The “Deal” is not good enough yet…

1481343928_8cdd45a135 Stripped of the "Bells and Whistles," the "Christmas Tree Ornaments," and other distractors, the basic bailout remains an arrangement in which the government of the US would:

– Buy bundles of securitized mortgage paper of various kinds from those willing to sell them.  These bundles would be bought for prices greater than their current value (why else would they be sold?) but less than they cost the sellers. (Again, why else….)

– The government will hold the paper until some of it evaluates to a level at which commercial buyers on a preferred list (not just anyone!  You there!  Forget it!) will be established.  The government will then sell the evaluated paper for less than it is then worth.  The rest of the paper? (the worthless part) Who knows? I would bet that the government (you and me) eats that part.

– The buyers of the "good" paper will then seek to enforce the terms of the loans.  Why else would they have bought it?

What a good deal for the taxpayer.

We are told that this crisis is about "main street" and not "Wall Street" and that it is about credit shrinkage, not the value of companies like Goldman Sachs where Paulson still has a lot of his money in a "blind" trust.   Financial media anchors plead desperately for proletarian plebeian understanding of the immediacy of the threat to every day life.  On one CNBC today, the winsome anchor trembled at the story of a woman in California who runs and owns an olive products business.  Her enterprise has been a success over the last years and she wants to expand through increased staffing and marketing.  Sadly, she went to the local banks and was turned down for a quarter million dollar loan.  This is a sad thing.  Sigh.  Sigh.  At the very end of the story the network felt obliged to add that after this story had been run earlier in the day, the olive merchant had received many calls from private investors and a couple of banks offering to loan her the money.  Anecdotal?  Yes, but much of what is being said about the end of credit operations is worse than anecdotal. It is mere rumor mongering and scare tactics.

The "Bells and Whistles" in the "rescue plan" are such nifty things as increased FDIC insurance limits, and an improvement of the AMT situation.  It is quite openly admitted that the "sweeteners" are just that.  They are designed to provide cover for members of the House in order to enable them to face voters in their constituencies.  The citizenry seems to be widely hostile to the basic deal that I outlined.  The citizenry is referred to with thinly concealed contempt by the financial media, most politicians and a lot of bloggers.  Well, the financial media speak for traders, not taxpayers.  Their reverential attitude toward people like Buffet is revealing.  Buffet is the proud owner of five billion dollars (newly purchased) of Goldman Sachs debt.  He said today that if the bailout is not passed he will have made a very bad bet.  We should take his advice about this?

The framers of the the Constitution deliberately created a system in which the House of Representatives is elected every two years and represents constituencies of a size that make members more vulnerable to the citizenry than the senate.  The Constitution also requires that all revenue bills originate in the House.

To overcome that "difficulty" Senator Dodd and friends have arranged to vote on a cleverly shaped non-revenue bill filled with "meatiness."  The purpose of this exercise is clearly to chivvy the House along into compliance with the received wisdom of the elites (and the moneyed).

If we accept the claim that the credit markets are in severe danger, then we citizens should demand a better deal for accepting a role.  Equity in the companies we are going to save is one possibility.  Alternatively, Paul O’Neill has recommended a federal guarantee for the value of the presently rotten paper so that it will trade like money.  That would be another way out that would not put taxpayers directly at risk.  The alternatives that do not depend on taxpayer exploitation have not been developed.

Citizen voters should remember what happens in the next few days.  pl

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38 Responses to The “Deal” is not good enough yet…

  1. Serving Patriot says:

    Thanks for your words. Two quick thoughts.
    First, one cannot help but wonder if there is some “manipulation” underway in the credit market; manipulation meant to apply pressure to exactly the kind of woman profiled in the news. Manipulation that threatens the day-to-day operation of the generic, non-finance industry businessman, farmer and (presumably) credit worthy consumer just out to buy that new car. The kind of manipulation one would expect from a neighborhood under an organized crime protection racket. It sure seems that way as all of a sudden, no bank or other credit extending agency is willing to lend their money to low-risk creditworthy individuals and businesses. Yet, the People are expected to sign on to what amounts to a $700,000,000,000.00 line of credit for the very same misers?
    Second, I thought the Constitution said all appropriations must start in the House of Representatives? At least that is what it says here: Article 1, Section 7
    Third, sad to see the voters treated with such contempt and derision by their elected officials. I consider the 228 brave ones from Monday to at least be doing what their constituents demanded (by a WIDE margin). Sad and gutless to see the higher house now offer “sweeteners” including revenue cuts (tax breaks) to pull forth reactionary GOP congressmen when they could, as easily, add sweeteners (direct mortgage assistance, revenue additions by taxing $1M+ incomes, equity stakes in bailed out firms) to entice progressive democratic congressman to switch sides. (
    What can one expect from today’s gerrymandered and incumbent filled Congress? Seems that there is actually a dual racket underway – incumbency protection and financial services protection. Too bad that these gangsters are going to meet a nation full of Eliott Ness’ in about 5 weeks.

  2. Maureen Lang says:

    Paul O’Neill’s idea makes too much sense to be considered right now. The PTB, both Dems & Repubs, have other fish to fry.
    Where would we be at in all of this if O’Neill had been allowed to continue as Treasury Secretary, I wonder. He was thrown aside in the manner we’ve come to expect during the current Fed Admin’s quest for absolute loyalty over even basic competence. What a sorry 7 1/2 years this has been economically- a runaway, careening train followed by a train wreck that might have been prevented if someone truly capable had been kept in the engineer’s seat.

  3. Tom Fitz says:

    Amen, Col.
    I was undecided before the House vote, but since then I’ve had a chance to read the modified Paulson proposal and now agree with the majority who voted NO. The bill before the Senate has grown from a pig to a warthog, and even a bucket of lipstick isn’t going to make it acceptable. Go back to the drawling board; start with DeFazio’s proposal, Soros’ proposal, or a blank sheet of paper. The Paulson proposal even with the little window dressing added in the House bill is A) too much money given to the wrong people with no oversight, and B) doesn’t actually deal with the problem.
    I am NOT looking for a perfect solution to the crisis (when has there ever been a perfect solution to a crisis??), but it seems to me we need something that is just big enough to buy time without fiscally tying the hands of President Obama. So, I want to see a smaller dollar amount, I want it used only to directly recapitalize companies by taking an equity position, and if we don’t have the votes for any systemic reforms right now, leave it at that (ok, higher FDIC coverage too).

  4. bstr says:

    Dear Sir. You propose new rules for those who write you such as “Insults are not allowed.
    – ad hominem attacks are not allowed.
    – Gross language is not allowed unless present in quotation or used in such a way as to not violate other SST policy.
    And then propose we discuss Congress? Nigh impossible.

  5. Jose says:

    Col, the rush to pass this bill in troubling.
    There was no consideration for alternatives plus the same clowns that got us into this mess are suppose to save us.
    To Paul O’Neil’s plan check these alternatives:
    This is a big mistake because if you think it will stop at $700 billion, you must still be looking for Saddam’s WMD’s.

  6. Jim Borland says:

    Sen. Jim Webb disappointingly voted for the bailout. In an earlier letter to Senator Dodd he suggested later action to tighten regulation of the financial system. We’ll wait a long time for that; pity that in the 400+ pages of the bill Webb couldn’t have made a start.

  7. DanaJ says:

    I think the saddest, most pathetic moment was when Paulson (or was it Bernake?) got down on his knees to beg Pelosi’s backing.
    We are being had, in a big way. But the Congress will probably approve this “thing” that stinks to high heaven.
    Can’t one see by now that all the screaming and shouting are a distraction? Sure, the markets are down, but they haven’t fallen thru the floor into the basement, and I don’t think they will.
    We the tax payers are being asked to foot the bill to cover Wall Streets bad ‘bets’ in a way that will hog-tie any future spending discretion by an Obama or McCain administration.
    My god, the debt that has been run up by the Bush administration will bankrupt this country.
    Has anybody ever thought through the consequences of that? If McCain is (s)elected he has stated quite clearly that he will only budget for defense and not much else, every thing other than that will be cut or eliminated, or “de-funded” as Reagan liked to do.
    What will be left of this once great country?
    Thank god my parents have passed on, they would be horrified and disgusted by all of this, a country run by Banksters.

  8. Curious says:

    With the way things are going the banking crisis now has spill over to other sector and regions of the world.
    1. Europe is now about to enter massive credit crunch. And they have sizeable corporations that will be in trouble.
    2. Car industry is crashing. 20-30% sale reduction. This is going to hurt massively. (tho’ to be honest GM, ford, and chrysler all deserve this because of their highly mismanaged product line)
    4. consumer spending grinds (people’s credit card is tapped out) This mean this holiday season will be very bad.
    5. stock market will continue drifted downward. (Won’t go back up until economy is healthy and people have money again)
    6. housing price will keep going down for next 6-10 months.
    Now the ugly part:
    7. China slow down. They are not that sophisticated. They will retract instead of start spending internally.
    8 the rest of asia then also cooling. That means no part of world is growing.
    Big question: middle east, Pakistan. What will happen there as credit crunch hit those area.

  9. m savoca says:

    congressman Brad Sherman from California 27th (not my district) made one of the most well reasoned arguments against the bailout i have heard yet, when he appeared on CNBC , as a guest of Kudlow
    his arguments revolved around the lack of meaningful oversight, and section 112 of the bill which provided for using US taxpayer money to bail out foreign investors and foreign investment!!
    Jay Inslee of Washington State also had well reasoned arguments against as did many others…true servants of the people…indicating the bailout was the wrong medicine and congress was being stampeded into a hysterical response.
    but alas the pigmen of wall street have many more lobbyists and make larger campaign donations then “we the people..” so apparently greed will win out.
    i am disgusted
    by the way, prediction, 700 billion is just a first installment…and none of this will staunch the flow of blood. we are in very dire straights.
    isn’t it interesting, the PROBLEM was too much bad credit and loan defaults…so the solution?…another “white line” of credit drawn out on the mirror for the “credit drug addict” economy.
    like many others i spent several days with phone, fax and computer doing my own lobbying.
    guess we are going to give it one more try before Friday’s vote in the house… and then there is “payback” in November if the people will remember.

  10. Tom Milton says:

    They vote against my financial interests and I will vote against theirs.
    A plain and simple exchange.
    Thank you for this great forum.
    BTW SP you are spot on.

  11. James R. Bradford says:

    This morning I heard members of the professional punditry as well as politicians deriding the members of Congress who opposed this bill out of fear of being defeated in the coming election.
    Aren’t they supposed to be afraid of that? Isn’t that an underlying necessity in a functioning democracy? Are we now past paying lip service?

  12. Cold War Zoomie says:

    This was on NPR yesterday afternoon about small banks that have continued business the old-fashioned way:
    Amid Financial Turmoil, Small Banks Thrive
    How many of these banks exist and will they keep us afloat during the meltdown?
    I hope there are a lot more people like Leon Moore out there.

  13. Patrick Lang says:

    If you want a bank like that try Burke & Herbert Bank and Trust Co., Inc. in Alexandria, Virginia.
    I am a stockholder. pl

  14. DanaJ says:

    Anyone want to bet Georgie attached a signing statement giving him the ‘power of the purse’ so he can just authorize another 700B by executive order? The last remaining power of Congress has been given up to the Imperial Presidency. They might as well just stay home for good after this next recess.
    Really, we need to keep a sharp eye out on any statement attached to this thing after it passes.

  15. Tom Milton says:

    Crawler on Bloomberg TV this AM states:
    “LIBOR rises as banks hoard cash after Senate approval”.
    Cost stated on BBC today as at least $15,000 per US household.
    Not to worry, the AMT kick-in was raised $1,500 or so.

  16. Andy says:

    I heard that too. There’s been a lot of bank consolidation over the last couple of decades, ISTM there is something desirable about limiting the size of financial institutions so that they are not “too big to fail.” IOW, fewer, bigger players presents more risk to the system than many smaller players.

  17. John Howley says:

    Warren Buffet is a member of the Washington Post’s board of directors.
    I believe he is also a major shareholder of same.
    WaPo has printed at least three fevered editorials in favor of the bailout and not once has this conflict of interest been mentioned.
    Perhaps it is not considered noteworthy because such conflicts of interest are now the norm in Washington, D.C.

  18. Dana Jones says:

    Pat, I’d like to add to my prior comment.
    A lot of people do not clearly understand Presidential Signing statements. They think of them as a post-it note added as an after thought by Bush.
    They most definitely are not. Under Gonzalez, they have become very carefully crafted legal documents, sometimes many pages long, drafted well before hand.
    They are specifically written to enhance Presidential powers, and if possible to limit Congressional authority over the Executive branch.
    They have been used to negate legislation that was supposed to place limits on the executive, not withstanding the clear intention of Congress.
    I would be very interested in what kind of language is in the now 400+ page “bailout” bill, and even more interested in any signing statement that gets attached to it. No doubt in my mind that there will be some innocuous clause in the bill that will be amplified by a later statement that will give the Executive the ‘Power of the Purse’ in an “emergency” that is supposed to be solely invested in Congress.
    We are in very dangerous territory here.

  19. lina says:

    I don’t understand all the ink spent railing against this bill as though upon passage it will be written in stone. They’ve cobbled together this monstrosity in order to survive the next four months. After that, this law, like all laws, can be amended.
    There is regime change on the horizon, therefore anything passed right now will have a very short shelf life. All this hysteria is baffling to me.
    Obvously, Paulson, et. al., handled the public relations on this worse than anyone could have imagined. Then again, it’s what we’ve come to expect from the Bush Administration.

  20. JohnS says:

    I’m on board with those economists who think thebest way to get us through the immediate credit crisis is by injecting capital into troubled banks and getting a direct equity stake in return, rather than by trying to inflate the value of toxic assets.
    But that ain’t gonna happen — America doesn’t nationalize banks. Ever ever ever! Because all the usual suspects will scream “Socialism,” and that would mean the Democrats would have to pass and own that particular piece of Commie legislation all on their very-nervous own. So we’re now stuck with the the re-reworked Paulson $700 billion Senate rescue bill and it will pass the House tomorrow and here’s why.
    This is the fix-it that’s gonna get us through until next year when the real heavy financial lifting begins. We’d all better work very hard to make sure that an Obama Administration is in place…

  21. You may not care for this, but your screed is profoundly wrong-headed and one of the worst examples of know-nothing economic populism.
    Taking this: Yes, but much of what is being said about the end of credit operations is worse than anecdotal. It is mere rumor mongering and scare tactics.: While I am not watching any American media, which tends I am sure to the hysteric, the sober Financial Times reports data, not anectdote (which is indeed meaningless):
    The data tell us clearly the following:
    (i) LIBOR has exploded to levels not seen since the 1970s roughly, and
    (ii) Banks are hoarding cash, not lending across to each other (the volumes are not a “conspiracy” as one commentator speculates, a peculiar thought;
    (iii) cash is being hoarded across the board.
    That spells contraction, and if not corrected Deprression. This is not theory, nor “financial media” this is actual live developments. And LIBOR is a bedrock market rate. Much global lending facilities, for SMEs say for working capital lines balancing receipts and costs, are based off of a LIBOR derived rate. So if LIBOR is 3.1% for overnight, an open working credit line for a SME is often LIBOR plus 400-700 basis points, or 4-7% over LIBOR. LIBOR skyrocketing and cash buildup mean lending is going down, and the rates at which lending is occuring are up, so our SME for working capital instead of paying say 7, gets with with a wider spread and at a higher base, to pay 12, as an example.
    The Great Depression was not set off by the Wall Street stock crash, it was set off by serial panics and bank runs subsequent, over the period of years. This arty does a nice job of summing up the American experience: The commentary here, including the OP is square in the opening paras.

  22. David Habakkuk says:

    Whether or not the amended plan can get through the House will be clear by Friday. But as it patently won’t clear up the mess, it may be worth thinking of what might follow.
    Among the many reasons why Paulson’s proposals are such a shambles is that they conflate two distinct if related problems. One is the fact that the banking system in the U.S. — as in the U.K. and Europe — is undercapitalised. And as undercapitalised banks contract their lending, even where no risk is involved, this could spell big trouble for Main Street as well as Wall Street. The other is that banks are not lending to each other, largely because nobody has much idea what many of these exotic financial instruments created by the ‘rocket scientists’ on the basis of the assumption that house prices could never fall are worth.
    What Paulson and Bernanke planned was a kind of stealth recapitalisation by paying a great deal more for these instruments than anyone else would. Even apart from the obvious danger that taxpayers would be giving massive subsidies to the greedy incompetents who created the mess, the record of past financial crises shows clearly that public acquisition of dodgy assets is a very poor way of recapitalising banks.
    Among other things, it tends to prevent banks which should do going to wall. And one of the things urgently needed both in the U.S. and the U.K. is a rapid contraction of a bloated financial sector. (We don’t want to end up like Japan.)
    A very shrewd lady called Yves Smith, who runs a blog called Naked Capitalism, pointed to an IMF study which demonstrated that direct recapitalisation of banks has been far more successful. She and others have pointed out that such recapitalisation has on occasion been done by private sector mechanisms — such as debt-for-equity swaps. It has also been done by governments injecting money in return for various kinds of stake, or by temporary nationalisation, as was done very successfully by Sweden. In neither case do financial institutions get a free ride at taxpayers’ expense.
    What makes the best sense for the U.S. needs to be thrashed out reasonably quickly. But even if it is possible to minimise the need for state finance, solutions are not going to arise spontaneously. Without active government involvement, they won’t happen.
    A further question is what it is sensible to do to relieve distress in the housing market. Foreclosures are commonly not only a disaster for those who lose their homes, but leave the mortgage lenders worse off than they would have been, if some kind of renegotiation had been possible. In a collapsing housing market, the properties may simply remain vacant and go to rack and ruin.
    One of the few people to anticipate the scale of the current crisis, Professor Nouriel Roubini of New York University, has recalled how during the Depression the Home Owners’ Loan Corporation was create to buy mortgages from bank at a discount price, reduce further the face value of such mortgages and refinance distressed homeowners into new mortgages with lower face value and lower fixed rate mortgage rates. He thinks something similar should be tried again.
    Doubtless a new HOLC, like Swedish-style bank nationalisation, will seem too socialistic for many. But perhaps on this occasion one can usefully recall Deng Xiaoping’s justification for his ditching of communist orthodoxies: ‘It doesn’t matter whether the cat is black or white, as long as it catches mice.’

  23. VietnamVet says:

    The bailout is kicking the can down the road. Hopefully throwing cash at the banks will lubricate the credit markets to keep the money flowing till after the election. But, it does not resolve the basic problem created by deregulation; the 61 trillion dollars of derivatives – the unsecured bets on secularized mortgages on the books of the financial institutions. More debt than all the money in the world. The banks know what’s on their books. They don’t know what is on the books of the other banks. So they won’t lend to anyone but most transparent and credit worthy at high interest rates.
    The only way to fix the problem is to wipe the worthless derivatives off the books. The only sure way is to nationalize the banks and re-charter them like Sweden did in the 1990’s. But, the basic belief system of the Republicans is against nationalization. If John McCain is elected, the credit problem will fester and depress the economy for the next four years. The GOP scheme is to inflate the debt away but the numbers are so huge that the inflation will only make the dollar worthless.

  24. TomB says:

    Obviously everyone is rightly upset at the idea of our government going in and using its money/our money to bail out these companies. But it seems to me that this represents something even worse.
    After all the entire attempted purpose of all this is to give … confidence to the markets and the American people and etc. and so forth, right?
    But what about confidence in the government? Both economic and moral? Even if this had been done smoothly the first time around the damage done to the idea that the government wasn’t monstrously corrupt just seems to be to be enormous.
    But now, when we see that oh yeah, it’s more likely they only wanted to add some more *individualized* slush to the trough, the only possible conclusion is obvious.
    In brief these Senators and etc. aren’t just in favor of transferring our money to “the markets,” they’re in favor of transferring away our economic and indeed even our moral confidence in our entire system of government too.
    Seems to me this obscene orgy just shows there is absolutely nothing some of these folks won’t betray for their own interests. Nothing. Not the economic well-being of the nation, and not its fundamental civic foundation either. Nothing. They’re selling it for a song.

  25. zanzibar says:

    As usual our elected Senators and Congressmen do not represent OUR interests. This is nothing but a transfer of wealth from working Americans to US & FOREIGN investors. It will not solve any of the credit related problems. Why?
    First, banks mistrust each other because all their balance sheets are opaque. Notice how Paulson, Cox, et al are pushing for more obfuscation and fighting tooth and nail against transparency.
    Second, all the banks have INFLATED asset values on their books. There’s a reason why no private investor who looked at Lehman’s books decided to bite. Look at the price Citi paid for Wachovia compared to their book value reported on their most recent financial statements. And now under this plan the Paulson will purchase toxic waste at even more inflated prices.
    Third, all the major banks, specifically those in Europe are severely under-capitalized. Banks like DB & Barclays are levered 50x/40x. DB’s balance sheet is nearly as big as German GDP!
    The interbank market is frozen because of the above. The Paulson Rape US Taxpayer bill will NOT solve the above. There are many small and regional banks in the US that were prudent through the entire credit bubble have solid balance sheets and are well capitalized. The US banking system will not collapse. In fact these banks should be rewarded for their strong fundamental management principles by allowing them to expand by buying assets at market prices rather than perpetuate failed policies that weaken the system further.
    There are large pools of private capital (I know of several of them) that would be happy to buy assets at CURRENT MARKET prices. Banks will not do that when they can sell to the US taxpayer at above market prices. As a result we are seeing the entire system moving to severe distress at the margins while the clearing process is frozen. Banks are also behaving in a predatory manner. Why lend at low rates to weaker banks when they can use the cash to buy assets in forced mergers GUARANTEED by the US taxpayer. Folks, we are being gamed.
    Those that believe this $700 billion revolving credit line is going to end at $700 billion also believe in the tooth fairy. The way this plan is constructed will provide a temporary palliative of confidence just like the Bear Stearns bailout or the Fanron bailout but in the intermediate term will further exacerbate the credit market failure since it does not address the root of the issues.
    While Paulson and the Republican and Democratic party leadership are using SCARE TACTICS to rail-road the American people for an UNLIMITED BLANK CHECK – Bernanke’s helicopters were in full dump mode. Just this past Monday they pumped $630 billion. This is not a typo. This is a single day’s helicopter drop mostly to foreign central banks. No Congressional authorization – nothing!
    At the end of the day look who are pushing for this bailout – Wall Street, private investors like Warren Buffet and Bill Gross, the European elites who want US taxpayers to pay for the foolishness of their banks and Asian SWFs that want to get their money out of their bad investments. None of these folks CARE about Main St USA.
    This is a direct attack on working Americans by financial elites around the world. This is new world war with trojans in our country – they just happen to be our financial, corporate and political elites!
    We have to fight back. We have to assert our sovereignty for the sake of our children.

  26. charlottemom says:

    Lounsbury —
    No denial on the frozen capital markets — frozen on the prospect of this bill. Uncle Hank is on the sidelines waving a giant $700 billion check at banks, so its a bit of running down the game clock going on.
    Americans – consumers, companies and U.S. are hitting PEAK debt levels. (Witness the increase of US debt ceiling voted on by Congress this week – $11.5 trillion.)
    So who exactly is going to buy up cars now? Which Americans are going on buying sprees? Companies are contracting and employees are being let go; do you think this bill helps that situation? Many of the companies being denied access to credit lines (i.e. car companies) are overleveraged already with grim future revenue projections. Would you lend freely to companies with shrinking revenues? More debt — the solution to problem is more of the problem.
    I’m resigned to this bill being passed — its a terrible bill. However those credit-starved, overleveraged companies and individuals on Main Street that think this bill with deliver them a credit lifeline are sadly mistaken.
    By the time the Treasury overpays for the crap assets of Hank’s favorite banks US and foreign banks, credit will still remain tight, housing markets will continue to fall, companies will fail and employees layed off.
    I’m disgusted by the pundits, our “leaders” et al that are stoking panic and fear. They are talking “their books” and by opposing THIS plan, I’m talking mine.
    Hopefully we’ll get it right on the next bailout, because yes, there will be other rescues.

  27. john in the boro says:

    First off, like most of the respondents on SST, I am not an economist, speculator, or investor. So what little I know about economics comes from articles, essays, and books. Looking at the two articles that Lounsbury cites I am struck by the pricing of risk due much to the uncertainty over how to valuate derivatives. The other striking feature implies that central banks are working at cross purposes with banks. Banks are trying to price risk while the central banks are trying to keep interest rates down through increased liquidity. One result is hoarding, that is, banks with money are parking it in treasuries. As an aside, the BBA LIBOR was over 6% and often at 8% in 1986 [earliest stats from BBA]). Seems rather paradoxical, whether the central banks intervene or leave the pricing of risk up to banks, the result restricts the amount and affordability of working capital that is available to business. Valuating the derivatives appears to be the key to breaking the impasse. I think there are two choices: the Paulson Plan, let the American taxpayer absorb the loss, or write off the losses, control the collapse, and recapitalize the banks left standing. Neither option appears attractive or free from potentially bad consequences. The question is: How does the international financial system prevent or mitigate a contraction which seems inevitable because of the current recession?
    What Pat implies is a matter of perception. Is it the economy or the political economy or the international political economy? The decisions made and plans proposed are at least partially political. The American public has some say in the final form of whatever emerges from the Congress. How much is anybody’s guess. Part of the problem is the movement away from classical economic theory, arguably the U.S. economy was and is managed albeit haphazardly vice free market, to a “planned economy,” politically that is socialism to many Americans. I think this goes far in explaining why many pundits (such as Lounsbury’s cited NYT article) use anecdotes from the Great Depression rather than from the 1980s or direct criticism at the Community Reconstruction Act of 1977 rather than the Gramm-Leach-Biley Act of 1999 (progressive/liberal commentators go the opposite). The attribution of blame is a very important part of the political process. However, as some participants in this forum demonstrate, whatever comes out of the U.S. Congress will effect the world economy. Here’s hoping the Congress rises to the occasion this once and finds a formula that angers everyone.

  28. Curious says:

    Interesting approach.
    Chile in turn faced a similar situation to the one that the United States is experiencing today. In Chile, the government adopted two types of program: one for bank debtors and another for banks. Bank debtors were offered the possibility of rescheduling their obligations and receiving a preferential exchange rate for the repayment of foreign-currency liabilities. Banks were assessed for their long-term viability. Viable banks were offered the possibility of selling bad loans to the Central Bank, with a repurchase agreement based on future profits. Indeed, the majority of domestic banks used this facility and the total amount involved reached US$5 billion. Non-viable banks were intervened and liquidated.

  29. charlottemom says:

    Some gallows humor. There is a website for a new U.S. government hedge fund:
    StrategeryCapital Management LLC
    “Putting your money where our mouth is.”

  30. smoke says:

    So much to not understand, so much not discussed in Big Press.
    1) Why suspend mark-to-market principle? Has it already been done by SEC? Doesn’t this undermine the whole argument that $700B junk buy-off will re-establish confidence in financial markets?
    2) Dana J
    I have never understood why signing statements should have any legal standing at all. Not mentioned in Constitution. Any precedent, before present Administration, for judicial acceptance of signing statement restrictions or expansions of legislation?
    3) Lounsbury
    If banks are hoarding, and the bad paper in their assets runs to $Trillions, then why won’t they hoard another $700B?
    4) CWZ
    Farmers & Merchants Bank, Clarke Co, Virginia

  31. Marcus says:

    Does no one in the media see the obvious conflict of interest of Paulson at Treasury Secretary? He was one of the progenitors of this “toxic waste.” And now we are flocking to him for solutions?
    The Pols are not consulting with independent experts on this issue. Even my Senator cited consultations with Paulson as part of her reason for voting for the “Rescue” package. This is rash misfeasance and “citizen voters” should reject them for it.
    I highly recommend a recent Noriel Roubini interview, (not his BLOG)for clear and concise understanding of the problem.

  32. TomB says:

    CWZ wrote in response to a post by Dana J:
    “I have never understood why signing statements should have any legal standing at all. Not mentioned in Constitution. Any precedent, before present Administration, for judicial acceptance of signing statement restrictions or expansions of legislation?”
    I don’t think you’ll find any such precedent Zoomie, and I think you’re right in the sense of people getting overly upset and distracted by them.
    After all, all they are is the President saying what his interpretation is of the law he or she is signing. And to be sure Bush has pushed this envelope. But in terms of what this does while you never know what circumstances might throw up I suspect nothing much, except if anything I wouldn’t be surprised that they will come back to bite some President in the ass some day.
    This is because Presidents decide every day to take positions on what various laws mean. And when challenged they then go and tell their Justice Departments what to say they mean in front of the courts, and if necessary then go and tell their Solicitor Generals what positions to go take in front of the Supreme Court. That’s just part of the Executive’s authority, period.
    So what difference does it make if a Prez. says today what he thinks the law says, or tomorrow via his attorneys when the law is in front of the courts? No signing statement is going to bind a future President to any particular interpretation; it’s an absolute right and common as hell for a new President to instruct his attorneys to utterly switch tacks on interpreting all kinds of statutes from the position their predecessor(s) took.
    Indeed if anything these signing statements are kinda dumb in my view, and maybe reflects Mr. Addison’s unfamiliarity with actually practicing law in the real world.
    After all there’s a *reason* why good lawyers tell clients to keep their mouths shut until they absolutely have to, such as those who are just arrested whether guilty as hell or innocent: The very high likelyhood that what you say today is gonna be used against you tomorrow when more facts come in, or your failure to say everything you should have originally or etc., etc.
    So indeed I wouldn’t be surprised if in the future the biggest splash any signing statement is ever gonna make in the courts is someone—perhaps the courts themselves—saying to an Executive that gee, while he or she is now saying X, their signing statement said Y, and some adverse consequences could well obtain for that Executive in some circumstance like that. Certainly would hurt their credibility or the respect the courts otherwise usually afford the government in many instances.
    This isn’t to deny how … forward-leaning Bush has been with this, and indeed even kind of high-handed and arrogant. But he does have the right to set the official U.S. position on the interpretation of most laws, and he’s just pushing this to the limit I think.
    After all, if Congress doesn’t like a signing statement saying that law means X when they really meant Y in passing it, they can go an pass it all over again with different, more categorical language saying Y if they want.
    So I think your instincts are right on and that people have gotten a little distracted by these instruments, albeit entirely understandably. If anything, all these things have done so far is foolishly tipped people off to what laws George was intending on playing fast and loose with from the start.
    Wasn’t well advised I don’t think.

  33. I have seen or heard two rather alarming figures! First, that just under $200B a day is flowing out of the Federal Reserve to the financial institutions based on the FED’s open drawer policies previously announced. Second, that the outstanding derivatives are almost $600T and of course we now know most off the books, no knowable value, and uncertain as to legal status, much less financial status. WOW! Well guess the $700B drop in the bucket is the first step in a march of a 1000 miles–or in Washington lingo “Substantial Progress” or a “Helpful beginning.”

  34. Harper says:

    It is now 1140 hours on Friday, Oct. 3, and the members of the House who voted down Monday’s version of the bailout (pig sans lipstick) are being bashed by desperate
    Wall Street lobbying and front groups to shift their votes. In the interim seven days, the minimum cost of the bailout has gone up to at least $1.3 trillion, and rising. If the members of the Congress continue to listen to their constituents, and vote no, once again, then the bailout of swindlers will be off the table, the Senate will look like a bunch of Wall Street cronies, and we will be back to a sane starting point for seriously dealing with the problem, Constitutionally.
    The simple truth is: There is a Plan B. Just let the existing laws (most from the FDR era) do their job. The repeal of Glass Steagall of 1999 must be reversed. Otherwise, all the mechanisms are in place for a bankruptcy reorganization. I have heard recommendations to lift the ceiling on the FDIC insurance on legitimate household and business deposits in commercial banks, and this makes some sense. With 100 percent insurance, the full faith and credit of the Federal government, standing behind legitimate bank deposits, we immediate would cut off the capital flight from banks ($1-2 trillion in withdrawals since the crisis began last month), provide for an orderly sorting out of which banks are solvent, which need recapitalization, and which are hopelessly gone. Bankruptcy reorganization does not reward the criminals, thus satisfying the number one demand of the vast majority of Americans. Rep. Marcy Kaptur and others have a bill to create a special panel to probe the criminality in the bailouts to date, and this would further satisfy the actual and legitimate demands of the people. A “New Pecora Commission” if you wish, would look into the circumstances of the bank and insurance company and brokerage collapses, and would also have the capacity to refer matters to the Justice Department for criminal prosecution, where appropriate.
    Ending the ceiling on FDIC insurance, and increasing the reserve requirements by licensed commercial banks would go a long way to the needed reregulation. Other steps can be taken as well–at leisure. For example, ban naked short selling altogether. Make it a crime on the books. Stop purely financial institutions from speculating on the commodities futures markets. If they cannot actually take delivery of a commodity, they have no business buying a future position. These are but some of the reregulations that can be done, to restore solvency to the banking system, to restore confidence that the financial institutions are once again being competently regulated, in the general welfare intersests of the population. And not one nickel of taxpayers money will have gone to bailing out gamblers who bet and lost.

  35. Cold War Zoomie says:

    Smoke commented on the signing statements, not me.
    To those who have recommended banks, thanks…but I’m quite happy with my credit union.
    I was just wondering if there are sufficient numbers of small, conservative banks (and credit unions) out there to provide a bit of a buffer during all this mess.

  36. Curious says:

    I have seen or heard two rather alarming figures! First, that just under $200B a day is flowing out of the Federal Reserve to the financial institutions based on the FED’s open drawer policies previously announced. Second, that the outstanding derivatives are almost $600T and of course we now know most off the books, no knowable value, and uncertain as to legal status, much less financial status. WOW! Well guess the $700B drop in the bucket is the first step in a march of a 1000 miles–or in Washington lingo “Substantial Progress” or a “Helpful beginning.”
    Posted by: William R. Cumming | 03 October 2008 at 07:20 AM
    ding ding ding… you got it ..
    This is the part I don’t understand abut Paulson plan. Suppose 5 guys playing late nite poker. They are crazy gambler. by the end of the night, they owe each other $5 million dollar against each other. Nevermind that each of them only begin with $50bucks. (eg. the transaction between them are not real money, just bunch of IOU between crazy gamblers)
    So. would YOU bailing them out $5million, and insist that is the right thing to do? or… give them $10 bucks for taxi ride home and tell them to suck on it about their $5million fictious money?
    That’s essentially what the $600Trillion derivative market is. It’s just betting money between investment bankers with no semblance to real world economy.
    The real asset (housing, commodity, metals) obviously is not that size.
    So, they should have let the entire derivative market collapse. Most of it are just accounting numbers. (of course a lot of super rich bankers will ends up with nothing.)

  37. Curious says:

    The $850B bail out bill is approved by congress. Thus begun the destruction of US financial system and dollar reserve system.
    Within 10 yrs, US economy will be at the bottom of top 5 pile.

  38. Curious says:

    The banking crisis in the United States has shaken many things in recent days, not just the chancellor’s affection for America and the respect the rest of the world once had for the US as an economic and political superpower. Since the US investment bank Lehman Brothers plummeted into bankruptcy two weeks ago, the financial crisis has developed a destructive force of almost unimaginable strength. The proud US investment banks with globally recognized names like Merrill Lynch and Goldman Sachs have all gone bankrupt, been bought up or restructured. The American real estate market has essentially been nationalized. And the country’s biggest savings and loan, Washington Mutual, has failed and been sold at a loss.
    Ironically, it is in the country of unfettered capitalism that the government now plans to intervene in the economy on a scale not seen since the Great Depression, and, with hundreds of billions of dollars, attempt to save the financial sector from failure — out of fear of something even worse: an economic collapse with declining prices and widespread unemployment.
    This is no longer the muscular and arrogant United States the world knows, the superpower that sets the rules for everyone else and that considers its way of thinking and doing business to be the only road to success.
    A new America is on display, a country that no longer trusts its old values and its elites even less: the politicians, who failed to see the problems on the horizon, and the economic leaders, who tried to sell a fictitious world of prosperity to Americans.,1518,581502,00.html

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