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18 September 2008

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William R. Cumming

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

SubKommander Dred

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

SubKommander Dred

David Habakkuk

If there is one economist who has been consistently right about the way all this was likely to play out it is Nouriel Roubini, the New York University professor who runs RGE Monitor.

Following the takeover of Fannie and Freddie, Roubini produced a post entitled 'Comrades Bush, Paulson and Bernanke Welcome You to the USSRA (United Socialist State Republic of America)':

Concluding the post, Roubini stresses the role of ideological blinkers -- in a way directly parallel to arguments repeatedly made on this blog about the distorting effects of such blinkers on U.S. foreign policy:

'Like scores of evangelists and hypocrites and moralists who spew and praise family values and pretend to be holier than thou and are then regularly caught cheating or cross dressing or found to be perverts these Bush hypocrites who spewed for years the glory of unfettered wild west laissez faire jungle capitalism (and never believed in any sensible and appropriate regulation and supervision of financial markets) allowed the biggest debt bubble ever to fester without any control, have caused the biggest financial crisis since the Great Depression and are now forced to perform the biggest government intervention and nationalizations in the recent history of humanity, all for the benefit of the rich and the well connected. So Comrades Bush and Paulson and Bernanke will rightly pass to the history books as a troika of Bolsheviks who turned the USA into the USSRA. Fanatic zealots of any religion are always pests that cause havoc and destruction with their inflexible fanaticism; but they usually don’t run the biggest economy in the world. But these laissez faire voodoo-economics zealots in charge of the USA have now caused the biggest financial crisis since the Great Depression and the nastiest economic crisis in decades. So let them be shamed in public for their hypocrisy and zealotry that has caused so much financial and economic damage.'

(See http://www.rgemonitor.com/roubini-monitor/253529/comrades_bush_paulson_and_bernanke_welcome_you_to_the_ussra_united_socialist_state_republic_of_america.)


J

Colonel,

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

lina

There's no short term quick fix. None. Climbing out will be painful and expensive. Others can talk about the regulatory failures that contributed to the current debacle. I'm more focused on the future.

America has created no new industry since the mid-90s. The reason the economy boomed in the Clinton years was the "digital revolution." Bill Clinton gets credit for it because it happened on his watch. Since 2000, the American economy has been based on people suing each other and selling each other houses (footnote Tom Friedman). Half of that is now gone.

America needs new industry. The answer: environmental technology. If the U.S. government gets behind the concept of "saving the planet" it will be the catalyst for all manner of new industrial innovation, and it will cause the next economic boom.

It won't happen in a McCain-Palin drill-drill-drill administration.

It has a chance of happening in an Obama administration.

GSD

So, does this financial collapse officially usher in the end of the Ronald Reagan/Gordon Gecko, greed is good, let the markets decide era?

-GSD

As I have said elsewhere, my liberal big government just bailed out your conservative free market.

Farmer Don

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

Duncan Kinder

Getting elementary medical procedures such as colonoscopies and - less clearly but still arguably - chest CAT scans is always a good idea; and maintaining one's health is always valuable.

So getting such matters tended to now remains a good investment.

Mike Martin, Yorktown, VA

Let's view this as a national trauma that COULD and SHOULD cause our nation to reflect on:

- the morality and ethics we currently have in our economic world, and

- the type of government we've brought on ourselves and what we want to see in the future.

Drongo

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

Dave of Maryland

This is not bad! Not yet! You want bad, think of this:

Suppose you are a small shopkeeper on a side street in Berlin. Suppose the year is 1916. The war is two years old. It is eating you alive. Already so many young boys have died, and for what? When, you ask yourself, will the good times of two years ago return? When? You have a son. He's just turned 16. What will his future be? You are suddenly fearful.

But the war goes on & then ends horribly. It's now late 1918 & all the young boys are dead & gone. Including yours. The past two years, watching him grow up, complete school & then go into the army to a fate he could not escape, was a living nightmare.

But now that peace has come, will things get better? No. There is a revolution. It is put down. An escapist, libertine, vapid, horrid culture arises. Then comes inflation & savings are ruined. You're not yet back on your feet when the Depression comes & there are no jobs. A vulgar Austrian rabble-rouser & his thugs are suddenly in the streets...

So think again of that lonely man, on that lonely day in a pub on a side street in Berlin in 1916. When would the "good days" of 1914 return? Only two years before?

Not in 1919. Not in 1933. Not in 1945 with the entire city in ruins.

Not until the mid 1960's. In other words, not in your lifetime. Not in your children's lifetime. When the "good times" finally return, your grandchildren are old.

And that was only if you lived in the "lucky" west side of town. For those on the other side of town, life did not return to "normal" until the 1990's! All because the Kaiser, long dead & gone, made a foolish decision on a foolish day many years earlier. If he knew what the outcome would be!

I first had this nightmare in 2005. I still have it.

Harper

Yes, it is really, really, really bad. It is the entire system, one gigantic bubble, that has burst, not this or that individual bank or insurance company or hedge fund. The solution is really not mysterious. Under the US Constitution, you can put the whole mess through bankruptcy reorganization. Write off all the purely speculative debt, or at least set it aside for sorting out. Do what FDR did in March 1933. Send auditors to all the chartered commercial banks, and see which ones are solvent, which ones can be saved, and which ones are hopeless. Capitalize the banks by investing in real economic recovery--rebuild rail, water systems, energy (nuclear), hospitals, schools. Build our way out of the collapse, rebuild a genuine productive tax revenue base. It will take several generations to correct the folly of the past thirty years of deregulation, unbridled free trade, globalization, outsourcing, and the rest. In the meantime, wars are just too expensive to even consider, under the austerity conditions we are going to have to go through.

History is always the best judge of what works and what doesn't. When you look back at the periods of real economic recovery, going back to Hamilton, the World War II mobe, etc. you see how we always build our way out of a financial catastrophe, and never bail out the banks at the expense of taxpayers. Our Constitution says the general welfare comes first, and never mentions the obligation to bail out parasites. Congress needs a good kick in the ass to do their job. Bush, Paulson, Bernanke, never even consulted with the Congress. Bush never called Congressional leaders to the White House to confer on how to deal with the biggest crisis in memory. Instead, they brought in the very Wall Street parasites who created the mess, and they came demanding blood and flesh.

Fred

"In this present crisis, government is not the solution to our problem; government is the problem. "
Ronald Reagan, 1st inaugural address. http://www.reaganlibrary.com/reagan/speeches/first.asp

This is the logical result of the Reagan revolution. Ideology has prevailed over experience.

Pat, to quote a truly great American : "The only thing we have to fear, is fear itself…"

It is high time the citizens of this country put down the Buds and fantasy football papers and spend a few hours fulfilling their first obligation as a citizen, get informed, accurately, about what is happening. Turn off the buzzword 'new' programs and do a little work. Then get involved in selecting your representatives in the 'government of the people'.

bstr

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

Clifford Kiracofe

Economic security is fundamental to national security and thus to the "General Welfare" of this republic. George Washington emphasized this in his Farewell Address.

National strategy/national security policy must include economic security along with diplomatic, political, psychological, and military components.

The White House and Congress have betrayed the American people. Ideology, corruption and the like account for this. It is not a matter of political parties as BOTH are corrupt and incompetent. Perhaps they can learn and be educated. But certainly not by more Neocons, "free-marketers," Ayn Randians, Armegeddonists, Dominionists, and assorted other wierdo cults loose in this land and often found in "high places."

Will the American people through the machinery of THEIR government exercise THEIR SOVEREIGN powers over economic matters? Or will the cosmopolitan international financiers and other transnational economic forces continue to subvert and exploit this republic under the guise of so-called "globalization" and whatever other slogans they can muster and cycle through their "news" media propaganda transmission belts?

Our NATIONAL problem and challenge, involving the COMMON fate of some 300 million US CITIZENS, is not limited to the stock market or commodity market manipulation. At a minimum, we need to focus on the real/physical economy, re-industrialize, massively invest in infrastructure, and grow and protect our NATIONAL capital markets. And what about those unsustainable twin deficits: budget and current account? What about our present unnecessary and costly wars and systemic military Keynesianism?

This is a tall order as current US national strategy appears as some delusional variant of 19th century Mackinder-ism complete with exotic and narcissistic geopolitical fantasies.

Like Pogo says, the real problem is us, it is here within our national boundaries, it is NOT is some Third World sewer like Waziristan filled with some hundreds of psychopathic takfiri terrorists.

VietnamVet

Nouriel Roubini calls the neo-Republicans "fanatic zealots". Paul Krugman called them "radicals". Both are economy professors. The Iraq invasion and fighting never ending Holy Wars is crazy. Bullying nuclear Russia is frightening. Fanatic radicals control the GOP. To keep in power they lie and spin, and hold the American voter in total contempt.

The USA can recover from this disaster but it will take rational leadership. The American Century is over. It is time to rebuild the Republic based on the foundation that we have certain unalienable Rights, that among these are life, Liberty and the pursuit of Happiness.

Eric Dönges

I think what some of you that are arguing the banks shouldn't be bailed out are missing is that banking is based on confidence - the confidence that you're not going to loose the money you have in your bank account. If that confidence is lost (which it surely will be if several major banks collapse, taking peoples' life savings with them), people will want to all withdraw their money at the same time, completely wrecking the entire banking system, even those banks that, without the run, could weather the crisis without any outside intervention. You would effectively pull the rug out from under the economy. And since this is the U.S., we're talking of the worldwide economy. The last time this happened it wasn't pretty, and it would probably be a lot worse if it happened again.

While I agree that bailing out the banks in a way that rewards the shareholders of the failed banks is a terminally wrong idea (but as far as I am aware, this has not been the case in the latest round of bailouts), so is letting the entire banking system simply collapse.

Ormolov

Yes. Bad. Major dislocation. Suffering ahead. Getting worse.

But then what? Are we going to leave this same political class in charge to repeat its mistakes, as we did after the 1987 fiasco? Or will this be our twice-in-a-century opportunity to use cataclysmic change to our advantage?

I for one say let all these institutions fail. Smart money tells me on the radio every day that covering AIG's debt, and everyone else's too, is at best a 50/50 proposition, which means there's an equal chance that we're just burning up any real capital we have covering the losses of all this imaginary fake capital. Why not let it all fail? Nobody truly liked this system. Even the financial piranhas who brought on this mess with their greed and lack of foresight didn't like the system. They struggled against it and forced loopholes into it and bought the regulators and starved them of operating budgets.

Let's start over, shall we? Instead of focusing on how to minimize the dislocations, let's burn these crops in the fields and plow the ashes under. Neither Obama nor McCain is up for this job quite yet. They are still beholden to the money-men, of course. But what about six months down the road, when we're much worse off and we're still trying to turn 2009 into 2006? Bush will be vacationing in Paraguay and Cheney will be Oil Overlord CEO of Dutch Shell, but we'll still be here chasing our nostalgia.

INSTEAD, let's completely re-think the financial and corporate landscape. Let's limit the powers of the wealthy to do this to us again, just as we did during the New Deal. Let's begin a whole new WPA of biotech, clean energy, local farming, etc. The ideas are out there, ready to be implemented. It has always been inertia and the obstruction of vested interests that have kept them from happening. But now, there is no inertia in free-fall, and we can overcome the obstruction of these interests, handicapped as they are by the exposure of their bankrupt policies.

I'm sure the window is rather narrow, but it will widen as the financial crises spread. We can end our wars, reform our economy, employ our citizens, and save the climate if we just take the step.

If not... well, at least the climate will gain a slight advantage from a loss in productivity. Although we may be stuck with dirty old technologies, there will be that many fewer smokestacks in China and Ohio destroying our atmosphere.


Leila Abu-Saba

Oh it's probably bad.

However I'm with Farmer Don. Do exactly what he says and we'll be all right.

The military part of it will really make the politicians and Wall Street scream, but it's quite doable and very sensible.

Col. Lang, re soup kitchens - soup kitchens have been with us all along. The food banks have been under terrible strain this year. Cupboards bare. New people lining up. Middle class people live in their cars in specially marked parking lots in Southern California, while holding down jobs that pay for food and gas (but no health insurance or housing). The poor live in Hoovervilles (Bushvilles?) beneath bridges in Riverside County.

Sharon Astyk at Casaubon's Book blog has been warning of this and other crises for quite some time. I have been following her suggestions for storing food staples, and we'll be buying a large water drum in case of earthquake. Many folks in Houston would have appreciated 55 gallons of home-stored water this past week. Have a back-up plan for water and power if the public utilities get interrupted. Our authorities can no longer be trusted to keep the cogs turning efficiently.

Investing in gardening and emergency equipment, and energy efficiency around the home, is another prudent way to spend your money right now. Your choice: keep it in the bank at negative interest, or put it into hoes, seeds, hand-cranked flashlights and such? If things get really bad and people need to grow their own food to survive, what do you think the price of rakes and spades will do?

My children and I put together a home-made solar oven as a "fun" project. A solar oven may have to feed us one of these days. Plans are easily available on the internet. Our city house has a large lot with a stream; we don't have food plants in but the children are learning gardening at school and we're ready to start raising pumpkins, sweet potatoes, fava beans, kale and other survival food.

Above all, don't panic!

Curious

http://www.marketwatch.com/news/story/fundwatch-money-market-funds-see/story.aspx?guid={E322BE61-F830-4B58-94D8-C207E14714D3}&dist=hpts

Money funds see record $90 billion one-day drop
Putnam closes fund; Columbia, Dreyfus act to save $1 a share net asset value


Putnam said that the run on its fund made it unable to keep the afloat. "Constraints on liquidity in money market instruments created the risk that in order to process redemptions, the fund would realize losses in selling its portfolio securities," it said in a statement. "The Trustees determined to close the fund to ensure equitable treatment of all fund shareholders."
The statement did not say when shareholders will receive their money, nor did it say whether the payouts would maintain the fund's $1 a share net asset value.

-------

Remember that nosebleeder cash infusion that causes global commodity price spike?

They are doing it again, except twice as large now. So expect crazy inflation from $250B cash being injected into the global system.

fun fun fun ....

http://www.bloomberg.com/apps/news?pid=20601080&sid=asIS6b3aIbDo&refer=asia

The Federal Reserve almost quadrupled the amount of dollars central banks can auction around the world to $247 billion in a coordinated bid to ease the worst crisis facing financial markets since the aftermath of the 1929 Wall Street crash.

The Fed increased the amount of dollars that the European Central Bank, the Bank of Japan and other counterparts can offer from $67 billion ``to address the continued elevated pressures in U.S. dollar short-term funding markets.'' The Bank of England, the Bank of Canada and the Swiss National Bank also participated. Several of them lent funds in their own currencies as well with the Fed adding a record $105 billion in temporary reserves.

Curious

And they were talking smack against the russian? Do they have enough money to play against Russian sovereign funds? utterly laughable. people were shorting FTSE like the biggest party on earth in the past few days. Easiest money to make in the planet.

http://globaleconomicanalysis.blogspot.com/2008/09/britain-bans-short-selling-citing.html

Britain Bans Short-Selling Citing 'Extreme' Market Climate

UK Poised To Crash

Banning short selling is an act of pure desperation guaranteed to fail. Short term, I do not know what the market will do, but if shorts are squeezed out an air pocket below will form just as happened in the US with share prices of Fannie Mae (FNM) Freddie Mac(FRE).

The simple fact of the matter is that short sellers add liquidity to the market. Barring bankruptcy, shorts have to cover at some point. Also short selling is a necessary function of market makers.

-----

The spread is twice as big compared around Bear Stearn collapsing. (see chart. and be afraid)

http://calculatedrisk.blogspot.com/2008/09/a2p2-spreads-blowout.html

A2/P2 Spreads Blowout


Usually the spread between the A2/P2 and AA paper shows the concern of default for the A2/P2 paper. But right now this also shows the lack of liquidity in the system.

Curious

See FTSE chart

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

JoeC

Lina -

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

VictoriousShed

In the midst of the tumult I can hear cackling and even shouts of joy from certain presumably patriotic citizens.

How long before the chorus for elimination of social programs and the dreaded entitlements tunes up? "An up or down vote: destroy your country or do what we say?" This is not to be a partisan call, of course - both alleged sides of the USA political class are generally behind the movement of money upwards and the losses downwards, like it or not.

Current events provide an excellent background for radical change. Who will benefit from it?

Ultimately what scares me the most is best summarized by song lyrics:

"Everybody's singing with their hand on their heart / About deeds done in the darkest hour / That's just the sort of catchy little melody / To get you singing in the showers."
(DPA MacManus)

John Howley

No new taxes and cheap credit helped to keep American voters fat and happy during the disastrous (and still not finished) Iraq war.

We re-elected Bush we wuz so happy!

After Bush, we will pay. Like a hangover.

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