In defence of the US bailouts

[Edited by Temujin… we do not want personal attacks in the posts, especially against other ALS bloggers. Keep the discussion to the issues.]

There has been a great deal of discussion of the US financial bail-outs recently. Neither the Fed nor the US Treasury have created any sort of moral Hazard up to this point in time in dealing with the crisis.

1. Bear Stearns.

Shareholders were rolled getting a fraction of what their stock was worth. The first instructions from the US authorities was that JP Morgan pay no more than two bucks a share. This was later raised to 10 bucks by JP Morgan as they realized the original price was far too low.

2. Fred and Fannie.

These two institutions always operated in the market with the understanding that the US government provided an implicit guarantee. The securities they offered traded only a few basis points above treasuries because of that underlying covert guarantee. The government and the electors had decades to remove the guarantee. However seeing both groups benefited from these monstrosities through cheaper mortgages, political donations and other skulduggery there was no desire to remove the guarantee. As there was no way the government could walk away from these monsters without committing a dishonest act they were obliged to effectively nationalize them. Meanwhile the shareholders were screwed.

3. AIG.

AIG was a nationalization. The stockholders got rooted and the creditors rank below the Fed on the liquidation. If anyone thinks creditors are getting looked after I suggest you buy their bonds and stand in line.

4. The proposed Resolution Trust type set up.

This is a trade off. Either the government buys the toxic waste sitting on the bank balance sheets  and start lending again or the US and possibly the world goes into depression.

If we want to avoid these problems in the future (Good summary by Mark Hill)

1. don’t run an inflationary monetary policy

2. Don’t run lax anti-discrimation lending practices

3. Remove implicit guarantees.

And by the way, Ben Bernanke and Treasury Sec. Paulson have done a masterly job of trying to fight this crisis. The problem we have is interest rate targeting, it has not been the way these two fine public servants have conducted themselves during the crisis.

Although Ron Paul offers some good ideas, I disagree with the Paulite attempts to blame the Federal Reserve for many of the financial problems of the world. The Fed is a fine institution. There are problems with the way it runs monetary policy but that is a problem shared by every major central bank in the world.

80 thoughts on “In defence of the US bailouts

  1. “The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their Property until their Children will wake up homeless on the continent their Fathers conquered.” – Letter by Thomas Jefferson to Dr. Thomas Cooper, January 1814

  2. The Federal Reserve, the their fellow anglophile central banks are no capitalist conspiracy eh?

    Any body, or in this case bodies, that run interest rates at an average 4% under output for 30 years is absolutely corrupt. The governorship nominations processes in the US are corrupt. The chairs in the academic institutions are elected by corrupt street bent board processes. And how could those idiots Stiglitz and Mishkin find their ways back onto campuses. Are you going to say that consecutive chiefs of Goldman elected Treasury Secretary was good process? And that they haven’t been elected to look after their mates? And how about helicopter Ben? Do you think Bush and Cheney had him nominated to do a Volcker? Do you think his seminal works are master strokes of getting out there heading off inflation or banging it out of the system a la Volcker?

    And the problem with the big red interest rate lever was that it didn’t react to asset inflation and money supply growth. And please don’t run the stupidity of the line that the math got away from them.

    And when Japan showed them how to rig asset markets with a bank balance sheet and BIS wrote some new rules, the only question Wall Street asked is how do we get around it to do the same thing and then 100 fold.

    So whoever you are or whatever you have been doing these past 30 years, my guess is that you have been clipping the ticket climbing the public or private sector ladder while stealing from our grandkids. Yet you still have the arrogance to think you won’t be personally isolated and fried.

    Being hung drawn and quartered on George Street is what awaits you.

  3. If every central bank has the same flaw, then why do we need them?

    A large part of what created this crisis (all of it, essentially), was the fact that people over spent. What drove people to spend so much? Artificial interest rates. Who sets the interest rates? The Fed. Am I nutty to think that the Fed caused the majority of all of this? I don’t think so, or I wouldn’t think it.

    Obviously, you see the risk in big government with Fannie and Freddie because of the implicit guarantee they provided because it encouraged investments that otherwise would have been withheld. So, we both see the risk in big Government, just disagree on the Fed.

    A national bank can not accurately give interest rates. The market can.

  4. See, now we get the conspiracy nutballs come out of the swamp. These are the Ron Paul supporters types that Sukrit attracts.

    Is that a personal threat, Rob Roy? I sure hope it isn’t.

    Let’s fisk Rob Roy:

    The Federal Reserve, the their fellow anglophile central banks are no capitalist conspiracy eh?

    No champ, they’re not a capitalist conspiracy, you nut case.

    Any body, or in this case bodies, that run interest rates at an average 4% under output for 30 years is absolutely corrupt. The governorship nominations processes in the US are corrupt.

    Where’s you evidence the Fed ran interest policy “under output for 30 years? I would be the opposite if they were running an inflationary monetary policy, you nut case.

    The chairs in the academic institutions are elected by corrupt street bent board processes.

    Pure idiocy.

    And how could those idiots Stiglitz and Mishkin find their ways back onto campuses.

    Nonsense.

    Are you going to say that consecutive chiefs of Goldman elected Treasury Secretary was good process?

    Yea, they’re good guys, you reprobate.

    And that they haven’t been elected to look after their mates?

    Oh, what mates are those?

    And how about helicopter Ben? Do you think Bush and Cheney had him nominated to do a Volcker?

    They nominated him to be Fed chairman. He as an excellent academic and he’s done an excellent job so far during the crisis.

    Do you think his seminal works are master strokes of getting out there heading off inflation or banging it out of the system a la Volcker?

    Please explain your incoherence.

    And the problem with the big red interest rate lever was that it didn’t react to asset inflation and money supply growth. And please don’t run the stupidity of the line that the math got away from them.

    See above, but add incoherent twit to the comment.

    And when Japan showed them how to rig asset markets with a bank balance sheet and BIS wrote some new rules, the only question Wall Street asked is how do we get around it to do the same thing and then 100 fold.

    See above about again.

    So whoever you are or whatever you have been doing these past 30 years, my guess is that you have been clipping the ticket climbing the public or private sector ladder while stealing from our grandkids.

    Oh, I get it, another disaffected currency conspirator.

    Yet you still have the arrogance to think you won’t be personally isolated and fried
    Being hung drawn and quartered on George Street is what awaits you

    See above about the threat, dickhead.

  5. Boy, that’s some response to a reader. You’re worried about someone else giving libertarianism a bad name? Exactly what banner are you trying to fly? How could a nutty response get so far under your skin?

  6. For what it is worth I agree with the general thrust of what Garrett is saying in terms of central banks being a recurring source of financial instability. Interest rates should float. They shouldn’t be “managed” by a monopolised and government sanctioned printing press.

  7. Neither the Fed nor the US Treasury have created any sort of moral Hazard up to this point in time in dealing with the crisis.

    What about for creditors?

  8. Terje:

    As an AIG creditor would you want to be sitting around waiting for the Fed to be paid out before you have a hope of getting back the money?

    You wanna be the fund manager that goes to the investment committee meeting telling your associates that the rated paper you bought in AIG is fine… that it’s actually a good thing.

    I wouldn’t .

    There’s no moral hazard for the creditors as creditors don’t really want to have potential hassles with the return of their money in nay way unless they’re vulture funds that buy distressed paper as a bet.

    But yes, central banks do create instability for the reasons mentioned.

  9. It is in fact more than just the implicit guarantee that is at the heart of the problem, the blatant use of Fannie and Freddie as a mechanism of social policy is at the real root of the problem. The guarantee, implied or otherwise was the only thing that could make the whole thing work.

    A recent in World Net Daily under the heading,
    “Guess again who’s to blame for U.S. mortgage meltdown: Analysts point not to greed, but to social activist politics.” has this to say: –

    While many pundits are pointing to corporate greed and a lack of government regulation as the cause for the American mortgage and financial crisis, some analysts are saying it wasn’t too little government intervention that cased the mortgage meltdown, but too much, in the form of activists compelling the government to pressure Freddie Mac and Fannie Mae into unsound – though politically correct – lending practices.

    “Home mortgages have been a political piñata for many decades,” writes Stan J. Liebowitz, economics professor at the University of Texas at Dallas, in a chapter of his forthcoming book, Housing America: Building out of a Crisis.

    Liebowitz puts forward an explanation that he admits is “not consistent with the nasty-subprime-lender hypothesis currently considered to be the cause of the mortgage meltdown.” ……..

  10. This whole bail-out situation falls on the laps of the taxpayers. We’re going to suffer while the CEOs of companies that made unsound business decisions get their multi-million dollar pensions. Prices on gas, food, and other goods will continue to go up due to inflation and other taxes. The government will still continue its policy of deficit spending putting us (taxpayers) further in the hole.

    And there is nothing immoral about that? And as mainstream commentators/analysts/politicians demand even *more* government intervention and the creating of a new bureaucracy that will take even more funding, what are we left with? Less money in our pocket, more bills piling up, and in other cases, homelessness.

    The crisis we face today is horrible, but tinkering with it is not going to solve the problem in the long run. This is a short-term fix, and like any short-term fix, it will eventually make the problem worse.

    There needs to be more transparency; the amount of money in circulation needs to be regulated by our own elected officials (preferably ones who do not cater to corporate lobbyists).

  11. “the amount of money in circulation needs to be regulated by our own elected officials”

    err, no that’s exactly what we don’t want. The choices are
    1) a politically independent central bank
    2) free banking

    Many people here are not happy with no. 1 but they then need to accept that (2) is the only alternative. As long as 2 isn’t politically possible, we will have to live with 1 however imperfectly it is implemented.

  12. Are the Austrians right? I don’t know, but from what I have read, I think we can glean the following predictions:

    (1) An increase in the Federal Budget deficit (currently around $400bn, to increase to $1trn or possibly $2trn
    (2) A collapse in the $US
    (3) From (2) higher inflation, at least 10% though probably much, much higher
    (4) Also from (2), increase in gold price, at least to $US1,000, though maybe up to $US2,000.

    JC, if these things transpire, would that be sufficient to concede that the Austrians are right? Just wondering.

  13. E.D

    Mises and Hayek are basically right about nearly all things. In my mind they explain economics best, although i think they were wrong about the math side that.

    Having said that we don’t have economies based on Austrian school thinking. So have to make best with what we have.

    The world would be a better place without central banks and with free banking, limited regulation and free flowing trade and commerce. We don’t have that so we need to get along as best as we can.

    My point is that the Fed and US Treasury has done a decent job of managing the crisis.

    And yes I believe the crisis was created essentially by a bad policy set from the Fed.

  14. John H

    Sukrit started the abuse by suggesting that disagreeing with his Ghandian swill somehow makes me like Bird.

    Go take a look at the thread where he spat the dummy.

  15. If you want to see whats going on just go and look at the graph for USA M3 money supply. It all had to come to and end. The sad thing is the Australian graph looks just as bad we all see and I may say, enjoy the effect, asset inflation.

    Moral hazard is not going to be a problem, they have been scared out of their wits, the big risk now is deflation. The only way to stop deflation is too keep that money circulating, which just happens to result in taxes and if the tax rate is high enough will tend to pay off the debt.

  16. Jason,

    The options you offer at comment #12 are too limited and merely reflect your own preferences. For instance a currency board is a viable option for many nations and if done right it will achieve price stability. Also a similar fix to something such as gold might be viable. To suggest that free banking is the only alternative is in my view a little simplistic.

  17. Please watch this short video,”Money as Debt” that explains why the monetary system of debt and interest is not sustainable, and why these bailouts are just the big boys inflating like mad to keep the system afloat.
    http://clicks.aweber.com/y/ct/?l=JkhqS&m=1aqu4l6SUnEpNr&b=EctgL6tFsgMTYjxXwkJ97A
    OR Google “Money as Debt” and it will pop right up.
    I’ve had more people “get it” after watching this video than with any other information I’ve tried to supply, although the DVD “Money Masters” is very good, and Griffin’s book “The Creature from Jekyll Island” is loaded with proper references. The banks can’t allow any of the funds with a cumulutive 1 quadrillion in worthless derivatives (that’s 1,000 trillion) to fail because the whole domino effect would bring them all down. GDP of all countries combined is only 60 trillion. Their only way out is to hyperinflate. But of course it won’t work, and we’re all going to go down with the ship. Ron Paul has been trying to warn us about this for 30 years.

  18. JC… I know that Sukrit is throwing around his fair share of abuse. If he has written something that you thinks needs moderation (especially in an actual post) then please let me know.

    I can see a lot of virtue in arguing the pros and cons of monetary policy and foreign policy. I can’t see much value in libertarians spitting the dummy at each other each time the topics are discussed.

  19. Fair enough, John. No probs. I know you’re trying to slow things down and I respect that. Thanks.

    Perhaps I have been a little harsh on Sukrit and apologize.

  20. Elena – I watched the movie (all 47 minutes). It was such good propaganda I suspect that even the maker of the film believes it. Which is scary stuff. The problem was not with what was said, most of which was true, but with what was not said.

    For example it skips the issues of banks needing to manage cash flow and how this gives rise to natural limits on the multiplier irrespective of legislation. When they lend you money for that car they do just write it into your account. However the minute you withdraw the cash to go shopping they need to have the cash to give you. Even if you go shopping with a cheque book they will need to stump up the cash when the cheque is deposited with another bank and that other bank comes looking for settlement. In Australia there is no legislated reserve ratio at all and our banking system seems to be holding up a lot better than the US system where there are restrictions. During the great depression Australia only had one bank that had difficulties and depositors were even in that instance ultimately repaid.

    The film goes on endlessly about the quantity of money as if this is important. It isn’t. The only real thing that matters with money is it’s value.

    Thirdly the film makes out that we are all of us from governments to families in debt. This is simply untrue. As an example the Australian federal government has no net debt at all and it is in fact lending out money. For most of my life I have managed to not be in debt although I have certainly had a morgage at some times. However we can see this even more generally by simply looking at the publicly available balance sheet of any listed bank. On it we can see that the bank generally owes as much to customers as other customers own to it.

    For example take a look at the following:-

    http://www.nabgroup.com/0,,32973,00.html

    In 1997 NAB owed depositors A$141,988 million. And it was owed A$144,695 due to loans made. The difference being easily accounted for out of owners equity (ie what the shareholders deposited or else their retained profits).

    The fact that there isn’t the currency to “pay out” these debts all at the same time is irrelevant. There isn’t enough phone lines for us all to use the telephone at the same time but the telephone system is robust none the less. There aren’t enough roads for us all to visit Dubbo on the same day but the road system works. The fact that we time share the cash isn’t generally a problem.

    I would agree with the implication that we would be better off without central banking or legal tender laws or fiat currency. However the solution that is ultimately offered at the end of the film is for the nationalisation of banking. A daft idea for the same reasons that nationalising telephone networks and airlines was daft.

  21. JC,

    Yes its true that we don’t have economies based on Austrian school thinking. If you mean we don’t have laissez faire markets, I don’t think Hayek or Mises would dispute that, though perhaps you mean something else.

    In any case, you didn’t answer my question, though probably for good reasons. Nonetheless, still wondering.

  22. The FED by nature is a terrible institution that should be abolished because it uses the redistribution of wealth from all people holding dollars in order to increase the money supply for the rich.

  23. I can understand people being against central banking because it theoretically can’t do as good a job of stabilising price levels as competing private currencies but what one earth does it have to do with redistributing to the rich or corporations? at least 2 commenters if not more have made this assetion now

  24. Ed
    In any case, you didn’t answer my question, though probably for good reasons. Nonetheless, still wondering.

    What exactly do you think I’m hiding?

    The other question is where did all these anti central “banksters” come from?

    Do you guys actually think there is a capitalist conspiracy by the central banksters to steal from the poor to give to the rich dudes. Honest question here.

    last question……. has bird got all of you? Is this Bird’s work turning people against the banksters? LOL.

  25. Schecter Poultry v US 295 us 495 1935. Supreme Court ruled
    “Congress cannot abdicate it’s responsibility and delegate to another group” The principle was unlawful then and it is now. “Congress shall coin money and regulate the value thereof” Not a private bunch of terrorist bankers.

  26. Yes they can, Ron. The Congress will simply vote on the rescue package, which means they are not abdicating a single thing.

    And since when have banks been terrorists, Ron? And where are you guys all come from?
    This is an interesting collection of views. Do you know Birdy? Has he been getting to you?

  27. The reason why I said “the amount of money in circulation needs to be regulated by our own elected officials (preferably ones who do not cater to corporate lobbyists).” is because we do not have this currently. Ron Paul has said time and again that he’s tried to get information from the PPT but has been unable to; the federal reserve did not consult with congress before spending millions of taxpayer money.

    In order to fix this system, the first thing we need to do is de-monopolize the Fed, audit them, and have true congressional oversight. The fact that our entire monetary policy is controlled by a private financial institution astounds me — and when I tell my family and friends, it astounds them too.

  28. “terrorist bankers”?? What the…

    What bankers do is voluntary exchange among consenting adults. I understand that not everybody believes in freedom, but if you think the government should ban or regulate the voluntary actions of bankers then the burden of proof is on you.

    Calling them terrorists is absurd.

  29. One question I have not seen asked: If after the present bailout the U.S. government will pay 1/5 of its income to service the national debt and this one trillion added liquidity (from the bailout)plus the present deficit spending caused inflation that forced the interest rates up to 5 times what they are at present, would we not have to pay 100% of our income to service the debt?
    That is assuming that income remained the same which I doubt would be true. If the above has any degree of truth would that not be a bigger crisis than the present one?

  30. Ron and Ralph Fool’s Overture. History recalls how great the fall can be, while everybody’s sleeping the boats put out to sea. Borne on the wings of time, it seemed the answers were so easy to find. “Too late” the prophets cry, the island’s sinking let’s take to the sky. Called the man a fool, stripped him of his pride, everyone was laughing up until the day he died. And though the wound went deep, still he’s calling us out of our sleep.

    Apocalypse Now…

  31. Jeez, sometimes it can be mighty depressing being in libertarian company. this is a good post by jc, who has highlighted an important point – the Fed and the Treasury have so far done a reasonable job of trying to fix an impossible situation.

    it baffles me that some people here are so certain as to what needs doing. this is a problem of mammoth complexity.

  32. There is no defence of any government bailout, other than the fact that it will help special interests.

    I want to know exactly how the U.S Taxpayer is going to get $700bil worth of value from this bailout, and just what the hell Hank Paulson means when he says that this bailout will be better off for the tax-payer ?

    There is no rational answer, and the bail outs are preventing all of the malinvestments and bad decisions to be liquidated. Austrian economics suggest this is precisely what prolonged and deepened the Great Depression, and I’d be willing to bet my house that this credit crunch is going to be very very deep and is far from over.

  33. Jono:

    They can either try the bailout, clean the balance sheets of the banks and hope they a start lending again or we go into depression. Choose which way you want to go.

  34. If you think this crisis is over, I think you need to take a close look at America’s looming deficit, the spread of the credit crisis to commercial real estate, the fact that housing prices haven’t bottomed out yet, the inflationary effects of this bailout and the economic slowdown in Europe and concerns in Asia.

    The banks and financial institutions are haemorraging money. The mortgage assets are costly to own, and it doesn’t help by transferring ownership to the US taxpayer.

    If you want my opinion, I’ll take a short sharp recession over a prolonged depression.

    Choose which way you want to go.

  35. Jono:

    1.the deficit will be smaller than the one the occurred as a result of the SL crisis.

    2. Real estate in some areas is actually stabilizing. Home builder stocks have rallied. See HOV, KBH.

    3. Seeing major bank failures would be a disaster. The Fed won’t allow badly damaged banks to survive by the way. They will either be closed down or merged.

  36. Maybe having a depression is the best solution, but hard to see anyone signing up for it. Still, if easy money was the core problem then more easy money seems a funny response.

  37. jono

    No one is arguing that bailouts are the perfect solution. What is clear, though, is that if the Treasury and the Fed had simply done nothing (i.e. let Freddie, Fannie, AIG, Morgan Stanley and probably Goldman all go to the wall), we would be staring down the barrel of a major and prolonged depression.

    Now there are good arguments that this is precisely what we need to delever the developed world’s overly extended balance sheet, but be clear that the consequences of ‘no bailout’ are extremely severe. No elected politician in the world would stand idly by and watch as their country’s economy fell to pieces.

  38. jc – the next 12 months will see over $2tril in Alt-A loans resetting. For months we’ve been flooded with bad news, with layers of government at all levels being close to bankruptcy, with foreclosure and clearance rates hitting new lows. The cost will not be similar to the S&L crisis which amounted to $200bil. If you believe the laughably low estimates of the cost that have been put out there by the proponents of the bail-out for the banksters, then good luck to you. This will easily run into the trillions.

    Pom – I don’t disagree with you on the point that no politician could ever stand by and do nothing. And yes, the consequences of no bailout would be severe.

    But where we disagree is the costs and side-effects of the bail out. $700bil is several thousand dollars per tax payer. Where is the money coming from ? I don’t think I’m being pessimistic when I predict that the American government is rapidly going to lose its AAA credit rating and its currency is going to be dumped.

    No politician is going to discuss the causes of the credit bubble, and thus no politician is really going to address the problem by undoing all the regulations and central banking that caused it.

    Japan tried every stimulus and bail-out package in the ’90s but they could never recover from their slump. Housing and share prices never recovered.

    The Great Depression was full of people calling an early bottom, and I see no basis to believe that it is any different this time.

  39. The more things change, the more they stay the same. People always ignore the warning signs. Keynes was wrong in 1929, but we still treat him as the oracle:

    1929 February:
    “…the boom will collapse within a few months.”
    Friedrich von Hayek. Austrian Institute of Economic Research Report. One of the few economists to predict the crash….he was awarded the Nobel Laureate in 1974.

    1929 Summer:
    “…a great crash is coming and I do not want my name in any way connected with it.” Ludwig von Mises…. The reason Von Mises gave for rejecting a high position at Kredit Anstalt (then one of the largest banks in Europe)… two years later this Austrian bank was declared bankrupt.

    “There will be no more crashes in our lifetime.”
    John Maynard Keynes, renowned British economist and graduate of Cambridge….is quoted by several sources to have uttered these words to Felix Somary (Austrian School economist and Swiss banker) when warned against buying stock as a crash was imminent.

    1929 September:
    “Stock prices are not too high and Wall Street will not experience anything in the nature of a crash.”
    “Stocks are now at what looks like a permanently high plateau.”
    Irving Fisher. Fisher graduated from Yale and was regarded as one of America’s greatest economists. Also an inventor and author, Fisher made a fortune when he sold his index file system to Remington Rand. His reputation was tarnished when he kept insisting throughout the Great Depression that a recovery was imminent.

    “Sooner or later a crash is coming, and it may be terrific…factories will shut down…men will be thrown out of work…the viscous circle will get in full swing and the result will be a serious business depression.”
    Roger Babson, speaking at his Annual National Business Conference.

    1929 October 28th, “Black Monday”….stock market loses 13%.

    1929 October 29th, “Black Tuesday”….stock market loses 12%.

    1929 October 30th:
    “This is the time to buy stocks. This is the time to recall the words of the late J.P.Morgan… that any man who is bearish on America will go broke. Within a few days there is likely to be a bear panic rather than a bull panic.”

    R.W. McNeel, market analyst New York Herald Tribune.

    1929 November 10th:
    “A severe depression such as 1920-1921 is outside the range of probability. We are not facing a protracted liquidation. ”
    Harvard Economic Society.

    1929 November 14th:
    “The end of the decline of the Stock Market will probably not be long, only a few days at most.”
    Irving Fisher, Professor of Economics Yale

    1930 June: “The depression is over.”
    U.S. President Herbert Hoover.

    1932 June
    …………….. stocks have crashed 91% to a low of 34.

  40. jono

    i actually agree with you that the US’s AAA credit rating is now in jeopardy. and that the US$ (and all fiat currencies) will devalue against tangible assets (such as metals and oil).

    the challenge for us libertarians and free market think-tanks such as the CIS is to suggest practical ‘minimal interference’ policies that would ease the pain.

  41. i suspect that we are currently (i.e. today) in the midst of a ‘bear panic’ or ‘melt-up’.

    however liquidity is going to be mighty hard for market makers to provide, given that they can’t short stocks.

    this new anti-shorting rule is a potential catastrophe.

  42. I’d like to see some informed forecasts about where this is heading.

    Is this a dead cat bounce following the mother of all interventions, or is it the bottom?

    Can we expect a global recession/depression?

    Will the US taxpayers take a bath, or will they get a nice dividend in a couple of years? http://www.businessspectator.com.au/bs.nsf/Article/Paulsons-vulture-set-swoop-JQ4F7?OpenDocument&src=sph

    Can/have Paulson and Bernanke done anything to ensure it can’t happen again?

    Put your cocks on the block folks.

  43. David:

    I think the stock market will head higher before a period of calm. Finance stocks will do pretty well now that their balance sheets are going to be cleaned out somewhat. this will be followed by a period of sub-growth for several years.

    The size of the problems very closely resembles the SL crash.

    The Resolution Trust took in about $500 billion of bad debts when GDP was around $5.5 trillion…. in early 1990’s.

    They’re now talking about up to US$1 trillion with GDP of $13.5 trillion. It’s of about the same magnitude.

    The US stock market should rally from here and then do nothing for a long time.

    Don’t know about here because these idiots can do anything after seeing what they did with the short selling ban. Australia will have a regulatory uncertainty discount that will have to be built in because of the ALP’s idiocy.

  44. I’d wager that Paulson is doing everything possible to create another huge credit-driven easy-money bubble, which will precisely ensure that it does happen again.

    Am I the only one here is more than concerned about the kind of inflationary storm this can unleash upon the economy ?

    Look at the kind of dictatorial powers Paulson is seeking, based on the draft legislation.

    Hes asking to run a $700billion fund to buy mortgage related assets.

    Hes asking to run a $400billion fund to disperse in the money markets.

    Paulson is seeking complete authority (with legal immunity) in solving the crisis. The draft legislation makes the Treasury Secretary’s action non-reviewable or by any other Federal agency or U.S. court.

  45. jono

    I don’t think anyone disagrees with your opinions. They make sense to me. they’re setting the seeds for the next fall by creating a monetary expansion now. True enough.

    ideally they should clean things up now and make the changes (we all agree on) when things are better.

    I don’t blame Paulson making that request. Can you imagine the Congress getting involved. I would much rather have Paulson oversee things than Barney Frank, Chuck Schumer or Nancy Pelosi.

    Have you given it some thought that Paulson may want the authority because he knows those trogs only too well. 🙂

  46. No I hadn’t considered it. I’d rather Congress bicker and argue for weeks without a response so that the markets could properly liquidate the bad investment decisions once and for all.

    Hes been Treasury Secretary since 2006, why didn’t he ask for these powers before the meltdown ?

    Paulson is worth $700m himself, and he worked at Goldman Sachs most of his life, and was Chief Operating Officer 1994 till 1998. I bet this plan is motivated by self-interest and crony capitalism, not the common good.

  47. Paulson is worth $700m himself, and he worked at Goldman Sachs most of his life, and was Chief Operating Officer 1994 till 1998. I bet this plan is motivated by self-interest and crony capitalism, not the common good.

    Jono, i really think you’re on he wrong path here. You could say the dude is misguided, he’s wrong etc. but I don’t think you can say that he is doing things because of self interest and cronyism. that’s just plain wrong.

  48. You could say the dude is misguided, he’s wrong etc. but I don’t think you can say that he is doing things because of self interest and cronyism.

    I’ll take all 3. And I’ll add my 4th. Paulson is part of the government, and any government MUST look like it doing something in response to any crisis. So there are 4 reasons why Paulson knows he can get away with this power-grab.

    Its because he is misguided and wrong, that he is optimistic that it will actually have any calming effect.

    They’ve already tried the TAF, TSLF, PDCF. They’ve brokered the take-over of Bear Sterns by JP Morgan by sweetening the deal. They’ve banned short selling financials. AIG is being placed into conservatorship. None of these moves had the desired effect.

    What I want to know is what will his next move be when this one proves ineffective ?

  49. What’s wrong with self-interest and cronyism? Greed works, after all!
    Pommy, yes, the Fed can be congratulated for doing a good job, but the root cause of many of these problems is the tendency of governments to support winners. The Fannies and Freddies of the market are fed by the Feds. The problems wouldn’t be as big if they hadn’t politicised the markets.

  50. What I want to know is what will his next move be when this one proves ineffective ?

    Dunno, but you wanna buy inflation- is- coming type of stocks.

    commodities, BHP, Aussie dollar- even US banks now.

    this has to be the most interesting market ever.

  51. jono

    i bet this plan is motivated by self interest and crony capitalism

    now your credibility is disappearing faster than Treasury bills at the Fed.

  52. In the Wall Street Journal today there is an article saying that Goldman Sachs and Morgan Stanley have been granted a banking licence.

    The Federal Reserve, in an attempt to prevent the crisis on Wall Street from infecting its two premier institutions, took the extraordinary measure on Sunday night of agreeing to convert investment banks Morgan Stanley and Goldman Sachs Group Inc. into traditional bank holding companies.

    With the move, Wall Street as it has long been known — a coterie of independent brokerage firms that buy and sell securities, advise clients and are less regulated than old-fashioned banks — will cease to exist. Wall Street’s two most prestigious institutions will come under the close supervision of national bank regulators, subjecting them to new capital requirements, additional oversight, and far less profitability than they have historically enjoyed.

    Interesting times.

  53. Yea that was out earlier this morn. It allows them to go to the Fed window like another bank. It’s actually not a bad move.

  54. The new powers Paulson is asking for do seem rather extreme… this is some of the legal text they’re rushing through:

    “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”

    Yikes!

  55. They do seem extreme, Fleeced. however it avoids having to deal with Barney Frank, Charlie Rangel, Chuck Schumer, Nancy Pelosi who have been making all sorts of stupid suggestions.

    Remember that Schumer caused a run on a bank in the mid west by opening his stupid mouth. Charlie doesn’t file tax returns and Pelosi is a complete moron.

    These aren’t smart people, so although the law seems extreme in my mind its an attempt by Paulson to simply avoid stupidity and try to get the job done.

  56. Hmmm… I see an intervention as necessary, as long as it’s temporary – but just how temporary will this new deal end up being?

    I keep remembering Milton Friedman’s words in my head, “where are we going to find these angels to organize society for us?”

    Pelosi is certainly stupid, but Paulson is no angel.

    On Pelosi… she’s already wanting yet more easy loans for those who probably shouldn’t have them. On that note – anyone remember HomeFund fiasco in NSW in the early 90’s?

  57. “As congressional aides and officials scrutinized the proposal, the Treasury late yesterday clarified the types of assets it would purchase. Paulson would have authority to buy home loans, mortgage-backed securities, commercial mortgage- related assets and, after consultation with the Federal Reserve chairman, “other assets, as deemed necessary to effectively stabilize financial markets,” the Treasury said in a statement.

    The Treasury would also have discretion, after discussions with the Fed, to make non-U.S. financial institutions eligible under the program.

    The plan would raise the ceiling on the national debt and spend as much as the combined annual budgets of the Departments of Defense, Education and Health and Human Services. Paulson is asking for the power to hire asset managers and award contracts to private companies. Most provisions of the proposal expire after two years from the date of enactment.

    “We want this to be clean, we want this to be quick,” Paulson said on Fox News Sunday.

    The Bush administration seeks “dictatorial power unreviewable by the third branch of government, the courts, to try to resolve the crisis,” said Frank Razzano, a former assistant chief trial attorney at the Securities and Exchange Commission now at Pepper Hamilton LLP in Washington. “We are taking a huge leap of faith.”

    http://bloomberg.com/apps/news?pid=20601087&refer=home&sid=ae6b6P1L8E_E

    From Road to Serfdom:
    “We must here return for a moment to the position which precedes the suppression of democratic institutions and the creation of a totalitarian regime. In this stage it is the general demand for quick and determined government action that it is the dominating element in the situation, dissatisfaction with the slow and cumbersome course of democratic procedure which makes action for action’s sake the goal. It is then the man or the party who seems strong and resolute enough “to get things done” who exercises the greatest appeal. “Strong” in this sense means not merely a numerical majority – it is the ineffectiveness of parliamentary majorities with which people are dissatisfied. What they will seek is somebody with such solid support as to inspire confidence that he can carry out whatever he wants.”

    Or as JC puts it, Paulson is the man who will “get the job done.”

    But what the heck, I’m probably just being paranoid, I hope.

  58. But what the heck, I’m probably just being paranoid, I hope.

    Dude, I think you’re being a little melodramatic here, no?

  59. Wish More People Would Have Debated Ron Paul Rather Than Dismissed Him. Debate Is The Distillation Of Reality.

    The Worst IS Yet To Come.

    The Fundamentals Are Flawed And The Results Will Be The Same Again.

    The Complexity Of Corruption Is Vast.

    Simpletons Over Simplify. The Mentally Minuscule Argue About Party Lines And Labels While Avoiding Root Cause And Corrective Action.

  60. Yeah, maybe a little. But come on JC, if you are a libertarian, you cannot possibly be relaxed and comfortable about this.

  61. pommy..
    I’m going to make one point here that I think is undeniable.

    -> The finance and banking sector is by far the most powerful special interest group in America.

    You may not agree or believe with what I will now present to back up this point of view, but do your own research. Don’t bother arguing with the following points, I’m only trying to establish why the banking and finance sector has enormous political clout.

    In the early 1980’s, the banking and finance sector had the same size as the manufacturing sector. Since then, it has ballooned because of cheap credit and government support. Both political parties receive huge contributions from Wall St, and already Obama is the 4th highest ever recipient of campaign contributions from Wall St. As I’ve said, the Treasury Secretary spent most of his working life at Goldman Sachs. Its no wonder that he proposed a bail out for one particular industry.

    What about the failing auto firms, or even the tech sector ? What about the 24,000 Hewlett Packard workers who were retrenched, why doesn’t the government bail them out “to restore confidence and liquidity to the markets” ?

    Look at the extreme powers granted to the Fed. An unelected, unaccountable shadowy group which never releases the minutes of its meetings, and whose charter and powers continue to grow and grow with every crisis. Several years ago, they ceased publishing M3 data, and it makes it more difficult to track the expansion of the money supply.

    The Fed was founded through secret discussions with private member banks in 1913, and the board of the Fed is filled with people who’ve come from the banking and finance sector.

    The Fed has such a broad charter, much more broad than our own central bank. It isn’t limited to targeting inflation, but rather maintaining full employment, providing economic stimulus and providing liquidity.

    Could you imagine an organisation with as many powers to oversee and regulate any other industry ?

  62. One more thing I must add. Paulson is the biggest liar in this saga.
    ——————————–
    July 10:
    Paulson: “Homeowners should not anticipate a government bail-out. Banks should not expect to be bailed-out by government, despite intervention by the Federal Reserve in the near-collapse of Bear Stearns in March.”

    July 11:
    Fed spokeswoman Michelle Smith: “There have been no discussions with the GSEs about access to the discount window”

    July 13:
    “Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,” Paulson said in a statement in Washington

    July 20:
    Paulson: “Our banking system is a safe and a sound one.”

    August 19:
    Treasury Department: The Treasury has no intention of using its newly authorized power to invest in either the debt or equity of Fannie and Freddie.
    ——————————–

    Meanwhile, some common sense from the former Treasury secretary:
    Former U.S. Treasury Secretary John Snow said that Fannie Mae and Freddie Mac have relied on leverage to fund their businesses in the same fashion as a hedge fund, and that the government should avoid taking them over.

    So why is the current treasury secretary and not the former treasury secretary, “The Man to get the job done” ? ? ?

  63. I must admit, the banking and finance sector does seem to be the most heavily protected… and with all those economists on board, too – many of whom would espouse the virtues of anti-protectionism in just about every other sector.

  64. jono

    Paulson is the biggest liar in this saga

    Paulson is the Treasury Secretary!!!! his job is to inspire confidence not peddle doom! imagine if he said what he actually thought. ‘guys this is f***ing serious. sell everything and stick it under the mattress’.

    only ex-Secretaries and ex-Fed Governors can say what they think.

    I have a number of friends who have worked with Paulson during his Goldman days. They describe him as one of the brightest and most honest guys you will ever meet.

  65. jono

    John Snow is an ignorant fool with no knowledge of the markets who used to hang out with Bono to try and look cool. Paulson is one of the smartest men on the planet.

  66. Thanks I’m very reassured now. *NOT* :

    http://www.bloomberg.com/apps/news?pid=20601087&sid=aUj_9.k13q7s&refer=home

    Goldman Sachs Group Inc. and Morgan Stanley may be among the biggest beneficiaries of the $700 billion U.S. plan to buy assets from financial companies while many banks see limited aid, according to Bank of America Corp.

    “Its benefits, in its current form, will be largely limited to investment banks and other banks that have aggressively written down the value of their holdings and have already recognized the attendant capital impairment,” Jeffrey Rosenberg, Bank of America’s head of credit strategy research, wrote in a report dated yesterday, without identifying particular banks.

  67. Oh and the last paragraph of that article is interesting too:

    Even without sales by commercial banks and savings-and-loans under the program, the companies may be harmed as the disclosure of prices paid in the troubled-debt auctions force them to “hasten the pace” of their own losses, Rosenberg wrote in his report. Banks and insurers mark down certain securities and derivatives to market prices in their earnings reports, avoiding losses on others unless they deem the declines to not be temporary and provisioning against loans as they go bad.

    Bank lobbying groups today asked Congress and the U.S. Securities and Exchange Commission to suspend a rule that forces companies to put a price on difficult-to-value assets such as subprime mortgages

  68. OMG! Even Paul Krugman thinks its a bad idea:

    “Everyone agrees that something major must be done. But Mr. Paulson is demanding extraordinary power for himself — and for his successor — to deploy taxpayers’ money on behalf of a plan that, as far as I can see, doesn’t make sense.”

    “Some are saying that we should simply trust Mr. Paulson, because he’s a smart guy who knows what he’s doing. But that’s only half true: he is a smart guy, but what, exactly, in the experience of the past year and a half — a period during which Mr. Paulson repeatedly declared the financial crisis “contained,” and then offered a series of unsuccessful fixes — justifies the belief that he knows what he’s doing? He’s making it up as he goes along, just like the rest of us.”

    “I’m aware that Congress is under enormous pressure to agree to the Paulson plan in the next few days, with at most a few modifications that make it slightly less bad. Basically, after having spent a year and a half telling everyone that things were under control, the Bush administration says that the sky is falling, and that to save the world we have to do exactly what it says now now now.

    But I’d urge Congress to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it a plan that addresses the real problem. Don’t let yourself be railroaded — if this plan goes through in anything like its current form, we’ll all be very sorry in the not-too-distant future.”

    http://www.nytimes.com/2008/09/22/opinion/22krugman.html

  69. JC: “This was later raised to 10 bucks by JP Morgan as they realized the original price was far too low.”

    What? JPM is an altruistic organization? Who knew? I didn’t and I used to work for them (yeah, I know I’m not supposed to say that, but it was a while back).

    Reality is they got muscled into it by the shareholders kicking up a stink.

    The rest of your comment is pretty good (except for Mark’s pt 2 about lending practices – the CRA was passed in 1977, if it failed to have an adverse impact for 30 years it can hardly be true evil).

  70. BTW – how come noone here has touched on Lehman’s?

    Surely that’s one that the two golden boys really s***fed up, and has more than a little to do with the current mess.

    After all if your liquidator is about to dump a whole bunch of very illiquid securities on the market in a few weeks (when the last price is over a year old) and that is going to force a little of the old mark-to-market …..

    …. then maybe the dynamic duo leapt before they looked?

  71. Incredible thread here. Where Humphreys decides to let on a traitor to the libertarian cause, so that he can advocate stealing off the people to give money to rich bankers.

    The idea was simply to retire debt with new cash creation, and at the same time increase the reserve asset ratio. Does anyone NOT now understand why this was the right policy mix? How on earth anyone thought that stealing for the bankers was good policy beats me. But there you are. Cambria, phoney libertarian, came out in favor of bank communism.

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