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Have economic questions; will listen to answers

Every once in a while I find myself asking questions to which I don't know the answers. For instance,

*To whom do we owe the National Debt?

*Who is the "we" that owes it? All the American people? The American government?

*Can whoever it is to whom we owe it foreclose on whomever it is that owes it?

[*Should that be "whoever it is that owes it" in that last question?]

*What would a foreclosure on the National Debt look like?

*Could we all wake up tomorrow and discover that our entire country is now owned and ruled directly by China, which has foreclosed on the National Debt?

These are not smart alecky questions, to which I already know the answer. (Well, okay, so maybe the last one is a smart alecky question to which I already know the answer. The answer is "no."...Right?)

But actually, for all the others, I really don't know the answers. But I bet my blog colleagues and readers do.

Comments (218)

Super Size that Rescue
Hank P and Mickey D.

By Rob Long


TO: All McDonald’s Team Members

FROM: Management

RE: New Federal Guidelines in wake of the federal rescue

Dear Team:

As most of you are aware, the past few days have been challenging for all members of the McDonald’s USA and McDonald’s Worldwide Team.

McDonald’s, as you know, maintained a complex and highly-leveraged commodity futures operation, and recent events in the financial markets have made our risk-management strategies impossible to maintain.

All along, as we faced a softening demand for our products and in the wake of our increased exposure to losses in the commodity derivatives market of beef futures, hog swaps, egg instruments, bun swaptions, potato debt flotations, and partially-hydrogenated vegetable oil puts, it was our intention to reach some productive and effective understanding with our creditors and our business partners. Unfortunately, due to market conditions, that was not to be.

Effective close of business today, the McDonald’s Corporation is a wholly owned subsidiary of the Federal Department of Agriculture. They wisely — and quickly — stepped in to provide management with a credit facility, in exchange for ownership of the company. If you’ve seen the recent news about what the Treasury Department has done for AIG, the troubled insurance giant, you’ll understand what happened here. It’s basically the same, but with fries.

Many of our newest Team members on the griddle station, or at the Fry-O-Lator, have come to us from senior positions in the old-line Wall Street firm of Lehman Brothers, which recently experienced its own financial crisis. For those of our employees who are confused about the turbulence in the financial markets, we suggest you reach out to these new Team members for a full explanation. During your break.

Until our new management team at the Department of Agriculture forms a plan for the eventual sale and disposal of the company and its assets, it will be business as usual.

That said, we are now a department within the federal government, and we will have to adjust our business practices to reflect that:

The target service time, from the customer’s order at the counter to the delivery of his or her meal, with change. The old target of 120 seconds will be replaced by a new, federal target of three hours.

Ketchup will no longer be available.

Our new hours: 10AM to 3:15PM.

In light of federal diversity programs, all images of the “Hamburglar” will be destroyed. New character images will be delivered to franchisees as soon as possible.

The paper hats will be replaced immediately with OSHA-regulated helmets.

All members of the McDonald’s Team are now members of SEIU, the Service Employees International Union, and as such are no longer required to work while standing or looking directly at the customer. Obviously, this is going to take some getting used to for Team Members used to the “old” way of doing business. Large chairs will be delivered to each location for use behind the counter. Employees will be taught to mumble darkly, and to sigh in an irritated fashion.

The Drive-Thru facility will remain operative in every location for the convenience of the customer, and orders will continue to be taken via the intercom. But in keeping with federal guidelines dictating “convenience,” both the payment window and the pickup window will be permanently shut.


If you have any questions about the above changes, please refer to the leaflet: “So, You’re A Federal Employee! Here’s What You Don’t Have to Do!” which is being distributed by the new managers from the Department of Agriculture.

All of us here in management know this is a trying time for Team Members, and we sincerely apologize for the situation we all find ourselves in — although, frankly, we’ve got it a lot better than our friends at WalMart, who just last week were bought by the Department of Commerce, and who now have to undergo a painful and complicated conversion to the work rules of the Association of Federal, State, County, and Municipal Employees Union (AFSCME).

McDonald’s is a proud American firm. Indeed, for many, we represent America at her finest and most delicious. We are grateful to our partners in the Department of Agriculture for recognizing that McDonald’s, truly, is too big to fail.

We’re all excited about the new, Federally Owned McDonald’s!

McDonald’s Executive Team

(until close of business tonight)

— Rob Long blogs at roblong.com.

SOURCE: http://article.nationalreview.com/print/?q=ZGY3ODZlMDE0NmY5ODQwMmE3NDdkMzVmNGRkNTUyYTI=

Yes, yes, that's what _prompted_ all this economic soul-searching.

But I really am curious about the answers to the questions I actually asked in the post.

Lydia,

*Could we all wake up tomorrow and discover that our entire country is now owned and ruled directly by China

NEWS FLASH LYDIA -- Consider not only the fact that most of our products in the U.S. are made there, but that China had been for quite sometime now buying up large shares of major U.S. companies (not the least amongst them, those involved in defense), as well as US Treasury bills!

I take it this means you don't actually know the answers to any of the other questions in the list?

As I understand it, the National Debt is owed to every person and institution who owns any form of Federal Government bond. To the extent that Americans own many (most?) of those bonds, the debt is in some sense money "we" owe ourselves. More accurately it is money owed by taxpayers to investors. All that a holder of a government bond owns is a promise of a future revenue stream. Owning all the US government's debt wouldn't mean that one owned a single square inch of America. There is no possibility of foreclosure, so we won't wake up to see the red star waving over the Capitol dome.

I haven't the least clue about economic matters, but yes, it should be "whoever": "it is whoever" is a *clause* as the object of the preposition; "whoever" is the predicate nominative *of that clause* and therefore is a subjective pronoun (it would be an objective pronoun if it were a direct object in its own clause). In other words, the word "whoever" itself is not the object of the preposition; if it were, then it would correctly be "whomever," but the usage is determined by its position in its own clause.

Oh, mercy me, grading mode in full operation . . . !!! But very possibly not the least bit useful . . . :)

Thanks, guys. Beth, I thought that might be right, but I couldn't put my finger on why. I love stuff like that, so I'm very pleased to have it right, finally. I will hopefully never make that mistake again.

Step2, very informative article, thanks. Though now I'm puzzling on how to fit this info. together with what I've learned about how the Federal Reserve _increases_ the money supply by _buying_ government bonds. In this article, too, they talked about that as one form of "monetizing debt" and about how it increases the money supply (is inflationary). But wouldn't this mean that paying off the national debt would also be inflationary, because it would be the government's paying off its own bonds? Or would that be different, because if they really were paying off the national debt they would be buying the bonds somehow with dollars they had gotten from somewhere (e.g., from tax revenues) rather than with newly created dollars?

And this article says, too, that the govt. usually _doesn't_ monetize increased debt but rather issues new government bonds. But I had understood that the federal reserve issues new government bonds when it wants to _decrease_ the money supply. So does this mean that typically, when the government contracts increased debt but doesn't monetize it, the money supply is decreased and deflation occurs?

Cyrus, I'm beginning to understand what you say better now and am trying (as in the previous paragraph) to put this together with the tiny bit of other information I've recently laboriously acquired about economics and how the federal reserve system works.

Sorry to be so ignorant.

But I suppose it's nice to know that it isn't like the whole national debt is owed by America to _someone else_. Only (as Aristocles emphasizes) some of it.

"To whom do we owe the National Debt?"
About 40% is owed to the Federal Reserve Bank. I wouldn't worry about them. They are largely a printing press busy devaluing the worth of the dollar and making life for future generations fairly nasty. It is those troublesome foreign owners of our debt who pose the biggest worry.

The magnitude of the foreign-owned portion of the national debt is nearly three times the total amount of currency in circulation! Of the U.S. debt owned by foreigners, central banks own 64% with private investors owning nearly all the rest. Biggest holders as of this quarter;
Japan 593.4
China, Mainland 518.7
http://www.treas.gov/tic/mfh.txt

"Who is the "we" that owes it? All the American people? The American government?"

National Debt refers to the federal government. Perhaps someone can explain to our creditors the government does not represent the American people, though I doubt they'll be amused.

"What would a foreclosure on the National Debt look like?"

Before that happens, our creditors would simply pursue their present course of action; 1)buying our assets - American banks, companies, properties, etc. etc. 2)insist on our buying of their products and commodities so as to enrich
their own people and coffers. 3)our military serve as Hessians in far-off places for obscure causes.

We won't go into arrears. We'll simply cease to function as a sovereign nation. Our trade imbalance is connected to national debt in that our creditors force us to consume their goods in exchange of their holding our debt.

"Could we all wake up tomorrow and discover that our entire country is now owned and ruled directly by China, which has foreclosed on the National Debt?"

It won't be sudden development. It is an incremental dissolution that comes in stages and brings with it the risk of war; "screw you, I don't have the cash right now".

What you are witnessing today is a direct result of our nation losing its status as a leading economic producer and exporter of goods back in the early 70's. An economy dependent on the consumption of foreign goods is naturally going to experience deflationary pressures on the wages of its workforce. In step credit cards, "hi-tech bubbles", increased public spending programs and subsidies, private creative lending programs, and "housing bubbles" to provide strapped households with sources of "disposable income".

I don't want to delve into what Wall Street did in packaging and redesigning liabilities into opaque financial instruments that few understood. Suffice it to say, debt is not wealth.

Mortgage means "death grip" in Latin. And I can't think of a better description of our long-term situation.

You yourself owe it, Lydia, and so do your kids, and your kids' kids, and maybe even their kids too. We all owe it. We owe it to anyone who loaned the government money to purchase the goods and services it thought it required. We ourselves pay the government's bills, all of them.

Some of that borrowed money might have gone to your next door neighbor for the goods he or she has provided the government, or perhaps to a technology company in, say, France or Germany. It goes everywhere.

But to get huge portions of that money, we have had to borrow it. Some of our creditors are domestic, some are foreign. When lenders loan money, they loan it from limited supplies. When the government jumps into the lending market as a borrower, it gobbles up enormous amounts of the limited dollars available for lending. Because when the demand for a thing goes up, the price of it goes up too, the price of borrowing goes up for everyone concerned. You are competing with your own government for loans, and as a result of your government's borrowing activities, you must pay a higher price for your own loans, whether for cars, houses or anything else. The government is driving interest rates up by means of its gigantic loans. Conversely, when the supply of a thing goes down, the price goes up. Because the number of dollars avaialble for borrowing has gone down in the wake of the government's borrowing binge, the price required to borrow what remains goes up. You pay double -- you pay for the government's loans and you pay a higher price for your won. Ain't life grand?

In that light, if the $700 billion dollar bailout goes through, try to imagine what the interest will be on that loan -- every day, and what your daily share of it is. We all pay that interest, largely to banks in Switzerland, China, and elsewhere.

If we fail to pay our debts to our creditors, they can try to foreclose on their loans to us, but it wouldn't do them much good. It's not like foreclosing on a home loan or a car loan where you can repossess the item in view. Our creditors can't repossess what we bought with the money we borrowed, whether it be food for the WIC program or tanks destroyed in Afghanistan. Our creditors want us, indeed they need us, to succeed in paying them back, not to default. So they will sustain the loan for as long as it might reasonably take to get the money. But in that eventuality, our credibility as a borrower is severely compromised, and fewer and fewer lenders will elect to loan money to us. We then will have to draw back our spending to whatever we can purchase with cash on hand, rather than with loans (not an entirely bad prospect). Or, we could do what foolish governments have tried to do before, which is to print more money in order to have money to pay the bills. But flooding the market with printed money simply steals value from the dollars your citizens already have, and leads to hyper-inflation, which can never solve the problem. When the market is flooded with printed dollars, it lowers the value of each of the dollars out there. In such a case, the, say, $300,000 you might have in retirement reduces in value to about 50 bucks. You pay again. Hyper-inflation is theft. You are the victim; your government is the perpetrator.

Because almost all modern enterprise is run on a credit basis, if you gut the credit market with huge losses, you make future loans impossible for almost everyone, and enterprise comes to a screeching halt. You enter an enormous economic depression, one that might take 10 or 20 years to reverse, perhaps even longer.

So, no, China won't own us. But they might lose their financial shirts by investing their money in loans to us.


"the State pays for the blunders of private enterprise... Profit is private and individual. Loss is public and social."
Gaetano Salvemini on Fascist economics, Italy, 1936

Make no mistake, a bailout will eventually be approved for the simple reason that when the rich catch a cold, the rest of us get a pneumonia. Moral hazard and Too Big to Fail win again. Yet, let us desist from any paeans to the glories of our wondrous "free enterprise" system. We're all socialists now, especially when it comes to transferring wealth upstream to the rich or into the Treasuries of foreign adversaries. Deep spiritual disorder is the cause of this crisis, not merely poor economic policy.


It is the height of foolishness to take the line that debt per se is bad. It all depends on why you take on the debt and what is done with the money. Most of the things government does with money are foolish, so most of what constitutes the national debt is bad. Buying up all this distressed illiquid paper is one of the few things which are very much not foolish, for a whole host of reasons. Main Street populism seems determined to commit financial suicide here in the name of self-righteous dudgeon.

If Bill Gross (and the investment bankers I've spoken to) are right, the federal government will probably earn 15% or so by holding the distressed paper it is proposing to buy, at a steep discount to book, under the plan. The underlying property is still there: real houses, real buildings, real land. This is not like a company, where the entire income stream can go away in a heartbeat because of some unexpected move by a competitor. The underlying assets here are real, tangible property.

So the government will borrow at 3.5%, and earn 15%. Discounting dramatically for illiquidity, if the scenario is right, it is still likely to earn quite a substantial amount of money for taxpayers.

Let me repeat that:

The 'bailout' will not cost taxpayers a dime. Not a penny. Not a nickel. It will earn them a substantial amount of money.

There are risks, of course, as there are in any investment in what amounts to a large global macro hedge fund. Those risks are relatively small, and the consequences of permitting bank lockout, money market catastrophe, etc to happen are not relatively small.

This is like co-signing on a loan to buy a profitable but hard to sell investment - a profitable investment which, if it is not bought, will result in you losing your job.

The way main street populists are looking at this is just stupid, stupid, stupid, stupid, stupid. And self destructive. And stupid.

And by the way, if you read Belloc's essay on usury, you'll see that this isn't some post-capitalist libertarian or socialist nuttery on my part. Lending and borrowing money for productive purposes is not bad, and failing to do it when circumstances call for it can be really, really, really dumb. Borrowing money for optional consumption, to enable bad behavior, etc, not so good. Debt in itself, paying interest on loans in itself, is neither inherently bad nor inherently good.

Would you borrow money to have your appendix out so you can go back to work? Would you borrow money to have your appendix out if your appendix contained a diamond that you could sell for more than the cost of the operation, though it might take you some time to sell it? Or would you rather die of a ruptured appendix, because debt per se is bad, even when you stand to both preserve your income and make a profit?

Since when did we become the financial equivalent of Christian Scientists?

Debt's not a bad thing at all. As long as you can afford to service it. The United States has an enormous advantage in that the dollar is the world's reserve currency, and our debts and our oil imports are all denominated in dollars, which our government can "print" to its heart's content.

What Mr. Bauman is describing is a form of default. Really, any inflation, not just hyper-inflation, is a form of default.

Zippy, how will taxpayers make money on the bailout? By liquidating those assets the government would own as a result of the buyout at some future date?

Lending and borrowing money for productive purposes is not bad, and failing to do it when circumstances call for it can be really, really, really dumb. Borrowing money for optional consumption, to enable bad behavior, etc, not so good. Debt in itself, paying interest on loans in itself, is neither inherently bad nor inherently good.
Zippy, what's your opinion on financing regular, as opposed to extraordinary, expenses? I'm referring to the way the Federal Government runs enormous deficits to pay for routine operating expenses and disbursements, like defense and entitlements, and not for extraordinary occurrences like wars and Wall Street bailouts? Does it matter at all?

Cyrus,
Could you clarify? While I think we agree, I'm not certain. I wonder in what way do you mean that "any inflation is a form of default?"

And do we agree that inflation is not the same as rising prices, but is when the gov't adds to the money supply?

Best,
MB

So the government will borrow at 3.5%, and earn 15%. Discounting dramatically for illiquidity, if the scenario is right, it is still likely to earn quite a substantial amount of money for taxpayers.

This is, of course, hypothetically possible. But to hear many of the pundits and financial masters of the universe now entreating the American people to pull their sorry asses out of the fire they created with their excessively leveraged wagers (on the prospects of unlimited future growth), this will be a virtually dead lock on substantial financial gains. That would be true if and only if the real estate market were to ascend to the excessively-valued heights of the bubble itself; and if the Fed is intent upon engineering the re-inflation of that bubble, we're in more trouble than we can even conceptualize. In reality, some of these investments are likely to be losses, while others might turn profits of the magnitude you mention. What the percentage breakdown between these categories might be, I cannot forecast.

More theoretically, the very existence of this alleged crisis stands as yet more irrefutable proof of the following: that markets are not self-regulating in any manner consonant with the common good; that markets are artifactual, the products of the intersection of culture, politics, and fantasies concerning unlimited growth and aggregate utility; that our failure to acknowledge this contingency of markets is ideological, and, like all ideological fantasies, eventually redounds negatively upon Actually Existing America; that there obtains a massive structural disjunction between the Real Economy and the Speculative Pyramidal Economy, a disjunction between actual productive factors and the American way of life; that "too big to fail" really means "too big to justly exist". It would be an extravagant hope, for any number of reasons, but perhaps, in a better world, such a crisis would disabuse us of the immanent faith in limitless growth, the finite infinity, which yokes together a ferocious presentism and reckless gambling on the future - why bridle one's appetites in the present if the future will afford yet greater abundances, why practice deferred gratification now if the future will retire all of the obligations we so recklessly assume?

Zippy, how will taxpayers make money on the bailout? By liquidating those assets the government would own as a result of the buyout at some future date?
That is, in fact, the proposed plan. The problem is not that the underlying assets are worthless. The problem is that they are illiquid. If I owned the Mona Lisa and had bills to pay right now I would have to sell it at a steep discount; the guy who could afford to bide his time -- the federal government in this case -- will make a killing, precisely because he can afford to bide his time and I cannot.

This is classic, by the way. Venture capital funds and many hedge funds have really great returns, but they are not liquid. You sign up for a ten year partnership, you send in the money when they make capital calls, and you don't see disbursements unless and until they bloody well decide to make them. One limited partner in a private equity fund I am in lost his shirt because he couldn't make the capital calls; but if you had the cash you made 30%.

Ironically, global macro plays like this are usually only available to large investors who can commit a million dollars or more, and will not see it come back for years.

Zippy, what's your opinion on financing regular, as opposed to extraordinary, expenses? I'm referring to the way the Federal Government runs enormous deficits to pay for routine operating expenses and disbursements, like defense and entitlements, and not for extraordinary occurrences like wars and Wall Street bailouts? Does it matter at all?
I think it is perfectly fine to finance productive activities with debt on an ongoing basis. In fact it is often foolish not to do so. Everyone who has a mortgage is doing this: you need a place to live, and over time it should also appreciate as an asset, but you don't have the cash to just buy it outright; so you leverage it with a bank loan. You need a car to get to work, the car itself is a terrible investment, but getting to work is a great investment part of the expense of which includes transportation. Nothing wrong with a car loan; foolish to work at the corner 7-11 when you can work for the law firm downtown for three times the money.

Of course, a great many of the things the government does are not productive. The problem though isn't how the activities are financed. The problem is the activities themselves.

...entreating the American people to pull their sorry asses out of the fire...
Sorry, Maximos, but the play here is to entreat the American people to pull their own sorry asses out of the fire. I own my houses, cars, etc outright. I haven't bought trips to disneyland on home equity leverage. I'm not gonna make a dime on this 'bailout', unless I'm given the opportunity to make a side-by-side investment along with the Federal government, which I very well might do if the opportunity arises. And if and when I do, I'll be making money off of the investment bankers and other financial institutions who were stupid enough to get caught holding illiquid paper to back liquid money markets.

I am very much on board the against-idealism-about-capitalism train. Who could read the things I write and think otherwise? But self-destructive populist opposition to this particular thing is really, really dumb.

Zippy is right. The federal government will largely buy things that are devalued because of the inability of the owner to move them at this moment in the current climate. If you buy devalued real estate at 10 cents on the dollar and have the financial resources to be patient and wait for the value of that property to return to a more reasonable level and sell it even at 40 or 50 cents on the dollar of its original price you make money. Individuals that have extended themselves beyond their paying capacity cannot do this. The idea is that it will not bankrupt the government to sit on property that is only temporarily bad the same way it will hurt the overall economy to have massive loan default in the private sector and valueless property even for those who did not make the mistake of taking loans that they were incapable of paying.

The government will not spend $700 billion and have it lost. It will invest it and certainly make a profit. The big sticking points are guarantees on where the money from the bail out will go and wil not go, bad CEO's cannot be given a windfall for failure, and assurances of how the money borrowed will be accounted upon the sale of the assets at the more opportune time.

Sorry, Maximos, but the play here is to entreat the American people to pull their own sorry asses out of the fire.

This is a both/and, reflecting both the improvidence of the American people generally, as well as the inordinate speculation and leverage of the masters of the universe. The economy functioned just fine without this stuff twenty-five years ago, and, absent it, we might actually reckon with the disjunction between our resources and our expectations, between the real economy and those elaborate mathematical models, all of which simply presuppose the possibility of seemingly limitless expansion, amounting to wagers on future expansion. Both the pimps and the johns need to sober up.

Could you clarify? While I think we agree, I'm not certain. I wonder in what way do you mean that "any inflation is a form of default?"
I meant that inflation caused by government expansion of the money supply when the same government owes debts denominated in pre-devaluation dollars is a form of default on that government's debt. Inflation benefits all debtors, but government is the only debtor with some control of the value of money. The opportunities for mischief are obvious, and a state doesn't need to indulge in a Weimaresque orgy of printing to in effect debase its way out of much its debt.
And do we agree that inflation is not the same as rising prices, but is when the gov't adds to the money supply?
Yes.

"Lending and borrowing money for productive purposes is not bad, and failing to do it when circumstances call for it can be really, really, really dumb."

On this point, I think Zippy is exactly right. Perhaps we differ on what purposes are or are not productive, but his is the right principle.

I think the bailout is a mistake, perhaps even a whopper. Why? Because I think -- as another general principle -- interventionism is almost always foolish. The gov't is not at all good at deciding who ought to be the winners and who the losers in the marketplace. No individual, no panel of experts, no politicians, and no bureaucracy has the knowledge necessary to make that decision wisely, or to take into account all that needs to considered. I think it's ham-handed, at best, and is so by necessity. I think the interventionist track record is a very bad one. Plus, the incentives set in motion by interventionist moves like the bailout are all wrong. Set those loose in the marketplace and bad things not only happen, they multiply madly.

Let failed operations fail. If you don't, those that acted wisely all along, and who kept out of trouble, will be punished, and those who acted foolishly will be rewarded, inducing the wise now to become foolish later, and the foolish now to stay the course.

If bailouts make money for the government, then let's bailout out all those who lost, or are losing, their homes and farms to foreclosure. That way, we could make even more money. Of course, if we do that, then I think I might want to stop making my mortgage payments -- along with millions of other homeowners -- which is my point about incentives.

Cyrus,
Thanks.

Maximos: While I'm not completely averse to just let it all fall apart, that'll show 'em as an approach, that is not what the populists think they are doing, and I doubt the Resistance would get populist support under a 'disneyland vacationer, blame thyself, welcome thee to the homeless shelter' rubric. They think they are opposing a 'bailout'. Which is a load of self-destructive nonsense.

Michael:

My ideal structure would probably be a managed partnership, where a bunch of private investors make the investment decisions with their own money and the government just does a side-by-side at some predetermined ratio. Unfortunately that will probably never happen, because then private individuals might, you know, actually make some money in a 'government' program. And we can't have that.

Given political realities, I don't think you will see anything better than minor tweaks on what was originally proposed. But I could be wrong. I heard on the radio some proposal for the government to sell 'insurance' against the paper instead of buying it. I just can't imagine that being smart: basically, the feds would be selling puts against the paper without holding any of the upside. Yechh. Count me out. That one will screw the taxpayers, though they'll try to make it look smaller in dollar terms.

Zippy is right. The federal government will largely buy things that are devalued because of the inability of the owner to move them at this moment in the current climate. If you buy devalued real estate at 10 cents on the dollar and have the financial resources to be patient and wait for the value of that property to return to a more reasonable level and sell it even at 40 or 50 cents on the dollar of its original price you make money. Individuals that have extended themselves beyond their paying capacity cannot do this. The idea is that it will not bankrupt the government to sit on property that is only temporarily bad the same way it will hurt the overall economy to have massive loan default in the private sector and valueless property even for those who did not make the mistake of taking loans that they were incapable of paying.
But the federal government is being asked to pay well above current market prices for these assets, indeed it must do so for the bailout to have the desired effect of saving the institutions that own them. These houses aren't going to return to their overstated 2006 value unless there's another bubble. They're still dropping in value as we speak (I'm so glad our deal to buy a house in June fell through). To the extent that the government has bought performing mortgages, I suppose they, and by extension "we" will profit, but the millions of foreclosures on houses bought around the market peak are just a loss, no matter how long the new owners wait for the right buyer. A 4 BR rambler in Lake Ridge with an un-permitted subdivision for the previous owner's cousins from Guatemala ain't the Mona Lisa.

Zippy, I think you misunderstand me. I'm agnostic on the substance of the "bailout", or whatever one elects to call the thing. I incline to the opinion that this is one of those systemic contradictions that occasionally necessitates some correction, even of the direct, interventionist sort, precisely because capitalism simply is not what its arch-theorists claim that it is, namely, self-regulating, transparent, and largely benevolent. What I am not agnostic on is the economic and moral undesirability of the policies and practices, from the Fed on down through the Treasury and Congress to Wall Street and the American people themselves. And my concern is that the "bailout" might leave intact much of the self-destructive fantasizing that has brought us to this pathetic pass - just a hiccup in the system, not a structural flaw, the only people who would dare to question the established order of things are cranks and radicals, scary people all, and so forth. The reality is quite the reverse: we, or at least most of us, along with the political and economic establishments, are the scary radicals mortgaging the future to perpetuate, just a little while longer, our unsustainable ways of living. Our descendants will execrate our profligacy and avarice.

I heard on the radio some proposal for the government to sell 'insurance' against the paper instead of buying it. I just can't imagine that being smart: basically, the feds would be selling puts against the paper without holding any of the upside. Yechh. Count me out.

That proposal gives me the tremors, it is so bad.

But the federal government is being asked to pay well above current market prices for these assets, ...
It is a classic value-for-liquidity play, like factoring receivables or any number of other things. If someone proposed to tender an offer to buy up all of them, the price would be $X, which is not the same thing as what it costs to buy one right now. If you go out to buy a share of Yahoo, the price is the market price. If you go out to buy the company Yahoo, you have a different market.

The scuttlebut is that the underlying on these has already been steeply discounted and is better than the current market: that it is a liquidity problem, not a core solvency problem. But only someone with access to hundreds of billions in cash can make the play.

...but the millions of foreclosures on houses bought around the market peak are just a loss...
Unless I'm mistaken the paper is already discounted for that, and discounted in addition for liquidity; and the idea is that Newco will buy them from there at something like 65 cents on the dollar. The financial institutions have no choice -- they need the cash now, not three years from now.

The 'bailout' will not cost taxpayers a dime. Not a penny. Not a nickel. It will earn them a substantial amount of money.

No doubt the Paulson plan, if enacted, would not cost taxpayers the full $700 billion that he is asking for. That it would actually make money I would call a bit of irrational exuberance on the part of the plan's boosters.

That proposal gives me the tremors, it is so bad.
It was the Republican counter proposal. In a sense it is just what you would expect. It is pretty clear that a bunch of money can be made on this, and if you don't want the federal government to make the money the way to do that is to have basically the same deal but where the government just takes the downside, without any of the upside. It is a reverse-taxation proposal -- a large transfer of wealth to the already wealthy.

Par for the course for the GOP, in other words.

I find resistance to the government making money off of - gasp - something other than taxes extraordinarily foolish. As I've suggested before, there is little apolitical reason why an institution as large, old, and venerable as the US Government should be dependent on tax revenues at all.

Could somebody answer the following question: If the government increases the National Debt to allow for the 700 billion thingy (_I_ tend to call it a bailout, but I see that is controversial in this thread, so just call it a thingy), and if the government does not monetize this additional federal debt, will this cause inflation or deflation?

I believe part of the proposal _did_ include a rise in the statutory limit on the national debt, understandably enough. So evidently this does involve additional federal debt. Will this mean decreasing the money supply, as the selling of federal bonds usually does? Will it mean increasing the money supply _only if_ the government monetizes the additional debt? If it means abrupt deflation, will this not mean at least a mini-recession?

I'm just trying to integrate this proposal with what little else I know about monetary policy.

If bailouts make money for the government, then let's bailout out all those who lost, or are losing, their homes and farms to foreclosure.
Well, the problem here is that by selecting out the defaulters you've rolled up all the losses in a package and separated it from the gains. The underlying paper the feds are talking about buying is mostly performing mortgages mixed in with some defaulting mortgages. They are tied together in the way these assets have been securitized. Naturally if you "buy" only the expenses of a business, and none of the revenues or profits, you are going to lose. And that really would be a "bailout" of the institutions holding the paper, since you would take away their losses and leave them their profits.

The 'bailout' will not cost taxpayers a dime. Not a penny. Not a nickel. It will earn them a substantial amount of money.

Who is "them", Kimosabe? If these "ill-liquid" (But definitely not solid) "assets" are of value then let them go on the open market.

The govt takes our money to buy crap nobody wants and then sells it and uses that money for more unconstitutional govt spending.

The tax payers don't earn a damn thing.

Absent equity provisions the proposal is likely to be a big loser for the taxpayer - asymmetrical information and all that. Equity kickers will still recapitalize institutions that need it but keeps folks more honest.

Treasury not the Fed issues debt instruments. If the Fed acquires them then the money stock is increased. If other entities buy them the effect is neutral as to money stock but reduces capital available for other purposes and increases the portion of the federal budget devoted to debt service.

If these "ill-liquid" (But definitely not solid) "assets" are of value then let them go on the open market.
I've already addressed this point a couple of times in the thread. People can try to understand the point, or not; but I'm not going to beat my head against a willful desire to not understand.

Okay, Al, but in this case, do the other entities need to buy them in order for the govt. to have the money to buy the distressed assets? Which are they likely to do: "Sell" them to the Fed (for newly created dollars) or sell them to other entities?

And isn't it usually stated that the effect of selling federal debt instruments on the open market is _not_ neutral as to money stock but rather decreases it? That's certainly the explanation given as to how the FOMC (I think I have that acronym right) slows down an overheated economy.

I'll say this much right here: Aside from everything else, if this is going to be a matter of massive inflation of the money supply, I'm agin' it. That's not real debt, productive or unproductive. That's just pretending you can get something for nothing.

This bail-out is ABSOLUTELY necessarry!

Wall Street cannot fix itself!

IT's not as if there are Bank of Americas out there to buy the Merrill Lynches of Wall Street or as if there are the JP Morgans who will buy its Washington Mutuals!

Or is there?

Wall Street cannot fix itself!
Oh, it can fix itself all right. Good and hard. The folks who have made their money will hunker down, and Main Street will starve. As I said to Maximos I have some sympathies for the "let them eat cake" approach here; but understand that it ain't pretty, and neither is it necessary or inevitable.

This isn't likely to be 700 B all at once - I believe the recently blown up deal called for an initial 250B so it may well be doable as part of the regular treasury operations. The extent to which the Fed uses any of that to increase the money stock will be decided by other policy considerations. Given present conditions and Bernanke, monetization beyond the needs of the economy is unlikely. This may help:

http://research.stlouisfed.org/publications/review/84/12/Monetizing_Dec1984.pdf

"Open market" activity by the Federal Reserve is designed to achieve policy goals and is different from Treasury selling debt. US debt is considered safe (thank you Alexander Hamilton) and will sell easily at the appropriate rate - lots of dollars need a parking place and it is in most everyones interest that the treadmill keeps running. If a Treasury auction actually failed the results would be disastrous.

This should be viewed as a capitalization problem and just buying whatever is thrown at the the Fed is problematic. Just purchasing these instruments would provide firms with an incentive to dump the junk and keep the good stuff. Zippy's scenario assumes symmetrical information and that we do not have. There needs to be some discipline involved hence the necessity of equity participation as well as a hard look at re-regulation.

I've already addressed this point a couple of times in the thread. People can try to understand the point, or not; but I'm not going to beat my head against a willful desire to not understand.

Zippy. You know less about my intent than you do about the putative "value" of all the stuff we taxpayers are going to purchase but thanks for the arrogant condescension nevertheless.

The 'bailout' will not cost taxpayers a dime. Not a penny. Not a nickel. It will earn them a substantial amount of money.

That is flat-out bull. IF the govt "earns" a profit it will have earned that profit with the tax payers money and if you think the govt will use that money in ways other than spending on new programs then I will start beating my head against the wall of the nearest illiquid asset.

IF the govt DID make a profit and sent us rebate checks on the profit, then you'd be talking sense.


Zippy,

Have you followed the discussion at CNBC, NRO, and/or Newsweek?

There are quite a number of experts who hold to the belief that an immediate government bail-out as this isn't quite as necessary as one might imagine.

Not to mention, Ben Stein, a republican, mind you, as well as a previous proponent of a number of Bush's actions in the past, had rather scathing criticism of Paulson and the validity of such plan even in this time of crisis.

Heck, he even opined that the better alternative might be simply to resolve the mortgage crisis by devoting some resources to that end (as opposed to this outrageous plan) in order to repair the housing market and stabilize home prices which, in turn, might just go on to actually help the economy.

He sees no reason for the immediacy of such a plan or even the need for it.

Further, should the events be as dire as Paulson has judged it to be, just what the heck was Paulson doing all this time?

Ben Stein claimed that with all kinds of elaborate data that Paulson gets on a daily basis, he wasn't actually able to detect such a catastropy in advance?

Zippy's scenario assumes symmetrical information and that we do not have. There needs to be some discipline involved hence the necessity of equity participation as well as a hard look at re-regulation.
Well, my scenario is really Bill Gross's scenario, and neither of us is calling for indiscriminate buying, lack of transparency, or a moratorium on re-regulation. It is certainly possible to do the generally right thing in a stupid manner; but you don't see me over here with a foam finger that says "Go Stupid!".

I frankly don't know what I think of equity participation. In one sense it creates a conflict of interest, because if I hold warrants in Goldman then I want Goldman to get a good deal as seller at the same time as I want Newco to get a good deal as buyer. There is an argument for diversifying risk, I suppose, but I don't like highly politically charged transactions where principals are sitting on both sides of the table at the same time.

I forgot to add that I think this bailout will purchase the hard certainty of a future of more of the same that brought us to this point.

Washington Mutual's last press release can be read here.

http://isteve.blogspot.com/

I am sure the Bail Out will fix what is wrong with our financial system. Not.

Let the fall-out of this disaster be experienced by the tax payers. That may be the first step on a road to recovering our Republic.

Yes, I've listened to some to the financial entertainment networks, some of the time. Booya and all that. I've also, though quite rarely, watched 'reality' television.

Ben Stein claimed that with all kinds of elaborate data that Paulson gets on a daily basis, he wasn't actually able to detect such a catastropy in advance?
Ben Stein is a righteous dude and all, but if the markets were as predictable and deterministic as this implies he'd already rule the world. We've known that there were liquidity troubles with the auction rate stuff for some time now, but the needles on the seismograph shouldn't be mistaken for a future-viewing machine.

The politicization horses have already left the barn. If you can think of a way other than equity participation to provide a check on abuse, I would be interested in hearing it.

I don't see any way in which the value of these instruments can be ascertained without compelling honesty from the institutions and the equity warrants do that.

BTW, Brad DeLong had an interesting idea: A 100% marginal tax rate on all income over $1M unless it is in the form of 10 year restricted stock.

IANS: Again, I have at least some sympathy with the 'let the town burn down and start over' approach. However, that is decidedly not the Main Street narrative. The Main Street narrative is that this is a fraudulent bailout of fatcats at the expense of taxpayers, as opposed to a bailout of taxpayers. My objection is not to clear eyed debate, but to all the B Taurus Fecius.

Booya and all that.

I don't actually watch/listen to nor do I endorse the loud-mouth CNBC personality you are referring to here.

That particular individual strikes me more of a slimy, gimmicky snake-oil salesman.


Still, I am rather shocked that you would actually advocate government intervention of this nature -- especially one of such magnitude.

Were you always the Democrat?

If you can think of a way other than equity participation to provide a check on abuse, I would be interested in hearing it.
That's a toughie, I'll grant you. We need them to see the gibbet out their office window every day though, not yet another incentive to play both sides. Personal liability for material misrepresentations is one thing that comes to mind. Still, though, that's more an implementation detail than a go or no-go bullet.
Still, I am rather shocked that you would actually advocate government intervention of this nature -- especially one of such magnitude.
To everything there is a season.
Were you always the Democrat?
Were you always a junior high student?
Were you always a junior high student?

I'm not the one with the *Pollyanna* view on all this.

You look at this as if you're the one making the investment when, in actuality, there are several stakeholders in the matter and have reduced the entire matter to some sort of basic trading transaction.

However, this is not the case.

We are talking on a grand scale here.

For somebody who abhorred the reductionism of Apple Trees & Elections, I find it rather ironic that you have committed the very same error here but with more gravitas.

That is flat-out bull.
No, it isn't, for reasons already repeatedly explained.
IF the govt DID make a profit and sent us rebate checks on the profit, then you'd be talking sense.
I could certainly support that amendment to the proposal.

Aristocles: my retort was to your gratuitous "were you always the Democrat". I took it as a signal not to take what you were saying seriously. If you want me to take what you are saying seriously, it is always possible for you to approach the discussion differently.

It's not clear to me how equity participation would be a check on abuse, but whatever.

The problem with evaluating the merits of something like the Paulson plan is that it involves a lot of issues that are beyond the competency of most people. When that is the case, one thing to do is to look to those who do have a mastery of the subject, and see what they think about it.

From what I've seen, it's hard to find many among the economics community who like the Paulson plan. See here, and here. Support for the plan seems mainly to be coming from 1) current or former Fed and/or other government officials, and 2) people on Wall Street.

Although I don't necessarily agree with all the details in the given example below (I believe there is yet other more intimate aspects of the situation as well as other variables that should have been addressed), it is relatively a far better example as opposed to the much more oversimplified, overly optimistic sketch that Zippy has given.


From the Newsweek article I read last evening:

Under Paulson's proposal, the Treasury could buy distressed mortgage-backed securities. Consider a batch of hypothetical securities originally worth $100 million and paying an interest rate of 6 percent. They're no longer worth $100 million because half of the homeowners have stopped making their monthly payments. Suppose, then, that the government buys the mortgages for $50 million. It earns 6 percent on its $50 million, and if it borrowed money at 4 percent to buy the securities, it would make a tidy profit. If the government holds the securities until maturity and all the remaining homeowners repay their mortgages, the government would come out ahead.

Would something like this happen? It could, and Pimco's Bill Gross argued in the Washington Post that it might, but there are several reasons it might not.

First, we don't know what price the government would pay for the mortgage-backed securities. There are conflicting goals. On the one hand, the government wants to minimize the bailout's costs to taxpayers; that would favor paying the lowest possible price. In my example, the profit would be greater if the government paid only $40 million. On the other hand, the whole idea of the bailout is to help banks and other financial institutions get rid of risky assets and replace them with cash that would encourage a resumption of normal lending and investing. That favors a higher price. If the government paid $80 million instead of $40 million, say, it would lose money.

Second, we don't know how a weakening economy will affect future mortgage repayments. The worse the economy gets, the more homeowners will default. At the end of June, about 2.75 percent of home mortgages were in foreclosure, and an additional 6.4 percent were at least 30 days behind in their payments. The unemployment rate was 6.1 percent in August. If it rose to 7 percent or higher, defaults and delinquencies would climb. In my example, if only 25 percent of borrowers repaid their mortgages, the government would lose money.

No wonder members of Congress -- and the public -- are confused. My simple example captures the main unknowns, but in practice there are many more. What bonds and securities would Treasury buy? Would the government hold them to maturity or later try to resell them to private investors? To all questions, Paulson has said in effect: Trust us.

(note: my emphasis)

Returning to the original topic, the following iten and the links enclosed therein may be helpful re: Fed policy, deflation, asset bubbles, etc.:

http://delong.typepad.com/sdj/2008/09/delong-smackdow.html

I think I'm following this, Al. The people who decide who buys the increased government debt are different from the people who decide how much to increase government debt. Or, at a minimum, these things are decided on the basis of separate sets of considerations. So if we increase the National Debt, it could go either way as to what effect this has on monetary policy and the money supply. We just don't know the answer to that question going in, and the congressmen arguing all this out right now don't know, either, and probably can't know. Have I got that much right?

"The 'bailout' will not cost taxpayers a dime. Not a penny. Not a nickel. It will earn them a substantial amount of money."

Don't blame us stupid Main Street Populists if we're just a tad bit skeptical. And give us a break for still clinging onto quaint notions against the concentration of money and power in too few hands. My own wariness also stems from personal experience. I work for one of the rating agencies at the center of the storm, though not, thank God, in the structured finance area.

The bailout is coming and it has been engineered by such moral giants as Barney Frank and Chris Dodd, who played a major role in the front-end of this scandal with the race-based sub-prime lending schemes and their manipulations of Fannie Mae and Freddie Mac. Right by their side are the inspirational figures from such institutions as Goldman. The moment I heard Morgan Stanley was bumping into Goldman during their desperate bid to find a savior, I knew Paulson and the boys would ride to the rescue.

Again, this disaster is born of spiritual disorder and any genuine "correction" will have to start there. Since none seems forthcoming, the pain will only continue.

Zippy, like some others, I'm a bit surprised at your positive approach to this massive level of government involvement and buying-up of assets. I know that you know far more than I ever will about money, but I don't really see the positive relevance of the consideration that the government _could_, in principle, get to the point where it could pay for itself and would not have to tax. Here are a few givens, which you know as well as I do:

It's _given_ that the government isn't going to stop taxing the taxpayers and therefore that the power of owning all this property, whether what they own in return for the increased debt is productive or not, is going to be *in addition to* the power to tax, not *instead of*. (Let's remember that the phrase "a country in which the government owns the means of production" commonly refers not to small-and-rational-government paradise but to a communist state!)

It's _given_ that any profit the government does happen to make on this deal is not going to be made by "the taxpayers" but by the government, that these aren't the same things, and that it will be spent on the sorts of things government typically spends money on, which ought not to brighten the eyes and lighten the heart of any conservative.

It's _given_ that government entities are not typically very good at managing what ought to be profit-making enterprises. There are many and varied reasons for this. That's why economies work better when the government does _not_ own all the means of production. Hence, just pointing out that this deal could, if put through by a private entity with tons of cash, be profitable, hardly shows that it will be ultimately profitable if carried out by the federal government. How many of us would really want the federal government for our landlord? Think "housing projects."

And that's just for starters. I'm still trying to figure out how likely it is that this 700 billion will not really be dollars at all that the government just happens to have or happens to borrow from real people with already-existing money or whether this 700 billion or some significant portion thereof is going to be "created" ex nihilo. And if it is just borrowed from the present money supply, what will the effects of _that_ be? Haven't figured that one out yet, but when we're working on this scale (or even that 250 billion to start with) there can hardly be _no_ skewing effects on the economy of this much government economic activity.

I think the example aristocles hits the nail on the head. This isn't a simple transaction. If it was a clear-cut as Zippy makes it out to be, a lot of people would be diving in to take a share of the assets. As pointed out, no one knows where the real estate market is going to bottom out and buying up the securities isn't going to stop that slide.

One aspect left out is the political one. Once the government owns most of these toxic securities, the government will in effect own the mortgages. There is going to be a lot of political pressure to forgive a lot of bad mortgages. If that happens, more people will walk away from their mortgages.

The 'bailout' will not cost taxpayers a dime. Not a penny. Not a nickel. It will earn them a substantial amount of money.

Because Friday is a Universal Mandatory Day of Penance, I will try once more (and then bang my head against an illiquid asset).

How is it that we taxpayers "earn..a substantial some of money.?

Lydia, in answer to you questions.

- We owe it to whoever owns Treasury bonds. I have $50 sitting on my desk at home.

- See above.

- No, the terms of when the debt is due is based on the length of the bond.

- Don't worry about it.

- No because before that happens the government will simply print money to the point that it takes a wheelbarrow full of it to buy a loaf of bread. But since the bonds are fixed amounts, it would erase the debt. Of course no one in their right mind would loan us a dime at that point.

Sort of. Treasury is charged with raising needed funds. The Federal Reserve is an independent entity - a central bank - and engages in various activities designed to keep things on an even keel.

We have a pretty good idea of what is going to happen as far as raising the money is concerned. The Fed Chair is not going blow up his reputation as well as the economy by creating hyper-inflation. The Treasury auctions are open and will have no problem getting buyers. There will be nothing special about raising the funds - just more bills and notes and its all fungible. As I understand it, the budget will only have an estimated eventual net number used as a line item.

I'm not worried about that end of things; I am more concerned with the internals of the deal lest we taxpayers get screwed. Paulson's original proposal was properly DOA, Dodd's bill was a good start and the proposal of the House Reps is simply loony toons.

This is something else we need to address at some point:

"But the seizure and the deal with JPMorgan came as a shock to Washington Mutual’s board, which was kept completely in the dark: the company’s new chief executive, Alan H. Fishman, was in midair, flying from New York to Seattle at the time the deal was finally brokered, according to people briefed on the situation. Mr. Fishman, who has been on the job for less than three weeks, is eligible for $11.6 million in cash severance and will get to keep his $7.5 million signing bonus, according to an analysis by James F. Reda and Associates."

The Masters' of the Universe mentality has to end. There are currently folks on Wall Street who got seven and eight figure bonus' for getting us into all this. They are laughing at us. Past a certain point, income stops being about having a comfortable life and becomes so much score keeping - much like 10 year olds playing a video game. This mentality should be taxed out of existance.

Kevin,

The bailout is coming and it has been engineered by such moral giants as Barney Frank and Chris Dodd, who played a major role in the front-end of this scandal with the race-based sub-prime lending schemes and their manipulations of Fannie Mae and Freddie Mac.

I watched CNBC this morning in absolute shock, disbelief & utter disgust when the Reid et Dodd team bold-facedly put the blame solely on the Republican party!

Never mind the fact that it was the Democrats who consistently opposed regulation on Fannie & Freddie (I wonder why?).


Find Me a Demon By Mona Charen

EXCERPT:
In 2006, McCain had called for more stringent oversight of Fannie Mae and Freddie Mac, whose failures underlie today’s unraveling.

In a press release at the time McCain declared, “If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.”

...

McCain would have been better advised to aim his fire at Democrats in Congress who declined to regulate Fannie and Freddie adequately because they favored making questionable loans to so-called “underserved” populations. A bill to more strictly regulate the mortgage giants passed the Senate Banking Committee in 2005. But as Kevin Hassett of the American Enterprise Institute explains, “Democrats opposed it on a party-line vote.”

Wall Street, whether McCain likes it or not, is identified in the public mind with Republicans (though, as the Center for Responsive Politics reports, the finance, insurance, and real estate industries gave more contributions to Hillary Clinton and Barack Obama earlier this year than to McCain). Still the perception endures that Republicans are the party of the rich. Railing against “greed and corruption” won’t get McCain very far. But pointing up the Democrats’ role — their cozy public/private partnerships, the multimillions made by Democrat bigwigs like Franklin Raines, Jim Johnson, and Jamie Gorelick — would certainly confound the image the Obama campaign is attempting to paint.

As for Obama, he has used the financial crisis as the pinup for Republican approaches to the economy generally, proof he says that “too many folks in Washington and on Wall Street weren’t minding the store” and plucked a couple of McCain quotes out of context for good measure. Obama heaped scorn on McCain’s comment that the “fundamentals of the economy are strong,” omitting the next words, which were “but these are very, very difficult times.” Obama (remember him? the fellow who was going to run a different kind of campaign?) also trotted out McCain’s old quote “I’m always for less regulation” without clarifying that McCain had specifically called for more regulation of Fannie and Freddie, the two quasi-governmental entities that are at the heart of the current meltdown.

Obama seems to have dropped any pretense to running an honest campaign. Virtually all of his charges against McCain now dabble in deception. Noting that McCain wants to increase competition in the health care insurance market, Obama says, “So let me get this straight — he wants to run health care like they’ve been running Wall Street.”

Now let me get this straight: the sub-prime mortgage disaster, created in Washington by politicians who wanted to increase home ownership and, yes, perpetuated by unwise gambling in the financial markets undermines the validity of competition? It really makes you wonder, when Obama invites voters to fire the “whole trickle-down, on-your-own, look-the-other-way crowd in Washington who (have) led us down this disastrous path” whether he really means capitalism itself.

SOURCE: http://article.nationalreview.com/?q=YWEzMDVmMGI5MDVkMGNhY2Q2MDRkYjVhNTBlMWEzZDI=

The Fed Chair is not going blow up his reputation as well as the economy by creating hyper-inflation.


You folks do know that Ben Bernake's academic expertise is on The Great Depression, no?

Essays on the Great Depression Ben S. Bernanke

Book Description | Reviews | Table of Contents

COPYRIGHT NOTICE: Published by Princeton University Press and copyrighted, © 2000, by Princeton University Press. All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher, except for reading and browsing via the World Wide Web. Users are not permitted to mount this file on any network servers. Follow links for Class Use and other Permissions. For more information, send e-mail to permissions@press.princeton.edu

Excerpt:
Chapter 1


THE MACROECONOMICS OF THE GREAT DEPRESSION

A Comparative Approach

To understand the Great Depression is the Holy Grail of macroeconomics. Not only did the Depression give birth to macroeconomics as a distinct field of study, but also—to an extent that is not always fully appreciated—the experience of the 1930s continues to influence macroeconomists' beliefs, policy recommendations, and research agendas. And, practicalities aside, finding an explanation for the worldwide economic collapse of the 1930s remains a fascinating intellectual challenge.

http://press.princeton.edu/chapters/s6817.html

As pointed out, no one knows where the real estate market is going to bottom out and buying up the securities isn't going to stop that slide.

Chris. Nobody knows what the value of these things are. They ought be allowed to rise or fall in value according to the market.

Nobody even knows the real value of Bonds being traded.

The more one hears of "transparency" the more one can be assured they are standing before a Three-Card-Monte Table. I do not trust Paulson as far as I can throw Rep. Jerrold Nadler

Blackadder may be right about a division on this between economists, on the one hand, and people with deep finance experience on the other. I leave it to the gallery to figure out which of those two professions never has to even actually be right, let alone produce anything of value, and which is ruthlessly measured on actual metal-meets-the-meat performance.

Aristocles:
Yes, it is complicated, and yes, there are risks. That is why I compared it to investing in a global macro hedge fund. Profits are not guaranteed, the fund may (and probably will for a period of time) lose value to levels below the initial investment, etc.

Kevin:
I think Barney Frank ought to swing from a gibbet, with this as one of the least of his crimes. But that is neither here nor there on whether the populist mythology fomented by the media around this "Wall Street bailout" is or is not utter nonsense. It wouldn't be the first time a crooked sodomite cop helped stop a disaster in part attributable to his own crimes and then attempted to declare himself a hero, and it won't be the last.

Lydia:
On given 1: yes, note my careful qualification, "apolitical".

On given 2: I agree. Lets say the three options are to (1) actually give any profits to taxpayers; (2) let the government keep them, which at least mitigates its voracious demand for tax revenue a bit; or (3) pass them through to the very institutions which are now holding this illiquid paper. The present plan is for (2); the insane Republican "sell puts as insurance" plan is (3); and I Am Not Spartacus' proposal is (1). I agree with IMNS that (1) is ideal; on the other hand, it won't happen. Given the other two, (2) is far, far better than (3), and for your average Joe any of them will be better than doing nothing. In (2) the taxpayers do not lose money: the government is not required to raise taxes to pay for the plan. In (3) the government will have to raise taxes to pay for it, and all the wealth will transfer to the very people who were complicit in creating the problem in the first place.

On given 3: Absolutely. Uncle Sam is not Mr. Right, but he's Mr. Right Now, and unlike everyone else in the known universe he actually does have access to the hundreds of billions of dollars to make it happen.

If it was a clear-cut as Zippy makes it out to be, ...
OK, my initial rant must have left the impression that I think it is 'clear cut', since obviously a number of people are under the false impression that I think this is a trivial matter of co-signing for $700 billion and walking away with a trillion five in a few years. Let me make it very clear that it is not 'clear cut'. It is like taking on a massive hedge fund investment: the kind that everyman would love to get his hands on, but that only the wealthy have access to. There are risks. Under very reasonable assumptions, it makes a lot of money. It might not make any, it might lose a lot, and it depends on how it is managed. Even if it loses money viewed in isolation, it nevertheless preserves the functioning of the economy and keeps tax revenue from plummeting, so it has a double-whammy positive effect.

There are a lot of messy potential downsides to it, of course.

But it is not a "bailout" of rich fatcats by American taxpayers. It is a bailout of American taxpayers by American taxpayers.

Chris L.,

"I think the example aristocles hits the nail on the head. This isn't a simple transaction. If it was a clear-cut as Zippy makes it out to be, a lot of people would be diving in to take a share of the assets. As pointed out, no one knows where the real estate market is going to bottom out and buying up the securities isn't going to stop that slide.

One aspect left out is the political one. Once the government owns most of these toxic securities, the government will in effect own the mortgages. There is going to be a lot of political pressure to forgive a lot of bad mortgages. If that happens, more people will walk away from their mortgages." -- Posted by Chris L. | September 26, 2008 3:59 PM

That's actually why I brought up that example (even in spite of it being yet deficient in my own view since there are other factors, which the author himself acknowledged, which were not addressed which could have other damaging consequences) in order to demonstrate just how badly reductionist Zippy's own example was.


Chris. Nobody knows what the value of these things are.

Dillon at CNBC actually had the same opinion and brought up what seemed a rather interesting proposal on the necessity for the determination of this value in order inter alia to facilitate resolution in such crisis as well and better manage the real estate market itself.

Unfortunately, I had to leave for work and so I couldn't stay for it.

Amidst my hustle & bustle this morning, from what hazy details I'm able to recall, he estimated the national value originally at $46 trillion dollars (I think). He claims it is perhaps now at around $45 trillion. Although, I think he was merely providing an example.

I am certainly open to correction to these details.

...in order to demonstrate just how badly reductionist Zippy's own example was.
I used some examples to show generally that debt is not bad and that the attitude many have toward it is counterproductive. I did not reduce the current crisis to those examples.

Okay, I just discovered that it appears Radigan had talked about this once before on Sept 16th (apparently, when I was at work!):

"Traders across the world are demanding a market solution to this problem. We collectively, 300 million Americans (Banks and Individuals) have about 46 trillion dollars worth of houses that we own as a group. It is possible that those houses are only worth 45 or 44 trillion dollars. We don't know because there is not a public market for the bonds that back our homes. The traders are demanding the rollout of a market for these assets.

How do you do that?
The Federal Reserve could use public money and demand public disclosure in an electronic market that lets everybody from the capitalists in our own country to those around the world, Dubai, China, and all the rest - to bid on these assets. The consequence of doing that would be meaningful markdowns for certain banks in America. In order to avoid the cascading effect of that, with the fear that would precipitate in the banks, the traders suggest that you should clear these trades through the federal reserve so that in the event that a bank must fail as a result of the new marketplace marks on these bonds the federal reserve can supervise an orderly disposition of those assets and allow the healthy banks with capital to resume lending.

Until we acknowledge that we are long 46 trillion in houses (and they may not be worth that) and can define the market for the assets so that we know how much we owe and allow the capitalist system to bid on it - the traders will not be satisfied nor will anyone who believes fundamentally in free markets. That's the umbrella here. The housing stock in America may be worth too much."

...let the government keep them, which at least mitigates its voracious demand for tax revenue a bit

Zippy. You can not be serious (said in my best John McEnroe voice). The Govt's appetite for tax revenue is insatiable. Literally.

Ron White has a funny routine where he describes being on an airplane that is clearly having mechanical difficulties and is in danger of crashing. While the others are worrying, praying etc, he says, "Take her down.."

When it comes to this crisis-du-jour I say, "Take her down."

Those advocating this plan can not tell us it will be successful in putting right what is wrong with the economy. Sure, we are being told this is the-mother-of-all-crises but nobody I know believes that is so.

I want Bush to put his family fortune on the line to back this plan. I want Paulson to put his family fortune on the line...I want Bernanke to put his family fortune on the line...

AND, I want Bernanke to promise that if his personal economic markers, (he can pick them his own self) are not met in one year then he will agree to appear before a joint session of Congress and advocate dissolving The Federal Reserve and the Congress can, FINALLY, begin discharging its Constitutional duties in this area.

I am sick to death of the Establishment walking over to the crap table and put MY money on black when EVERYBODY in their right mind KNOWS the economy will land on Red.

Let them put-up their own money or shut-up about "crisis."

Under Clinton we had Robert Rubin as Treasury Sec, a former multi-millionaire big-wig from the funny money farm known as Goldman Sachs and now, under Bush, we have Paulson, another multi-millionaire big-wig from the funny money farm known as Goldman Sachs.

The track record of G.S. has been B.S.

Take her down...

Sure, we are being told this is the-mother-of-all-crises but nobody I know believes that is so.
[... shaking head ...]

Zippy,

(2) let the government keep them, which at least mitigates its voracious demand for tax revenue a bit;

IF it all works out as you speculate, what makes you think it will actually mitigate and not exponentially increase the Government's voracious demand?

You do know about the Costco effect, don't you?

Do you really believe that if you were to give a bloody Fatso a super-abundant supply of Hostess cupcakes, he won't increase his consumption of it, craving for even more?

I myself had a question about what you said, Zippy, about mitigating the need for tax revenue. Every year I look at this pie chart in my 1040 booklet showing govt. expenditures. And this big wedge of it is "interest on the federal debt." Now, if any ordinary person goes into debt to buy assets, whatever profits he makes on those assets must, inter alia, pay the interest on the debt he took to purchase the assets. This would mean, if applied here, that if the federal govt. succeeds in making a profit by buying these distressed assets, part of it would "go" (however the accounting of that would work) to paying the interest on the new treasury bonds that had been sold to borrow the money to purchase the distressed assets. Right? But is there any way, any way at all, to make the federal government do anything like that? Isn't it more likely that if they should succeed in making a profit they will just spend it all and have the taxpayer pay the interest?

Aristocles:

Viewing an outcome as less bad than another outcome is not - as I am really quite certain you know - the same as viewing it as ideal.

Give the two options - the only two options - of a cash windfall for the government which does not come out of taxpayer pockets, or a cash windfall for the financial institutions holding the illiquid paper which does come out of taxpayer's pockets, which do you prefer?

IMNS:
You may be interested to know that as we get into late next week without a deal, it is not out of the question that some major US corporations might not be able to make payroll; not because they don't have the cash, mind you, but because the banks holding their deposits do not have the cash.

People who think there is nothing to see here are frikking crazy.

Lydia,

Isn't it more likely that if they should succeed in making a profit they will just spend it all

Not only that, as I tried to make the additional point earlier, after spending all that, it'll make their appetites swell even more than it was initially!

What so upsetting about Zippy here is the fact that, contrary to initial belief, he's not for big government -- no, he's for a GODZILLA-Sized Government whose appetite can only then be alleviated by even greater super-sized buffets!

But is there any way, any way at all, to make the federal government do anything like that?
Is there any way to make the federal government do anything? If there is, then that would apply here. If there isn't, then what difference does it make?

Keep in mind that the federal government has two independent symbiotic sources of revenue from the deal. One is any actual profit (revenues beyond principal and interest expense) it makes directly from holding these illiquid assets to maturity, or selling them later in a better market. Two is the preservation of its own ordinary tax revenue stream, which will take a serious hit without doing this, like a guy who refuses to have his car fixed so he can get back to work.

What so upsetting about Zippy here is the fact that, contrary to initial belief, he's not for big government -- no, he's for a GODZILLA-Sized Government whose appetite can only then be alleviated by even greater super-sized buffets!
You know what, Aristocles: that's just a bald faced nail-spitting lie. Liar.

"Right? But is there any way, any way at all, to make the federal government do anything like that? Isn't it more likely that if they should succeed in making a profit they will just spend it all and have the taxpayer pay the interest?"

This is the text of the agreement that blew up yesterday. If it is written in the enabling legislation that any profits go towards the national debt then that is what will happen. Remember, the foolish tax cuts from earlier in this century will expire soon so, assuming a proper recovery from the present recession, deficits may be going down and this may all work out.

"Text of Lawmakers’ Agreement on Principles

Congressional Republicans and Democrats came to an agreement on principles for the Treasury’s Troubled Asset Relief Program that they will take into final negotiations with the White House. It includes sections on taxpayer protections, oversight and transparency, homeownership preservation and funding authority. –Phil Izzo

The full text follows:
Agreement on Principles

1. Taxpayer Protection

a. Requires Treasury Secretary to set standards to prevent excessive or inappropriate executive compensation for participating companies

b. To minimize risk to the American taxpayer, requires that any transaction include equity sharing

c. Requires most profits to be used to reduce the national debt

2. Oversight and Transparency

a. Treasury Secretary is prohibited from acting in an arbitrary or capricious manner or in any way that is inconsistent with existing law

b. Establishes strong oversight board with cease and desist authority

c. Requires program transparency and public accountability through regular, detailed reports to Congress disclosing exercise of the Treasury Secretary’s authority

d. Establishes an independent Inspector General to monitor the use of the Treasury Secretary’s authority

e. Requires GAO audits to ensure proper use of funds, appropriate internal controls, and to prevent waste, fraud, and abuse

3. Homeownership Preservation

a. Maximize and coordinate efforts to modify mortgages for homeowners at risk of foreclosure

b. Requires loan modifications for mortgages owned or controlled by the Federal Government

c. Directs a percentage of future profits to the Affordable Housing Fund and the Capital Magnet Fund to meet America’s housing needs

4. Funding Authority

a. Treasury Secretary’s request for $700 billion is authorized, with $250 billion available immediately and an additional $100 billion released upon his or her certification that funds are needed

b. final $350 billion is subject to a Congressional joint resolution of disapproval"

Permalink | Trackback URL: http://blogs.wsj.com/economics/2008/09/25/text-of-lawmakers-agreement-on-principles/trackback/

Zippy:

Apologies, Zippy, for the tenor of the comment; but do you actually deny the fact that if you give Fatso a super-abundant supply of Hostess cupcakes, his consumption as well as his craving won't increase to such greater extent?

Take, for example, those who earn a substantial amount of money -- thousands of dollars more than they had earned initially.

Isn't it interesting that while the amount is substantially larger than before, such persons tend to end up in debt due to their spending more & more?

I don't deny the effect, Ari. It just isn't important or urgent enough to factor into this decision. At all.

It just isn't important or urgent enough to factor into this decision.

I didn't say it was. at all.

I think you already know my attitude to all this.

However, don't confuse my own reasons for that of the populist herd in the media.

Mine are entirely different.

It's not about Wall Street, in my case.

It's about (among other things): GOVERNMENT.

Let Wall Street reach equilibrium on its own (as it should in our system of government).

Fatso doesn't need more cupcakes -- he needs DIET!

If there isn't, then what difference does it make? Well, the difference it makes is that I would be disinclined to refer to any sort of probabiilty that the government's voracious demand for tax revenue is going to be mitigated.

Aristocles, do I understand you to be taking the "take her down" approach, and let the chips fall where they may, including, if it happens, the dire results we've been hearing about, such as major corps. not being able to make payroll?

You may be interested to know that as we get into late next week without a deal, it is not out of the question that some major US corporations might not be able to make payroll.

An unnamed economist says that some unnamed third parties told him that some unnamed fortune 100 companies would not be able to make payroll on Tuesday unless there is a bailout before then. I don't know that this is the most reliable source of information, but it does provide us with a testable prediction. If Tuesday comes and no bailout has been agreed to, we will see whether the warnings given here were accurate, or whether they were the result of panic and/or scaremongering.

I agree thoroughly with Zippy that the credit freeze is a situation that can quickly and easily become a legitimate threat to the economy as a whole. The best we can hope for at this point is that we can avoid a hard landing.

I am of course extremely sympathetic to Maximos's position on this, since capitalism without risk of downside is an absurdity that needs to be shot down. But the investment banks, and the attending masters of the universe mentality, that helped multiply this problem are extinct. That business model is now defunct.

I also feel sympathy for Kevin, since the credit rating agencies are going to be sued into oblivion because of their involvement in providing cover for these lenders.

There is one point that I want to extensively disagree with, which is that the mortgage mess was caused by Democrats forcing banks to make bad loans. The Community Reinvestment Act has proven itself to promote better outcomes.

CRA Banks were substantially less likely than other lenders to make the kinds of risky home loans that helped fuel the foreclosure crisis. Specifically:
(1) CRA Banks were 66% less likely than other lenders to make a subprime loan.
(2) The average APR on subprime loans originated by CRA Banks was 68 basis points less than the average APR on subprime loans originated by other lenders. For lower income borrowers, the difference averaged 74 basis points.
(3) CRA Banks were more than twice as likely as other lenders to retain originated loans in their portfolio.
(4) Foreclosure rates were lower in areas with greater concentrations of bank branches.
(5) CRA Banks were 58% less likely than other lenders to originate subprime loans to lower income borrowers.

*There is a very high statistical correlation (0.816) between the proportion of lending that is subprime and the foreclosure rate.

Without the CRA, the subprime crisis and related spike in foreclosures might have negatively impacted even more borrowers and neighborhoods. Compared to other lenders in their assessment areas, CRA Banks were less likely to make a subprime loan, charged less for the subprime loans that were made, and were substantially more likely to eschew the secondary market and hold subprime and other loans in portfolio. Moreover, branch availability is a key element of CRA compliance, and foreclosure rates were lower in metropolitan areas with proportionately greater numbers of bank branches.

Aristocles,
Your Ron White approach is just irresponsible. Millions of basically innocent people all over the world would be harmed.

Al,

The Masters' of the Universe mentality has to end. There are currently folks on Wall Street who got seven and eight figure bonus' for getting us into all this. They are laughing at us. Past a certain point, income stops being about having a comfortable life and becomes so much score keeping - much like 10 year olds playing a video game. This mentality should be taxed out of existance.

Maybe in a perfect world. In this one, levying 100% of income over 1 million per annum would just mean that the MoTU would pick up and leave for London and Singapore, taking their corporations and the wealth they generate with them.

Well, the difference it makes is that I would be disinclined to refer to any sort of probabiilty that the government's voracious demand for tax revenue is going to be mitigated.
If the government has literally infinite inelastic demand for tax revenue then there really isn't much to talk about at all. Personally I think there may be some value in discussing revenues and expenditures as distinct things, where taxpayers can benefit both through lowered expenditures and through alternative sources of revenue. But then maybe I'm just an idealist.
Aristocles, Your Ron White approach is just irresponsible. Millions of basically innocent people all over the world would be harmed.

You seemed to have confused my views with that of I AM NOT SPARTACUS.

There is a rather subtle difference between his & mine, which I suspect you either have neglected or failed to grasp.

In any case, I leave the exercise entirely to you as to what kind of plan I actually endorse in this crisis and their underlying assumptions; the latter being just as probable as yours or Zippy's.

(Hint: It does not endanger the any Innocent.)

I also feel sympathy for Kevin, since the credit rating agencies are going to be sued into oblivion because of their involvement in providing cover for these lenders.

I was going to say something to that effect (Kevin's a good guy). Although, now I know why he doesn't like the Wall Street Journal much. I had quite some articles that have basically deemed these agencies as co-conspirators.

There is one point that I want to extensively disagree with, which is that the mortgage mess was caused by Democrats forcing banks to make bad loans.

Thank God somebody else agrees (I thought I was the only one here)!

The Democrats' grand dreams for the populace that, on the other hand, only caused their demise!

I tell you: The Myth of The Modern Welfare State are just that -- a Myth!

It more often has done harm to the citizenry than anything else with the Middle & Lower Classes taking the brunt!

I leave the exercise entirely to you as to what kind of plan I actually endorse in this crisis and their underlying assumptions ... (Hint: It does not endanger the any Innocent.)
What is your workable plan which does not involve harm to anyone innocent? Spell it out.

Cyrus:

What you seem to be saying is that we need these folks. I say good riddance, what real value have they produced. If we have to live in a world where profits are privatized and losses are socialized, then perhaps Kevin is right.

On a more serious note the.rates and levels are negotiable - I picked 100% and $1M and 10 year restricted stock - could be other numbers. The main point is that the present structure rewards those who are willing and able to game the system. Productivity is up about 22% over the past eight years while real wage growth is just south of 2%.

The folks who you fear would leave constitute a fraction of one percent of the population and, for the most part cause more harm than good.

Al,
Cyrus is right. We DO need them. They are the ones with the real wealth -- and by "real wealth" I don't mean money. They are the ones with the brains and the know-how to generate prosperity. It's easy to get poor. Most people in the history of the world have managed that. But these folks know how to transcend poverty, and when they do, they take lots of others with them. They do not succeed alone, or solely to their own benefit. If, by means of confiscatory tax policy, you give them a huge incentive to leave, they will leave, and take their greatest resource with them -- their brains.

If you send them away, you impoverish the the rest of us.

"Cyrus is right. We DO need them. They are the ones with the real wealth -- and by "real wealth" I don't mean money. They are the ones with the brains and the know-how to generate prosperity."

Michael, this thread has been about getting us out of the mess these folks have gotten us into. Executive compensation in the United States far exceeds the rest of the world. If someone creates a real business, restricted stock would work just fine (Warren Buffett and Bill Gates come to mind). How about you justify someone getting eight to ten figure compensation for creating this present debacle.

Basing compensation on quarterly numbers and the stock price is a racket. A very smart con man is still a con man.

Al,
They are millionaires and billionaires because of their talent. Drive them away and you drive away one of the nation's greatest assets.

You think that these folks go us into this mess. We disagree.

You think that the government ought to set the levels of compensation. We disagree.

You think that heavy taxation on the wealthy will help solve the problem. We disagree.

You think that the con men responsible for this mess are in business. We disagree.

I think the con men most responsible for this debacle are in Congress. Businessmen responded to the perverse rules and incentives set before them by government (namely, by the Democrats). In order to get votes to stay in office -- in order to maintain their positions of power -- the Democrats crassly and cravenly insisted upon, among other things, giving absurdly cheap home loans by the hundreds of thousands to minority applicants who can't actually pay for them, which is far more wicked than compensation based on quarterly numbers. Kick the politicians out, which means voting for McCain, who said years ago that that Democrat endorsed practice was the door to disaster.

Or, since you incline toward taxes, tax the politicians who voted for such nonsense so highly that you drive them out of the country the way you want to exile the wealthy with taxes.

People who think there is nothing to see here are frikking crazy.

Well, it is easy for me to cop to insanity. But, I didn't write there was nothing here to see. I just do not agree this is a super-sized crisis that will destroy the economy if we do not get this B.O.

Ron Paul claims if we take her down the result will be a recession of a year. I trust Ron Paul more than I do Paulson, Bernanke (and Paul mano a mano with Bernanke was fun to watch)and the rest of The Establishment.

As I understand it the FDIC can take her down just as poorly as this proposed B.O., and at a far smaller cost and the vast majority of men and women will have their savings protected.

Major Corporations can meet their payrolls. I think the claim they can't is silly. When I hear such claims I remember the Washington Monument ploy and how access to that tour is among the first things denied (as a way to manipulate the public into thinking things are far worse than they actually are) whenever there is a Budget Battle going on in Washington.

If it proves to be true that Major Corps can not make their payrolls it is not my fault or the fault of other tax payers. Let the stockholders and employees etc sue the suits and send them to the slammer rather than sending in the collectivist clowns.

The threat "major corps can't meet payrolls" is an attempt to psychologically transfer responsibility away from where it belongs (with the suits) to the tax payer. Blaming others is classic liberalism.

There are plenty of suggestions percolating at Lew Rockwell's site and the criticisms there seem right on the money. I am not a libertarian but the arguments/criticisms/solutions there supply the facts which fit my Common Sense objections to the B.O.

http://www.lewrockwell.com/

BTW, there are millions of insane know-nothings like me out here and that is why calls to our representatives are so stridently opposed to The B.O. and FAR outnumber calls to our reps supporting The B.O.

Zippy. I am not smart enough to understand this. Are those who comment on this aspect of The B.O. right about money going to such groups as Acorn?


http://publicmarkup.org/bill/dodds-legislative-proposal-treasury-department-aut/1/5/

I should say, in fairness, that to the extent that this has come about because of political pressure to give the uncredit-worthy home loans, our Republican presidential administration was in that up to the hilt, particularly w.r.t. illegal aliens. And let's remember that this was partly a deliberate, cynical ploy to favor amnesty: "You can't deport them if they own homes here." And let's remember who Mr. Amnesty has been in the Senate--none other than John McCain. So far, Tom Tancredo is the only man on Capitol Hill that I have heard of who has the guts to speak out about this, and that just in the last few days. (As far as I know, even Mr. R. P.--whose name I give that way to avoid having his army of bots come down on this thread--has not done so.) So as far as Democrats vs. Republicans, there is plenty of blame to go around.

Lydia,
Yes, that's what McCain said about deportation. But that point does not weigh with regard to blame for the current crisis. One can have McCain's view on immigration (I don't), and not be responsible for the financial policy that set the current shipwreck in motion.

Letting more immigrants in the door than I would is one thing; giving them home loans they cannot sustain so that they will stay and vote for you is quite another. Even if we had absolutely open borders, this crisis need not have happened. Immigration did not cause it. Trying to win votes from immigrants (and many, many others) by implementing a disastrous financial policy did. Blame attaches to the latter, not the former.

By the way, I temporarily oppose large scale immigration solely for security reasons. Even though immigrants are good for the economy, I have made what I think is a prudential decision regarding national security -- open borders let in our enemies, not just folks looking for work. In this case, the price paid for heightened security is the loss of economic benefit provided by immigrants. I can't think of a way to have greater homeland security and immigrant economic benefit at the same time.

We're talking about deliberately giving home loans to illegal immigrants, here, Michael. And that because one plans to give them amnesty. I really have to say that you can't delink the whole amnesty mess from various attempts to turn a blind eye to the presence of illegals in the country prior to amnesty and to "root" illegals in the country to support a later amnesty plea, and it was announced openly that their legal or illegal status would not be examined in giving them home loans.

Lydia. You are right. The "Diversity Recession" is explained here;

http://www.takimag.com/site/article/the_diversity_recession_or_how_affirmative_action_helped_cause_the_housing/

Id like to know why the poor tax payers has to pony-up for "assets" of questionable value when the smart-set on Wall Stare sitting on scads of cash.

The Standard & Poor's industrials, a group of 368 large companies that excludes banks, insurers, utilities and transportation firms, held about $620 billion in cash and short-term securities as of June 30, according to data compiled by S&P analyst Howard Silverblatt.

That was roughly the same amount that they had in March 2007, before the financial market crisis mushroomed. Since then, companies have cut back on dividend increases, share repurchases and expansion, essentially hoarding cash because of concern about the state of the economy.

"They've got money," Silverblatt said. "They're not spending it yet."

They ain't but we ought?

Bill Bonner at The Daily Reckoning has these guys pegged. FWIW, I don't use his investment advice but he has both monetary expertise and common sense and has been around a long time.


Bonner writes about a coming $900 BILLION request to B.O Banks...

http://www.dailyreckoning.com/

I agree completely with Michael's response to Al, all except the endorsement of McCain. If McCain is one of the people behind the 'insurance' proposal, well, all I can say is that as far as I can tell the 'insurance' proposal is an outrageous taxpayer ripoff. Why should the taxpayers be willing to cover all the downside here without getting any of the upside?

IMNS:

There are a number of things I really like about Ron Paul, but many of his financial ideas are downright crazy. Returning to the gold standard, for example. I trust his judgment on this about as much as I trust the judgment of my crazy retired neighbor. And besides, I know firsthand what a collapse of liquidity is likely to look like in the places where the rubber meets the road.

As for corruption, redirection of profits to ACORN, etc those things should be fought tooth and nail. Profits should go to pay the national debt and only to pay the national debt. One would hope the Republicans would do their job there rather than promoting their cover-the-downside-only insurance scam. But these are just details, none of which constitute a reason to let the credit engine sieze.

The information I have is limited, of course; the pool of people I've talked to is small. It is always possible that this is not what it appears to be. But it sure looks like what it appears to be, and treating the issue of which corrupt contractor is getting paid what to repair the levy as the hurricane approaches as the highest priority is madness.

Id like to know why the poor tax payers has to pony-up for "assets" of questionable value when the smart-set on Wall Stare sitting on scads of cash.
Because the cash they are "sitting on" is in banks, not in bags of bills in the closet.

Okay, I get that about the cash being in banks. But presumably, the govt. is going to get the "cash" to buy all this stuff from people who buy Treasury bills, right? And where is that going to come from? I mean, either the money literally exists in the system and is available to buy something with--be it to buy new debt instruments from the government so that the government can buy the "distressed assets" or to buy the "distressed assets" directly--or it is not the case that the money exists and is available to buy stuff with. If it exists and is available to buy stuff with, then the question of why Wall Street doesn't use it to buy the assets comes back again. If it doesn't exist and/or it is tied up in banks about to fail and hence is not available to buy stuff with, then *where the dickens are people going to get the money from to buy the new federal debt instruments* with which the federal govt. is going to buy the assets?

I realize this must sound simplistic, but there is just something very weird about this whole thing. On the one hand, the idea apparently is that the rich guys can't buy these assets because they can't get at their money, because their money is tied up in banks that may be about to fail, there would be a "run" on the banks if they tried to get at enough money to buy the assets, or something like that. On the other hand, the idea is apparently that the government _does_ have this money. But the govt. doesn't have money in bags of bills in the closet anymore than anyone else does. Unless, of course, we're talking about the government's creating the money ex nihilo, on which I've already given my opinion. But the scuttlebutt here appears to be that the govt. isn't going to do that. They're just going to sell treasury bonds to various people and get the 700billion (or 250 billion, or whatever it is) that way. So people _do_ have the money and _can_ get at it. And around and around I go again on the "where is the money coming from" question.

And another thing: Why do we assume that there must be some one entity that can create a giant fund, sort of like a hedge fund, to buy the whole jolly lot for the 700 billion? I mean, nobody talks that way about anything else. Why can't these securities on the failing mortgages be bought by people in bits and pieces if they are a good investment?

My guess as to why is this: It's only if the govt. steps in here in a massive way and buys the whole kit-n-kaboodle that _any_ of it will ever be worth _anything_. If somebody just bought a few of these things and there were no bailout, he'd lose big-time. But that seems extremely artificial and unhealthy to me. As though the govt. has magical powers attributed to it to make assets "valuable" by buying them en masse when they wouldn't be valuable if anyone else bought them, a bit at a time, or even a securities-bundle at a time, in the way that everything else in the market from ships to shoes to sealing wax is normally bought.

Because the cash they are "sitting on" is in banks

No way, Zippy. I thought the cash was in stored in the Social Security Lock Box.

Now that the quips are out of the way, WHY is the smart-set sitting this out? What are they waiting for? Why ought we tax payers fools rush-in where the smart-money men fear to tread?

IOW, we have the most financially sophisticated folks NOT pulling the trigger on these amasing deals but we have you telling us tax payers that we SHOULD pull the trigger by supporting this B.O.

Yet another way - If we insane know-nothings DON'T support The B.O. WE will be to blame for financial armageddon but the Wall Street Smart-Set who are sitting on their cash will not be blamed.

That makes no sense to me.

I don't think Billy Mays could sell this to the average American

So people _do_ have the money and _can_ get at it. And around and around I go again on the "where is the money coming from" question.
Existential questions about money are a bit above my pay grade. Every time I think I start to understand it, I learn something else which convinces me that I don't, and that many people who think they do, do not. Whether anyone actually does or not I don't really know.

"There is a theory which states that if ever anyone discovers exactly what the Universe is for and why it is here, it will instantly disappear and be replaced by something even more bizarre and inexplicable.There is another theory which states that this has already happened." -- Douglas Adams

It might be possible in principle (though I'm not sure it would pass Constitutional muster) to just force everyone who is holding cash in money market accounts to do an outright swap of some percentage for T-bills. But that kind of thing would be far more intrusive, disruptive, and coercive than what is actually on the table; and would probably not have the desired effect of loosening up credit.

IANS: If you were under the impression that my statement was a non-substantive quip, you could not possibly be more wrong.

"I also feel sympathy for Kevin, since the credit rating agencies are going to be sued into oblivion because of their involvement in providing cover for these lenders."

Step2, thanks. It is absolutely brutal to witness the destruction of a once proud franchise at the hands of a delusional and avaricious few and the suffering it has inflicted on my better, more noble collegues.

Note too, the complete lack of accountability on the part of those politicians and financiers who blocked reform of Fannie & Freddie in 2003 and 2005, refused to give the SEC the muscle it needed, and developed complex financial instruments that we are now told are "too exotic" to insure.

Think about that one. Paulson is telling us the insurance proposal put forth by Cantor and the House GOP can't work because many of the securities are too hard to understand and unwind so as to quess at their underlining value. He's right, and Cantor has withdrawn his proposal.

The "greatest economic power in the world" isn't much different from the cargo-cultists of the Pacific Islands. Like them, we're being told by our witch-doctors and medicine men that the "big boxes from sky" will return only if we submit to the daily application of leeches to our skins.


Sure, of course, I'm not proposing that people be forced to buy anything. But is the idea that the guys with the money (in the banks, not in bags in their closets) are going to be more willing, voluntarily, to buy the T-bills that the govt. is going to sell in order to buy the bad mortgages than they are to buy the bad mortgages directly? And is the idea somehow that they _can't get at the money_ to buy the distressed mortgages but _can get at it_ to buy the T-bills? That seems a little weird to me. I mean, somebody, or some group of somebodies, is/are going to have to find this 700 billion somewhere to loan it to the government.

"...the populist mythology fomented by the media around this "Wall Street bailout"..."

The handle Wall Street Bailout is appropriate, since it wasn't until the wise-guys downtown started feeling the pain that the bailout was conceived. Back in August of 2007 we could have told our banks to freeze the rates on their ARMs from going up, built a lending facility to stabilize some of the major lenders from going under, and restructured our banking industry through mergers and new regulations. This proposal was dismissed as "socialistic", by many of the same clowns who are now sticking the taxpayer with a much, much bigger bill.

Those who publicly make the connection between an American economy based on consumption and; globalization, declining wages and standards of living, manufactured "bubbles" and the self-bankrupting practice of being the "the policeman of the world", are always dismissed with the perjorative of "populist". Yet, all they are doing is voicing what is spoken privately by those heavily invested in the perpetuation of "the game."

In this brave new world we've built where the guilty are not only immune from accountability, but actually flourish at the expense of their victims, the very least anyone retaining some residue of traditional Christian belief can insist on is a bailout that introduces some measure of justice to our body politic. A narrative of how we got in this mess should be attached to the
actual legislation.

But is the idea that the guys with the money (in the banks, not in bags in their closets) are going to be more willing, voluntarily, to buy the T-bills that the govt. is going to sell in order to buy the bad mortgages than they are to buy the bad mortgages directly? And is the idea somehow that they _can't get at the money_ to buy the distressed mortgages but _can get at it_ to buy the T-bills?
It isn't that "they" can't get at it so much as that the simplified view of a "they" at all doesn't work. Usually money market funds are held in lieu of holding cash because money market funds earn interest. If you look at corporate balance sheets and see "cash and cash equivalents", what you are seeing is money market funds and similar stuff. T-bills are similarly liquid, but are viewed as slightly more solid, and so pay less interest.

The key problem with the MBS is that they have been treated as non-volatile liquid assets, and have been held by many institutions as that kind of asset serving that kind of purpose; but now, with all the defaults/etc, they have been simultaneously de-valued and have become illiquid. They have become (or really always were) something entirely different from the function they have been performing in the financial system. Someone who buys them up can get a good deal on them right now as a long term investment, but he can't use them as a "cash equivalent". So when the federales come in and essentially trade them for T-bills (with an intermediary cash transaction), the feds are taking a valuable asset which is inappropriate to its present place in the machine and replacing it with a different kind of asset which is appropriate to that place in the machine. And for doing that, the feds should be able to make money on the deal. But you have to be big enough to make the deal at all in order for it to make sense: there is no individual hedge fund or group of hedge funds which can do this, because it only works if it actually has the macro effect of loosening up credit. Otherwise we go into a depression, and smart money just sits out a depression.

The feds are basically proposing to swap oil for diamonds because diamonds don't make a very good lubricant. Asking why the holders of money market accounts don't just voluntarily do it themselves is like asking why we shouldn't take more oil out of the sump and put it back into the filler tube instead of swapping the diamonds in the sump for oil.

Kevin:

A narrative of how we got in this mess should be attached to the actual legislation.
I don't disagree in principle, but on the other hand it is more important to survive the accident in progress than it is to figure out who is to blame. And the notion that congresscritters will get that narrative right and attached to appropriate legislation in time to avert the accident is I think a pipe dream. The initial proposal no doubt has a lot wrong with it, but is any of that likely to be improved by congresscritter meetings in time to make a difference?

"If somebody just bought a few of these things and there were no bailout, he'd lose big-time."

Which is why nobody is willing to buy at a price that would leave the firms holding them solvent which get us back to capitalization and equity.

"But is the idea that the guys with the money (in the banks, not in bags in their closets) are going to be more willing, voluntarily, to buy the T-bills that the govt. is going to sell in order to buy the bad mortgages than they are to buy the bad mortgages directly?"

The Treasury instruments are backed by the full faith and credit of the United States and the various mortgage instruments aren't. U.S. debt is a safe haven in uncertain times and there are plenty of dollars floating around. The debt will be issued in bite sized chunks, not all at once.

Michael, this was posted over at Angry Bear:

"How did Lehman manage that ?

Robert Waldmann

A commenter over at naked capitalism notes that

$110b of senior LEH debt went from trading .95 to .12 in a matter of days .... If you include the less senior debt that is trading at essentially zero, LEH had $110b hole in its balance sheet. And just days before this, the market was being told and was believing that the $10b disposition of Neuberger was going to solve their funding problems.

Now is there a precedent in this history of bankruptcy--excluding cases of accounting fraud--where bonds collapsed like this once a bankruptcy court opened up the books? I'm thinking the answer is 'no.' Which then makes you re-evaluate the premise that there wasn't fraud at LEH in marking the value of their assets.

Now I may be crazy, but I think that the idea that accounting fraud is required to achieve this is old fashioned and out of date. I think it can be achieved without breaking the laws, such as they are.

Lehman could have made their senior debt worth 12 cents on a dollar in case of default by selling CD insurance on their own debt -- lots of it. This would not require any false accounting as they are not required to report this fact.

Now I would be reluctant to believe that a bank could insure its own debt if it hadn't already happened .

The trader then went on to tell me that Commercial Bank of Korea would sell credit default protection on bonds issued by the Commercial Bank of Korea.

Who would buy a CDS on Lehman from Lehman ? Only a fool ? Well I have another candidate -- someone who had bought lots of cash settlement CDSs on Lehman debt from a third party. The payout on a CDS depends on par value minus settlement value. A huge amount of Lehman insurance of Lehman is not very useful to someone who wants to hedge, but it is very useful for someone who wants Lehmen to settle for as few cents on the dollar as possible because, he or she has bought Lehman CDSs from a third party.

Now to Lehman, insuring their own debt is a very very attractive proposition. It is money for nothing unless they go bankrupt and if they are bankrupt well they are bankrupt. The whole source of moral hazard and adverse selection in credit markets is that it doesn't matter to the debtor how much he goes below zero.

A positive price for Lehman insurance of Lehman makes sense (algebra will be after the jump when I type it up). There was money to be made at the expense of holders of Lehman debt who didn't think of the possibility of over-insurance.

Is this what happened ? I have no idea, but I guess we will find out fairly soon.

First a CDS on LEH issued by LEH is definitely not worthless. It can't possible pay out as described in the terms of the contract, because it only pays when Lehman defaults, but it can pay its stated value times the cents on a dollar payout ratio found by a bankruptcy court. Even in the case of LEH,this will be positive.

Now algebra. I will assume all debt is equally senior. The par value of LEH debt is 1 (for simplicity). They go under with assets equal to y (which must be less than 1 for them to be bankrupt). the payout ratio phi is equal to assets over total liabilities. However the liabilities are not just debt. They include self CD insurance for x units of par which, in theory shold pay x(1-phi). Actual payment on the CDSs is .

phi is given by
1) phi = y/(1+x(1-phi))

Note that phi is not zero, so the CDS has positive value -- you don't have to be crazy to buy it.

This gives a quadratic equation with one solution to phi between 0 and 1

2) phi = (1+x - ((1+x)^2-4yx)^0.5)/(2x)

phi is definitely real and positive. 2 can be rearranged to

3) phi = (1+x - ((1-x)^2+4(1-y)x)^0.5)/(2x)

And y

taking a first order approximation alpha is approximately equal to

4) phi is roughly equal to y/(1+x)

Which is positive.

So total payouts on CDSs are

5) x(1-phi)phi= xy(1+x-y)/(1+x)^2

And the ratio of the payout to the face value is

6) payout/x = y(1+x-y)/(1+x)^2

oh this is odd. take the derivative of the payout/x with respect to x

7 d(payout/x)/dx = y[(1+x)^2-2(1+x)(1+x-y)]/(1+x)^4 = y(2y-1-x)/(1+x)^3

So the payout per unit of self CDS increases in units of self CDS outstanding until the number of units, x is equal to 2y-1. For LEH senior debt, imagine the accounts were accurate (as far as they were supposed to go) and y = 0.95, the value of LEH self insurance would increase in LEH self insurance outstanding until the amount was equal to 90% of total LEH senior debt. That seems to me to be an unstable market.

Now how high would it have to go before it stops making sense to buy CDS from LEH ?

Well that depends on the price doesn't it. If normal investors like Janet Tavakoli won't touch it, the price could be very low, say one tenth as much as third party insurance. That would make it optimal to a price taker so long as alpha is greater than 0.1. Obviously I chose 0.1 out of my hat, because it is close to current market estimated phi of 0.12.

Could this have happened ? I don't see why not. As far as I know it was all legal and profitable to both parties in the contract."

Assuming you have read this far, let me make the point that the potential transaction and others far more complex accomplish nothing productive. It is parasitic activity that sucks the life out of an economy.. had I made that statement a year or so ago, it would have explained to me how all this spreads risk and allows for the efficient use of capital. That explanation no longer holds water, of course.

The folks who you deem indispensable employ very smart folks (often rocket scientists, literally) at very good wages to come up with these schemes. Folks thus employed are not available for activities that actually produce something.

Anyway, if the present situation hasn't shaken you out of the standard talking points, nothing I write is going to change that. Besides, after the debate last night I am feeling generous and can let the ideologically based just-so stories pass without comment.

I favor a steeply progressive income tax above a certain level and tax and regulatory policy that encourages socially productive endeavors.

You don't

In some areas of life frogs do need storks.

Assuming you have read this far, let me make the point that the potential transaction and others far more complex accomplish nothing productive.
I thought it made perfect sense. Counterintuitively, bond insurance from the bond issuer itself actually does have a nonzero value. Interesting.

I think we are all agreed that a lot of banks/people did a lot of things here that were either tom-fool or outright fraudulent. Maybe some of both. Now the country is tottering, apparently, on the brink of major economic fallout, and the proposal is that the govt. prevent this by purchasing the bad debt as a long-term investment in return for T-bonds, which people trust more, which amounts to increasing the national debt.

It seems to me that a very salient question here is this: Can this type of process go on forever? Is it a sustainable economic model for people in the economic sector to do tom-fool or fraudulent things (perhaps pushed by government itself, but for _whatever_ reason), to drive the country to the brink of depression, and for the national debt to go up in order to save us from that fate?

I mean, maybe it can be repeated ad infinitum. What do I know? But if, as a certain school of economic thought holds, we are merely putting off the evil day and making it worse when it finally, inevitably, comes, then we shouldn't do it this time. We should take the crash and get it over with.

I'm probably the least knowledgeable person in this whole thread about economics, but FWIW, every instinct I have about the whole way reality works is that this process cannot go on being repeated forever without there being some highly nasty consequence. And it makes a sort of common sense that they would be the worse the longer they had been put off and pushed under the rug, as it were.

It seems to me that a very salient question here is this: Can this type of process go on forever?
I think that is a perfectly reasonable debriefing question, and a very unreasonable one in the face of what is objectively an unnecessary crash. It is not impossible to be both against drunk driving and at the same time in favor of preventing this very accident right now. In fact that seems to me to be the only reasonable position to take. Letting the drunk driver kill himself and a bunch of innocents in an accident is not a good model of "tough love".

"The initial proposal no doubt has a lot wrong with it, but is any of that likely to be improved by congresscritter meetings in time to make a difference?"

Zippy, the payoffs to Acorn and La Raza have been stripped out. More oversight has been added. Improvement has been made because this proposal has been exposed to some rays of light. Lets see it withstand more sunshine.

But what if it's actually true that preventing this "accident" is passing on a worse accident to a different generation? Then is it not actually morally questionable to prevent this "accident" by massive government prop-ups of the economy which will cause a worse crash for some other set of people later on?

Kevin:
AFAIK those were not in the original plan. They were added by congresscritters.

Lydia:
It is pretty clear to me that this is a net reduction of the national debt, taken in itself, compared to inaction. Externalities we could argue until the cows come home.

I'm just very concerned about any approach that sounds to me like, "The heck with the law of unintended consequences. The sky is falling. The government has to do something, stat." There is always this "first, do no harm" thing. This does not by any means look so simple to me as running out into the street to rescue a child in the way of an oncoming car or something of that sort. This is a huge bill involving a huge amount of money and power, and it seems to me there is at least some reason to think it will make matters worse down the line. I could be totally, absolutely far off and wrong. Out in left field, or right field, as is in this case more likely. But I respect the "Main Street" feeling that there is something very unhealthy about saying that we have to rush this through, the government has to do something, because otherwise the world will come to an end. For that matter, there are even worse things than the world's coming to an end.

Lydia,

A credit freeze, which is what is certainly happening right now, is devastating to an economy. Without what Zippy accurately describes as the "oil" for the engine of commerce, an economy breaks down in wildly unpredictable ways. As I see it, Treasury is betting on the fact that it can absorb the impact from this collapse of debt much better than the private sector. It will most likely mean a greater level of inflation and higher interest rates, but Treasury is the only actor big enough to ride out this storm.

Can this type of process go on forever?

Obviously not. What is needed are more citizen-activists who will promote transparency and better regulation. Part of the problem is that we let these market bubbles get so big because we adopt the assumption that they are the best vehicle for economic growth. There are multiple paths that will achieve sustainable but limited economic growth, it is the insistence upon strategies for exploiting the maximum profit with the least risk from capital and markets that is inherently unstable and corrupting.

Micheal,
They are millionaires and billionaires because of their talent. Drive them away and you drive away one of the nation's greatest assets.
It takes talent to learn how to be totally in the dark about what drives your profit margin. Icahn, Wall Street's legendary corporate raider, has described this debacle as a crisis of corporate governance, which it is.

You think that these folks go us into this mess. We disagree.
If they were not responsible, they certainly seemed eager participants when they made a fortune from the deal.

You think that the government ought to set the levels of compensation. We disagree.
That is awesome, they get to plead bankruptcy and still keep their golden parachutes. "Accountability for thee, but not for me" should be their motto.

You think that heavy taxation on the wealthy will help solve the problem. We disagree.
It won't solve the problem, but it will allow the government to indirectly compensate for worker productivity growth, which is incredibly skewed towards the wealthy. If you want to see the continuing squeeze on the middle class in America just say so.

You think that the con men responsible for this mess are in business. We disagree.
There are sharks in Congress and on Wall Street, it is naive to think otherwise.

Zippy, the original plan was 3 pages long. The add-ons were in place during the White House food fight on Thursday. I rather we let the usual suspects reveal themselves, whiles we deliberate, imposes the necessary conditions. A very instructive historical record and damning narrative will emerge.

Lydia, you mean your confidence is shaken by the fact that the very same people who brought us to this low estate are also the authors of this "rescue plan"? You're not alone.

One redeeming aspect of all of this is a lot of people across the political spectrum are going to lose their religion.
Who Lost America is going to be a question gaining greater saliency in the near future.


It just seems to me that it requires an awful lot of optimism to think that this plan will make things better in the long term rather than worse. Again, I could be way off, because I know I'm way outside of anything like my field of expertise. But conservatives are supposed to believe in the law of cause and effect and in the claim that you can't get something for nothing. It looks to me like if we think that that people can do this stuff, the government (which apparently partly caused the mess) can come along and clean up the mess, and everybody wins, because the govt. is just another actor in the economy, only bigger than everyone else, and it will make enough profit from this deal not only to pay for the deal itself but even to leave our National Debt situation better than it was before, involves a hidden and perhaps unrecognized assumption that you _can_ get something for nothing.

If you were under the impression that my statement was a non-substantive quip, you could not possibly be more wrong.

Zippy. You are flat-out wrong about The B.O. There will be no substantive change. Once you stop being so defensive try re-reading this thread and note how you have changed your position with out admitting it.

For instance, you repeatedly wrote the tax payer would profit. You don't even write that anymore.

The best thing that could happen is for the govt to fail in trying to pass The B.O.

Lydia is right that this will only delay the Reckoning and make that day of Reckoning worse than if we let it happen now.

Men a lot smarter than you, men more experienced than you, men who have been around a lot longer than you, arw counseling against The B.O.

I could write more but I sense I am just an irritant for you.

C'est la vie. No hard feelings on my part, brother. I hope your hopes are realised.

I would recommend reading this link about The B.O. This man is a Constitutional and sound money genius. (I don't think our friend, Zippy, can dismiss him as a Ron Paul's nitwit neighbor about The Gold Standard, for instance).

His novel "Crashmaker" (he co-wrote it with Trader Vic) taught me more about The Constitution, The Federal Reserve, Sound Money and Liberty than anything I learned in College).

Dr. Vieira has a really original idea about what can be done. The question is - who in Congress has the cojones?

http://www.newswithviews.com/Vieira/edwin82.htm

IMNS:
My position has not changed. The American taxpayer ends up far better off with than without.

iPhone replies are terse.

Lydia:
It isn't something for nothing. It is a hedge fund -like play for distressed assets. Very common, just not on this scale.

But is the idea that the guys with the money (in the banks, not in bags in their closets) are going to be more willing, voluntarily, to buy the T-bills that the govt. is going to sell in order to buy the bad mortgages than they are to buy the bad mortgages directly? And is the idea somehow that they _can't get at the money_ to buy the distressed mortgages but _can get at it_ to buy the T-bills?

It's the difficulties involved in estimating the value of the distressed assets and assembling the financing so that they buy them soon enough and at a price that won't result in a slew of financial institutions failing. The federal government has all the necessary funds at its disposal (because of its borrowing abilities) and buying virtually all of stuff will result in a fully diversified portfolio.

"You think that the con men responsible for this mess are in business. We disagree.
There are sharks in Congress and on Wall Street, it is naive to think otherwise."

The revolving door between business and government is a large part of this problem. Also we have examples like Billy Tauzin, the Republican Representative from Louisiana who ran point on the Medicare Drug Bill and then went to work for Phrma at $2 million per year.

Zippy, I understand that it makes sense. What I find problematic is that we have a financial system in which such non-productive manipulation is possible.

If it is no problem for the govt. to do this, then I suppose the logical conclusion would be that heck, yeah, this can go on forever. It's just a profitable deal for Uncle Sam, bailing out bubbles and preventing the consequent collapse of the economy. Just so long as, in the process, Uncle Sam gets lots of assets out of it that may appreciate over the long term.

I realize this may sound sarcastic, and I'm not trying to sound sarcastic. But I'm trying to see how this can be a bad thing and a good thing at the same time. On the one hand, it's supposed to be just a giant hedge fund with U.S. the biggest player in the game. Business as usual, in a sense, only on a larger scale, but perfectly rational. Yet on the other hand, are we really supposed to be _happy_ that it has come to this? I don't think even Zippy is saying that. But why not? It seems to me that either this is rational economics or it isn't. And if it isn't, we should put the brakes on right now. If it is, I guess we'll just do it over and over and over again, and that'll be no problem. But _that_ sure doesn't seem right.

Al:

I understand that it makes sense. What I find problematic is that we have a financial system in which such non-productive manipulation is possible.
It isn't non-productive to the guy who wants the additional protection, and the guy who wants to sell the additional protection. Crypto-marxists are always trying to dictate what is and is not "productive". If someone made a moral argument against I might be interested, but "unproductive" is not a quality I'm willing to stipulate when we have a demonstrable value to buyer and a demonstrable gain to seller.

Lydia:

...are we really supposed to be _happy_ that it has come to this?
I'm sure that Lehman employees and shareholders, AIG employees and shareholders, etc etc are not particularly happy. Lots of people who planned on moving, etc are not happy. Lots of people who've been hit with foreclosure are not happy. There is plenty of misery to go around right now, and there is a reason why the assets are 'distressed'.

Furthermore, it is just bloody risky for things to get to this point for the financial system as a whole, and there is plenty of reason to not want it to happen again. And yes, this is also the case on a much smaller scale any time a hedge fund buys up distressed assets for a fraction of their original value.

People get routinely paid to be undertakers. Does that mean we are all supposed to be happy about death?

I don't understand why the binary alternatives are "let the Titanic sink" or "pop the champaign". Rational economics contains all kinds of really, really crappy events, which hurt a lot of people, that sometimes someone gets paid to deal with.

It seems to me that either this is rational economics or it isn't.

It's tactically rational, at least strongly arguably so, but strategically foolish, if we leave in place the specific regulatory bungles (mandating the extension of mortgages to poor credit risk borrowers, waiving capitalization requirements for selected investment banks, permitting dubious innovations in credit markets, etc.) and permit the continuation of the luxuriant growth of speculative investment vehicles, which have tended to presuppose both a loose monetary policy generally, and facts about the real economy (regarding asset appreciation, borrowers' ability to pay, itself a complex factor) that are neither obvious nor guaranteed. Some of these bungles have already more or less canceled themselves, albeit not without a measure of economic distress.

There's more than enough blame to go around; the thing to be avoided is the reductionistic or specially-pleaded account, according to which, for example, nasty Democratic congressmen and improvident borrowers are culpable, but masters-of-the-universe bankers, hedge-funders, and speculators are wholly innocent, and preposterously leveraged CDIs could continue indefinitely provided that Democrats don't compel us to lend to African-Americans and Hispanics - which is the tone in some right-wing circles. This entire debacle is a reflection of the American character, in a manner analogous to the old quip about democracy, to the effect that the people know what they want, and deserve to get it, good and hard. We, collectively - which is not to say, to a man - believe in the fundamental fantasy of limitless expansion, of something-for-nothing, and get the economy we deserve. Reality just bit back.

I agree with Maximos' last post, except that I would say it is just plain foolish, as in phenomenally and negligently stupid, period, to let the Titanic sink in a fit of high dudgeon. If I became King in the resulting aftermath, one of my first official acts would be to hang the congresscritters who failed to act from the nearest city wall. But it is certainly strategically foolish to leave in place the specific regulatory bungles, etc. etc.

I would say it is just plain foolish, as in phenomenally and negligently stupid, period, to let the Titanic sink in a fit of high dudgeon.

But, again, though I'm in high dudgeon over this episode, I'm not arguing that the Titanic should be permitted to go under, but that, should we decide to bail out the Titanic, we ought subsequently to purpose not to build any more Titanics. I don't envision this happening.

I don't envision this happening.
That's as may be, but "let it sink or they'll just build another one" is a morally repugnant argument; an argument which I would have to adopt as my own in order for the prediction to have immediate relevance.

Actually, I don't perceive a causal relationship of any sort between "letting it fail" and "them not building another one". Throughout the boom-and-bust cycles of the 19th Century, "it" was always permitted to fail, and they always came back to build another one; conversely, in recent years "it" has not been permitted to fail, but instead has been succeeded by "another one." There is, therefore, no predictable relationship between the two phases, discernible on the basis of the particulars of each situation; there is only the human-all-too-human desire for the next big thing, the one constant throughout. Is dealing with that factor immediately relevant? Probably not. Human action is sequential, after all, and this is pretty much a matter of metaphysics. But it will become relevant on the 'day after', and it's a dead certainty that few will perceive it that way when that day comes. Essentially, when you screw up, you've first got to fix it; and after fixing it, you've got to sit down and ponder the path by which you arrived at the screw-up.

If we're arguing, I don't perceive the material disagreement. I may not believe the financial bailout to be quite as imperative as some are arguing, but that's not the same as deeming it unnecessary. Let's get it done, and move on. The contraction of credit is a problem, and even in our little niche market, we fully anticipate experiencing some of the consequences. I'm not articulating the argument you deem repugnant; I'm arguing only that, once this is done, we should not permit "them" to build another one, where the building stands in no necessary relation to what we do or do not do now.

Yeah, I don't think we're disagreeing at this point, Maximos. And unfortunately fixing it is most definitely the easy part, not to say that it is easy or without risks.

I don't understand why the binary alternatives are "let the Titanic sink" or "pop the champaign". Rational economics contains all kinds of really, really crappy events, which hurt a lot of people, that sometimes someone gets paid to deal with.

Agreed. As one of my economics professors was fond of saying: "Nothing is either good or bad save the alternatives that make it so." Hence even Gary Becker writes:

"Despite my deep concerns about having so much greater government control over financial transactions, I have reluctantly concluded that substantial intervention was justified to avoid a major short-term collapse of the financial system that could push the world economy into a major depression."

The biggest problem going forward is figuring out how to minimize the moral hazard.

I'm afraid I'm still inclined to disagree with everybody on this one. But then, I'm inclined to sympathize with the "crazy" notion that there are such things as economic principles and that these provide a _strong_ argument against government bailouts, yes, even government bailouts of all of us.

But, Zippy, earlier in the thread you said you had "some sympathy" for the perspective that it should all be allowed to come down. Now you're saying you'd hang any congressmen who failed to act. Is that a change? I mean, are you really saying that if people think things like sound money, limited government, and the refusal to encourage further behavior of this type take those principles to be strong enough to mitigate against this hurried-up bailout plan, you'd hang them? I'm sorry to hear that.

And as for whether this encourages further such actions, well, again, I'm not convinced that it's "repugnant" to take that as an argument against. What if we got into this mess partly because it was _assumed_ that there would be a bailout? You quote someone predicting _exactly_ that, Zippy, in the quote you give in the post above. Doesn't a rich parent sometimes stop bailing his kid out of jail because he knows the kid has gone on vandalizing and using drugs partly because of the assumption that dad will always take care of it, and he needs to learn that his actions have consequences? Yes, the innocent will suffer, but the innocent will suffer _anyway_. And, once again, while it is clear to you that this will minimize their suffering, a) that isn't clear to everybody else, at least not where "they" includes innocent people yet unborn and unconceived, and b) it's not clear that govt. always has to do the consequentially right thing if this means taking on too much power. We also don't think we have a responsibility to invade other countries to minimize the suffering of the innocent. This is an example, to be sure, but the point is that there are such things as deliberate self-limitations of activity on the basis of principle that sometimes mean letting suffering take place.

...earlier in the thread you said you had "some sympathy" for the perspective that it should all be allowed to come down.
Sure. There are cases where I have some sympathies for vigilantism too. I have some sympathies for those who faced the dilemma of whether or not to drop the atomic bomb. In no case does that imply ambiguity in my mind about what is the right answer.

"The innocent will suffer anyway" is just not a good argument here, at all, because the innocent won't suffer anyway. The credit engine most likely does not have to sieze, if we add some oil -- which we get paid for adding.

What if we got into this mess partly because it was _assumed_ that there would be a bailout?
That just isn't the case. People don't drive drunk because they know that doctors are going to patch their victims up at the hospital if they crash. They drive drunk because of irresponsible short sightedness, selfishness, etc. The notion that we should not act here is like saying that we should not pull ourselves from a burning wreck, even though we are perfectly capable of doing so, because doing so would encourage drunk driving. It is just self destructively crazy, and I don't know how to make it more clear that it is self-destructively crazy.

"I'm afraid I'm still inclined to disagree with everybody on this one. But then, I'm inclined to sympathize with the "crazy" notion that there are such things as economic principles and that these provide a _strong_ argument against government bailouts, yes, even government bailouts of all of us."

You're not disagreeing with everybody, Lydia. I've been against it from the beginning of the thread. Unless I misunderstand them, so have a few others. This sort of interventionism is a bad idea.

Without even hearing them, I suspect I'd agree with most of your principles, and would likely apply them in the same way you do. Regardless of its final set of constituent details, the bailout is contrary to most of the economic principles to which I hold. Unfortunately, the debate has now gotten down to "How can we do this really bad the best way possible?"

Thanks, Michael. Is it possible that you and I together are finally going to end up agreeing with the paleocons? Wild. Crises make strange allies. And who would've thought Michelle Malkin would have come out so strong? I was talking to a paleocon friend at church today who said, "Bernanke is an unreconstructed Keynesian." That rather confirmed my suspicions. He said the entire economics faculty at Chicago has come out against it, for what that's worth.

I'd be interested in hearing just what economic principles can transform into a moral justification for inaction on the part of the government here, and just how they undergo that transformation. I suspect that the 'principles' are something to the effect that the government simply by assumption never has a legitimate role in economics other than the enforcement of private contracts, or something like that; a position I view as being about as far from reality as one can go. But I wouldn't want my assumptions to substitute for what others really think.

It is also possible that we still don't agree on the underlying facts about the concrete situation, I suppose. I doubt anyone here would refuse to crawl out of a burning wreck on the theory that doing so would violate a fundamental economic principle of actions having consequences. But that in effect is what is being proposed.

I mean, think about it for half a second: does the Chicago School really think we should do nothing and let the country burn, in a spasm of circular reasoning, and even though it is completely unnecessary, as a means to the end of vindicating their theories?

Economic theory is lovely, and there is much to be learned from it, but the notion that we have a complete economic theory-of-everything which somehow compels us to inaction in a real concrete situation is balderdash. The last century or so is littered with examples of people dying for the sake of vindicating economic theories. The notion that it is 'conservative' in any reasonable meaning of the term to adopt that approach is untenable.

Well, yes, I remain pretty dubious about the factual predictions that I understand you to be making, Zippy. Again, you know more than I do about money and how it works, but again, too, one has to do the best one can with what info. one has. And as far as I can tell, economic theories tend to be based on a particular estimate or prediction about how economic facts work. That is to say, I don't imagine most Austrian School or Chicago School people would be that if they really believed that Keynesian economics is the way to bring about the greatest happiness for the greatest number, or whatever. And the same for the Keynesians, mutatis mutandis. Ultimately, we're not talking about murdering anybody (so to speak), so a hard and fast rule that the government shouldn't (or should) be treated as just another economic player among others, or that the government shouldn't (or should) be in the business of creating money ex nihilo will be based on a strong hunch (at least) that if we don't follow this rule, we're going to cause more problems than we solve.

In my view, Lydia, your mention of the Austrian school strikes the right note, just as I think Frank Beckwith's mention recently of Murray Rothbard's analysis of the Great Depression in another thread was striking the right note.

I'm not a thorough-going Austrian, but am considerably so. In so far as one can, without gross inconsistency, I try to add Smith, Sowell and Gilder into the mix. (I think GG's The Spirit of Enterprise and his Wealth and Poverty are wonderfully well done, especially the latter, in which he argues forcefully that capitalist values are Christian values.) That is, I am much more likely to understand economics as a philosophy, a wisdom, than as a social science exercise in number crunching. I think it is better pursued and better understood as one of the humanities than as an exercise in aggregation and in computation.

Or, to invoke John Milton, if you want to understand what makes for a happy and prosperous nation, you must see first what makes for a happy and prosperous person. The Austrians at least try to start there: "Let's do economics as primarily a study of the individual and his or her choices."

As for the categories of political analysis and of various schools of thought, I think nothing better has ever been written than what came from the pen of Edmund Burke. Centuries later, we have not yet caught up to him, even on the right. The best current commentator, in my view, is normally George Will. His little Statecraft as Soulcraft is a profound book, truly profound. He's a Straussian, with all the profundity and misconception that might entail. But He's also a humane, articulate, insightful commentator who knows how to put politics in its wider context in human life generally, as witnessed by, for example, his equally brilliant books on baseball. (If you try to understand American life and leave out sport, you will, and you must, fail.)

"We, collectively - which is not to say, to a man - believe in the fundamental fantasy of limitless expansion, of something-for-nothing, and get the economy we deserve."

Indeed, but that illusion is dying before our very eyes and its death rattle includes 2 archaic ideologies. The Left prevented regulation and reform of their peculiar institutions; Fannie & Freddie, while the Right protected their sacrosanct Market from common-sense regulations, transparency and oversight.

"Edmund Burke. Centuries later, we have not yet caught up to him, even on the right."

You mean "especially on the Right", has it has become a safe-harbor for the very "sophists and calculators" who find cover in abstractions that he decried long ago. He'd use the revolutionary and anti-human works of both Marx and Rothbard has kindling for his fireplace.

Well, yes, I remain pretty dubious about the factual predictions that I understand you to be making, Zippy.
Which ones? That failure on the part of the government to inject liquidity would have dire consequences, that doing so is a net economic positive for taxpayers and the government versus not doing so, or something else? (Did I make any predictions other than that?)

I should make it clear that I'm no Keynsian. I hold the science of macroeconomics in roughly the same regard as I hold climate science; which is to say, it is in the main a highly politicized battleground of false religions.

that doing so is a net economic positive for taxpayers and the government versus not doing so

That one. Esp. over the long run.

OK. So it is a basic disagreement about the facts.

I think so.

But I have to admit that I think the distinction between theory and fact gets a bit muddled when we're talking about economics. I think you can see how that could be. Same with one's approach to forms of government. Most of us don't think that the personal rule of an absolute dictator is _intrinsically_ immoral, but I think most of us would also consider it _so_ fraught with probable disaster that we would oppose replacing America's present form of government with an absolute dictatorship, even if that would prevent a lot of human suffering in some strange immediate situation. Is that a matter of theory or of fact? I guess one could say that one's commitment to representative constitutional democracy is a matter of one's being overwhelmingly convinced as a factual matter that ditching it is likely to be a terrible move, all things considered, and one is willing to maintain that even in the face of predictions that something exceedingly bad will happen in the immediate short run if one doesn't ditch it.

I'd say that's probably something weirdly similar to what's going on in resistance to the bailout.

It was, amusingly, Keynes himself who said, "In the long run we're all dead." If I were convinced that government bailout now, the precedent that would set, and so forth, would make things better--even, yes, materially better--or even just _not worse_ for Americans until, through some _other_ mechanism, America ceased to exist or the sun went nova or something, I'd support it. Indeed, if I even thought that relatively probable, all things considered, and as far as I can see, I'd support it.

If I had to summarize my view, it is that

1) I know for a certainty that a credit freeze is very likely be a disaster in the short and medium term, to a degree that many people simply do not appreciate at all. And when I say disaster, I mean disaster. It is not outside the realm of possibility that it could result in a war with China, for example, to say nothing of its domestic effects. I can't predict exactly what form the disaster will take, nor precisely how bad it will be, any more than I can predict exactly how the train cars will end up in a major train wreck. But I know it is bad and should be stopped.

2) In the short and medium term, a credit injection by the feds has a very good chance - though it is by no means an absolute certainty - of averting the disaster. It even has a reasonable chance, managed well, of being profitable; because these MBS's are very likely already written down, in aggregate, to below their hold-to-maturity value -- assuming no Depression II. Nobody knows for sure, but the case for it is quite reasonable.

3) When it comes to long term predictions of effects, I trust them about as much as I trust long term predictions about the effects of our actions on the global climate. Given (1) and (2), those predictions are not worth the paper they are printed on in terms of priority, and people should stop pretending that they know the answers. It is like worrying about the effects of our tanks on global warming in the middle of a war. Yes, there is the law of unintended consequences; but right now we have to worry about the consequences we know. It isn't short sighted to take emergency action in a real emergency.

4) There are a ton of perfectly legitimate regulatory/etc things we need to worry about, to make this not happen again. They are small in priority compared to (1) and (2), or at least far less immediate in priority, though that does not mean that they are not very, very important.

5) Many conservatives don't like this intervention because it smacks of socialism. But a big crash would and perhaps will give us lots more socialism, good and hard, and probably much worse besides.

I'm in a better position than most people I know to ride this out, however it goes. Even the folks I know who are far more wealthy than I am tend to be pretty highly leveraged; I'm not. But I don't think it is good at all that folks do not appreciate and understand what we face here. It is different with a hurricane on the way: everyone understands it enough and what to do enough to make sense of it. That is most definitely not the case here, even among the academic experts.

"1) I know for a certainty that a credit freeze is very likely be a disaster in the short and medium term, to a degree that many people simply do not appreciate at all."

I disagree. Quite of few of us understand we are on the brink of a disaster and agree a bailout necessary. We're just not sold on either this plan, or the people composing it. By the way, you seem a lot less confident than you were on Friday; "The 'bailout' will not cost taxpayers a dime...It will earn them a substantial amount of money."

"5) Many conservatives don't like this intervention because it smacks of socialism."

This is more an atavistic sentiment leftover from an earlier age, or a response to small business members in their shrinking electoral coalition, rather than a serious, principled opposition to socialism. The conservative establishment has quietly and sensibly stopped the ruse of paying rhetorical homage to small government even as they simultaneously fund the world's largest military-industrial complex. If Bob Dole was the "tax collector for the welfare state", his hapless descendants are now administrators of Leviathan. Mere right-wing liberals upholding the guns half of the "guns and butter" bargain.

As Americans learn life as a debtor nation isn't all that is cracked up to be, a challenge to our 1 party state may gain traction.

In the meantime, should we be surprised that a regime that sanctions the killing of future generations, has few qualms about stealing from them?

We're just not sold on either this plan, or the people composing it.
I prefer red ambulances to green too. From what I've seen, every modification has been for the worse: first the Democrats' pork barrel, followed by the Republican insurance scam, and now it looks like we'll get a nice cocktail including both. More time with the congresscritters is congress, not progress. But whatever.
By the way, you seem a lot less confident than you were on Friday
Selective quoting. Immediately prior I said "...if the scenario is right, it is still likely to earn quite a substantial amount of money for taxpayers."

I'll tell you what, though: I've come to regret bothering to take the time to explain why it is a net gain rather than a loss for taxpayers. It seems like I've completely wasted my time.

He said the entire economics faculty at Chicago has come out against it, for what that's worth.

Last time I checked, Gary Becker is still on Chicago's economics faculty and he has indicated support (with reservations) for the most recent plan, so your acquaintance is either exaggerating or misinformed: http://www.becker-posner-blog.com/archives/2008/09/the_700_billion.html

Another country tried a different approach which seemed to work:

"Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing cheques. Banks had to write down losses and issue warrants to the government.

That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.
"If I go into a bank," said Bo Lundgren, who was Sweden's finance minister at the time, "I'd rather get equity so that there is some upside for the taxpayer."

Sweden spent four per cent of its gross domestic product, or 65 billion kronor (RM33.7 billion) , the equivalent of US$11.7 billion at the time, or US$18.3 billion in today's dollars, to rescue ailing banks. That is slightly less, proportionate to the national economy, than the US$700 billion, or roughly five per cent of gross domestic product, that the Bush administration estimates its own move will cost in the United States.

But the final cost to Sweden ended up being less than two per cent of its GDP. Some officials say they believe it was closer to zero, depending on how certain rates of return are calculated."

http://www.nst.com.my/Current_News/NST/Sunday/Columns/2361578/Article/index_html

"I've come to regret bothering to take the time to explain why it is a net gain rather than a loss for taxpayers."

You had a tough argument to make. We've been mugged and the ambulance drivers look a lot like our assailants.

A 3 page document outlining a 700 billion transfer of taxpayer funds is the stuff of banana republics. If we can't trust at least some of our elected representatives to ethically fulfill their constitutional duties, then we might as well do away with the underground tunnel that connects the White House to the Treasury building, give Paulson a uniform with epaulets and wait for him to issue his edicts from a balcony window.

You had a tough argument to make.
I wasn't making an argument, as much as trying to explain some things to people who want to not understand it. My bad.

Zippy, I heartily hope you are right and the doom-sayers (about the plan, that is) are wrong. My whole instinct, based on analogies to individual finance--you can't stay out of trouble by spending more than you earn; taking endless loans just makes the final crash harder when it comes, and so forth--say that we're hurting somebody else worse by not taking the fall ourselves now and that this is just going to keep going until it can't keep going anymore, at which point this will add its bit of inertial weight (or something) to the pain of the ultimate crash. I really do hope that I'm just flat wrong on this. I actually do love my country, not to mention my fellow citizens, not to mention, heck, myself. I don't want to live through another great depression, either, that's for sure.

I wasn't making an argument, as much as trying to explain some things to people who want to not understand it.

Attributing bad intent to those who disagreed with your assertions is rhetorically hitting below the belt. Keep you punches up, Zippy.

The fact is you failed to convince your readers and instead of accepting your failure with humility, you continue to fault your readers.

Many financial and economic experts HATE this B.O. and have what they claim are better ideas; ideas and plans that are time-tested, reality-based, and plans that that have successfully applied to banking crises and worked in other countries who faced situations similar to what we face.

I can not believe that only this B.O. Plan is the one that will work when many experts are in such purple-prose opposition to it and absolutely convinced it will not only not work but will make matters worse.

The idea those who oppose the B.O. are too stupid (well, I am) or don't care about their fellow citizens or don't have a clue are really not wonderful ideas.

There is a lot to be said in favor of the Common Sense of Americans when it informs then that The B.O. is not all it is cracked-up to be.


http://www.rgemonitor.com/roubini-monitor/253783/is_purchasing_700_billion_of_toxic_assets_the_best_way_to_recapitalize_the_financial_system_no_it_is_rather_a_disgrace_and_rip-off_benefitting_only_the_shareholders_and_unsecured_creditors_of_banks

The original post dealt with our national debt and its economic, social, moral and national security implications. Regarding the latter, foreign banking concerns are eligible to receive these funds;

“…any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States … and having significant operations in the United States, but excluding any central bank of, or institution owned by, a foreign government.”

I will say that some of the economic "theorists" do have counter-proposals. That's at least worth thinking about. I'll admit, though, in fairness to Zippy, that I'd be willing to consider almost anything that looks more market and reality based than this gigantic bailout. I think one issue here is that the gains being expected have to come in at least some sort of long-term. Defining long-term is very difficult, but part of the argument for the bailout is that the federal government can "afford to wait" until the assets have risen in value. So already that's asking us to look at the long-term, or at least the long-middle-term, or something like that. But in that case, I start asking myself what the effects are going to be in that same period of time of this increased debt that we're taking on up-front, especially given the probability that there will be at least some gradual or not-so-gradual monetization of the same, meaning bare inflation in an attempt to "pay off" stuff with ex nihilo created money. In other words, it seems to me that if we can't know anything about the longer-term, then plausibly we can't know that this is a good deal, economically, in which case, the argument seems to me against giving the govt. this much power, letting the guys who got us into this mess write the supposed rescue without any attempt to address the minority loan issue that probably partly caused it, and so forth.

"without any attempt to address the minority loan issue that probably partly caused it, and so forth."

Lydia, instead of "so forth", you can say the lack of regulation, skirting of SEC requirements and rampant greed that, on top of the gouging at Freddie & Fannie, fed this monster. Its o.k., you're membership to the Milton Friedman Sociey won't be revoked. And if it is, that might not be the worse thing to happen. Frankly, I'm surprised we haven't had Chile's Minister of Finance weigh in on the matter. We might as well go the full-Caudillo and insist our rulers wear bullet-belts, too.

The "minority loan issue" is one of those psuedo-facts that is destroying conservatism right now. Firstly, it confuses a supposition with a fact. Secondly, it is an a priori ridiculous assertion. Thirdly, the idea that one should attempt to make an empirical case for the proposition before engaging in such wild demagaugory is completely absent.

it is an a priori ridiculous assertion

Baloney. It is, based on other facts (which is hardly "a priori"), overwhelmingly probable that this was indeed pushed and that credit-worthiness was considered the enemy. Firstly, even before the specific evidence comes in, we know that this is _exactly_ how the race-mongers work; we have seen it mess up all sorts of areas of human endeavour--normal standards are the enemy if they have "disparate impact." None other than the (in other areas) conservative justice Clarence Thomas has seriously proposed that the LSAT should be abandoned for admissions to law school because it has disparate impact. You may think that's all just dandy, but if you do, then you are part of the problem.

More specifically, there have been all along news stories of these people _bragging_ that they were removing "barriers" to minority homeownership. To get down to some of the mechanics, a fellow called into a talk radio show last week and explained what it was like working for a bank in the 90's. He said ACORN would come in and threaten to shut down the bank by having such-and-such many people in the front lobby changing their dollars into pennies if the bank didn't raise its percentage of loan acceptance but such-and-such many points. Literally, the banks were given quotas by activist groups (a very familiar strategy in all minority politics going back to at least the 60's) as to what percentage of loan applications they had to accept. It went up a bit every year. Of course their rejection of loan applications previously was not some sort of anti-minority plot, so of course they had to loosen standards of credit-worthiness to meet these quotas, and of course there were more foreclosures in that band. The only question is _how much_ that contributed to the current crisis.

More from those notorious bastions of white racism - the Latino Economic Development Corp. and Washington Post.;

"Theirs is a story that Erick Gutierrez, housing director for the Washington-based Latino Economic Development Corp., said is all too familiar. Gutierrez blames the government for allowing so many subprime loans, such as Ortiz's, which required no proof of income. "You could say: 'You clean houses on weekends? Great!' And then put down that they made $1,000 a week," he said.

But by then, real estate agents would have made their commissions, mortgage brokers would have their closing costs, and the risky loans would have been repackaged and sold to Wall Street. No one cared as long as the housing market continued to boom.

According to the Center for Responsible Lending, 40 percent of loans to Latinos are subprime, and it projects that one out of five of these loans made in 2005 and 2006 will go into foreclosure."
http://www.washingtonpost.com/wp-dyn/content/story/2008/03/21/ST2008032103607.html


...you can't stay out of trouble by spending more than you earn;
That is simply, plainly, manifestly and absolutely false as a general principle. There are times when it is absolutely imperative to spend more than you earn in order to stay out of trouble: to take out a loan to pay for your appendectomy or to have your car fixed or whatever. If you have a mortgage or a car loan you are doing it yourself right now, and with significantly less legitimate motivation.

My assessment of this discussion as a complete waste of my time would perhaps improve ever so slightly if my interlocutors would simply admit unequivocally that clear, obvious point. One need not think that this is the exactly right thing to do, that there are not better alternatives, etc. I myself see a number of things wrong with the Paulson plan; however, I have zero confidence that continued machinations by politicians is going to improve it, and it is far better than nothing.

But enough of the religious clinging to "leverage always bad" in the face of careful, time consuming explanation why it is not.

Kevin,

Do you know if the Guitierrez loan fell under the CRA? Over 3/4s didn't fall under CRA regulation. Of course that would require actual research.

Having looked at Kevin's story, I can tell you that the CRA had absolutely nothing to do with that loan.

Zippy,

Thanks for the time you took on this. Your explanation makes sense (even if it took me two days to read everything). I started out thinking we should avoid the bailout at all costs, but now I see that it's not so bad after all. (Yes, I'm using bailout as a simple matter of convenience.)

I did have a mortgage. All-gone now (thank God). I made good 'n' sure that the collateral covered the loan. It was fixed-rate. Very conservative, and I had good evidence (not just hopes) that it would increase in value faster than I would be paying interest into it. It wasn't a distressed asset. It was a darned good house that had every prospect of going up in value. I paid it off lickety-split, in half the time, to make _really_ sure I wouldn't be putting in more interest than I was getting value.

I've never had a conventional car loan, ever, even at my poorest. I once had a personal loan, no interest, from a relative, for $1000 for a car, but this was only after the first car, paid for with $500 cash, was totalled in an accident. That short-term loan was paid off exceedingly fast, and I've never had another. I think the casualness with which Americans take auto loan, not to mention, heaven help us, school debt, is highly regrettable. I have known impoverished graduate students refuse to buy a $6000 car that they could have afforded with little or no debt and buy instead a $13,000 brand-new car because an in-law had talked their ears off about safety gadgets. They turned around and were in an accident and totalled that car while they still owed money on it. They should have listened to us in the first place and not gotten into auto debt.

I think you'd have to admit, Zippy, that the present "hedge-fund" proposal, at its best (and it isn't at its best, anyway), is a heck of a lot more risky than a conservative, fixed-rate mortgage on a single house. We'd just be hoping for the best.

But I do appreciate the time you have put into this. I think we will agree to disagree. And I want you to know, Zippy, that I do _hope_ you are right and hold it open as a live possibility. To some extent this all comes down to that age-old question of what money is and the only slightly less age-old question of what happens when government goes into massive debt on behalf of its citizens. Truth to tell, I'm not sure we've seen the answer to that clearly enough displayed yet on the ground, so we are all guessing. Unlike you, I don't conclude from the fact that we are all guessing that it's okay--either economically or morally--much less morally imperative, to take on huge quantities _more_ of such federal debt in order to fend off a looming economic crash.

"Do you know if the Guitierrez loan fell under the CRA? Over 3/4s didn't fall under CRA regulation. Of course that would require actual research."

Did I mention the CRA in my response? The sub-prime racket originated under the rubric of Good Intentions and was based on eliminating the alleged racial discrimination in bank lending practices that prevented millions of minorities from owning their homes. What is funny about your documentation-free argument is that it conflicts with not only the public record, but those organizations that act as defenders of minority interests. Do I think predatory lending was involved? Of course, banks essentially said if we have to extend credit to people with bad credit records and below median wages, then we'll need to factor that into our rate formulas. I've said all along it was exploitative, but the original premise was also fraudulent.

"It's common for low-wage workers in the Washington, D.C. area to be are steered into taking out loans for homes that cost $300,000 or more, on which they quickly default, said Saul Solorzano, executive director of the Central American Resource Center of Washington."
http://www.dailyreportonline.com/Editorial/News/print_article.asp?individual_SQL=7/25/2007@15563_Public_.htm

I think you'd have to admit, Zippy, that the present "hedge-fund" proposal, at its best (and it isn't at its best, anyway), is a heck of a lot more risky than a conservative, fixed-rate mortgage on a single house.
That is far from obvious, actually. Aggregating all of the MBS's into a single portfolio diversifies risk in a way that it is simply impossible to diversify the risk on a single house.

"alleged racial discrimination"?

Alleged. My goodness you're an idiot. It was a matter of official policy.

If you knew how to read, you would see that a bank didn't retail a loan to Guitierrez.

The sub-prime racket originated under the rubric of Good Intentions
No. People make sub-prime loans because they think they can make money. You do know that you don't have to be a bank to make loans, don't you?

MZ:

Are you actually denying that the Clinton administration pressured Fannie Mae and Freddie Mac to change their rules and buy up sub-prime loans, specifically to make home ownership more 'affordable' to poor minorities? I'd be the first person to grant that this is one factor among many in the meltdown, and even that entirely absent that factor the CDO nonsense was its own independent disaster a-brewing; but denying that it is a factor at all is just historical revisionism of the worst kind.

"Alleged. My goodness you're an idiot."

M.Z., always good to engage you and your highly developed sense of moral and intellectual superiority. Before we accept either, can you offer some supporting evidence for any aspect of your argument?

Trace the genesis of the sub-prime market, who the primary recepients were, the reason for government-mandated relaxation of lending standards, and if you have anything new to say, please do so. Otherwise, don't let this distract you from hustling votes for the abortion industry's favorite water-carrier.

Zippy,

That was a second order effect. There is no special class of minority owner securities. The primary reason beind allowing subprime MBS purchases (not to be confused with originatng subprime loans or insuring them against default) was that Fannie and Freddie had consumed the conventional loan market and needed new avenues to add shareholder value. Also CDOs are different from MBSs.

"There is no special class of minority owner securities."

No kidding. Anyone claim otherwise?

"CDOs are different from MBSs"

Right again, but equally as irrelevant as the previous statement.

"Fannie and Freddie had consumed the conventional loan market and needed new avenues to add shareholder value."

So what policies did they adopt? What market did they seek to tap? Did they or did they not alter their credit standards for that market? You made the claim; "The "minority loan issue" is one of those psuedo-facts that is destroying conservatism right now.", and have offered nothing to support that off-the-wall contention.

M.Z.,
I know there was racism in the real estate and banking industry, but harder to make that argument about the latter, circa 1990.

Fannie & Freddie were supposed to make homes more affordable, instead prices increased. Like much of the Great Society, the biggest victims of this debacle are the people who were supposed to be helped by relaxed lending standards. I said earlier, if we had prevented banks from re-setting their APR's and established a lending facility for banks riddled with these loans the damage would have been greatly lessened. The cries of “socialism” would have been deafening, but look where we are now; transferring wealth upstream to avoid another Depression. God save us from ideologues.

Alleged. My goodness you're an idiot. It was a matter of official policy.

If you knew how to read, you would see that a bank didn't retail a loan to Guitierrez.

Regardless, you could state your case with a bit more charity.

Calling J.P. Morgan He was more effective than Paulson and Bernanke combined.
By L. GORDON

In the fall of 1907, it took J.P. Morgan just eight weeks to resolve a credit crisis similar to ours. Several years of buoyant growth and too much risk-taking in poorly understood investments led to needs for capital that could not be met. Morgan, then 70, locked the nation's top bankers into the ornate library at his home for late-night confession sessions. He asked them to lay bare their balance sheets, keeping himself alert with endless Havana cigars.

CorbisThe bankers reviewed one another's assets and liabilities. Morgan then decided which financial institutions had to go and which would live, getting commitments from the survivors and from the U.S. Treasury for infusions of capital. This Panic of 1907 had rattled the New York Stock Exchange and the markets for gold and municipal bonds, ruined several banks and trust companies, and nearly bankrupted New York City. Share prices fell by half. But once Morgan was done knocking banking heads together, markets swiftly recovered. In other words, Morgan was more effective in his day than the combination of Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke have been in ours.

We're now well over a year into this credit crisis. One big difference is that each of the bankers in Morgan's smoke-filled room actually knew the details of his bank's respective assets and liabilities. Today, financial instruments are so complex that banks are still trying to unravel the different pieces of mortgage-related securities.

"J.P. Morgan and his men had direct access to the books of nearly every troubled institution, enabling them to fairly appraise their value," wrote Robert Bruner and Sean Carr, authors of "The Panic of 1907," in Newsday. Now, "despite mandated regulatory reporting, it is difficult, if not impossible, for financial decision-makers to know with clarity what is going on."

As sophisticated as we are now, with hundreds of categories of debt available on a single trading screen, in some ways more information about assets and liabilities was available in 1907, when the workflow device for traders was a simple pencil and scrap paper. We also seem to have forgotten a basic point well known to Morgan, who would have recalled the panics of 1837, 1857, 1873 and 1897: Until prices are established, credit panics will not end and financial firms will remain frozen. The lesson of previous credit crises is that the sooner new valuations are set for bank assets and liabilities, the sooner recovery begins.

SOURCE: http://online.wsj.com/article/SB122264844037784117.html#printMode

Interesting post on the role of GSEs"

http://economistsview.typepad.com/economistsview/2008/09/it-wasnt-fannie.html

Oh, and perhaps now we will apply the Swedish solution; you know, the one that worked.

Also CDOs are different from MBSs.
Yes, and anal-retentive is spelled with a hyphen. You can consider me to be referring to pretty much any mortgage-derived securities. You know, the kind which are causing the lock up in liquidity, which caused Wachovia Bank to crater over the weekend despite the present ban on short selling, and the fixing of which Main Street is responding to by lighting itself on fire and Republicans are responding to by insisting on terrific taxpayer ripoffs which they label "protecting the taxpayer". Those things.

I wasn't attempting to be a smart aleck Zippy. Precision can help us from going down rabbit holes.

Al,
The Swedish proposal is intriguing and gives some form to what we should be pursuing. The next 2 years will be consumed by the restructuring pf our financial infrastructure and readjusting our way of life within the harsh limits of reality.

In the meantime, it appears the 700 billion figure is already being revised upwards by our planners;

"There was already a sense that the plan would not be enough to break the log jam in the credit markets, where banks are even refusing to lend to each other. Earlier Monday the Federal Reserve raised the amount of swap lines it has with foreign central banks to $650 billion from $290 billion. It also announced bigger and longer-term auctions totalling more than $400 billion, but the credit markets remained stuck."
http://www.forbes.com/businessinthebeltway/2008/09/29/bailout-congress-credit-biz-beltway_cx_bw_jz_0929vote2.html?partner=rcp

I suppose a seance to consult J. P. Morgan wouldn't help? :-)

"In the meantime, it appears the 700 billion figure is already being revised upwards by our planners;"

That is why the Dems (and any Reps who want to, of course) should pass a bill that temporarily nationalizes those institutions that are under capitalized and dare Bush, in effect, to veto it.

I believe the Brits have already done this with one of theirs.

http://news.bbc.co.uk/2/hi/business/7249575.stm

Trying to drive straight ahead by looking in the rear view mirror is not consistent with a long life. Morgan-like actions failed in 1929 so I'm not sure just what is to be accomplished in this crisis by invoking 1907.

"That is why the Dems (and any Reps who want to, of course) should pass a bill that temporarily nationalizes..."

I'm afraid courage and creative statesmanship are curently hard to find at the center of power. Add the crippling effect of believing one's own proganda and you have major obstacles in the way. The Democrat caucus has just enough members convinced in their view that America is rife with bigoted, sometimes violent people beholden to discredited religious dogmas to prevent them from taking up your proposal before Election Day. Come January they will be haunted by memories of Clinton’s triangulation and the resulting loss in power, prestige and perks.

A deleveraging crisis creates a great deal of political instability and inflames a host of cultural tensions. The last thing Democrats want to become is the singular face of a globalist, technocratic elite. The temptation to lustily pursue their full agenda will conflict with the internal fear of engendering a backlash that costs them their recent electoral gains. Expect to read a lot of somber opinion pieces about the innate truculence of an ungrateful and unenlightened electorate in about 2 years.

On September 26, Blackadder said:

An unnamed economist says that some unnamed third parties told him that some unnamed fortune 100 companies would not be able to make payroll on Tuesday unless there is a bailout before then. I don't know that this is the most reliable source of information, but it does provide us with a testable prediction. If Tuesday comes and no bailout has been agreed to, we will see whether the warnings given here were accurate, or whether they were the result of panic and/or scaremongering.

Today is Tuesday. See Michelle Malkin. "Carnage in the Markets! Oops, Never Mind."

http://michellemalkin.com/

Is this the time for imprudent gloating? "Carnage in the Markets! Oops, Never Mind.", is kind of like coming into the dugout and telling your pitcher he has a no-hitter going after 6 innings. What a complete violation of mojo etiquette and commons sense. Unreal.

Wouldn't it be nice if she were right? Look, I like to be a Puddleglum-y type and face the worst. What I challenged was the wisdom of the bailout, not the dire predictions. But let's face it--these supposedly wholly theoretical economists who don't know beans about the real world _are_, some of them, challenging the dire predictions. Since nobody is supposed to be happy about the bailout, the best outcome would be if, in fact, there is no bailout _and_ the market does not collapse. There have been a few actual, concrete predictions made, as the quotation I gave from Blackadder indicated. One of them named today. When people start saying, "There's going to be another Great Depression, and it starts next Tuesday," I at least give them credit for making concrete predictions. But the virtue of concrete predictions is that they are falsifiable, and that today is Tuesday is an undeniable fact. You may not like Michelle Malkin's style,a nd indeed, she may be jumping the gun. I haven't entirely given up on being Puddleglum and accepting the worst. But how nice it would be if the sky were not really falling. In which case, not rushing into the bailout will have been justified in the event.

It is always important to understand the self-referential and self-fulfilling nature of the market. Right now there is virtual certainty in the markets that the Republicans were spanked badly enough yesterday that substantially the same deal will be passed very soon now, most likely this week. The plummet yesterday - already shored up by the ban on short-selling - was not predicated on an expectation of no deal, but on continued uncertainty about the terms. If everyone on Wall Street believed that no deal was going to happen, yesterday would look like a walk in the park. And that is just in the equity markets.

Zippy - as a Catholic do you not profess a debt to the Truth?
Is stealing immoral?
Is lying a sin?
IMHO you are proposing your very own American Cafeteria Catholic flavor of the tyranny of relativism with your "virtual certainty" - what is happening in our economy is not the operations of a "free" market in any philosophical sense, since the absolute value of the terms of exchange have no rational meaning - the value of the legal tender, the dollar, is a figment of the Fed's imagination.

There are voices in the economic world (since Menger founded the Austrian school in 1871) who know that value is "real" - either you have wealth that can sustain you and your dependents or you don't. Our conundrum is that the State has conned enough of its citizens to favor the financial services sector that has colluded with it to concentrate its power to expropriate the private property (wealth in savings and investments) of its citizens - stealing the real purchasing power of the fiduciary media used to express value.

http://www.europac.net/media/PeterSchiff_10-01-2008.mp3

Taxpayers will be safe perhaps in your scenario, but the dollar is under attack. NOT safe are all wage-earners and savers of assets denominated in the Federal Reserve Note (Greenbacks) and that's the lying part - the moral hazard of the corporatist statists in league with Vulture Capitol-ist Guiliani (http://www.marginalrevolution.com/marginalrevolution/2008/09/vulture-capitol.html) cannot hide from the evil they have perpetrated.

Lydia - I see your expertise is in epistimology, so I wanted to make sure you were aware of the praxeological ("practices" of acting persons, cf McIntyre "After Virtue"; Mises "Human Action" and JPII "The Acting Person") aspects of the debate on economics:
"Epistemological Relativism in the Sciences of Human Action"
http://www.mises.org/story/2975

where many in today's debate on "stability" (taxes as 'patriotic' duty) have confused ends and means. I hope the material will assist you apply your expertise to cut through the obfuscation of Catholics like Zippy who would have us believe that our "Dear Leader" has our best interests at heart (since the doctrine of the Fall tells us he does not, nor do either of the two candidates in line to replace him either, since none of the three share a classical Catholic understanding of how conscience makes the man - to be truely human is to be free to act morally and chose the good, to be enslaved is to have another tell you they know what is good for you, the dictatorship of relativism at work with the "labor theory of value" of Marx or Milton Freidman).

Clare:

I appreciate it that people disagree with me. I don't appreciate it when people call me a liar, nor am I even slightly impressed by the proposition "either you are a dogmatic Austrian or you are a liar".

Also consider Mirror of Justice recent focus on the jurisprudence of
fractional reserve banking as a question of private property rights that are not well resolved - does the government have the right to debase our money without our consent? (Juan Mariana SJ denied that Carlos Re had such a right to finance his profligacy and wars of conquest of the 1600s)
see Google cache (the website has a "security certificate" bug of some sort )
http://74.125.113.104/search?q=cache:JjQVh14zD7QJ:https://mises.org/about/3238+mises+spanish+scholastic&hl=en&ct=clnk&cd=3&gl=us&client=firefox-a
more on the Spanish roots of the Austrian school here:
http://mises.org/journals/aen/aen17_2_1.asp
and more on JPII and prudence as the necessary virtue ot guide right reason here
http://blog.mises.org/archives/003415.asp


Opops mea culpa, oversight on the MOJ links
mirrorofjustice.blogs.com/mirrorofjustice/2008/09/a-catholic-appr.html
mirrorofjustice.blogs.com/mirrorofjustice/2008/09/the-financial-c.html (Rick Garnett, Notre Dame)
mirrorofjustice.blogs.com/mirrorofjustice/2008/09/general-thought.html (Elizabeth Schlitz Uni St Thomas)
Fractional Reserve Policy, Roman Law, and the Financial Crisis
mirrorofjustice.blogs.com/mirrorofjustice/2008/10/fractional-rese.html

(and please do check the reject spam pile for my last post on spanish scholastics, JPII etc "retained for approval")

Zippy, I'm a sinner too, we all are, don't take it personally!
There's a lot of dissembling going on - you propose calling this expropriation of taxpayers private property a "virtual certainty" predicting a future gain - if you're not being dishonest, I maintain your delusions are as dangerous as those BXVI warned the good people of France about when he visited Lourdes recently. The institutional usury Fr Bernard W Dempsey S.J. warned of in 1956 has come home to roost - fractional reserve banking untethered from exogenous value is a gnosis of the first order where only the "elect" know the risks. Hogwash! Most Americans are naturally prescient of the risks to our economy from these illuminati illusions - moral hazard rewards immoral behaviour. If you want it expressed in a culture of death metaphor: Contraception (booms - aka - price inflation) encourages abortion (busts - aka - buyers-remorse deflation). You cannot argue the evil "effect" without reference to the evil "cause"!

I'm not awfully bothered whether you're impressed with my "dogma," in much the same way as I try not to offend those who would have us believe that the Return on Investment of a fecund conjugal act is merely a bunch of tissue belonging to the owner of the uterus that was "invested" in. Roe was unjust. Abortion is intrisic evil. You may not do evil that good may come of it. You may not suggest that robbing Peter to pay Paul is honest, when it is obvious it is not. You may ask for a charitable donation from Peter to help Paul when he's gone bankrupt, that's how freedom in morality works.

Your gold and lead analogy is a narrative of propaganda, no better than attempting to blame gravity when the planes of certain airlines all fall from the sky. No amount of revisionist physics will prevent badly-designed instruments from condemning passengers to perish. The sooner the bad actors are removed from the economy, the better for all of us virtuous actors pursuing economic practices we deem fit for purpose (saving for retirement is a fools game if the denomination deferred for future consumption is being devalued, the net gain is ZERO).

oops again that would be 1946 not '56
and more on "dogma", that good which we Catholics value for its rigor and immutability (cf Gold) in times of fear and doubt (cf collapsing FIAT currencies), from de Soto:

" Ironically, the Reformation actually set back the cause of free-market economics. The church had long been a vital equilibrating power to the state. As the church declined, so did the wisdom of its best economic theorists, while the power of the state and the influence of its apologists grew.

so why did it take an Austrian to rediscover Spanish economics?

de SOTO:

The books of the scholastics were typically published in Brussels and in Italy, and they were sent to Spain and to Vienna. So they made inroads this way. There is also a scholastic tradition of thought in Austria which is, after all, 90 percent Catholic. "

see http://mises.org/journals/aen/aen17_2_1.asp

Clare:

Your attempt to make comprehensive assent to Austrian economics a doctrine of the Catholic Faith, dissent from which is sinful, is certainly one of the more amusing forms of perverse economicotheology I've seen in the last few weeks. It is almost as amusing as finger-wagging about my capacity to grasp which kinds of investments show promise of profit and which do not.

"Look, I like to be a Puddleglum-y type and face the worst."

Me too. There is something about facing reality boosts one in the virtue of courage. I always make it a practice to start with the worst case scenario and work up from there whenever making what is laughingly called "plans", or considering various contingencies. This approach is salutary in that it minimizes shock and disappointment, while cultivating an attitude of gratitude; "thank you Lord for a separated shoulder instead what could have been a neck injury." And so forth.

In this economic crisis, I fear misfits like myself, who always felt modernity a house of cards, will be vindicated in ways that provide few emotional buffers or consolations. Watching the sacking of Rome had to be heartbreaking and harrowing for even the most alienated of Christians.

We've built an economic Tower of Babel of opaque abstractions, unaccountable technologies and sophisticated deceptions as a result of our arrogant self-assertion. Unwinding the complex interconnections of financial instruments and institutions is far less daunting than asking corrupted money-changers to renounce the very practices and system they so successfully gamed. Harder still is addressing the spiritual disorder upon which modern economics and politics are founded.

Unwinding the complex interconnections of financial instruments and institutions is far less daunting than asking corrupted money-changers to renounce the very practices and system they so successfully gamed. Harder still is addressing the spiritual disorder upon which modern economics and politics are founded.
I agree Kevin. Using the defibrillator is the easy part; reforming our lives is the difficult part.

I don't think the man on the street understands the fact that we had an actual panicked bank run a week ago thursday. Not the threat of one, but one actually underway for about two hours, one which could have made all of the man on the street's savings disappear. Not mom and pop in long lines outside the bank demanding all their money now, but corporations and other institutions in long computerized lines outside the bank demanding all their money right now. This was averted by - and only by - Paulson's immediate promise that money market funds would be backstopped and $700 billion would be allocated to sop up all the illiquid mortgage paper.

Part of the reason everyman doesn't understand that that is what happened is because it happened out of everyman's sight. We've become very, very expert at hiding pain and atrocity beneath layers of abstraction, automation, and media. It almost killed us just now, and we are still on a gurney in the emergency room; but all of this is hidden behind a veil.

"It almost killed us just now, and we are still on a gurney in the emergency room; but all of this is hidden behind a veil."

Zippy, A life sustaining sense of the Incarnational has been drained from our everyday lives. We rejected the Divine Mysteries and are now on a gurney, shielded by veils of our own making.

"The sooner the bad actors are removed from the economy, the better for all of us virtuous actors pursuing economic practices we deem fit for purpose.."

Excellent observation and better a twenty than a ten.

Zippy, even from your own perspective I think that "criminal negligence" is not the correct term for Representatives who spent a heck of a lot of time not only boning up on the crisis but also fighting the bailout/rescue, because, based on the work they had put in, they thought it was the _wrong thing to do_. 'Negligence' usually implies that one hasn't tried, hasn't informed oneself, is just going off on one's own way, doing what is convenient to oneself, and letting things go however they are going to go without caring. You could hardly say that for Congressmen who stayed in session and argued against your views. That's just not negligence. I would suggest, from your perspective, that "criminal wrong-headedness" might be more accurate. A negligent mother sleeps all day and lets her kids get into the household poisons. A wrong-headed mother talks to a bunch of people, does Internet research, talks to doctors, and finally decides to go with, say, naturopathy rather than conventional medicine for her beloved sick child about whom she thinks night and day. The latter is not negligent.

Mind you, I'm trying to put this more accurately from your own perspective. I'm not accusing the Senators and Representatives who fought the bill to the last of being even wrongheaded, criminally or no. But 'negligent' I won't let pass in total silence.

Oops. I see that belongs in the other thread. Will re-post there.

Say good-bye to the last vestiges of a Constitutional order. The New Rome will pass away much like the original.

So, is this the biggest bait and switch in American history? There will certainly be critics who say that Paulson and the Bush Administration were disingenuous when they were selling Congress and the American public on the program back in September. And they’d probably be right. Paulson said today, he knew when the bill was signed the purchase of trouble assets wasn’t the right solution to the problem.

http://blogs.abcnews.com/theworldnewser/2008/11/want-some-gover.html

Kevin,

You should've seen the many and diverse arguments thrusted back and forth this morning at CNBC concerning this ever sorry arbitrary state.

DOW 7000, here we come.

Ari,
The Dow will be the least of our problems and trading will likely be suspended for a week when it goes below 7000. No, the California State Supreme Court will overturn Prop 8, just to further drive home the point: the experiment in representative government is over. We are now a nation of men shackled by one law; the will to power.

Kevin,

I wanted to skip over those particular ramifications in order to limit the discussion.

However, now that you've openly expressed them, I'll just say that the representative government you speak of was never one to begin with; it was, all the while, but an illusion.

This reality has always been apparent but largely ignored.

I disagree. We once had customs and governing forms that served to thwart, or slowdown the designs of the plutocracy.

But check out this clip of Peter Schiff correctly calling this crisis in 2006, while being treated as a fool by the usual apostles of unlimited growth and economic progress. Hubris meet nemesis;http://distributism.blogspot.com/

Kevin,

Even in the early days of res publica, the patricians engaged in creating the illusion that had the plebs believing such things as the Law having application even to those of the patrician order; would it be any different in this ersatz modern-day reincarnation (both recent & historical events should serve as proof of such), which only redeeming quality some say is that it is the least worse of governments?

These days, don't expect those who have the dignity of a George Washington; they're more Benedict Arnold, plain & simple.

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