the private bankers, but for the people’s benefit. It is time that the General Welfare clause of our Constitution was enforced once again. And for those member of Congress who side on the part of the bankers and against the people and our Constitution, then I say serve them breakfast behind federal jail cells bars for their betrayal of trust.
I would first like to remind Clifford, wrt his final statement, that Bush was elected by the Supreme Court. The American people were absolved of their democratic reponsibilities as of that day. (Sarcasm off)
An additional comment re. the Fed. It is a private bank which keeps its ownership secret. Conventional Wisdom has a principal stakeholder being the Bank of England — the Rothschild empire, an empire which made exceptional profits off of wars.
I, as others, am aghast at the party that claims to be fiscally prudent and that created this problem is now bailing out the gamblers with ‘my’ money risking my family’s country. I find it intolerably hypocritical that the financial institutions and the party in the Whitehouse preach free-enterprise, with a corallary that regulation is Unamerican and will hamstring the country’s economy. Yet, the U.S. dollar that they are playing with belongs to the U.S. people and is backed only by the credibility of the U.S. Government. It does not belong to Wall Street. It belongs to the Government and the Government should be obligated to regulate it in order to protect it.
Can I get credit (or a loan) for calling this: “Passing the buck”? *g*
Or when is a tax not called a tax?
When the Fed, the Treasury, the Administration and Congress give away more of our money to prevent private financial corporations from failing and send the bill to your children, your children’s children and their children ad infinitum.
Of course, the money will require a minor script change to: “In servitude we toil.”
They are in a hurry to re-shuffle the financial deck before the third-quarter financial reports have to be filed.
As sad as all this is the only laugh I can get is a recent prognostication, that once our Treasury follows through with whatever entity they create, they will find more Mortgage Backed Securities than there are Mortgages in this country. But again that is not funny.
Let’s hear more about the ‘Fed.’ I thought it was part of the govt, but it turns out that I, (like most Americans, I suspect), know as much about it as Sarah Palin knows about the Bush Doctrine and Russia combined…
Colonel,
A number of people have been calling the modern day Republican party dominated by neocons as Right wing Bolsheviks on the account of their zeal for a revolutionary foreign policy. I think we now have to recognize that they are just as communist in their attitude towards economics and business as well. They don’t believe in free markets. They in fact believe in using the power of the government to destroy and undermine free markets, as has been demonstrated both by their roles in setting the stage for this fiasco in the first place and by bailing out those involved at the present.
http://www.forbes.com/home/2008/09/19/banking-bailout-paulson-biz-wall-cx_lm_0919questions.html
7. How much will a new agency cost taxpayers?
Paulson says it would need “hundreds of billions” to make a real impact, and as everyone knows no initial government estimate is ever what the ultimate cost turns out to be. The RTC, initially funded with $50 billion, ended up costing taxpayers $160 billion. The Treasury has already pledged to inject $200 billion into Fannie and Freddie and $200 billion into AIG, plus a smattering of other spending. (It’ll buy back more mortgage-backed securities from banks, it said Friday, for example). The out-of-the-gate cost of all these bailouts seems to be $1 trillion.
Early in my career, I represented a credit union in Florida that had been trading with one of the New York securities firms resident in the World Trade Center. The credit union securities trader was a pathetic sort of guy, crippled by polio, who was a perfect mark for the sharpies in their limosines. At the time credit unions were limited to trading only in government secured bonds like GNMAs and FNMAs.
The sharpies had an interesting scam. It literally was run on a three-ring notebook with a two-column form. They would call up a credit union and talk with the trader and “sell” the CU a “GNMA Forward”, “Repo” or “Reverse Repo” for delivery some months in the future. None of these contracts were GMNAs, they were contracts to deliver or receive real securities at some future time. They were unregulated futures. The securities salesmen in the boiler room would help the traders set up the most ophisticated “hedges” to “make sure they were insulated from losses.”
The local cu traders had not a clue about what was really going on and since they were told these instruments were GNMAs and FMNAs, they thought they were buying real, government guaranteed securities when, in fact they were purchasing unregulated futures contracts.
This securities firm had a whole stable of credit unions they sold their swill to. They never made a “trade” unless they had
transactions matched with other credit unions or S and Ls. on one line Buy-Sell on the two column notebook page. During the time the trading was occurring, interest rates were rising and the real GNMA’s became more and more discounted and had a whole stable of gullible country and blue collar industry credit unions to “sell”. When a trading pair neared “delivery” either they would settle the trade with a check or do a new pair of trades rolling the losses into the price of the next trading pair.
Practically no actual bonds were ever elivered. For years the local CUs thought they were doing great in secure investments–until rising interest rates swallowed them.
Eventually, the National Credit Union Administration discovered that many of the credit unions it was responsible for supervising had been rolling their losses into successive trades and were way underwater. The NCUA then added a “mark to
market” requirement that immediately put a lot of credit unions, including my client, into an insolvent position.
Essentially, the securities firm had made a huge market, taking a sliver of a haircut on the spread in each trading pair with a capital investment of a three ring binder and 250 pages of copy paper forms and had made millions while stealing the savings of millions of CU members. When the whole scheme was discovered it all collapsed, destroying small credit unions all
across the nation. The taxpayers had to pump in millions to cover the deposits.
When the accounting was done with my client, as I remember it, but I am not sure of the exact amount, were six to eight million dollars in the hole on about a hundred “trades”. However, when we put the whole trading history together, they had done over ten billion dollars worth of trades in one million dollar units with the securities firm having shaved from 1/8 to 1/4 point off of each of the hundreds of “trades”.
The trades were all air. Practically no real GNMAs or FNMAs were ever transferred. The whole scam was just two columns in a notebook and it was all legal, but the losses were devastating. The securities firm made millions and the tax payers and cu members funded the take. The NY sharpies always appeared in limosines in a retinue for depositions and had the best NY lawyers. Their offices in the WTC were filled with the most exquisite Nineteenth Century sculptures.
I am sure, that when all is said and done, the current fiasco is similar. The bandits have made millions on “air” while the taxpayers fund the losses because otherwise, the depositers are total losers. This is what is called “free enterprise”
A similar situation occurred with the Savings & loan bailout. Now, it is sub-primes.
Derivatives are a disaster. Until there is meaningful regulation, the crooks will spin the fraud time after time.
Blame the SEC for reducing the Investment Bank’s leverage limits and the repeal of Glass-Steagal for the current fiasco.
Now BOA is the mega with Country Wide, depositor’s deposits, and Merrill Lynch. A certain prescription for disaster in the future.
One must not forget that “money” is just an idea. It is not real gold or silver, only a belief. In the macro scheme of
things, if you have too much money, you get inflation. If you have too little, you have recession or depression. The job of the fed is to make sure there is just the right amoung at all times. Taxes reduce money, and government printing and spending increase it. That is why “tax cuts” “work” because all taxes are is negative printing of money in a macro sense and as long as the amount of money is right for the circumstances all is well.
Interestingly, these “Air” tranactions described above are money too. When the New York sharpies started the trading they
were just printing money for themselves. When such “air” transactions collapse, the money supply shrinks. When the money
supply shrinks, there is a liquidity crisis. Thus, when the Fed pumps in “money” all it is really doing is making sure there is enough grease in the economic gears for the economy to continue working. In the long-term scheme of things, the pump priming is really just more “air”. If the “repayment” of the loans gets too burdensom, since everything is denominated in US
Dollars, the government can just “print” enough to pay the debt down. No problem. In the old days such printing cost paper
and ink. Prior to the German hyperinflation that solved the German WWI reparations problem, Hijalmar Schacht had to plan for months to make sure there was enough paper and ink to print all of the bills. Now days, its just a few inconvenienced electrons. Great game, yes?
The real “money” in the American economy is its productive capacity to produce goods and services. As long as there is a balance of “air money” in the system, everything will keep working. It was the failure to keep that proper balance that
caused the Great Depression. It would be quite unwise to let a minor thing like a subprime “crisis” get in the way.
It will all work out. The fed will inconvenience some electrons, “print” some “money” and balance it all out.
The securities traders and execs will all get bonuses and the taxes won’t rise—unless stupid people get in the way.
The next puff of “air” will trouble us again someday.
When our nation was very young, we financed the revolution using great bank notes, many designed with Ben Franklin’s slogans of hard work and thrift. In fact, almost none were ever honored. As each issue became due another, larger issue, was
printed and the scheme worked great. I wish I had Franklin’s exact comment that went something like this, “Bank notes are a wonderful form of debt, when they come due, their little brothers pay them off with not even the slightest effort.”
Sovereign money is a great thing. Let us just hope that the world will continue using the US Dollar as its world reserve currency lest we become another Argentina.
The fed had to act, and we will see if its skills meet the challenge. In the meantime, remember “money” is only an idea.
Here in Germany (conference), there seems to be a shock that after all the US preaching of free markets and disdain for gov’t bailouts, the US is, without a word, essentially privatizing most of its economy. The effect of this will IMHO cause a drastic reduction in US influence, once the dust has settled. I agree with the colonel that there is no reason to think it is over, and there are so many ways that it can feedback on itself to create new rounds of pain….
In regards to taxpayer money being at risk, it already is. If the financial system siezes and we go into a depression many of us regular folks will lose a lot of money and probably our jobs. I’d rather lose money to future taxes than see my 401K go down the toilet next week.
As to the government winding up owning these alphabet soup securities, if they’re halfway smart about it they could help the banks and get a good deal besides. No one is sure how much these packages are worth and that’s the main problem. They do have a value though. My mortgage is out there in some package as is the mortgages of all of the posters and the proprieter of this site and all of John McCain’s mortgages as well. I wouldn’t have any problem at all buying that package. I intend to keep paying unless I totally lose my butt in a crash and I’d bet the group around this website feels the same about that. The problem is that we don’t know anything about these packages because as I read somewhere the government was specifically forbidden (probably by Phil Gramm) to regulate or even collect data on these transactions. In any case it seems possible to me that the government could buy up one dollar grab bags and find a couple of dollars inside if they go about it properly. I’d gladly buy my mortgage back at a steep discount if only I knew where it was.
The bailout should also contain legislation requiring oversight and data gathering on all such future transactions. In fact government purchase of these securities could provide data for criminal prosecution of some of the worst offenders in this mess. If they stay in private hands we’ll never find out.
This is indeed a bailout of the bankers but if a financial meltdown is avoided it’s a bailout for all of us.
This really is a crisis of fear at this point. If we collectively believe a calamity is coming it vastly improves the odds that that’s what we’ll get. If something is done that allows us to believe that somehow things will work out OK the odds on that scenario go up. Recent market action strongly seconds this analysis. We can’t afford to not try it.
JT
clectrasteve, all,
Happy to add Supreme Court, whose appointments are approved or disapproved by the American people through their Congress, to the list. Not sure what you mean by the American people being “absolved.”
1. Banking history is an interesting area. The Bank of England was started as a private bank by private shareholders in 1694. The purpose was to profit from making loans to the state, a banking monopoly. In 1946, the Bank of England was nationalized by the state.
http://en.wikipedia.org/wiki/Bank_of_England
2. The practice of “fractional reserve (central) banking” is key to operations of the banking world today. One might call it a type of ponzi scheme shrouded in mystery by the transnational banking fraternity.
http://en.wikipedia.org/wiki/Fractional-reserve_banking
3. The Wall Street crowd used the Panic of 1907 to foist THEIR Federal Reserve System on the American people and this republic. Classes of stock were/are held by private US banks. Thus the Fed through its history has been privately held to an extent. I am not sure that it has ever been fully audited. Given globalization and mergers and acquisitions in the US, it is perhaps possible that some classes of shares are held by foreign entitites but an audit would have to reveal that.
http://en.wikipedia.org/wiki/Federal_Reserve
4. It is about time to take a hard look at the World War I era Fed and think through how it can be restructured as part of this republic’s national security machinery: diplomatic, intelligence, military, and so on.
Our central bank must be an engine to defend our Constitution rather than the tool of transnational cosmopolitican interests intent on subverting it.
The Fed can (and should) be blamed for its part in creating the dysfunctional US financial system. I’m certainly no fan.
It’s not, however, in any real sense independent of the government. Control is exercised by the Board of Governors who are appointed by the President and it’s regulated by the Federal Reserve Act which Congress is at liberty to alter. It must regularly report to Congress and its officials can at any time be called to testify on any matter of interest. It’s subject to official audits by the GAO and others as well as undergoing a full audit by an outside firm, and the results are published. Nor does it profit from issuing money since its entire operating surplus after payment of dividends (see below) are by law remitted to the Treasury each year.
The twelve regional Federal Reserve Banks (which, together with the Board of Governors comprise the Federal Reserve System) are indeed owned by the member banks of each of those regional system (they’re required to do so by law). However, these shares can’t be traded, pledged or sold and pay a fixed dividend of 6%.
Great weekend to read Hayek’s classic, “On the Road to Serfdom”. In the most recent edition, M. Friedman writes the introduction. Friedman’s attempt to elbow his way into the Hayek tradition, perhaps, is a deceit, at least based on some of Naomi Klein’s assertions.
Somewhat to my relief, anarcho-capitalists believe that Hayek did not go far enough. Libertarian scholar (and a very able one) Walter Block, in a review of the Road to Serfdom, argues that Hayek believed the government has a role to play in the economy through the monetary system, work-hours regulation, social welfare, and institutions for the flow of proper information. (hat tip Wiki).
So Hayek’s theories rest on a principle that recognizes that a limited government is better than no government.
Of course, speaking of the financial collapse of this week, Thomas Dilorenzo argues rather brilliantly in his book the Real Lincoln that the 16th president represented the very tradition that gave us last week’s shenanigans and the ascendancy of a corporate welfare state. Lincoln, a railroad man in 1861 in much the same manner as Bush is an the oil man today, promoted federal subsidies of corporations, regardless of the suffering involved. And the rest, as they say, is history.
Voodoo economics – or sagacious and far seeing sober planning for a prosperous future? Create more dollars by issuing bonds for sale to the Chinese and Arabs and Russians and even Europeans. Use these bonds to nationalise the bad debts accumulated by the actions of an unregulated and irresponsible banking system. Keep taxes low of course – and continue to build vast and ever burgeoning federal deficits and national debt. Continue the vast expence of wars – with Iraq Afghanistan hopefully soon – Iran and Pakistan. Miracle: problem solved. Shares around world leap up in value overnight. Kredit Krunch over. USA sconomy saved. US still hegemonic power. No inflation. No run on the dollar plummetting to twenty to the Euro as Chinese and Arabs etc ditch their worthless US gov’t bonds. No hollowing out of American manufacturing industry. No shanty towns around edges of New York and LA and Chicago….
When I hear the words “financial innovation”, I reach for my…
One great consolation is that the free market fundamentalists(Friedman said it, I believe it, and that settles it!) will have to shut up for awhile. They’re not slinking away quite yet, though- their latest talking point is to point the finger at Freddie&Fannie and the Democrats and their mission to help the working poor buy homes. It’s inventive,largely bogus, and utterly vile-it evokes property’s ancient fear of populist politicians buying the votes of the shiftless, undeserving poor(particularly the foreign, darker, poor) with their betters’ money. It’s aspirational identity politics- adopt the rich’s enemies, and you share their identity.
From the Historical Analogy Dept- with all the talk of 1929, let’s not forget the Jacksonian Democrats and their hostility to the “paper aristocracy” who used the paper money they created and controlled to take the real, “hard” money of the people by the simple expedient of driving up prices(inflation). We saw the price of homes, fuel, and food rise sharply- a considerable transfer of wealth took place. In the Jacksonian’s time this paper was not CDOs, but the paper currency issued by banks, who flouted what regulations that did exist, by, for example, shipping crates of specie(hard money) from bank to bank ahead of the examiners. The underlying asset of all the leverage was, you guessed it, land. There was, of course, a crash(1837), followed by a depression. This was worse in the then frontier western states, where a whole series of panics occurred; in 1847, the constitutions of both Michigan and Louisiana actually prohibited banking. Not practical, of course, and the Jacksonians’ destruction of Biddle’s bank had worsened the situation. But one can see their point. And it’s an enduring American impulse to “restore” a “natural” system(of money, in this case) in which constant control is not required to prevent abuses and calamities. It hasn’t worked out.
Annual “defense” spending: $0.5-1.0 Trillion.
Yes!
War of choice in the Middle East: $1-2 Trillion.
Go for it!
Bailout of Wall Street gamblers: $1-2 Trillion.
Gotta do it!
Another war in the Middle East. $1-2 Trillion.
Unfortunate but necessary!
Cost of redeeming assets saved by American workers and lent from the Social Security Trust Fund to fight wars of choice: $2.3 Trillion.
Priceless!!!
[But don’t be ridiculous. We can’t afford to pay for that…]
Colonel,
Bush and his right wing Republicans are directly and personally responsible for the deliberate removal of stock market and financial institution safeguards, put in place decades ago by Congress specifically to prevent what is now happening.
While all the Congresscritters “slave” away mightily this weekend out of sight of their constituents, one hopes that the leading critters (Democrats) take advantage of the moment to fulfill some of their promises to their base. After all, Paulson, Cheney, Bush and their base are quite intent on saving their own skins, and, at this moment, they need the imprimatur of the people’s Legislature to make their loss socialization somehow legal.
On that list of items the voters are still waiting for are: 1) nationalization (or socialization) of health care; 2) improvement of minimum wage standards; 3) protection of the environment and laborers; 4) resolution of immigration issues; 5) wind-down of the Iraq War; 6) support for local, state and federal infrastructure development and renewal, etc. etc.
Of course, since ALL the critters seem much more beholden to their special interest masters, the voters will again be played for chumps and the voter’s money will be taken by the three card monty artists on the Street and in the Treasury Dept.
Myself, I’d be happy for a single take for the bailout deal. That is, simply, permanent revocation of the “Bush Tax Cuts” that are due to expire in 2011, and the return to Kennedy-era tax schedule.
Since our government “business” is losing money and taking on mountains of bad debt, it only makes sense to improve our national revenue stream. And the thousands of members of the Bush Base are more than able to kick-in towards our collective national program a greater share than the millions of us regular folks barely able to make ends meet (or already underwater).
Its the Patriotic thing to do.
SP
(yes, I know… a snowball’s chance in Hades…)
Johnny Hart the creator of the comic strip B.C. had the strips characters decide that working together was the way to dig a dinosaur trap. After digging all day they found they didn’t have any way of getting out of the hole. When Peter asked how they dug themselves into the hole Curls replied, “Mass stupidity.” I don’t think we’ve seen the worse yet.
This is how I would describe current situation. It’s a ponzy scheme propelled by subprime/real estate bubble.
The banks created this “magic” papers. SIV, CDO, etc, that is beyond the reach of laws and traded only between banks themselves, over the counter. (supported by new legal loop hole) The rate of return of this magic papers are based on exotic “math” that nobody understands, aka the ponzi scheme. It gives the “high profit/rate of return” because
a. real estate bubble. Money is going in from all over the world into “hotspot” area like southern california, Virginia suburb, Colorado, etc. These are very small area that receive global money. So price going stratospheric.
b. stock market. Again, stock market is very tiny compared to the rapidly growing global economy.
c. cheap cash from Japan and seemingy endless chinese appetite for treasury.
All that are packaged into these exotic investment vehicles. (aka. the ponzi scheme)
These vehicles then are sold to other banks are AAA grade investment, that can be used as asset, allowing banks to expand even more loan…. these loan than are fed into the system again. (creating more real estate, buying more stock, commodity,…)
expanding the bubble and giving higher return to the “investment vehicles”…
Things are going well as long as everything grows.
———
Then comes
a. Japanese carry trade unwind (7/07. I still don’t know what happen there.)
b. massive oil shock (Iran tension)
c. all propelled by mega commodity speculation from post Bear Stern cash injection …
the economy grind to a halt… people don’t have money. Price of everything goes up. sub prime housing price collapse, stock market goes down, the ponzi scheme crash …
Banks refuse to lend money to each other, because they know everybody holds “investment” papers that worth nothing. Libor spike, banking system seizes.
———
So enter Bush administration, They are going to bail out the Ponzi scheme! (remember these ponzi scheme seemingly sit on top of real asset, which is what gives it the legitimacy of AAA grade investment, but in reality the real value lies in its ability to create “the bubble”. The entire ponzi scheme was re directed into of sub prime and stock price which then increase the value of the scheme. Without the bubble there is no high return for these investment vehicles. It’s just empty houses and overpriced stock.
The so called asset inside these investment vehicles probably only worth 5-20 cents on the dollar. The rest are pure fluff. (Hence the going price recently in the news.)
But Bush and Paulson are going to buy the entire ponzi scheme.
How the bad bankers are going to game the system:
take out the “real” hard asset inside investment vehicles, and sell the utter junk to government. Then sell the actual asset in the market.
The bank get to bill twice for its broken Ponzi scheme.
That $700B bail out money will be gone in few months at most. Then we are back into same situation, again.
slowing economy, massive inflation, unemployment, massive debts piling.
Then another cycle of bail out… this time GM, GE, retails, and general economic stimulus.
Colonel,
As explained in the comments, Wall Street for the last decade has been a ponzi scheme with the financial made men taking their skim off of the action. They have one big get out of jail card. If they are not bailed out, Americans will have to barter goods and services for a survival.
There are several big problems with the euphoria on Wall Street and in corporate media about the neo-RTC:
1) The derivatives are air. They are not physical assets like a house in Livermore.
2) The Federal Government since the Bear Stearns collapse has added 900 billion to the national debt. The neo-RTC will add a trillion more; an addition of at least 50% of the current federal government debt.
3) The USA is blowing trillions of dollars for holy wars overseas.
4) The incompetent “Greed is good. Government is evil” gang is still in charge and is close to getting four more years.
5) Both parties are pandering for more tax cuts.
Add them all together, Government Bankruptcy is just one decision away. Japan or China says the hell with it and stops buying Treasury Bills. Shock Therapy writ large. No military pensions. No money. We are all Houstonians now, no basic services; electricity, water or gasoline.
Congratulation people, we are now the new owner of cool $11,3T national debt! (Bush started his administration with $3.3T national debt. He has quadruple it in mere 8 yrs.)
The Bail out proposal. (legislation. must read)
http://calculatedrisk.blogspot.com/2008/09/bailout-proposal.html
Sec. 8. Review.
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
Sec. 9. Termination of Authority.
The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act.
Sec. 10. Increase in Statutory Limit on the Public Debt.
Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.
Re: post topic-
Worth watching the online vid, or reading PBS transcript also available-
Bill Moyers interviews Kevin Phillips on last night’s BM Journal:
http://www.pbs.org/moyers/journal/09192008/watch2.html
I’d strongly recommend just reading the proposed bailout plan. The NY Times has it in today’s edition, and it’s really short, only a couple pages long.
Some of its highlights are that (a) it’s patently unconstitutional, as its Section 8 insists that Congress and the courts have no authority to revise or review it, (b) it’s open-ended as to cost to the taxpayers, as the $700B provision only applies to assets held at any one time (so if some assets are liquidated, new ones can be added), (c) reporting requirements are minimal (Section 4), so there won’t be any accountability for past, present, or future miscreants, and (d) it permits use of any kind of contract vehicle the Secretary of the Treasury desires, e.g., more sole-source shenanighans (Section 2).
Why do I suspect that Paulson’s old friends at Goldman-Sachs are about to get a lot of new business from this?
Section 7 is also interesting, as it appears to permit just about any kind of payment (perhaps even commissions) to be acceptable as part of this “bailout”, so there’s an excellent opportunity for serious cronyism at the taxpayers’ expense.
And Section 12 states that virtually any kind of investment vehicle derived from mortgage transactions (residential or commercial) is fair game for this bailout, as long as the deal got done before Sept 17th, 2008. So it applies to all kinds of toxic financial waste, including the stuff that folks like Warren Buffett warned us about.
Finally, the package applies for two years, so why do I get the feeling the White House has already decided which party is going to win the next election?
Pat
I am glad you expressed your anger with your post on the last thread. 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 pay 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 followed this with another 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 and transparency rules were removed. Financial institutions essentially became gigantic leveraged hedge funds. Wall Street paid out hundreds of billions in bonuses based on “accounting profits”. Lehman paid its managers $5.7 billion in bonus in 2007. The whole edifice has now toppled. And here we are using the same playbook and the same plays – more regulatory forbearance via even more lax accounting and taxpayer assuming losses. Nothing learned. No accountability. Socializing all the losses with more and more debt.
We are now moving dodgy assets on to the taxpayer balance sheet and covering losses with even more debt. 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?
Next year budget deficit will be $1.5T.
http://www.nytimes.com/2008/09/21/business/21cong.html?_r=2&hp=&adxnnl=1&oref=slogin&adxnnlx=1221941093-/oWzHegYvnpNMLIepsorQA
A $700 billion expenditure on distressed mortgage-related assets would be roughly what the country has spent so far in direct costs on the Iraq war and more than the Pentagon’s total yearly budget appropriation. Divided across the population, it would amount to more than $2,000 for every man, woman and child in the United States.
Whatever is spent will add to a budget deficit already projected at more than $500 billion next year. And it comes on top of the $85 billion government rescue of the insurance giant, American International Group, and a plan to spend up to $200 billion to shore up the mortgage finance giants, Fannie Mae and Freddie Mac.
http://globaleconomicanalysis.blogspot.com/2008/09/700-billion-bailout-proposal.html
The reality is this bill does not and cannot protect the taxpayer. Rather this bill only promises to take the taxpayer into consideration. The Treasury will indeed take the taxpayer into consideration, then immediately discard any such ideas.
Inquiring minds are also noting “The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time.”
The idea behind the above statement is to allow for a continual dumping ground such that there will always be $700 billion in toxic garbage held under this program. As soon as any asset can be unloaded by the Treasury at cost, another toxic loan is eligible to be assumed on the books of the Treasury. This process can last for as long as two years.
Unconstitutional Provisions
Pay particular attention to section 8.
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
Essentially the law will state that whatever the Treasury does it is above the law. Such a provision is undoubtedly unconstitutional.