Open thread on the Economy

We 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

Comments

[fnord]

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?

[TCG]

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.

[Brian Forester]

I came across this on firedoglake.com:
http://firedoglake.com/2008/09/15/as-the-markets-plunge-bernanke-and-paulson-gamble-depositors-money/
( http://tinyurl.com/5ckkow ).

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.

[Curious]

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.

[Walter R. Moore]

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.

[11B40]

I pretty much agree with this analysis:

http://cunningrealist.blogspot.com/2008/09/wipeout.html

My profound hope is that this set of crises moves us away from the "series-of-bubbles" macroeconomic model and toward sustainability.

Let's see if Main Street can't take some power back from Wall Street. It's time for the people who create real value instead of shuffling bookkeeping entries disembodied from meaning to reassume leadership.

[m savoca]

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.

[Curious]

The sky is falling scenario... (big list)

http://www.rgemonitor.com/roubini-monitor/253618/the_worst_financial_crisis_since_the_great_depression

# 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.

...

[Mike Martin, Yorktown, VA]

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.

[J]

Colonel,

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.

[JohnS]

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...

[Cold War Zoomie]

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.

[Ormolov]

"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.

[Clifford Kiracofe]

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."
http://www.mcclatchydc.com/100/story/52559.html

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.

[Curious]

Instant reaction ...

http://ap.google.com/article/ALeqM5jQeA-KDvN1qKqngfzVwxcq7V5WwQD937T20O0

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.

[WP]

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!

[WP]

So, is this "crisis" really a silent coup?

[mlaw230]

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.

[Paul]

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.

[ked]

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.

[J]

Curious,

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".

http://www.un.org/Depts/los/convention_agreements/texts/unclos/part2.htm

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.

[JB]

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 www.allamericangold.com

[TomB]

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.

Cheers,

[R Whitman]

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.

[Curious]

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?)