Open thread on the Economy

Barter20300We are more or less standing on the edge of eternity in this economic and credit crisis.  The institutions that are dying in New York are the "connective tissue," the infrastructure of modern life.

It is time to declare an open thread for the discussion of this threat.  pl

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84 Responses to Open thread on the Economy

  1. fnord says:

    From a purely partisan point of view, its a bit sad to see the democratic answer to this challenge, hte seemingly onesided (righteous) blasting of the repubs without any substantive ideas or practical projects behind. Its good that they have started to punch, but it needs to be combinations.
    I would be interested in hearing the august personages of this blogs opinion on one subject: To what extent does this structural crisis tie in with the political crisis of the US? How much of this can be assigned to the Enron-like camraderie/open corruption that we have seen so much of in this administration? And where, oh where have all the money spent on the Twin Wars gone? Out of the country? Salted down? Pissed away? Where have the large US contractors put *their* loot? Thats what I would like to know. Haliburton?

  2. TCG says:

    Here is another fiasco created on Wall Street.
    Auction Rate Securities.
    An auction rate security is backed up by thousand of debt obligations of varying degrees of risk.
    Brokers sold these as liquid investments with a better rate of return than a money market and just as safe.
    The Market for Auction Rate Securities has been frozen for months locking up Billions of Dollars.

  3. Brian Forester says:

    I came across this on
    ( ).
    Which quoted from the financial times:
    “The Fed added that it was suspending a rule that normally prohibits deposit-taking banks from using deposits to help finance their investment banking subsidiaries to allow them to fund activities normally funded in the repo market on a temporary basis until January 30 2009.”
    It seems to be a fundamentally scary development that now even more money is chasing this bad dept in attempt to find just how much dept there is. That new money being tossed into the pot happens to be backed by the FDIC.

  4. Curious says:

    This is just the beginning, It’s the big earth quake that causes tsunami. (where will the wave hit? will there be aftershock…)
    1. AIG is going down.. (this will drain a lot of cash and further weaken banking system and more importantly. Manucipalities.)
    2. They still dont’ know “how much” exactly those junk paper worth (hundred of trillions). This is the scariest part.
    3. Biggies: will it bring down Japanese banks? or at least kill carry trade for good. (winding down carry trade alone will kill pretty much of the source of cheap capital)
    4. what will chinese do? They are the biggest last man standing right now.
    5. Next up would be Brazil, India, Russia + rich oil producing countries. (the are liquid, but individually too small to affect the course of this tsunami)
    6. Europe is gone. they are in batten down the hatches and prepare to submerge mode. They are conserving capital.
    Surprisingly at this very moment, country like Venezuela and Iran have the most soft power at hand. They literally can bring down the US economy in one blow. (close the gulf, stop exporting oil)
    of course that also means the entire planet economy will grind to a halt.
    after the tsunami is over:
    1. how bad will it damage the US budget
    2. Can military operation be sustained.

  5. Walter R. Moore says:

    There’s an urgent need to keep the markets afloat – which means deciding day to day whether to bail out companies with taxpayer-backed money – except the US couldn’t assume Lealmen’s potential debt – it’s too big!
    Beyond that we need to undo changes made to financial regulations made over the last fifteen years. Congress can start by rolling back the changes made by congress in 2000 – which are central to why so many banks drifted in the mortgage icebergs in the first place.

  6. m savoca says:

    this is a crisis created by the coupling of greed with deregulation.
    the greed factor has always been there. the deregulation has been overtaking the system since president Reagan said government isnt the solution, government is the problem.
    deregulation of the banking industry surged ahead thru 4 administrations, Reagan, Bush, Clinton, and Bush2.
    in deference to wall street bankers, Clinton with the prodding of Phill Gramm and other shills for wall street, erred big time in signing the Gramm Leach Biley act, “which was supported by nearly 90% of the senate,” and ended the glass stegall act
    the old law dated back to FDR and the great depression.
    Glass-stegall act placed a firewall between speculative banking and savings and loans (depository institutions)
    this firewall provided lender of last resort (government, as in fed reserve and FDIC) backing to depository Banks, but not investment banks… but in turn set free of regulation the investment “Banks” that were run by the big shots … the traders and speculation – investment crowd.
    now all that is gone
    the final nail in the coffin was the brainchild of a group of investment gruus called quants. they invented exotic investment strategies that involved homoginizing mortgages into larger blocks of security.
    this homoginization separated any one particular mortgage from any one particular bank or lender.
    thus responsibility for prudent lending by tie-ing risk to the originator or lender of the loan, went out the window
    these huge blocks of mega “mortgage paper” where then stirred together and then sliced and diced into “tranches” and repackaged into new seecurities called SIVs which were sold all round the world as AAA securities.
    mortgage lenders and developers went crazy with access to all this flood of “created” money and low low interest rates provided by the Fed under greenspan.
    People began buying multiple properties as speculators bidding up real estate into stratospheric levels. all this growth also fueled increases in consumerism beyond anything justified by workers earning power. huge debts ensued
    loan originators started inventing exotic mortgages where people could pay only the interest on their mortgage, no principal or in some cases even less than the accrued interest each month! this enabled lenders to sell houses to people who clearly did not have the capacity to repay the loan especiall after a low teaser rate expired.
    the entire system fed upon it self like a giant ponzi scheme.
    compunding all these [problems investment institutions invented and traded an exotic security they invented called credit defualt swaps. these securities were nothing more than bets or gamble on whether or not a particular investment would go bad. think of it as every body allowed to take out an insurance policy on anybody you choose on the face of the planet whether or not you even know them employ them or are related to them.
    the total notional value of all these Credit default swaps and related “derivatives is several hundred trillion dollars (yes thats right a factor of more than 10 times the gdp of the world. these investments” were also packaged, sliced, diced and mixed and sold around the world and to each other!!!
    its a house of cards. big shots made huge sums dealing this crap and the dominoes are beginning to fall
    we are in serious serious trouble.

  7. Curious says:

    The sky is falling scenario… (big list)
    # At the end of the day this financial crisis will imply credit losses of at least $1 trillion and more likely $2 trillion. The financial and banking crisis will be severe and last several years leading to a severe and persistent liquidity and credit crunch.
    # This is not just a subprime mortgage crisis; this is the crisis of an entire subprime financial system: losses are spreading from subprime to near prime and prime mortgages including hundreds of billions of dollars of home equity loans that are worth little; to commercial real estate; to unsecured consumer credit (credit cards, student loans, auto loans); to leveraged loans that financed reckless debt-laden LBOs; to muni bonds that will go bust as hundred of municipalities will go bust; to industrial and commercial loans; to corporate bonds whose default rate will jump from close to 0% to over 10%; to CDSs where $62 trillion of nominal protection sits on top an outstanding stock of only $6 trillion of bonds and where counterparty risk – and the collapse of many counterparties – will lead to a systemic collapse of this market.
    # Hundreds of small banks with massive exposure to real estate (the average small bank has 67% of its assets in real estate) will go bust.

  8. Mike Martin, Yorktown, VA says:

    I’m even more worried now about our $9,000,000,000,000+ national debt.
    My understanding is that much of that is the result of shell games between the Federal gov’t’s various money pots and the remainder is owed to Chinese bankers.
    The first is smoke and mirrors, and as such would – I’d think – devalue the dollar. The second would – I think – mean the interest rate for future borrowing would increase.
    I’m not an economist, but I am a retired GI who remembers that “Economic” is one of the four instruments of national power.

  9. J says:

    i see several problems that need correction
    1. the fed reserve act of 1913 needs to be repealed and the control put back into the hands of the treasury whom the congress have oversight over. the ‘fed’ is not a u.s. govt. institution but a private one that was created at the behest of the wall street types at the time. get rid of their red vampire fed and put our currency back on u.s. treasury notes and off the worthless fed reserve note.
    2. re-institute the bretton woods economic system and get back on a fixed rate and get rid of the ‘crap shoot’ floating rate that nixon set in motion when he trashed the tried and true bretton woods system.
    3. in the bretton woods system our currency was on the gold standard. which begs the hard question — when was a publicly available audit of u.s. gold reserves that are ‘supposed to be’ there was conducted? i don’t think that congress has ever performed a thorough audit of our nation’s gold reserves, which they should be required to do and make the audit finding public and the audit audited by an independent firm to make sure their audit is on the up and up.
    there are other items called ‘protectionist’ in nature that needs to be instituted to protect our nation and citizenry from the predators that we have witnessed in recent history. in accordance with the general welfare clause of our Constitution.

  10. JohnS says:

    In 1999, John McCain’s “economic expert,” former Sen. Phil Gramm (R-Texas), led the assault on the FDR era Glass-Steagall Act that separated commercial banks (for consumers) from investment banks (for speculative trading and mergers). His Gramm-Leach-Bliley Act effectively repealed it, allowing commercial banks, investment banks and insurers to merge.
    In 2000, Gramm managed to sneak an amendment (the Commodity Futures Modernization Act) into the omnibus appropriations bill that deregulated derivatives trading. It also infamously contained the “Enron Loophole” that exempted energy trading from regulatory oversight and brought us the Bush era of mostly unregulated securities.
    In his post-Senate career as a lobbyist, he successfully pushed Congress to pass the Responsible Lending Act that put the brakes on state trying to pass anti-predatory lending laws.
    Gramm has had a substantial role in getting us where we are today

  11. Cold War Zoomie says:

    Where to start? Who to blame?
    Here’s a pet peeve of mine. For years now it has been drilled into our heads that our homes are our “biggest investment.” This is dangerous thinking, and now we see why.
    Shelter is a necessity, not an investment. If you can afford to buy a house within your means and you don’t go crazy with the equity loans, then your shelter can be a home first and an investment second.
    Too many Americans reversed their priorities – they treated their homes as investments first. They didn’t read the fine print, and then used their home as an ATM. And way too many American mortgage brokers and mortgage companies were more than happy to feed the greed and sell the risks higher up in the mortgage food chain.
    Anyone with half a brain KNEW we were in an housing bubble two years ago. You don’t have to have a degree in economics to understand that. But we allowed cable news talking heads to influence our decisions.
    My grandparents lived through the Depression. They passed onto my parents a sense of frugality and fiscal discipline. What happened to my generation? We’ve just gone plain stupid when it comes to managing our money.
    Wall Street and Uncle Sam have been just as stupid, and worse. So don’t think I’m putting all the blame on the American consumer.
    And don’t get me started on advertisers and their incessant hogwash about how we “deserve” a new car, a vacation cruise, and whiter teeth. We don’t deserve ANYTHING we haven’t earned!
    I suspect we have reached our inevitable imperial over-reach.
    Here endeth the rant.
    More seriously, the USG is walking a very difficult tight rope – balance the need to keep Wall Street functioning at a minimum while limiting the moral hazards of bailouts. There has to be some serious pain felt without killing the patient.
    Does such a balance exist considering how complicated the credit problems are?
    I don’t think so. We’re just kicking the can down the road for another mile or so.

  12. Ormolov says:

    “Congress can start by rolling back the changes made by congress in 2000 – which are central to why so many banks drifted in the mortgage icebergs in the first place…”
    Although I think, Walter, we agree on the prescription, I would take issue with your characterization of “banks drifting into icebergs” as if it was a natural unavoidable event that they did so. We’ve had legions of financial whiz-criminals inventing new products and exploiting loopholes in the financial landscape with a ferocity unseen since the 1920’s. The farther we get into this election season and economic crisis, the more I’m returning to my Marxist roots: this is a CLASS struggle.
    What stands in the way of Obama’s election (apart from racism and Republican vote-stealing)? The overclass, worried that he would threaten their holdings.
    Why is our economy falling to pieces? The overclass has been unregulated. 1% of the citizenry have locked up half of the country’s resources.
    Why are we at war in the Middle East? The overclass plays its geopolitical games, keeping us captive to their energy markets while other options die on the vine.
    Populists like Ron Paul, Mike Gravel, Dennis Kucinich, hell–even Mike Huckabee–trot themselves out for primary season and try to speak truth to power. Then they’re put back in the shoebox under the bed for a few more years.
    Star chamber conspiracy? No. Not a conspiracy. Leopards sleeping on the branches above a herd of wildebeest don’t need to conspire with each other to get fat. They merely exploit their position until something is done.
    In the short-term I am pessimistic, since economic upheaval on this scale really only hurts the poor. But in the medium term we may be able to break their grip on certain structures and make them less monolithic. Locally (or home) generated power, local farming, etc. These are our revolutionary fights at the barricades. In the very long term I’m quite optimistic. Here in California recent anthropological evidence points to a crisis period in Native American history when new tribes moved in about 2500 years ago. At first they crashed the system, overfishing and depleting all their resources. Then after a painful and memorable famine, they learned to live within their means. They were regulated so much that the villages decided how many children to have and how many salmon each family could pull from the river. The result? When we arrived 400 years ago, we found California to be an extraordinary bounteous paradise.

  13. Clifford Kiracofe says:

    1. We Americans have gotten ourselves into this mess as Pogo would say: de-regulation, non-regulation (derivatives etc), unnecessary and costly wars on borrowed money/bloated “defense” budgets, lack of fiscal restraint, twin deficits (domestic budget and current account)and so on and on. A system of imperial “military Keynsianism” as some critics would say leading to the present (perfect?)storm.
    “WASHINGTON — No one cog in the federal government’s machine of financial regulation let down the country by failing to prevent the latest shakeout on Wall Street. The entire system did.”
    2. Domestic and international economic policy must be integrated into a serious national strategy/national security policy which includes other key components such as: diplomatic, political, psychological, and military.
    3. The President and Congress have failed to design and implement a national strategy/national security policy which protects and advances US national interests, the domestic economy and NATIONAL financial/capital markets being fundamental.
    4. It would appear obvious that a redo of the international financial architecture is long overdue. This means a new Bretton Woods of some kind.
    This in turn implies cooperation to this end of major powers: EU, US, China, Russia, Japan, India and etc.
    FDR led the way with Bretton Woods but it was not that long (a decade) before certain transnational financial interests began to subvert the original intent of the Bretton Woods system and machinery and it was downhill, at different speeds, from there till here.
    5. The magnitude of the betrayal of our republic by the Bush43 Administration AND Congress may take some time to sink into the public consciousness.
    6. Neither the Bush43 Administration NOR Palin-MacCain NOR Obama-Biden have, IMO, put forward anything serious at this stage of the financial crisis. They need to and soon.

  14. Curious says:

    Instant reaction …
    Iran announced Tuesday that it has put the elite Revolutionary Guards in charge of defending the country’s territorial Persian Gulf waters in what appeared to be a hardening of its stance in the vital oil route.
    U.S. commanders in the Gulf have in the past said they find Guards ships more confrontational than the regular Iranian navy, which until the new order was responsible for Iranian defenses in the Gulf.
    Iran has warned repeatedly that it will close the narrow Hormuz Strait at the mouth of the Gulf if the United States or Israel attacks it amid tensions over Iran’s nuclear program. Around 40 percent of the world’s oil passes through Hormuz. Last winter, Iranian and U.S. ships patrolling the Gulf had a several small confrontations in Hormuz that the Americans blamed on provocations by Guards ships.

  15. WP says:

    There is another way to look at it all–George W. Bush is the most successful President ever.
    If your goal is to gain power, then without a whimper, the government has just nationalized nearly the entire housing, loan, and investment mortgage industry, taken substantial control over almost all of the nation’s investments (including mine), and maximized the monopoly price of oil for the big oil companies by keeping two of the largest and lowest cost of production internation oil producers, Iran and Iraq, out of the oil market so that expensive American and Saudi oil can be sold at a maximum, monopoly price, created a huge market in military materiel and private military services controlled by who-knows-who by burning most of our equipment and reserves in Iraq on a discretionary war, greatly centralized federal power in a secret government, and most importantly put the best authoritarian surveillence system the world has ever seen in place to oppress the opposition at will.
    Who said the Bush was a small government guy?
    His real constituency, that small group of oligarchs that control most everything and keep most of the profits must be estatic!
    A heck of a job Georgie!

  16. WP says:

    So, is this “crisis” really a silent coup?

  17. mlaw230 says:

    Savoca has it about right on how we got here, the problem now is what do we do about it.
    These securitized mortgages are valued as securities, not as mortgages, so even if the underlying mortgages have only deflated 25-30%, i.e. they may ultimately be worth 70-75%, there is no market for them as securities and they must be “marked to market” at about 20%.
    Any one tranche may contain mortgages from dozens of geographic locations, so there is no practical way to de-securitize them and the investors are not set up to manage the underlying mortgages.
    Consequently, the “Servicers” are on auto pilot and a lot of homes are being foreclosed and left vacant because no one is sure who owns the paper.

  18. Paul says:

    Wall Street has run amok since the beginning of Bush’s term. The known facts have created the craters visible to the naked eye. Much is still unknown about the side-deals and back-alley transactions that are not on the balance sheets. The unknown may kill the entire banking system.
    The religious right preaches about abortion, life and contraception. I wish they would preach more about the seven deadly sins. See Wikipedia for an apt description of those sins.
    God help us.

  19. ked says:

    As in past crisis, future analysts will look back upon these times and exclaim (paraphrasing John MacEnroe), “you’ve gotta be kidding – how could they be so blind!?”. Anything really new here? We’ll hear alot about the Perfect Storm – who could’ve known?
    A wise old Bulgarian once asked me, as I attempted mitigate my responsibility for some outcome, “who shit in my pants?”
    The American System has suffered a systemic failure – self-control of our worst habits have been cast aside in the name of “free market” & “gov is not merely flawed – it is evil” ideology. We’ve experienced privitization of core gov functions, hapless response to natural disasters & world-wide trends, idiosyncratic national security policy, collapse of Federal checks & balances, and abandonment of financial sector oversignt.
    We may now learn how deep are our Nation’s reserves of wisdom, resources & the capacity to work together.
    I prefer to be optimistic… however, the sheep seem completely at a loss to act in their shared interest & the shepards just aren’t that good at their jobs. But when things are left to fate, fate seems more Old Testament than New.

  20. J says:

    the straits of hormuz is not international waters, but territorial waters of iran and oman. 10.5 miles are sovereign iranian waters, and the 10.5 miles in the southern side are sovereign omani waters.
    under international law, such straits are territorial waters of the adjoining nations. the water, seabed, air above — all are sovereign territory of the coastal state. ships belonging to foreign countries — including war ships — are allowed to pass through such straights, but under limited circumstances known as “innocent passage”.
    innocent passage is defined by the 1982 united nations convention on the law of the seas (UNCLOS) Section 3 Subsection A.
    Meaning of innocent passage
    1. Passage is innocent so long as it is not prejudicial to the peace, good order or security of the coastal State. Such passage shall take place in conformity with this Convention and with other rules of international law.
    2. Passage of a foreign ship shall be considered to be prejudicial to the peace, good order or security of the coastal State if in the territorial sea it engages in any of the following activities:
    (a) any threat or use of force against the sovereignty, territorial integrity or political independence of the coastal State, or in any other manner in violation of the principles of international law embodied in the Charter of the United Nations;
    (b) any exercise or practice with weapons of any kind;
    (c) any act aimed at collecting information to the prejudice of the defence or security of the coastal State;
    (d) any act of propaganda aimed at affecting the defence or security of the coastal State;
    (e) the launching, landing or taking on board of any aircraft;
    (f) the launching, landing or taking on board of any military device;
    (g) the loading or unloading of any commodity, currency or person contrary to the customs, fiscal, immigration or sanitary laws and regulations of the coastal State;
    (h) any act of willful and serious pollution contrary to this Convention;
    (i) any fishing activities;
    (j) the carrying out of research or survey activities;
    (k) any act aimed at interfering with any systems of communication or any other facilities or installations of the coastal State;
    (l) any other activity not having a direct bearing on passage.
    Article20: Submarines and other underwater vehicles
    In the territorial sea, submarines and other underwater vehicles are required to navigate on the surface and to show their flag.

  21. JB says:

    Here in Phoenix we have two guys on the radio who have a daily one hour show on the economy. I’ve been listening to them for a year or so and although they are sometimes stupid acting, they are able to see through the corporate and Federal smokescreen. At least it is entertaining. You can download their podcasts at

  22. TomB says:

    Col. Lang wrote:
    “The institutions that are dying in New York are the ‘connective tissue,’ the infrastructure of modern life.”
    Wait a minute, one minute we’re decrying the oil speculators and the next weeping over uber-speculators like Bear Stearns and Lehmann Brothers and the like and calling ’em “connective tissue”?
    I guess I think of ’em more like … urinary tract stones that just naturally form and so have to be accepted to some degree, but thankfully if sometimes painfully pass.
    “Creative destruction” in action in my opinion. (Which of course doesn’t mean that they don’t pose a domino-like danger if when they pass they’re big enough or it happens at the wrong time, nor meaning that nothing ought to be done beforehand to prevent same and to prevent the need for bailing out the bastards.)
    Ergo, assuming they don’t take the rest of us down with ’em, here’s to flushing a few more down the pipe. As everyone who owns a septic tank knows, an occasional pump-out *is* recommended.

  23. R Whitman says:

    Look for simple explanations to the present market crisis. All the “hot money” that was running up the price of oil futures has now been withdrawn from that market and is being used to “short sell” the stock of the weaker companies in the finacial markets, one or two at a time. There are any number of Wall St gunslingers and hedge funds piling on the short selling spree and making very large gains. The biggest problem for the companies is not being able to value the sub-prime mortgage bonds and their derivitaves that they have on the books so the accountants value them at zero. We all know that every mortgage represents a house or land or both that have some positive value regardless what the accountants say. Some vulture funds will buy up all this toxic paper, rationalize it and make even more money.

  24. Curious says:

    the straits of hormuz is not international waters, but territorial waters of iran and oman. 10.5 miles are sovereign iranian waters, and the 10.5 miles in the southern side are sovereign omani waters.
    Posted by: J | 16 September 2008 at 02:19 PM
    by now to close oil flow at the persian gulf is a trivial exercise.
    I can think at least 2 scenarios where no advance weapon can help moving oil in that gulf.
    The only way to do it is to skip the entire gulf altogether and build a pipeline that ends in Yemen. (who wants to cough up the dough?)

  25. As Sgt. Friday used to say on TV show Dragnet, “Just the facts.” Problem is no one seems to know the facts. Right now it is Chinese water torture. Drip by drip it turns out that those who should have known did not or did and did nothing. Let’s not look back. Just go back on gold standard and see if it can be any worse. As you can see no economist here. Another approach, offer Canada and Mexico the chance to join US and if they decline invade. Facetious of course.

  26. Walrus says:

    There is a way out of this mess, but I’m not sure America can take it.
    It involves Congress stopping listening to special interest groups and doing sensible things for everyone, starting by blocking their ears to the inevitable screams of “Liberalism”, “Socialism” and “Communism” when they do. What I propose will make Roosevelt look like a republican.
    Starting with reforming political campaign funding, providing public money and limiting spending, and eviscerating the lobbying industry. Political pork has to be eliminated forever.
    Followed by slashing (no, eviscerating) the Defence budget by 80 percent. Tell your allies to defend themselves.
    Reforming the corporate and individual taxation systems to encourage prudence, saving and thrift, and getting business and the wealthy to pay their fair share of tax.
    Re – regulating the financial system to provide absolute trust.
    Regulating the provision of Federal and State infrastructure, education and health funding to provide a common national standard – the objective being to provide fairness and equity, regardless of race, location or wealth. Follow that with heavy investment in infrastructure and services. No more poverty pockets.
    Overhauling welfare and social services to halt the development of an underclass.
    Reforming the justice system and doing away with the death penalty, again to prevent the development of an underclass.
    Committing to real “free markets” – where competition causes prices to drop, start with Health care, energy, and agriculture. Strengthen anti trust laws.
    Reforming pension and retirement laws to stop the nefarious practice of making pensions contingent on on the future existence of a company. Money should be paid into individual retirement accounts monthly and invested by funds managers at arms length from companies concerned. We do that here. No one can touch your nest egg.
    Internationally, it involves telling China to float its currency and fostering transparency in markets and real free trade.
    In other words, doing a “Meiji Restoration” – toppling the Shoguns who run your country and transforming the economy by importing worlds best practice, since, believe it or not, there are a lot of things that other countries do a hell of a lot better than America does. If you don’t believe me, look at quality of life, infant mortality and life expectancy indicators.
    Or to put it another way, stop the current perversion of the American dream into “Bait and Switch”.
    But it ain’t going to happen unless, to borrow a quote from Col. Lang, you really aren’t as weak, soft, and self absorbed as you appear.
    The alternative is a breakdown of the world financial system followed by blood in the streets as issues of food, clothing and shelter overtake concerns about foreign wars.
    The real terrorists were on Wall Street all the time. Will Osama Bin Laden finally bring the American experiment undone?

  27. bstr says:

    Dear Cold War Zombie, you might as well blame it all on the consumer. Wall Street and Uncle Sam are just big consumers. It is hard to take a detached position on the current mess. I keep wondering how my retirement fund will weather the predicted recession. But if I were able to step back I would recall that, on good authority, we shall always have the poor with us. We just hadn’t anticipated being a part of that cohort. That we will always enjoy the company of the poor reminds us that we are all sinners and doing what it takes individually to avoid sleeping with the poor.
    The Free Market hides a host of sinners. A commentator on MSNBC remarked that regulation of the Free Market was something akin to destroying the American Way. The pretty bubbles that used to pop and bring us back on course have, with non regulation, become more dangerous Not you of course, but certainly all the rest of us, are all sinners, we are all consumers, we have become leverage for some “other guy.”

  28. Andy says:

    I disagree with Col. Lang here that we are “standing on the edge of eternity.” To me, recent events are more like a long-overdue housecleaning resulting from more than a decade of poor and inappropriate regulation. It’s a serious problem yes, but this, too, shall pass, IMO.

  29. hope4usa says:

    My concerns are where will this lead us next, as this credit(both liquidity and solvency) unwinds. The foreclosures are only just beginning. Those people who have mortgages also have credit cards, home equity loans, car loans, student loans(whose credit market is in serious trouble)and pay real estate taxes. Think of all the entities–municipalities, corporations, more banks, that could be affected as this avalanche picks up speed on it’s way down the mountain.

  30. Patrick Lang says:

    Investors are the liquid running in the blood vessels. I stopped calling them speculators long ago. Investors just did what investors do.
    These investment banks and other institutions are the blood vessels and nervous system.
    “Drano” may be good for the system occasionally, but it is hard to do without blood vessels and a nervous system. pl

  31. Patrick Lang says:

    OK. It will pass. So did the Great Depression.
    Maybe it won’t be the Great Depression but it is going to hurt like hell. pl

  32. Curious says:

    Kaching, add half a trillion dollar obligation onto US debt on top of Fannie Mae $1trillion obligation.
    So just this past week, US debt increases by about 25%.
    Treasury Said to Be Considering AIG Conservatorship

  33. VietnamVet says:

    The disappearance of Merrill Lynch is the signal that deregulation does not work. Lehman Brothers collapse is frightening not that it failed but that the Government couldn’t bail it out. When a house can’t be sold, it is worth nothing. What this crisis comes down to is that you can’t get something from nothing.
    The only thing that can turn the American economy around is a fiscal responsible federal government that creates jobs for workers that provide enough money so they can buy what is made in the USA.
    Republican crony capitalism, the credit economy, outsourcing and never ending wars has forced the USA into bankruptcy. The only question is how severe will the downsizing be.

  34. Curious says:

    Relax, it only cost 18 months of Iraq war or so. (there goes incoming raging inflation. $210B cash into the system.)
    Fed Ponders Provides $85 Billion Rescue for AIG (Update: Now Official)
    $138 Billion Post-Bankruptcy JP Morgan Advance to Lehman; At Least $87 B Repaid by Fed

  35. zanzibar says:

    The central problem that I see with the financial system is – we have neither a capitalist, free market system nor a communist, government run system. IMO, what we have is a system of crony capitalism with profits based on Enron style accounting rules that are privatized and losses which are socialized. The financial system whose traditional role is to intermediate capital became a giant casino representing a third of the earnings of the S&P. In the early 80s financials represented 8% of the capitalization weight of the S&P. In 2006 they were around 26%. Essentially the US economy became a giant casino. Hedge fund managers were earning billions each year and Wall Street paid out billions in bonuses too. In 2007 Lehman paid out $5.7 billion in bonuses. All this speculation was enabled by unprecedented leverage. Fannie/Freddie were levered 80x. Many broker/dealers levered 30x. With the repeal of Glass-Stegall thanks to Phil Gramm, Bob Rubin and Bill Clinton we have depositor funds now used as casino chips. Add to this speculative mix opaque balance sheets. Regulators who should have been enforcing existing rules aided and abetted the mania by allowing systemic risk to metastasize and enabled lax derivative accounting rules that maximized “reported” profits. Greenspan with socialized bailouts as the core of monetary policy fostered a climate of excessive risk taking. We are quickly arriving at the moment when the Treasury’s balance sheet is no longer a pristine credit. When the Treasury market cracks there will be a real meltdown!
    In the spirit of offering constructive ideas as food for thought for resolving the current crisis I believe the most important issue right now is to build confidence in the books of the major financial players – so they can start to lend to each other. Transparency is key. All financial players should immediately disclose exactly what they own and the value they have placed on it on their books. Those institutions that cannot raise financing in the private markets because their assets are deemed to risky should be liquidated. Clearing prices need to be determined for all assets. All leveraged derivative trades should be netted out. Restate financials of all these companies on basis of conservative accounting principles and enforce clawbacks on bonuses and options. Strict reserve rules and chinese walls should be maintained for all depositor funds. A government bank that lends on the basis of sound collateral should be formed as a lender of last resort on a time-limited basis to provide debt financing to small businesses and individuals. An independent prosecutor investigation into non-enforcement of rules by regulators, as well as malfeasance and fraud by executives should be launched. Those found guilty by our courts should receive serious jail time.

  36. Indigestible says:

    I have always thought that foes of the death penalty should tie it to economic crimes. If they could, I figured that anti-death penalty support would suddenly come from unexpected corners of society.
    Maybe now is the time to really look at the death penalty for crimes of a certain financial magnitude (100 million, a billion?).
    These people wanted a feral economy and a feral society … we should give them feral justice.

  37. Conrad the Crazed says:

    The systemic downward spiral we’re witnessing in the economy can trace its origins to the Federal Reserve Act. Once the power to control the nation’s money was unconstitutionally granted to a private cartel of bankers, the die was cast. Through the various machinations (artificially originated, not as a result of normal market forces) of the Fed, the Great Depression eventually developed. How did we survive?
    1) A far more rugged sense of personal responsibility, moral fortitude, and ‘save first, spend later’ code of frugality was inherent in the population. 2) The existence of an active gold-standard/backed currency. This worked towards throwing a leash around the Fed, as they could only inflate/deflate in relation to the amount of quantifiable gold reserves. Very significantly, neither of those two exist today, and the sheer amounts of toxic debt is impossible to calculate, as some have already posted here, but estimates run from $400 trillion to $1 QUADRILLION globally. This makes 1929 look like kindergarten recess.
    I’m a bit alarmed at some of the earlier comments, which seem to honestly imply the nation (and world) was ‘peaches and cream’ until Dubya and his evil cronies had to go mess it all up. The prevailing wisdom being that ‘deregulation and/or lack of governmental intervention’ were somehow instruments of economic destruction. I even read a sincere longing for ‘Marxist roots’, in one commenter’s post.
    I think you do yourselves a great disservice in holding such a ‘tunnelized’ view of current events. You begin to flirt with full-blown bias if you truly believe all the ills you witness today are the result of some vile plot hatched exclusively by those ‘right-wing-republican-zealots’, and their Israeli enablers. Just a few points to illustrate what I mean:
    The Enron debacle/scam was already up and running full-tilt-boogie under the administration of Bill Clinton. The Glass-Steagall Act was likewise enacted during Slick Willie’s watch. The list of political beneficiaries resulting when institutions like Countrywide (etc) found themselves flush with new, government-mandated artificial low interest money for sub-prime mortgages, reads like a congressional roll call roster, with just as many (D) suffixes (Chris Dodd and Barney Frank come to mind) as (R)s. So it’s a bit odd to keep pushing the mantra that all this corruption and running amok by the financial elite was a sole product of ‘the Bush administration’.
    Returning to the road that got us where we are today, we can turn to another figure who seems to resonate rather positively with some on this thread. FDR’s criminal confiscation of all privately held gold (under threat of PRISON), together with the first level of decoupling between the dollar and gold (thereby violating Article 1, Section 10), gave the green light to the banking cartel that no longer would the supply of money be naturally restrained. Fiat became the order of the day. For the first time since the failed Continental note/dollar, we were exchanging pieces of paper (backed by nothing) as ‘legal’ tender. How interesting that later that same year, good ol’ FDR oversaw passage of the equally criminal 16th ‘Amendment’ to the Constitution, allowing the direct taxation of our labor, in clear violation of Article 1, Section 9.
    Since these crucial events, it’s been an out of control government running roughshod over the principles of sound money and free market economics at the behest of the well-connected political donors (lobbyists, etc) which has helped bring us to this point. Rather than allow real free markets to run and thereby self regulate (all under the controlling restraint of sound asset-backed currency), it instead opted to grant ever increasing largesse to the voting population in the form of artificial, non market-supported interest rates on non-existing sums of money (creating the boom-bust business cycle). This fed the Wall Street beast, as earnings exploded, making those at the top richer than some countries. As cartels are wont to do, they sought to solidify their positions at the top of the pyramid by demanding more and more government intervention/action, which only served to stifle competition by making any potential new competitor drown in an ocean of regulatory quicksand.
    What is needed here is less…FAR less, government intervention. The most effective way to accomplish that is a total repealing of the Federal Reserve Act; a return to an asset-backed dollar (gold/silver, as mandated in the Constitution), a repeal of the 16th Amendment and abolition of the IRS. Aside from these steps, let the market sort itself out. Those that gambled and lost…lost. It is of incalculably horrendous moral hazard to engage in the taxpayer bailouts that have already been awarded (thereby ensuring the pain of this disaster reaches our children’s grandchildren) for the sake of saving the well-connected of ALL persuasions or political leanings. Likewise, it is absolute lunacy to pander to the voting public by promising to let them keep their overvalued, sub-prime mortgages through some magical government handout of non-existent money.
    For those who are still not convinced, remember that anywhere Marxist/socialism has been applied, it has failed. If you think class warfare is rampant today, just wait until a small uber-elite group gets to make ALL decisions and rules on every aspect of your life. The very thing you fear in a capitalist free market is EXACTLY what you’ll get in a Marxist utopia. We are sadly well on our way to that very destination. I see our current choices for the oval office as a lose/lose situation. Your choices: corporatist fascism or outright socialism. Both lead to the demise of the United States as the Republic our founders constructed.
    “If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them, will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.”
    -Thomas Jefferson

  38. TomB says:

    Col. Lang wrote:
    Investors are the liquid running in the blood vessels. I stopped calling them speculators long ago….”
    A Saul on the road to Damascus conversion? Our crusty Colonel going grammatically diplomatic? (Quel horror!) Or did you just bet short on the market and clean up? I know there’s been nothing like making a killing to increase my appreciation of capitalism.
    Better watch out, we’re gonna start calling you John Maynard Lang.
    In any event I bet you’re wrong and we’re not gonna melt down, but I dunno that I’d bet you all that much on same. Maybe a beer. Maybe even two. But not three. And no fancy imports.

  39. Curious says:

    strange stuff starts to happen
    Reserve Primary Fund, a money-market mutual fund with $64.8 billion in assets as of Aug. 31, fell below $1 a share in net asset value because of losses on debt issued by Lehman Brothers Holdings Inc.

  40. Cieran says:

    What we now have is a Republican executive branch practicing socialism, no more, no less.
    But the GOP didn’t get us into that mess (both parties did, and warning signs were plenty visible even during the Clinton administration), and some of the worst culprits are the citizenry’s belief in “homes as ATM’s” coupled with Wall Street navel-gazing that set the stage for this particular stage of the crisis.
    Roubini and others have been predicting this for a few years, and Taleb pointed out the problem over a decade ago when he accurately predicted the fall of LTCM, which should have been a wake-up call to the dangers of quantitative financial innovation, but wasn’t.
    His most recent book was at its heart an explanation of how statistics was misused on Wall Street to misapprehend risk (he referred to the Gaussian models as “GIF”, for “Great Intellectual Fraud”, and he’s been proven right). Quant traders on Wall Street mistook precision for accuracy, and that kind of sloppy thinking never leads to good results.
    So what to do next? First and foremost, we need to mark these financial instruments to market instead of marking them to inaccurate statistical models of markets. That’s going to hurt (because the models often wildly overvalue the instruments), and all this government intervention only really postpones the day of reckoning for that reappraisal of resources. At some point, value exists only within the sphere of the free market’s transactions between buyers and sellers, and not in ill-considered computer models of such negotiations.
    I suspect that Baudrillard had it exactly right here — we have mistaken the parchment map of quant models for the actual muddy territory of finance, and have come to desire the map more than the land itself, since the model promised easy returns on minimal investment while the territory provided poorer returns and required real-live work in the presence of attendant risk. Getting back to reality is not going to be easy or pleasant, but since we live in the real world, we might as well get started on that journey back to it.
    Finally, Taleb doesn’t write much these days (beyond saying “I told you so!” occasionally), but one of his recent works is at this URL:
    The last section, titled “Phronetic Rules: What Is Wise To Do (Or Not Do) In The Fourth Quadrant” is especially worthwhile, and there’s a nice appendix for those of us who like seeing the math. The problem with the quant models is not hard to appreciate if such concepts as “skew” and “kurtosis” are understood, and why these supposed geniuses on Wall Street couldn’t figure that sort of stuff out is likely one of the great questions of our age.

  41. JohnH says:

    JohnS rightly assails Phil Gramm, formerly McCain’s top economic advisor, for pushing legislation that lay the foundations for the current financial meltdown.
    But let’s not forget who signed the legislation: Bill Clinton. Glass-Steagall was a gift to Wall Street, signed just when Hillary was about to announce her candidacy to represent Wall Street in the Senate.
    As for CFTC, there are some accounts that Clinton was even more eager than Gramm to exempt energy trading from oversight. Who knows what the man was thinking.
    Clinton’s approval of these measures was never brought up during the Democratic primaries. Hillary never repudiated the late term policy decisions that are wrecking the economy. So I am overjoyed that she is not the Democratic candidate. Who knows what gifts she would have given the rich and powerful.

  42. EL says:

    I am fairly sure of two ideas:
    1) This crisis won’t end until the housing market stabilizes;
    2) Almost no one thinks the housing will stabilize before late 2009.
    So…it looks like we have another year to go in this adventure. And the Fed and the Treasury have no idea what’s coming next nor does anyone else. My candidate for next big surprise is one of the big three auto companies, but that’s just a wild guess based on hints that the auto companies intend to ask for $100 billion in federal financing. After $80 billion in a loan to AIG, who knows? My advice (and I’ve followed it since February): Cash.

  43. TR Stone says:

    During the height of the “‘fredo Gonsalves” show, there was a post stating the voters will vote based on having their civil liberties trampled on, in response I posted, ” no they will vote on the value of the home”. I stick by that statement.

  44. Howard says:

    Government money creation (the Federal Reserve) is the root to many of our problems. From Lew Rockwell:
    This past week, the government announced that it would take Freddie Mac and Fannie Mae, the mortgage giants, under conservatorship, which is a nice way of saying that they will be nationalized.
    We don’t use the word nationalize any more. We can try an experiment and read the new term “conservatorship” back into history. In fact, we might say that Stalin and Lenin put Russia’s industries under a kind of conservatorship. Or we might say that Mao pushed a kind of land conservatorship, or that Hitler’s policy was one of national conservatorship. Marx’s little book could be re-titled: The Conservatorship Manifesto.
    You see, the government keeps having to make up new names for these things because the old policies, which were not that different in content, failed so miserably. The old terms become discredited and new terms become necessary, in an effort to fool the public.
    It’s as if a restaurant served a shrimp dish that gave all the customers food poisoning, and so each night it decides to serve the same shrimp but name the dish something new: crangon cocktail, prawn pasta, scampi salad, or what have you. But no matter what they call it, it is still poison.
    Such a restaurant would be out of business in a matter of days. People would not be fooled. But the government gets away with it mainly because we have no real choice about the matter, and because people are predisposed to believe the government far more than they should. It doesn’t help that the media are willing to echo the government line on this, adopting every new phrase as if it were the gospel.
    Hence the same is true of the word bailout, which you might consider unexceptionally descriptive of this move by the government to protect Freddie and Fannie from further losses. No, that word is not allowed either. President Bush told Fox the other day, ”I wouldn’t call it a bailout. I’d call it a stabilization.”
    We will soon put out a new edition of Mises’s 1922 book Socialism. Maybe to keep up with the time we should call it Stabilizing Conservatorship.
    What I also find striking is the way in which this move was announced. Let me read to you from the New York Times: “The Bush administration seized control of the nation’s two largest mortgage finance companies on Sunday…. It could become one of the most expensive financial bailouts in American history.”
    Even the most sophisticated observers of our present scene had to blink their eyes in reading such words. Without debate, without votes, without anything other than an executive fiat, the White House just decided, on its own, to seize the mortgage market. Harry Truman, who seized the steel industry, would be proud. Actually, this is an action to excuse dictators the world over, past, present, and future.
    This sort of thing makes a mockery of the Constitution and the very idea of freedom and the free market, to say nothing of the idea that we have a limited government. What’s more, if we can believe press reports, President Bush had very little to do with the decision. It was the work of Henry Paulson, the secretary of the Treasury and former head of Goldman Sachs, working on behalf of the nation’s most well-connected financial elites. Nobody elected this guy. Most Americans don’t even know his name.
    And look at how he throws around trillions of our money. The New York Times says that this is expensive. That’s one way to put it. It makes the S&L bailout look like the warm-up.
    Freddie and Fannie carry about $5.3 trillion in mortgage commitments and another $2.4 trillion in financial exposure. The total cost of this operation is unknown; it could reach to $2 trillion, with untold amounts of future exposure.
    These two New Deal institutions were founded to speed up the home ownership process for people that banks would otherwise consider unqualified. In time, under LBJ and Nixon, they were given legal permission to expand without limit, in the name of privatization, of all things.
    The motive was a classic bipartisan effort: universal home ownership. The left favored the redistribution. The right favored the supposed moral virtue associated with the nuclear family and its suburban abode. Thus was born the greatest wealth transfer in American history outside Social Security and the warfare state.
    In a free market with sound money, borrowing is connected with the ability to pay. At first, this is only available to the rich. As prosperity spreads, so does credit worthiness. Any government intervention designed to inject steroids in this process is going to end in what Rothbard called a cluster of errors.
    It is completely disingenuous that so many people are today decrying the banking system’s failure to discriminate between those who should and should not be carrying a mortgage. The banking system in a free market handles this just fine. Ferreting out the difference between those who can handle loans and those who cannot is a main job of the competitive system. The market precisely calibrates this. If one lender fails in its assessments of borrowers, another is there to correct the problem.
    If you rush the process of prosperity, and insist that everyone who wants a loan should get one, you set up a situation in which there will be problems down the line. That is precisely what the regime has done. It created Freddie and Fannie to subsidize loans. It engaged in a phony privatization that secretly socialized losses. The legal status of these privately owned, publicly traded, and government-protected agencies was always unclear, but the markets had long assumed that they would be bailed out.
    There was a moral hazard at the heart of this policy. But the real point is that the free market judgment about who should get what was being over-ridden. Surely, that is not a problem when it comes to promoting the alleged American dream! In fact, we are paying for this mistake a half century after the policy became a national priority. As the evangelical ministers like to say, the wheels of justice grind slowly, but they grind mighty fine.
    There is only one problem with applying the principle to this case. There will be no justice. If justice prevailed, the losses would be borne directly by those responsible.
    If we pursued a free-market policy from here on, the answer would not be complicated. The assets and liabilities of Freddie Mac and Fannie Mae would be auctioned today in the free market. It’s true that many loans would be defaulted on.
    What level of crisis would be precipitated by such a genuine privatization policy? It’s true that the press would be screaming bloody murder, and the big players in finance would suffer. But in time, the markets would revalue the resources and an important lesson would be learned. Sound loans would be picked up by financially responsible firms and carried to term. Home values would fall and many people would have to move to cheaper homes. We would then be back on sound footing again.
    From an administration that purports to favor free markets, this possible solution was not even considered. Instead, they proclaimed their regrets that they would have to spread the costs of this error over the entire population. Instead of fixing the problem, however, they only worsen it, underscoring the principle that America will not tolerate failure in business, and the bigger the failure, the more likely it is to be bailed out.
    Note that this socialistic bailout and nationalization – to use two forbidden words – were enacted by a Republican administration. Isn’t it ironic that when you look back at the big upticks in government intervention over the economy, you often find Republicans at the helm.
    As for McCain and Palin, they wrote in the Wall Street Journal that this bailout is “sadly necessarily” even as they promise reforms that will “require the highest standards of accounting, reporting and transparency ever demanded in government.” Well, here’s the thing: no one demands higher standards than the market itself, but you have to turn these institutions over to the market in order to elicit such standards.
    Congress’s role has been and will be to yammer. Only Ron Paul of Texas will have anything sensible to say about this fiasco. In fact, it was more than five years ago that Ron said the following: “If Fannie and Freddie were not underwritten by the federal government, investors would demand Fannie and Freddie provide assurance that they follow accepted management and accounting practices…. By transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.”
    It’s remarkable to observe that hardly anyone dares be against this policy. On the day following the nationalization, a day that will live in infamy, the Wall Street Journal editorialized against the Democrats and their reform efforts, but didn’t actually oppose the bailout. The New York Times called it “a reasonable and reassuring move.” The Los Angeles Times wrote that the bailout was “inevitable.” Steve Forbes in his magazine wrote that “drastic action” had to be taken because a default would “have trigged the worst financial meltdown since the Great Depression.”
    It’s interesting, isn’t it, that all these people believe that waving the magic money wand can make reality just go away. That incredible superstition seems to be the official position of the entire US establishment. And we like to flatter ourselves into believing that we live in an age without illusions!
    As for those who should know better, Greg Mankiw, author of the leading economics textbook, writes that because “it was likely to happen eventually” it is “better to get on with it.” The supposedly free-market economics blog Marginal Revolution warns that without the bailout, “most of the U.S. banking system would be insolvent,” failing to point out that a system that needs a bailout with fiat money is already insolvent. Econlog had lots of good thoughts, but didn’t actually oppose the bailout.
    The Cato Institute agrees that the Treasury had to bail out the mortgage industry because it “was forced to do so,” and that Fannie and Freddie are indeed “too big to fail.” The Heritage Foundation agrees that it was a “necessary step” and a “vital move toward reform.”
    Sure, these people have plenty of recommendations about what should have been done in the past, and lots of ideas about what should be done in the future. As for the present, they are ready to propagandize for the largest socialist operation in American history. In all of these latter cases, we are looking not at a problem of economic education but rather the courage to stand up to the state when it is needed most. They didn’t do so after 9/11. And now they have caved again.
    Part of the problem is the belief in the great myth propagated by Milton Friedman. As good as he was on many issues, he was not correct on his specialty of American monetary history. His view was that the Depression was caused by a Fed that failed to fully bail out the banking system. Ben Bernanke and many others are pleased to accept this view of history, and they are determined not to let it happen again. In fact, the Fed did attempt to bail out the banks, and was far too successful. This is the basis of the problem.
    In the end, we are talking about a price system that has rendered a verdict on the housing market. Prices don’t lie and there is nothing we can do to reverse them. Even the most powerful government in the world cannot do so. The attempt causes calamity. The Austrians understand this, whereas it seems as if hardly anyone else does.
    Pretty much alone in both predicting the calamity and actually opposing the bailout are those who have learned from the Misesian tradition, who have said plainly and clearly that this is a dreadful error, one that makes the US more socialistic than China.
    Let us address this claim that not bailing out the system, and not nationalizing the mortgage market, would lead to a financial meltdown on the level of the Great Depression. People talk as if the Depression were some sort of natural disaster that the government had to fight. In fact, it was the very fighting of the Depression that deepened it and caused it to last all the way through World War II. We have to understand that if we are to understand the real lesson of the Depression. Instead of letting prices fall and letting the bad investments wash out of the system, the government tried for years and years to keep prices high, employ people in make-work programs, and generally centrally plan the economy.
    In 1920 through 1922, we had a financial meltdown just as bracing and systematic as the one in 1929. The difference was that the government didn’t do anything to try to fix it. As a result, it solved itself and it is a forgotten event. Hoover and FDR, in contrast, attempted to use their power over the economy and monetary system to try to keep prices floating high and to keep liquidity in the banking system – precisely as everyone is attempting now. The result was to forestall the inevitable readjustment process.
    They believed that the low prices were the cause and not the effect of the recession. Does that error sound familiar? In other words, the Great Depression only became the Great Depression because the government followed exactly the same policies that the Bush administration is following now with regard to the mortgage market.
    It makes no sense to warn that we will repeat the past if we do the same things that actually made the past as bad as it was. To avoid another Depression-sized downturn, we need to avoid the mistakes of the past, among which were the policies that attempted to keep failing firms and industries afloat in difficult economic times.
    What should have happened in 1929 is precisely what should happen now. The government should completely remove itself and let the market reevaluate resource values. That means bankruptcies, yes. That means bank closures, yes. But these are part of the capitalistic system. They are part of the free-market economy. What is regrettable is not the readjustment process, but that the process was ever made necessary by the preceding central bank and other interventions.
    Let me state this very plainly: I do not believe for one second that if the government fails to nationalize Freddie and Fannie that the world as we know it will come to an end. Those who are saying that are trying to scare the population, the same as with every other major demand by the regime. It was the same with Nafta, the WTO, the war on terror, the war on bird flu, the nationalization of airport security, and everything else.
    If the government did nothing but sell off the assets of the mortgage giants, we do not know for sure what would happen, but the market has a way of finding value and readjusting. I would expect about 18 months of difficulties. Banks would fail just as many businesses in the free market fail every day. Housing prices would fall more, just as all market prices are subject to change. But the process of readjustment would be smooth and rational. And we would all stop living a lie and believing an illusion.
    Contrary to what the blogging heads say, there is nothing that makes this nationalization inevitable. If we had leaders who had courage, who understood economics, who could think about the long run, we would let the market handle the entire process, come what may. I guarantee that this solution is a better one than creating another trillion or so to bail out failing enterprises.
    And yet this is not just another longing for courageous leaders. We can’t hope for that. We need a guarantee. We need a system that would make it impossible for government to do these things even if it wants to. That system is called sound money. Think about the preconditions that made it possible for the Bush administration to decide one evening to dump a trillion plus to guarantee three-quarters of the home mortgages in this country. It is a system that is premised on the government’s capacity to print unlimited amounts of money.
    If it could not do that, no one would be talking about conservatorship. No one would be talking about guaranteeing the liabilities of the automotive industry either. War on Afghanistan, on Iraq, on Russia, and troops in another 100 plus countries, would be out of the question. These wouldn’t be issues. If government had to tax people directly for all its spending priorities, we would see Washington’s ambitions in every area scaled back dramatically. Every suggestion of a new program would be met with the demand as to how it would be funded.
    Fiat money with central banking, on the other hand, tempts corrupt politicians and bureaucrats, and it also further corrupts them. It is the great occasion of sin of our public life. The tragedy is that their use of the printing press not only corrupts them; it imposes dreadful and intolerable costs on the rest of society, in the form of price inflation and business cycles.
    We’ve seen the corruption grow worse over time. We are living now in the 37th year of fully fiat money with central banking. The politicians of the past were a bit reticent to use all the power they had. They are becoming ever more brazen. The sense of shame seems to be gone forever, their consciousness completely papered over by the ominous power they possess. The pundit class is following them, believing that there are no limits.
    In truth, all these bills must be paid. To realize that is to realize the necessity of radical reform. It can be overwhelming to contemplate the glorious results of a full gold standard reform. Inflation would stop eating away our purchasing power. The business cycle would be tamed. International trade would not be disrupted by wild swings in currency values. But of all the benefits, this one is the greatest: it would stop arbitrary rule, dead in its tracks. It would force the government to curb its ways. It would shore up our freedoms.
    For this reason, the policy of sound money is very much linked with morality. The Hebrew scriptures, in the nineteenth chapter of the book of Leviticus, warns “you shall have just balances, just weights…” The twenty-fifth chapter of Deuteronomy issues a similar warning: “You shall not have in your bag differing weights, a large and a small.” Proverbs says the same: “A false balance is abomination to the LORD: but a just weight is his delight.” Another passage says: “Diverse weights, and diverse measures, both of them are alike abomination to the LORD.”
    All of these relate in some degree to the need for sound money and condemn the act of fraud and monetary debasement. The consequences of monetary sin cannot be contained to the sinners only. They are spread out all over the whole of society, destroying its economic basis and corrupting the morals of society. They foster crazed illusions that we can magically generate wealth through the act of printing money, and the attempt to do so has catastrophic consequences. As Mises wrote: “Inflation is the fiscal complement of statism and arbitrary government. It is a cog in the complex of policies and institutions which gradually lead toward totalitarianism.”
    I find it sickening that there are so few voices outside the Austrian School that will stand up to this policy. And I fear that the consequences of this policy will be felt for many decades into the future. There is still time to reverse course. There is nothing inevitable about despotism. We are not being forced down this road. We can embrace freedom. If we understand that freedom is inseparable from sound money, we can embrace that too. Until then, we will continue to place our trust in the political establishment to do what is right. Call me a gold bug if you will, but I trust hard money far more than our rulers. And that, ultimately, is the choice we must make.
    This talk was delivered on September 13, 2008, at the Vancouver Mises Circle.

  45. g. powell says:

    The financial system has effectively been nationalized. Since finance in central to the economy, it is not too much to say they we are now an essentially socialist country. Thank you Mr. Bush.
    We are also coming very close to electing an old coot to be POTUS and door knob to be our VP. This nation is very close to collapse.

  46. I have been sanguine about this whole business, possibly because I’ve had a year’s practice coping with a really scary diagnosis. Tonight I wrote a blog post that starts out as a book review and ends up explaining why this panic doesn’t scare me.
    Bonus points to those of you who recognize the saint referenced.
    For the secular/agnostic, let’s just say my point is a) this too shall pass and b) you’re still breathing, aren’t you? Count your blessings.

  47. P Long says:

    I can’t claim to have a clear understanding of how this came about or all it’s implications, but one thing seems certain to me: America’s “brand” is taking yet another hit, one it can ill afford.
    America’s extensive mesh of financial ties throughout the world makes us essential to the economic well-being of virtually every country, a reality that makes our every diplomatic and military effort easier. There’s no doubt in my mind that the turbulence in the American economy is causing far-sighted leaders everywhere to look for an alternative to reliance on the US economy. That serves only to diminish our influence in the world at a time when we can spare it the least.

  48. Curious says:

    Who says the cold war is over? The monetary crisis we are in right now is the very product of WWII and has happened repeatedly in smaller scale during the cold war.
    I think postwar EU-US economic relationship is no longer sustainable as seen with Georgia/Russian case. (EU energy vs. US political urge)
    Then there is China trade imbalance (much bigger than europe during WWII, which supposedly will sustain US dollar hegemony. but they are not exactly WWII ally.)
    A second structural change that undermined monetary management was the decline of U.S. hegemony. The U.S. was no longer the dominant economic power it had been for more than two decades. By the mid-1960s, the E.E.C. and Japan had become international economic powers in their own right. With total reserves exceeding those of the U.S., with higher levels of growth and trade, and with per capita income approaching that of the U.S., Europe and Japan were narrowing the gap between themselves and the United States.
    The shift toward a more pluralistic distribution of economic power led to increasing dissatisfaction with the privileged role of the U.S. dollar as the international currency. As in effect the world’s central banker, the U.S., through its deficit, determined the level of international liquidity. In an increasingly interdependent world, U.S. policy greatly influenced economic conditions in Europe and Japan. In addition, as long as other countries were willing to hold dollars, the U.S. could carry out massive foreign expenditures for political purposes—military activities and foreign aid—without the threat of balance-of-payments constraints.
    Dissatisfaction with the political implications of the dollar system was increased by détente between the U.S. and the Soviet Union. The Soviet threat had been an important force in cementing the Western capitalist monetary system. The U.S. political and security umbrella helped make American economic domination palatable for Europe and Japan, which had been economically exhausted by the war. As gross domestic production grew in European countries, trade grew. When common security tensions lessened, this loosened the transatlantic dependence on defence concerns, and allowed latent economic tensions to surface.

  49. Paul Mooney says:

    Lets see. The government now owns and operates Fannie Mae, Freddie Mac and AIG (OK we just own that one).
    Doesn’t that make us kind of a socialist country?
    Brought to you, ironically, by the free-market-loving republicans.
    And since we own the world’s largest insurance company, can we use it to offer national health insurance? Seems logical – just another product to add to the United States’ insurance portfolio. I mean how can we offer auto insurance and not health insurance?

  50. TomB says:

    I have read through that fine Lew Rockwell talk you so graciously posted and think that perhaps the absolute central crux of it lies in this sentence fragment:
    “If the government did nothing but sell off the assets of the mortgage giants, we do not know for sure what would happen, but….”
    At bottom, economics is about mass psychology. What your house is “worth”—and indeed what anything is “worth” is entirely a function of people’s perceptions, and those perceptions change with the times.
    But Mr. Rockwell talks about “worth” and “value”—in the context of a recession or depression for instance—as if everything has some absolute, minimal intrinsic value. And therefore his prescription is that the gov’t should never interfere in the market and all we have to do is let the market “work.”
    But “the market” is in the human mind, and the Great Depression taught us that the swings in mass human psychology can last a long long time and cause an immense amount of suffering.
    So this is why the great vast majority of economists and etc. today agree that on occasion, in certain circumstances, some governmental action may well be worthwhile to try to stave off that mass psychology from tipping over in mass depression. As Mr. Rockwell himself notes in the talk you quote, “It’s remarkable to observe that hardly anyone dares be against this policy.”
    So it seems to me that Mr. Rockwell fails to listen to what this means; i.e., that damn near everyone does indeed recognize the potential volatility of mass psychology and that in the end economics is indeed about psychology.
    Nor I think does he even fully appreciate those central words of his that I quoted at the start: “we do not know for sure what would happen.” Because if he did he would realize that the reason this is so *is* because of the unpredictability of human psychology and its centrality to the idea of “value” and “worth.”
    In essence, he himself admits what he so strives to deny.
    There is no doubt in my mind that in the main his “hands off’ prescription for governmental interference is a good one. But what prescriptions are *universally* true, all the time, in all circumstances?
    Few we would trust I think, and yet, for the sake of capitalistic purity, that’s exactly what Mr. Rockwell is saying, and putting his trust in to avoid another possible Depression which, after all, he acknowledges in his statement saying that “we do not know what would happen.”
    I detest the need for the bailouts as much as anyone, and esp. of Fannie and Freddie since that need has arisen not from any private mistakes but from the most grotesque, blatant political corruption imaginable. (Mostly on the part of the Democratic Party.)
    But to chance another Great Depression for the sake of ideological purity and so as to let the system flush out mistakes as harshly as mass psychology might do is a bridge too far for me.
    Moreover, it seems to me that all of what we see going on has raised perhaps the ultimate question of governmental regulation. That is, we see now that so many of these huge concerns were nothing but gigantic palaces of debt.
    So how the hell did people keep lending to them and investing in them?
    Again in the final analysis it must be that at times people feel that is okay, and we ought to take a lesson from that to the effect that it’s not okay when these institutions get so big that their failure threatens to tip the mass economic psychology of the whole nation.
    Thus, and I say this as a rock-ribbed believer in capitalism—it strikes me that maybe the best answer is to simply not allow institutions become “too big to fail” anymore.
    If, after all, they have proven that nobody too big is invariably too smart to avoid failure, then I do not see why we should sit back and, like half-a-loaf Marxists, let them privatize their gains but socialize their losses when they fail.
    Mr. Rockwell simply goes too far. In his world the government wouldn’t even guarantee regular bank savings accounts and so think of just what that would mean to the banks’ ability to engage in what Colonel Lang so accurately called the “lifeblood” of the economy which is investing.
    In short, I think Mr. Rockwell mistakes a consequence—prices, values, worth—for a cause, with that cause again being simple human perception.

  51. J says:

    it just warms the cuckles of my heart the way the treasury sec. is instituting financial serfdom — a modern day version of financial serfdom — u.s. taxpayers underwriting monetary mega giants.

  52. Shrike58 says:

    Reaganism was a religion not a theory and until that faith is broken rational behavior will not be possible.
    Also, while the Fed might not be all that it’s cracked up to be, perhaps AIG can be the beginning of an insurance equivalent; it’s not as though the insurance companies care a great deal about their original business any more.

  53. Curious says:

    Morgan Stanley is gone.

  54. Paul says:

    Now that the taxpayers own 80+ percent of AIG, does anyone know if the assets on AIG’s balance sheets are accurate. Wasn’t AIG insuring swaps?
    It is said that Lehman died because they artifically valued (70% of so) their assets too high whereas Merrill Lynch saved itself by lower valued assets.
    My basic question is: did the Fed and the taxpayers buy a pig in a poke? Is the $85 Billion enough? Will this be another shell game?

  55. Mike Martin, Yorktown, VA says:

    As long as this is an open thread, let me deviate just a bit with this question:
    Are all the U.S. citizens who gather here registered to vote? I am.
    For anyone who’s not: you have no excuse. Get it done.

  56. Fred says:

    Oil, down to $94/barrel. Nothing like a global recession and financial crunch to ruin some hedge fund investments.

  57. Cold War Zoomie says:

    I really do want to believe that going back to the way we were before fiat currency and the Federal Reserve system would fix our problems.
    Is history on the side of that argument, though?
    Recessions in the USA
    BTW – this kind of debunks my need to believe that my generation is so different in its foolishness. Maybe compared to my grandparents we are. But history shows we are par for course.

  58. Curious says:

    We are near public panic/banking run phase of this crisis…few more months would be my guess.
    by next year, Federal budget deficit should hit near $1T range.
    The window is closing fast.
    Federal bank insurance fund dwindling
    Banks are not the only ones struggling in the growing financial crisis. The fund established to insure their deposits is also feeling the pinch, and the taxpayer may be the lender of last resort.
    The Federal Deposit Insurance Corp., whose insurance fund has slipped below the minimum target level set by Congress, could be forced to tap tax dollars through a Treasury Department loan if Washington Mutual Inc., the nation’s largest thrift, or another struggling rival fails, economists and industry analysts said Tuesday.
    Treasury has already come to the rescue of several corporate victims of the housing and credit crunches. The government took over mortgage finance companies Fannie Mae and Freddie Mac, and helped finance the sale of investment bank Bear Stearns to J.P. Morgan Chase & Co.

  59. Michael Torpey says:

    This letter is from James Gorman a Doctor of Jurisprudence
    Mike ~
    When Congress subcontracted its responsibilities under Article I, Section 8 of the Constitution (“. . . To coin money and regulate the value thereof . . . “) to the newly created Federal Reserve Corporation in 1913 pursuant the the “duly enacted” Federal Reserve Act which was passed during the Congressional Christmas recess of 1913 by a scant quorum of interested (that is, bought out) Congressmen, the demise of sound fiscal policy was about to be a fait accompli. However, the international banking families needed the creation of one more rule and one more institution which problems were solved by the enactment of the 16th Amendment in 1916 (the Income Tax Amendment) which still needed one more institution to perfect the plan to control the money supply and the value thereof by a handful of international banking families. That institution that needed to be created is the Internal Revenue Service in order that the government collect taxes. After all, these families — even at their most prolific — number only a few thousand members which is not much of a challenged for any American mid-sized city to resist such people from seizing their wealth and money. The passage of the Income Tax Amendment happened under President Woodrow Wilson (though the author of the article you sent me — which is a good article — attributes this to the administration of Franklin Delano Roosevelt who would have done it had it not already been accomplished).
    Under Richard Nixon’s administration, the United States was taken off the gold standard for regulating the value of the dollar and the amount of paper money that could be circulated (which depended upon the amount of gold reserve in Fort Knox. A interesting side question is: what happened to the gold in Fort Knox, Kentucky? It is no longer there. And no one seems to know exactly where it is.).
    The monetary system we now have works like this:
    (1) The Federal Reserve Banks (pursuant to their contract with Congress) decide how much money will be circulated in each of the Federal Reserve Districts. Each Federal Reserve Bank then issues numbers on a piece of paper to its member banks. This number is the amount of money that member bank has to work with. The member banks then make loans based upon “margins of reserves”, e.g., a 10% margin means that one million dollars can be loaned out as $10 million. The working stiffs of the U.S. then pay back these loans with sweat equity and with the creation of infrastructure, buildings, factories, production products, services, etc. The pay backs represent wealth, the addition of goods and services and wealth to the economy. Not a bad payback! Get created real wealth for issuing numbers on a piece of paper. How can I get into this business? I can’t. The last consortium of wealthy Texans who tried (successfully as they had many states borrowing money from them instead of from Federal Reserve Bank members) were sent to jail for a variety of ridiculous charges during the 1980’s, but the message was clear: don’t fuck with the money people!
    (2) The members of the Federal Reserve Banks borrow money at prescribed rates of interest as set by the FOMC (Federal Open Market Committee) of the Federal Reserve Bank. This is the “prime rate” of interest which member banks must pay for loans banks borrow from the Federal Reserve. This is what most people think about when they think about the Federal Reserve Bank and the Federal Reserve Banking system.
    (3) However, when the Federal Reserve Bank loans money to Congress (or to any other legislative body in the world government community), the interest rate is super, super exorbitant. This interest rate is known as the “national debt” and it amounts to several giga, giga gazillion dollars. In the history of this world banking system, no country has ever (yet) paid back even One Dollar of principal on the national debt. Indeed, virtually the entire federal income taxes collected is earmarked to pay the annual interest on the national debt. Not a penny of income taxes goes to the military defense or to the highway and national transportation infrastructure, or to Social Security, or to anything. Taxes on corporations is almost the exclusive funding for the military defense institutions. Thus, almost the entire amount of income taxes collected goes to pay the “interest on the national debt”, that is, the interest which the Federal Reserve Bank charges Congress for subcontracting Congress’ Article I, Section 8 powers to “coin money and regulate the value thereof”.
    (4) Two Presidents (not county Andrew Jackson who abolished the Bank of the United States) have issued Presidential Executive Orders demanding that Congress print money and keep track of it. Both Presidents were assassinated in office — Abraham Lincoln (who had other political issues that generated enemies) and John Kennedy (whose executive order issued in June 1963 is still in effect though it is not enforced). The money John Kennedy ordered Congress to print has “United States Note” on the bills (instead of “Federal Reserve Note”). The JFK money cost the ink, the paper, the engravers fees, and the overhead. No payback from income taxes required. Federal Reserve Notes cost gazillions in interest. (The national debt is almost exclusively interest on the money the Federal Reserve Bank loans to Congress.) Needless to say, no U.S. President since Kennedy has dared to order Congress to print its own money. Only George W. Bush has hinted that he might do that in both his first and his second inaugural addresses. However, time is running out for his administration and for him to secure a place in history as the greatest U.S. President since George Washington. All that would be necessary is an Executive Order abolishing the I.R.S. and the Federal Reserve Bank and ordering Congress to print money and regulate the value thereof. Of course, he would also have to explain to the American public the reasons for this and that the interest on the national debt is a giant, giant scam. Otherwise, he would be dead meat before dinner.
    (5) Yes, this system has been “adopted” by almost every country of the world, except those countries who are the enemies of the U.S. The United States supplanted England as the “collection agency” for the World Banking Community (which we will call the World Bank) following World War II. England lost its power position. Thus, the only common thread in U.S. foreign policy since World War II has been:
    (a) whichever government does not agree to repay interest to the World Bank and instead chooses to keep its money at home, e.g., Soviet Union, Cuba, Columbia, North Viet Nam, China (until recently), Panama, Granada, etc. becomes the enemy of the U.S. First, we try diplomatic and economic boycott persuasions.
    (b) If that does not get the leadership “to follow along with the program”, then we resort to displacing the leadership.
    (c) If that does not work, then the U.S. gets the “hit” to attack such governments and replace the leadership with more cooperative people.
    I believe that this little essay may help clarify some of the issues which your e-mail to me raised.
    Meanwhile, I remain
    a citizen of the U.S. and a proponent of abolishing the income tax

  60. zanzibar says:

    If the regulators had done their job and enforced existing regulations we would not have got to the point of “too big to fail”.
    The current crisis was entirely preventable and predicted ad nauseum. But…greed and politics under the euphemism of ideology got in the way. When the entire Greenspan era was predicated on a philosophy that Wall Street would always be bailed out then risks taken naturally swung to the extremes because the short term “profits” and personal rewards for executives were so high. In addition no one complained when the “Housing ATM” was generating all this “wealth” for anyone that purchased a house subsidized by taxpayers.
    So the question is what should be done now? I agree that we need an orderly liquidation as we did during the last bailout of the S&Ls – however – there were no lessons learned from the S&L corruption and bailout. Keating 5’s John McCain is on his way to be President. Does it not surprise you that there are no calls for any grand jury investigation of malfeasance and fraud? No calls for investigation as to why this happened and who was responsible. Unless those culpable pay a significant price we will keep repeating this scenario as we have over the past few decades. It just keeps getting larger in scope and size. The S&L bailout cost taxpayers around $300 billion this “securitization” and “shadow banking system” bailout will be measured in trillions. Future generations will not be happy with our irresponsibiity.

  61. Curious says:

    Oil, down to $94/barrel. Nothing like a global recession and financial crunch to ruin some hedge fund investments.
    Posted by: Fred | 17 September 2008 at 11:12 AM

    it’s deleveraging. All those hedge fund and CDO’s have to cash out and sell their asset.
    That’s why you see entire range of commodity going down in price steeply. (Gold, oil, steel, copper, … etc) all of them
    Now we know where Bush economy comes from. It’s nothing more than buying and selling of properties. Mostly paper money.
    so when economy is slowing down and foreign investors pulling out funds, everything deflate like last week sponge cake.

  62. Curious says:

    see non ferrous metal price (copper, aluminum, nickle, etc…
    all have that funny bubble curve, exactly like DOW industrial.
    They were desperate trying to make quick buck in commodity market to keep pace with deflating subprime market.

  63. TomB says:

    zanzibar wrote:
    If the regulators had done their job and enforced existing regulations we would not have got to the point of “too big to fail”.”
    You know, I would hope that this was the case, because I am so instinctively against my reluctant idea of giving even more power to the gov’t to forbid a corporation from getting any bigger for fear it was getting “too big to fail.”
    But I don’t think so any more zanzibar. So many of the things that these failing firms were involved in were not lawfully subject to any regulation, and even many of the things that were gave regulators only such limited powers that I suspect the big cause of what we are seeing was just stupid decision-making that was still perfectly legal and either unregulated, or conducted within the bounds of what regulation existed.
    For instance, what “regulation” is there to prevent an investment bank (not a commercial one) from buying oodles and oodles of bad mortgage bundles? None that I know of. Perfectly legal. And what regulation forbids people from investing in that investment bank? And while bank regulators can forbid this or that bank from making any more than X loans to that investment bank, I don’t think they can forbid all banks from lending more than Y to that investment bank.
    I don’t know; maybe I’m wrong. And I guess I even hope I am, but I don’t think so. And that’s why I say maybe the lesson to be learned from all of this is that we need some uber-regulation: Somebody somewhere (the Fed, the Treasury, whoever), to enforce a law that simply says that they have the power to prevent any particular business from getting to such a size that its failure would endanger the fundamental health of the entire economy.
    I know, I know; intrusive as hell, kind of subjective, but hell, better than having to make such subjective decisions as to who to bail out in the middle of the kind of shit-storm we’ve got going now, no?
    In any event that’s my brilliant idea for the decade and I’m sticking with it. Kind of. Until persuaded otherwise. Which you’ve kind of moved me towards. Somewhat. Maybe.

  64. Mad Dogs says:

    I hadn’t written a comment on this post because I didn’t want to get Phil Gramm anymore upset than he already is.
    You know, “No whine before its time”.

  65. zanzibar says:

    Banking regulators have the authority to establish reserve and capital requirements. Exchange regulators have the authority to establish margin requirements. Tools to prevent excessive leverage. If Fannie/Freddie were only allowed to lever 10x as opposed to 80x they would have had more capital. Broker/dealers could have easily been prevented from levering 30x. To address your question what would have prevented an IB from buying crappy MBS – nothing – however if they had to put up 25% of the MBS value with their own capital they could only get so far. There’s a lot more margin of safety before taxpayers need to show up.
    Also, the SEC has the authority to enforce disclosure rules. They could have easily enforced rules that would have made balance sheets more transparent for publicly traded companies. All this Level 2/3 asset shenanigans can be easily prevented.
    Next, accounting rules. Fannie was caught cooking the books. All Franklin Raines did was pay a small fine. No one went to jail. Its clear as day Lehman and AIG were cooking the books since no private party that saw their books made an offer. They were insolvent yet their balance sheet showed tangible book value. The SEC should have come down on that with a ton of bricks and the CEOs and CFOs prosecuted. WaMu was paying dividends on the basis of “earnings” for which there was no cash. The accounting treatment for neg-am loans could have been that you can recognize revenue when you get paid. After Enron they should have tightened and enforced derivative accounting rules.
    IMO, there’s no need for any further regulations. Strict enforcement of sunshine rules will go a long way along with increased capital requirements for illiquid OTC securities.

  66. Carl Osgood says:

    Dear Col. Lang,
    Let’s be honest here. The financial system is dead. What’s taking up the headlines these days is the flaking off of piecs of teh corpse. The system died a year ago, and the man who declared it so, on July 25, 2007, was Lyndon LaRouche. Within a week, Countrywide went belly up followed not too long afterwards by the British bank Northern Rock. What we have is a banking crisis comparable to that of the 14th Century, which resulted in a dark age that reduced the population of Europe by one-third. To avoid a reply of THAT scenario we need to do the following:
    1) Stop home foreclosures to keep families in their homes and save people. Theya re, afterall, much more important than the speculators.
    2) Put the banking system under bankruptcy protection. Separate the depository institutions from the toxic waste and write off that bad paper. It’s unpayable anyway.
    3) Seek a four-power alliance with China, Russia and India to establish a new fixed exchange rate global system modeled on that of FDR’s original Bretton Woods.
    If we don’t take tehse three steps, we’re all toast!

  67. Nancy K says:

    Tom B compares the economy and the collapse of institutions to a kidney stone. Well as a nurse I can tell you passing a kidney stone, if in fact it can be passed is an extremely painful experience. Men say it is more painful than childbirth. Always thought that comparison interesting.
    Hopefully we will all come through this but I think we may be in for a very uncomfortable journey.

  68. TomB says:

    Good arguments. However.
    A.) Aren’t you admitting that as regards Fannie & Freddie’s leveraging that the problem wasn’t a lack of *enforcement* of pre-existing regulations/laws, but indeed a lack of any such regulations or laws in the first place? As I understand it every time someone in Congress or otherwise tried to make ’em stock more capital, the Democrats screamed it down as “making war on home-owners.”
    B.) Beyond that however I’d admit that my argument for a “no too big to fail” law probably couldn’t apply to Fannie or Freddie anyway since they were government founded entities.
    C.) You say “… what would have prevented an IB from buying crappy MBS – nothing – however if they had to put up 25% of the MBS value with their own capital they could only get so far.” To which I’d say … “See? “If if if. But they didn’t, because there were no such regulations.” Right?
    D.) And, lastly, again I just don’t know. But doesn’t the fact that what regulations and regulatory agencies that *did* exist but still *did* fail militate just a bit in favor of my idea? I.e., okay, now that we *know* we can’t count on the classic regulatory scheme, shouldn’t we learn from that too and not depend totally on it in the future?
    Again, I’m not meaning to say I know I’m right on this, and you make some good points. I’m just trying to think it through. (Which explains the look of pain on my face.)

  69. Curious says:

    – Goldman Sachs is next. Morgan Stanley is gone.
    – Global market is now disengaging from toxic US investment houses. (Bad banks will pretty much die in few weeks, since nobody will provide them with liquidity.)
    – This is systematic flaw, rooted at taking down sensible market regulations. This is why the size is so large and so widespread. This is also why bailing out few institution at cost of $40B, $80B, $138B … etc doesn’t change the course of event. Because the magnitude of the problem is in hundreds of trillion range. Few hundred billions is squirt gun in the middle of forest fire. They have to change the regulation, settle the account, and talk with all big trading partners. Fix the whole world.
    – Media hasn’t asked, Why does this happen? The real hard question. … so congress and public will keep playing dumb. Until we have public panic (bank run) The stupidity continues…
    – When correctly done, supposed, at this very moment, Bush would have been in a gigantic emergency meeting with world leaders. (basically begging for money, and hold on to cashing out that useless papers, and help stabilizes US banking system. Make deal to create new system.) But there is such little goodwill int he world for Bush administration at this moment.
    (for eg. Bush told Korea, Brazil to eff off, during their big economic crisis. And there is no way China and Russia will play nice with Bush after what Bush has done so very recently.)
    Europe is on survival mode right now. Conserving capital and cutting lines to US banks. Japan is in mood bailing out US banks.
    -This will shake the core of Bretton Woods agreement. And thus finally ending the cold war. The whole system is flawed and unsustainable in the long run anyway. (Bretton Woods, US dollar becoming global currency is the biggest war booty there is)
    This is big people (Because of the size of derivatives market, which is essentially unregulated shadow banking system.
    There is a reason why McMansion and all those dinky houses can worth so much in such little time. The easy money comes from somewhere. Now that system is collapsing.
    Bloomberg is reporting Treasury 3-Month Bill Rates Drop to Lowest Since World War II.
    The three-month bill rate has averaged about 3.44 percent in the last decade. It touched 0.01 percent in January 1940, monthly figures on the Fed Board of Governors’ Web site show, as investors sought the assurance of getting their principal back. Daily figures only go back to 1954.
    “The panic going round the money market world is what they’ve been investing in is not as safe as they thought it would be,” said Dominic Konstam, the head of interest-rate strategy in New York at Credit Suisse Securities USA LLC, another primary dealer. “If the banks don’t want to lend to each other they don’t want to lend to the banks. That means where else are they going to put their money — they’re going to put it in T-bills for safety.”
    Deutsche Bank Limits Credit Swaps Adding to Bank Risk (Update2)
    Germany’s largest bank is requiring risk managers to approve trades where the company takes over an investor’s contract with another dealer, said the people, who declined to be identified because they do business with Deutsche Bank. Signing off on so- called novations can take an hour, deterring investors from the trades with the Frankfurt-based institution, they said.
    Financial companies are seeking to limit exposure to competitors after Lehman Brothers Holdings Inc. went bankrupt and the government rescued American International Group Inc., sparking concern that other dealers may fail. Credit-default swaps on Goldman Sachs Group Inc. and Morgan Stanley surged to a record today, as their shares fell the most in at least a decade.
    Many banks are now charging high rates to lend to one another, and some institutions have closed their windows altogether — a sign of how tight borrowing has become. The benchmark overnight lending rate for these banks, called the London interbank offered rate, or Libor, nearly doubled to 6.4 percent, the highest jump on record.
    “The magnitude of what we’re seeing today has never happened,” said Hogan.
    Investors appear to be running for safe ground. After tumbling earlier this week, oil prices shot up $6 a barrel today, or 7 percent, to $97.16 on New York Mercantile Exchange. The price of gold jumped $70.10 to close at $846.60 per troy ounce, one of its biggest one-day moves
    Shortly after George W. Bush was elected president, Congress and President Clinton were trying to pass a $384 billion omnibus spending bill, and while the debates swirled around the passage of this bill, Senator Phil Gramm clandestinely slipped a 262-page amendment into the omnibus appropriations bill titled: Commodity Futures Modernization Act. It is likely that few senators read this bill, if any. The essence of the act was the deregulation of derivatives trading (financial instruments whose value changes in response to the changes in underlying variables; the main use of derivatives is to reduce risk for one party). The legislation contained a provision — lobbied for by Enron, a major campaign contributor to Gramm — that exempted energy trading from regulatory oversight. Basically, it gave way to the Enron debacle and ushered in the new era of unregulated securities. Interestingly enough, Gramm’s wife, Wendy, had been part of the Enron board, and her salary and stock income brought in between $900,000 and $1.8 million to the Gramm household, prior to the passage of the Commodity Futures Modernization Act.

  70. Curious says:

    story from the trenches (worth reading)
    You see, it wasn’t just the people who wanted these homes. Mortgage lenders, working on commission, wanted the people in them too. During the initial phase, commissioned loan originators got used to their lifestyles. I was once invited to a party for a mortgage originator who was celebrating an $11K commission check. That would be a biweekly check. And we’re talking about a relatively small New England area.
    Rates continued to fall, and people continued to refinance. People who had been a little overenthusiastic—or deeply overenthusiastic—with their credit cards starting refinancing or taking out home equity loans to consolidate their debt. People realized they had more equity than they’d ever dreamed, and they bought boats and SUVs and campers with their low-interest home equity lines of credit. I had clients for whom I increased home equity lines six times… or more. I had clients for whom I refinanced loans against rental properties three or four times. Business was still good. But I became aware that it couldn’t continue—it couldn’t last forever.

  71. Arun says:

    m savoca: in deference to wall street bankers, Clinton with the prodding of Phill Gramm and other shills for wall street, erred big time in signing the Gramm Leach Biley act, “which was supported by nearly 90% of the senate,” and ended the glass stegall act
    Gramm-Leach-Bliley passed the Senate 54-44 along party lines, the lone Democrat voting for it being Ernest Hollings of South Carolina.
    That 90-8 is a Wall Street Journal goof-up. The details are in the dailykos diary:

  72. Curious says:

    The reason why Japanese carry trade was a big deal. (It finances these SIV scheme)
    In this mess, commerical banks originate mortgages, sell these mortgages to Investment banks like Lehman Brothers, who then “securitize” these mortgages into bonds (“securities”), and sell them to investors. This would have been difficult or impossible before Phil Gramm’s law. Because originators don’t care if the borrower can pay back the loan, they become interested only in fees. And the more money that is borrowed, more more fees they make. The investment banks, in theory, bear little risk, because they will sell these mortgage-backed securities to investors (mutual funds, insurance companies, and hedge funds for example). This is the realization of Alan Greenspan’s vision of spreading risk. The problem is you eventually reach the point where the entire economy is saturated with risk. Oh, and by allowing insurance companies to mix with other financial institutions, Phil Gramm’s law allowed AIG to collapse.
    The insturments that investment banks use to hold these mortgage-backed securities are a clever, Phil Gramm-endorsed, excersize in Enron accounting. Enron collapsed because it was riddled with liabilities, only it kept these liabilites off its balance sheet using “Special Purpose Entities” (SPEs). These were all but outlawed after Enron, but the “free market” found a way to do it anyway. The investment banks use “Structured Investment Vehicles” (SIVs). These techincaly don’t keep the liability off the balance sheet. Rather, they disguse the liability as an asset. These vehicles borrow money using short term investments, and use this money to buy long term debt (like mortgage backed securities). It turns around, and sells these debt to investors. In theory, the long term debt will earn the investment bank more money than they are paying on the short term debt. This is what, in theory, makes these things into assets. The only problem is that the bank needs a permanent source of new short term debt. If this dries up, the entire ponzi scheme collapses. The rising default and forclosure rates on of the underlying subprime mortgages that were being bought by these SIVs caused this collapse. Without short term funding, the bank no longer has the money to pay the long term creditors, and becomes insolvent.

  73. zanzibar says:

    Its obvious that my posts are not clear.
    OFHEO the regulator for Fannie/Freddie had the authority to determine capital adequacy levels. No new legislation required. They could have prevented the 80x leverage. They did not. Why?
    Banking regulators including the Fed, FDIC, etc already have authority to set reserve and capital requirements. No new legislation required. They could have prevented excessive leverage but did not. Why?
    Regulators of exchanges like CFTC have existing authority to establish margin requirements.
    SEC has existing authority to enforce disclosure rules. And establish guidelines for financial reporting. Their charter is investor transparency. They did not. Why?
    This is a case were regulators are complicit. Either they were sleeping at the wheel or they intentionally chose to abdicate their supervisory role, maybe because of ideology. Now, they’ll make a big deal of not enough authority and its not all centralized, etc, etc. But…why would you trust the guys that screwed up big time to do a better job when you give them even more authority.
    A point that Wall Street apologists will make is that the housing downturn was unforseen. But that is a canard, IMO. Systemic threat issues due to explosive growth in derivatives were widely discussed. This crisis was predicted and many people including folks like Paul Volcker were speaking out years ago when action could have been taken. Unless folks are held accountable and that includes regulators we’ll just see this repeat as we have over the past few decades.

  74. Paul says:

    Morgan Stanley seeking “fresh cash” from China. Isn’t that interesting?
    Thanks to corporate America, especially Wal-Mart, the Chinese will be using our dollars to buy up Wall Street. It’s only a matter of time before the banking system (and our fundamentals) will be owned by foreign interests.
    How about “them ChiCom guys”? Mao sought world dominance and it is just around the corner.

  75. TomB says:

    zanzibar wrote:
    Its obvious that my posts are not clear….”
    Less obvious than that I’m not as smart as you are on this stuff. And in any event my modest proposal at least theoretically founders on your ultimate point that no matter what regulations you have they ain’t worth spit if they ain’t enforced.
    I just thought that we got ourselves into a situation where these bastards on Wall Street were innovating these exotic new monetary “products” faster than the law or the regulators could assess and control them. And thus it seemed to me that the old classic way of regulation which assumes that regulating “processes” rather than outcomes was simply being overwhelmed and that therefore some simple “outcome” regulation might be a good idea to try.
    Maybe not though, so I guess I’ll have to abandon my idea of launching a last-minute blitz for the Presidency based on such an idea. I figured if I could have gotten you to sign on as my Treasury nominee I’d have been golden, but now….
    Needless to say though I still absolutely second your view that there are absolute rafts of the culpable out there that oddly enough no-one in the media or in power are concerned about. Enron goes down and Justice is all over it. What about Fannie and Freddie? The ex-CEO’s of same are walking away with severance packages of $15 and $10 million I’ve read.
    Obscene. Simply obscene. Someone ought to start hunting down those responsible with dogs, pitchforks, tumbrils and grand juries.
    And what makes me wanna puke is all that idiotic idol-worship we saw the media devote back in the go-go years towards so many of these idiots. Hero shots of this or that CEO who has now lost his shareholders zillions, standing in front of his empire building or yacht, while all of them it seems were doing nothing but skimming money off the ever-increasing galaxies of debt they were incurring for their companies and calling it profit.
    Beyond obscene.
    Maybe one salutary effect all this will have is to put an end to the infantile idolization of these go-go businessmen that our media has foisted upon us. I remember some B-school folks from University; they always seem to fall into one of two classes. One was the kind you would trust your wallet with and hoped would marry your sister. And the other was the kind that screamed “on the make” and with whom you wouldn’t trust a nickel with and who looked down on that first class as uncool fuddy-duddies. And you could almost always tell this second class from the first; the former so often seemed concerned about how well they could dress.

  76. Cieran says:

    Thanks for providing such excellent explanations of the relevant finance involved. You’ve been on the trail of this story for a long time, and your thoughts have certainly helped me understand this longstanding crisis-in-waiting.
    One quick comment about this:
    A point that Wall Street apologists will make is that the housing downturn was unforseen.
    This is exactly right, and it’s the tip of a larger iceberg, namely not only did Wall Street firms fail to consider what might happen to their investment strategies if the housing market peaked, but they embedded that particular blind spot into the computer simulations that they used to assess risk of defaults. Thus as they “stress-tested” their models for risk, they found none since they had failed to consider the real risks present.
    And since these widely-used models predicted manageable levels of risk, the resulting investment vehicles earned high ratings from agencies such as Moody’s and Standard and Poor’s. This veneer of investment quality permitted these toxic investments to spread globally, and now we’re seeing the resultant crisis of confidence.

  77. fnord says:

    Sirs: I shall admit to not being as smart as y`all when it comes to the finer details of global economy. However, the question remains with me: In the last 6 years of the twin wars, the US government has spent billions upon billions, mainly borrowed from China, upon investing in the conflicts abroad. This money must have been payed out to real live actors in the financial fields. This has been a massive transference of state capital into private hands. Where has this capital been reinvested? Why is it that none of this capital seems to have trickled back into the US economy? Could it be that your US capitalists are unpatriotic and/or gamblers?
    Please feel free to tell me why this is a idiotic perspective.
    P.S. As a member of a semi-socialist government, Norway, I have to say that it aint all that bad. Maybe you could get the new state-run insurance companies to go for less than optimal profits and provide an insurance-deal that normal people can live with. In Norway, the state took over the banks in the 80s after a very similar local crash, and it worked out OK.

  78. zanzibar says:

    Yes, the young’uns with their “quant” models and their infallibility complex looked good during the bubble. We old school types were looked on as luddites by the overlords for arguing common sense and ethics. The incentives are misplaced. Senior executives are focused on making their compensation plan which is all short term goose the stock price at any cost – integrity be damned. Any homeowner knows that you can’t purchase a $500K home when you only earn $50K a year (unless of course you plan to just eat rice & beans). You can’t then package and repackage a bunch of these loans and leverage them into securities and through some alchemy make it into a AAA security. That defies common sense. You don’t need to be a rocket scientist to figure that out. If your model is based on 5 years historical data when all assets were inflating it all looks wonderful. In their minds a 20% correction in home prices was like a 100 yr flood. The bottom line is that greed and hubris got in the way. It was too much money that came easily and all of them thought it was because they were geniuses. Now the prudent pay as the wealthy are bailed out. Folks who actually saved are being penalized as 3-month Tbills are yielding 0.04%. Our taxes will go up to pay for all this debt that the Treasury is accumulating.
    This article in the NY Sun today discusses the SEC’s rule making on capital requirements of broker/dealers. Any observer that paid a little attention would infer that the regulators and legislators were on the payroll of Wall Street firms. As is the norm the government officials and politicians spout mumbo-jumbo with big sounding words to distract attention from what they are actually doing. Since we have become a nation that prefers to watch American Idol we think we don’t understand it and believe that someone that speaks in “tongues” surely knows what they are talking about. The result is a freight train hitting the wall at high speeds. All so predictable.

  79. TomB says:

    Much appreciate that NY Sun story steer. But you really shouldn’t have noted it to me: Just when even I was tired of my own pedanticism in arguing for a “no too big to fail” uber-regulation, doesn’t it strike you that this article kind of supports it all over again?
    That is, the entire gist of the article and the argument of the former SEC dude it features is that this whole crisis we see amongst the brokerage houses and banks and etc. is not that the SEC rules and regulations were not enforced or obeyed, right? Instead it is that the SEC rules were *changed*, so that this imbroglio came about through entirely legal stupidities.
    Again then (and my God do I ever feel tiresome in saying this), what the hell’s wrong with an uber-regulation giving the Fed or Treasury the ability to put a cap on the sheer size of a company so that it’s failure could never threaten the whole economy?
    I know, I know, your point is that if only that SEC regulation *hadn’t* been changed… But it was, and that’s my point; such “process” regulations are always going to be supremely susceptible to manipulation, aren’t they? Much moreso than the kind of “outcome” regulation I’ve suggested.
    Plus I’d note and ask you something else related: At there’s a story essentially blaming those “credit default swaps” for all or much of this. I.e., those “derivatives” that Warren Buffett had called instruments of mass economic destruction and which, essentially, are “insurance” policies against the failure of one’s assets. (With the point of the story being that these sub-prime mortgages would never have been bought in such bulk by people like Bear Stearns and etc. and therefore never been made but for them believing they had such insurance. And that therefore it was really the insolvency of these “insurers” that is really behind all that’s happened.)
    So okay, to get back our point then, once again weren’t these CDS’s utterly unregulated? Isn’t this just another example of Wall Street innovating something faster than our system can assess and regulate its “processes”?
    In any event please God tell me to finally stop and get on some other hobby horse. Maybe … bringing back the Gold Standard. Bi-metallism. Whatever.
    (As you can see, I really need to go fishing.)

  80. Patrick Lang says:

    Oil is up, what? 25/bbl? Anyone want to argue that this is due to “fundamentals?” pl

  81. Cieran says:

    Oil is up, what? 25/bbl? Anyone want to argue that this is due to “fundamentals?”
    It depends… on whether mass economic hysteria is considered a fundamental!

  82. zanzibar says:

    Nothing is trading on the basis of fundamentals. Its all a giant casino and now with unprecedented government intervention there are no rules even. The government keeps changing the rules in mid-game – so what the “market” does on any one day is anyone’s guess. IMO, the financial system is getting unhinged because there are too many unintended consequences!

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