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It was a Bank Panic

I think people still don't understand what Secretary Paulson was faced with a week ago Thursday.

It was a bank run.

Actually, it was a bank panic, since a bank run applies to one bank and a bank panic is when it is widespread and happens to many banks at once.

We did not have the threat of one, but one actually underway, with all that that implies: disappearing savings accounts, following the Joads west with all remaining possessions packed into the car, etc.

We have not had a bank panic like that since the Great Depression.

It was not a visible bank panic, with physical lines of people outside of physical banks. It was an invisible bank panic, with computerized lines of people and mostly institutions outside of the computer network doorways of the banks.

This bank panic was stopped by one thing, and one thing only: Secretary Paulson's promise that (1) money market funds will be backstopped, and (2) $700 billion would be allocated to sop up all the illiquid mortgage paper clogging the system. This should work, and if it works and is left to be run well it will even be profitable, though the delays introduced by the criminally negligent House of Representatives last Monday have done irreversible damage.

So yeah, swallowing the "bailout" is a bitter pill, and it is unfair, and it sets terrible precedents, and it will be abused and misused in every conceivable way (even though run properly, with less interference by Congress rather than more, it could be profitable and could reduce the national debt), and all that. It was the worst thing to do, except for all the alternatives.

And yes, it may not be the last and final major intervention required.

What made this bank panic different from the ones during the Depression was its invisibility to everyman. You didn't see the lines; you didn't see the "bank tellers" involved in millions of transactions each second during that two hour period. That is a big problem with modernity: our relentless capacity to hide bad news and atrocity behind computer network cables, carefully prepared media presentations, and sanitarily marked medical waste bins.

Using the defibrillator was the easy part. Reforming our lives will be the difficult part. And if we don't reform our lives, we'll just end up in the emergency room again.

Comments (123)

Zippy,
The very structures we've created are themselves large impediments to serious self-reform. We've slavishly pursued illusions of limitless growth and progress for so long, that perhaps Technology may rule us us more than we'd like to admit.
One thing is certain, too many may are too hopelessly invested in this system to make a mending of ways anything but painful.

Kevin:

I have an inherently conservative, which is to say patient and trusting in Providence, temperament. That means that while the ultimate reforms I see as necessary are so radical that most people find them literally incomprehensible, at the same time I am firmly against any radical revolution or counter-revolution from without. That includes radical revolutions brought about by allowing the economy to literally burn down. Many people simply are not seeing the "bailout" as the inherently conservative thing to do; but it is the inherently conservative thing to do. One hypothesis is that they do not see it that way because they don't fully understand the problem; so I'm trying to help people like me in temperament to fully understand the problem.

People who are in favor of radical revolution and a fast-track overthrow of the current order are not going to find my understanding of things very palatable. People who on the other hand see the current order as something in need of no reform or just minor tweaks are also not going to find my understanding very palatable. In general, neither the impatient nor those satisfied with modernity will find my perspective very palatable.

But to the extent anyone exists with a temperament like mine, I can hopefully, for that sort of person, help to make the present hubbub more understandable.

"So yeah, swallowing the "bailout" is a bitter pill, and it is unfair, and it sets terrible precedents, and it will be abused and misused in every conceivable way (even though run properly, with less interference by Congress rather than more, it could be profitable and could reduce the national debt), and all that. It was the worst thing to do, except for all the alternatives."


Zippy,
Not counting the parenthetical digression, the paragraph above is just five words too long.

And it raises a question or two: What's worse -- a bank run, or a bank run by government? How about lots and lots of banks run by government?

I know how I'd answer those questions. I also know that effectively nationalizing mortgages is the dumbest economic idea to come down the pike in a long while, and that making US taxpayers pony up $700 billion for the privilege of watching one disaster take the place of another is abject foolishness.

Early in our history, because of the imposition of rather modest taxes, the price of tea and other things was getting too high. So we forcibly rebelled, because we opposed taxation without representation. In light of recent events, I desperately long for the opposite: How about a little representation without taxation? The tea tax was nothing compared to the price of bailouts. I suspect, and I hope, that the statist nincompoops who voted this travesty through will face a severe backlash at the polls next month -- and they deserve every bit of it. Indeed, they deserve worse than that, but because we are law-honoring citizens, we can't give it to them.

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.

"In general, neither the impatient nor those satisfied with modernity will find my perspective very palatable."

Agreed, the Burkean position was to support the bailout and the only revolution those of that persuasion can support is one of the heart. And I loathe the libertarian and faux populism that argues for the crash and burn scenario. The people who utter such nonsense have never seen the business end of a de-leveraging crisis.

My fear though, is that the system can't be reformed. At least not without a full repudiation of the mental outlook that produced it. A decentralization of power and a return to local autonomy seem the only humane paths to take, but how we get from here to there, is the great question. And in that regard, Burke is of little help. He was repelling a revolution. Our task it to overturn one, while eschewing the means and methods of the Jacobin, or professional rebel.

Kevin, even if I refrain from much comment on your full-scale and whip-lashing conversion from skeptic to vocal and wholehearted supporter of the bailout, can you guys at least try to hear how it sounds to say that someone who opposes a 700 billion (and more) dollar purchase, by the United States federal government, of "distressed" mortgage assets is a revolutionary? Can you even hear how it sounds to a fiscal conservative to hear such a massive government plan referred to as the only "Burkean" option and to those who oppose it, as opposed to those who were proposing it, as Jacobins? I mean, seriously. Just listen to that.

I know how it sounds. But it is true. And I'm sticking with negligence. Someone who makes the actual choice has a responsibility to know.

swallowing the "bailout" is a bitter pill, and it is unfair, and it sets terrible precedents, and it will be abused and misused in every conceivable way (even though run properly, with less interference by Congress rather than more, it could be profitable and could reduce the national debt)

This would seem to be a fairly significant walkback from Zippy's prior comments on the subject.

Zippy's line about the bailout being "the worst thing to do, except for all the alternatives" might be more plausible if it weren't for the near unanimity among economists that there were better alternative ways of dealing with the problem.

Likewise, Zippy's line about the "irreversible damage" caused by the failure of the House to pass the bailout on Monday might have more punch if it weren't for the fact that the Treasury is not planning on even starting to buy up assets for a couple of weeks.

Michael:

If you read my other post on the subject, you'll see that I agree that the Democrats' "stealth socialism" through Fannie and Freddie is one of the root causes. In fact I was called a racist for saying it.

BA:

I've already talked about the difference between finance people who are measured on results and economists who don't even have to be right to draw a paycheck before, so there isn't any need to address it again. As for the timing of buying up assets being a couple of weeks out, that is (manifestly) irrelevant. Nobody claimed that if Paulson did not start actually buying assets right this instant that the bank panic would resume. The bank panic was halted by Paulson's commitment to backstop money markets (some of which actually broke a dollar -- which is the corporate equivalent of the bank telling savings account customers that they can only have IOU's, not cash, and by the way they are only getting 97 cents worth of IOU on the dollar, and they'd better take it now because it may be less tomorrow) and allocate $700 billion to buy up assets. Once again you are treating finance as if it were a machine, perhaps some kind of plumbing with control valves or something, rather than human beings making rational and sometimes irrational choices, and, critically, involving trust. And while it is impossible to measure the cost of the criminally negligent House of Representatives undermining that trust as it ripples through the system, you can be certain that it is not insignificant.

But I'm frankly sick of talking about this subject with suicidal idealogues. My post is here so that people will understand why I see this as the most conservative possible action under the circumstances. It isn't an invitation to try my patience with vincible ignorance or childish games of 'gotcha'.

Zippy:

In fact I was called a racist for saying it.

Such abuse is a major reason that antiracism as it actually exists in our society at this time is evil, perhaps irremediably so. The word racist actually does have a mostly innocuous dictionary definition, but hardly anyone actually uses the word in the dictionary's way, nor has done for several decades. The word has become a content-free, yet still quite effective, insult, as you have found. It is regrettable that you have had to put up with it.

Other than that, I fear that I agree with Michael and Lydia. You may be right about the bailout, and as usual your reasoning is sound; but if the Congressmen that opposed the bailout are negligent then I will be negligent right along with them.

Now, now Lydia. Please follow the argument. My initial opposition was based on;
1) rapid passage of an unexamined measure of this magnitude would make a mockery of constitutional norms. More appropriate to Argentina than here.
2) hopes for improvement in terms of taxpayer protection, pricing of the securities, oversight and establishing a historical record that would serve as the basis for further reform. I said this at the time.

I was pleased the first bill was voted down. Unfortunately, even though few improvements were made, the need to loosen the money supply and tamp down the bad psychology taking hold within every sector of our economy, argued for passage this time. Not sure how such a resigned, fairly desperate argument as this can qualify me as a "...vocal and wholehearted supporter of the bailout"? But if changing one's mind is a vice, I plead guilty.

True to modernity's penchant for abstractions, we have constructed an opaque financial system that concentrates wealth in the hands of a few, remote, unaccountable technocrats. That is revolutionary and the kind of thing conservatives used to oppose. But then anyone who hails the merits of "creative destruction" and incomprehensible technologies is not genuinely conservative.

The system needs to be dismantled. The Burkean response is through gradual, evolutionary changes that do not cause massive social and economic upheavals. I am not convinced this is possible, but it is a worthy goal.

What is no longer acceptable is for ideologues to defend economic machinery they don't understand and can't explain to the rest of us.


Zippy,
Disagreeing with you, or with Treasury Secretary Paulson, is neither Criminal nor Negligent.

I would agree with you that the idea of letting the economy burn in order to build upon the ashes is suicidally stupid. I heard no-one making that argument. What I did hear is that the commitment of $700 bn on the basis of, basically, "I said so" is monumentally stupid. It was also monumentally stupid to hold a vote without being sure you could win. If the Secretary couldn't sell his program, and refused to actually describe the problem except in the vaguest and most useless terms available, then it's not the fault of Congress for not just trusting him. Their JOB is not to trust him.

Think of it this way. Let's say you're on the BOD of a mid-sized firm. One day the CFO comes to you and demands that the company issue a huge bond, totaling 1/3 of the capitalization of the firm. He also wants a commitment from the Board that he will be allowed to do anything he wants with the money, and an indemnification from the company for any acts he commits with regard to the money including criminal acts. When pressed on the need for the bond issue, he just keeps repeating that if he doesn't get the money, the company will go bankrupt, and all the board members will go to jail. Oh, and the board is not allowed to discuss the matter, just an up or down vote, and that vote needs to happen now, today.

Would any company on earth go along? That's what it looked like from the outside.

Danby:

Analogies (poor or otherwise) aside, sometimes immediate action is required, and those who get in the way or insist on homeopathic remedies or 'toughing out' a heart attack are criminally negligent. Screw appearances.

Howard:

I read your post, and as a non-ideological piece it is an admirable point of view which I share. Ask a pilot what the first thing to do is in an emergency, and he'll tell you "wind your watch". Unthinking reaction almost always makes things worse. On the other hand, taken to ideological extremes it would be suicidal, and it isn't as if Paulson hasn't spent all his time thinking through scenarios. Sometimes there is a mountain straight ahead and the pilot has to take confident evasive action RIGHT NOW to avoid disaster. Sometimes there isn't time to make everyone understand and get everyone on board the decision, which may be undemocratic, but hey, tough cookies. I'm an anti-democratic authoritarian by temperament, which helps; but when conservatism and/or democracy are suicide pacts, well, to Hell with them.

The Burkean response is through gradual, evolutionary changes that do not cause massive social and economic upheavals

Kevin, this particular bill didn't look like a gradual, evolutionary change in the direction of limited government and sound money. It looked like a giant leap in the other direction. This disagreement is hardly about incrementalism vs. revolution.

Zippy, look, I don't even know enough about this to spell out the alternatives that some of those economists you so strongly disagree with were proposing, and it would be to some extent fakery for me to go look them back up and then list them as if I knew independently what I was talking about. So I won't try to fake it. But the fact remains, as Blackadder points out and as I pointed out when I put up a URL on your site, that some of these ivory-towered guys _were_ proposing other things to try rather than simply saying, "Let it all burn, and never mind." Why, on your part, the adamant opposition to at least trying some of those things instead?

Does Paulson have to be right to draw a paycheck? Does Bernanke?

The markets aren't exactly doing so great this morning, and the Dow took a drop when the bailout was passed. If we still have a huge financial crash, no one will say that Paulson was wrong. They will just say, "Think how much worse it would have been if we hadn't gone with the bailout." It's not impossible that that will be true, but it does rather make falsification difficult here and does rather blur that supposedly sharp distinction between the guys out there in the real world who have to be right to draw a paycheck and the academics who don't.

Lydia,
Before you can put the patient on a rigorous rehabilitation regime, you have to stabilize his condition. The alternative to this measure we' were told by some was "let nature take its course", like Japan and Russia.

Fine. Japan went through a 10 year deleveraging crisis of negative and zero growth. It entered the crisis as;
1)the world’s top creditor, with a vast pool of household savings to cushion the trauma.
2)In contrast America starts its purge with net external liabilities of $3 trillion, and a savings rate near zero.
3)Foreigners own over half the US Treasury debt, and two thirds of all Fannie, Freddie, and other US agency bonds.
4) Japan is a homogenous island culture formed by Shinto and Buddhism with a collective memory of WWII, Hiroshima, Nagasaki and the complete devastation that entailed, as well as the humiliation of an occupation.

In other words, the shock therapy of such a repeat happening here is likely to prove fatal on many fronts. Not the least of which is, whatever remains of "free enterprise".

No true follower of Burke would ever accept such an approach.

Umnnnhhh..."a bank run...or panic"???

I have a lot of friends in the bank biz here in SE Wisconsin.

NONE of them mentioned deposit shrinkage. NONE.

Did you mean "money-market-fund" panic?

Lydia, the markets you are looking at aren't the credit markets. Read below. And hold onto your hat;

Oct. 6 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke may find the next fronts of the financial crisis to be just as chilling as last month's downfall of Wall Street titans: its spread to corporate America and state and local governments.

Companies from Goodyear Tire & Rubber Co. and Duke Energy Corp. to Gannett Co. and Caterpillar Inc. are being forced to tap emergency credit lines or pay more to borrow as investors flee even firms with few links to the subprime-mortgage debacle. California Governor Arnold Schwarzenegger says his and other states may need emergency federal loans as funding dries up.

A cash crunch on Main Street would endanger companies' basic functions -- paying suppliers, making payrolls and rolling over debt. The widening of the crisis suggests that Bernanke and Treasury Secretary Henry Paulson may have further fires to put out even as the Treasury sets up the $700 billion financial- industry rescue plan approved last week.

``The rest of the economy is clearly being affected right now by the tightness of credit,'' said Kurt Karl, chief U.S. economist at Swiss Reinsurance Co. in New York. ``It's just gathering momentum in the wrong direction.''
http://www.bloomberg.com/apps/news?pid=20601087&sid=aktjzhZEdgfY&refer=home

Why, on your part, the adamant opposition to at least trying some of those things instead?
When you have seventeen pilots all at the controls at once, you are going to crash. The pilot in command might or might not do the ideal thing, but there is a time for criticism and a time shut up and row.
Does Paulson have to be right to draw a paycheck?
For many years, yes, he not only had to be right he had to produce actual results. That distinguishes him from critics significantly in my mind.

Also, the stock market is the tail on the dog here.

Very well, Zippy. If you won't listen to academic economists (which, by the way, is what our Fed Chairman was before he took his current job), then let's focus on "finance people who are measured on results." Here is a bloggingheads with Yves Smith, an investment banker. Despite not being a pointy-headed ivory tower puffhead, she is no fan of the bailout proposal. I believe the words she used to describe it were "written on tissue paper." Mussolini is also referenced. She, at least, seems to agree with the economics profession that there were better alternatives to the bailout bill, and in fact is very skeptical that the bailout will do more than delay any crisis by a month or so.

Did you mean "money-market-fund" panic?
Yes. Money markets are the savings accounts for corporations. A run on them is ultimately more dangerous than a run on personal deposits. Do you really think you are immune to a bank panic just because it is starting at the corporate tellers rather than the personal tellers?

Blackadder:
I don't know Yves Smith from a hole in the wall, but she is not the Treasury Secretary. You'll find many people who disagree about many things right now. Why would you expect anything different? For that matter, why would you expect me to be impressed by an argument from authority at all?

Here is Arnold Kling. True, he is now an adjunct professor of economics, but prior to that he was chief economist for Freddie Mac (he left in the early 1990s to start his own business, and which he sold for a sizable profit in the late 1990s. He also thinks the bailout is worse than nothing, though he does not, in fact, propose doing nothing in response to the crisis.

The abstraction of modernity or the incarnational understanding of reality as held by traditional Christianity for several millennia. Looks like we made the wrong choice;

"The instruments themselves are at the heart of this mess," Grant says. "They are complex, in effect, mortgage science projects devised by these Nobel-tracked physicists who came to work on Wall Street for the very purpose of creating complex instruments with all manner of detailed protocols, and who gets paid when and how much. And the complexity of the structures is at the very center of the crisis of credit today."

http://www.cbsnews.com/stories/2008/10/05/60minutes/main4502454.shtml

...prior to that he was chief economist for Freddie Mac...
Isn't that sweet. Did he ever date Barney Frank?
"And the complexity of the structures is at the very center of the crisis of credit today."
Precisely. There is a growing capitalization problem, at the root of which is a liquidity problem (though both are now expanding to the point where fixing liquidity may not leave the capitalization problem in a state addressible by the market), at the root of which are these complex illiquid mortgage-backed securities, at the root of which is (possibly criminal) investment bank greed and irresponsibilty combined with ratings-agency negligence, at the root of which is main street buying things they cannot afford, at the root of which is main street narcissism and debt snake-oil salesmen and back-door socialism through credit, at the root of which is ... I could go on indefinitely.

"For many years, yes, he not only had to be right he had to produce actual results."

Zippy, Many of those results were ill-gotten.

I agree with you on where we are at in the crisis, but at some point a full accounting must be rendered by those who sailed under the pirates mast.

I don't know Yves Smith from a hole in the wall, but she is not the Treasury Secretary.

Well, ex-Treasury Secretary Paul O'Neil has also called the bailout plan crazy, but if by saying that the bailout was "the worst thing to do, except for all the alternatives" what you really meant was that Paulson was in favor of it, then I have no objection. Paulson clearly favors the Paulson plan. I had assumed, though, that by speaking of the bailout as being better than all the alternatives you were saying that there weren't any, you know, better alternatives.

I had assumed, though, that by speaking of the bailout as being better than all the alternatives you were saying that there weren't any, you know, better alternatives.
Yes, that is exactly what I mean. First and foremost, it is the best thing to do because it is what he actually promised to do, the promise which halted the bank panic. So if there is a reasonable financial case for it at all, which there is, it is presumptively what we should do, even if there are theoretically better alternatives, since the core issue is trust. You can't treat what is fundamentally a leadership and trust issue as a primarily theoretical and technical issue. There are theoretical and technical issues which are of paramount importance, to be sure, but treating those things as all that matters is stupid beyond words.

What I don't understand is why you think hurling opinions from various people at me is supposed to change my opinion.

Blackadder, every Titantic should have a resident wit like you on board. Libertarians are surveying the crash of a market system built on obscurity and impenetrability and yelling for more...invisibility. Splendid. At least this monstrosity has a footprint and the tiny patina of accountability. Not so for your ideological alternative.

Oh, as for your comedy routine, try to factor in the whereabouts of Paul O'Neil when this whole Ponzi Scheme was being devised. If only to rebut your hecklers.

Isn't that sweet. Did he ever date Barney Frank?

Oh, snap! Kling left Freddie in the early 1990s, before the housing bubble got started. Paulson, by contrast, was CEO of Goldman from the late 1990s until 2006, precisely when kind of the shenanigans that got us into this mess were in full swing.

So you detest Paulson, BA, and think he's a crook. I get it. Understand that the game here is "follow the leader or die".

Hold on, Zippy: You are the person who keeps saying that this is about people who really have to get results vs. pointy-headed academics who don't have to get results. Blackadder's "throwing opinions" is meant to answer something you've actually said. And as for "arguments from authority," you have repeatedly implied that we should listen to the practical financiers because they know what they are talking about, and that on their authority we shd. disregard those stupid economists, who were merely "throwing gasoline on the flames" when they counseled against the bailout.

And as for a trust issue vs. a technical issue, what-huh? That astonishes me. I mean, back when I questioned whether this was going to make things better vs. making things worse, you seemed to agree that a different evaluation of the economic facts would and should yield different conclusions about what we should do. Now, you seem to be saying that it doesn't really matter whether Paulson knew what the heck he was talking about, it was right to do what he proposed *just because he was in charge and it was what he proposed* and because on September 25 that proposal seemed to have the causal effect of stopping the run on the money market funds. That's it? That's all? No more factual basis, no more evidence for predictions of what will happen as a result, than that is needed for us to "shut up and row" and follow Mr. Paulson into billions of dollars of additional national debt? I mean, I'm just astonished. I had no idea that was what lay behind all of this in your perspective.

Libertarians are surveying the crash of a market system built on obscurity and impenetrability and yelling for more...invisibility.

What are you talking about? First of all, if you think that it's only libertarians who didn't like the Paulson plan, you need to go back and look at the links I provided earlier. John Lott interviewed economists from across the political spectrum late last week. Nine out of ten opposed the bailout bill, and the one who supported it had serious reservations.

Nor is it clear anything I've said here means we should have more invisibility in the financial markets. As far as I can tell, that charge is just out of left field.

try to factor in the whereabouts of Paul O'Neil when this whole Ponzi Scheme was being devised.

And where was Paulson during this period?

Lydia:

I've made lots of technical arguments that Paulson's proposal makes sense, many times with the caveat that it is probably not ideal.

But yes, when leadership and trust are a central issue in an emergency where something has to be done immediately, and you have a leader who says that we are going to do X where X is a sensible thing to do, it becomes presumptively the thing that should be done. Failing to do it undermines trust and leadership, which are part of what is at the core of the problem. What is so bloody outrageous about that?

This is not a machine which is being optimized in some fashion. It is not a theoretical construct which is being tweaked for evaluation by peers at an academic conference. It is a bunch of interconnected human institutions functioning in real time. Why is it shocking that leadership and trust are central concerns?

"What are you talking about? First of all, if you think that it's only libertarians who didn't like the Paulson plan,..."

What I'm referring to is the anachronistic argument that says just a little tweaking and the (magical) markets will sort it all out. Sure. Check out the credit markets and tell us your solution. Does it extend beyond accounting tricks? I don't like Paulson or much of the plutocracy, but we have to make temporary common cause with bandits just to save us from the full effects of their banditry. Don't worry, if you like O'Neill & Paulson can share the same scaffold it you like.

What I'm referring to is the anachronistic argument that says just a little tweaking and the (magical) markets will sort it all out.

Okay, so where have I made that argument?

Check out the credit markets and tell us your solution. Does it extend beyond accounting tricks?

*My* solution, if you could call it that, would be to go with the consensus of economists rather than relying on the wisdom whose run as CEO at Goldman left the place in need of a bailout (not, mind you, that Goldman was the only or even the worse offender; but if the reason we are to give more credence to financial people is because they have to delivery "results" then I'm not sure why Paulson's opinion should rank all that high). So far as I know, much of what is proposed in the linked to post could begin now. It wouldn't require congressional action and it wouldn't require waiting a couple of weeks before you start doing anything while you flesh out the details.

BA:

FWIW, I see the capitalization problem as (at least somewhat) separate from the liquidity problem. And the stuff in the post you link is - as the post itself points out - already happening. In principle you might make the liquidity problem go away without taking mortgage derivatives off market. In practice, restoring balance sheets will not in itself restore trust. Both/and, not either/or.

"The governments of China and of the major oil producers – as well as many vulture funds - would be enchanted at a chance of buying up a few major Western banks. They have plenty of money available."

"Recapitalization" through sell-off to foreign ownership, or nationalization. The former is nightmarish, the latter is coming. Seems odd to object to this plan on that basis, though.

I'm an anti-democratic authoritarian by temperament, which helps; but when conservatism and/or democracy are suicide pacts, well, to Hell with them.

there is a time for criticism and a time shut up and row.

the game here is "follow the leader or die"

.

Sorry, Zippy. I thought you were a Catholic, not a Fascist.

Part of the deal here is that Paulson has to sell his idea. He refused to do so. So we all have to go along, because he said so? I thought you said above that you refused the argument from authority.

Trust will not be re-established by this intervention, that's why the financial markets are still reeling. The only thing that will re-establish trust is what you refer to above as "accounting tricks". That is, forcing mark-to-market. There is lots of capital in the market. It's just staying away from risky companies. Until all the crap is brought out into the open, everybody is risky. Given that in the last couple of takeovers, thanks in part to Paulson, both the shareholders and the bondholders have been wiped out, why would anybody invest in a bank unless they know what the exposure to the worthless paper is? Until you force that, there will be no new capitalization, and even the government isn't big enough to cover that hole.

Should an intervention have happened? If it was a run, then indubitably yes. Should it have been this intervention? Likelier than not, no.

Danby:
That I am authoritarian in temperament and skeptical of democracy is not a mystery to anyone who has followed my writing. (Fascist, eh? I suppose that is supposed to be a scary heresy or something? Maybe we should take up the subject of authority and Catholicism with King St. Louis IX, rather than digressing here).

Part of the deal here is that Paulson has to sell his idea.
I do think he did a poor job selling it; on the other hand, there isn't always time to put on the leisure suit and do a dance before deploying the defibrillator paddles.
why would anybody invest in a bank unless they know what the exposure to the worthless paper is?
You may not realize it, but you are making an argument that resolving the liquidity problem, and more specifically getting the mortgage derivatives out of the picture, is prerequisite to solving the capitalization problem. I do still have hope for a market solution (or semi-market: see e.g. WaMu and Wachovia) to the capitalization problem, probably because I am a relentless free market optimist.

DOW is currently at 9,782.82 with a lost of 542.56 points.

Let It All Burn! Black Monday, The Sequel.

DOW 8,000 -- Here We Come!!!

But yes, when leadership and trust are a central issue in an emergency where something has to be done immediately, and you have a leader who says that we are going to do X where X is a sensible thing to do, it becomes presumptively the thing that should be done. Failing to do it undermines trust and leadership, which are part of what is at the core of the problem. What is so bloody outrageous about that?

Well, most importantly, I understand that whether X is a sensible thing to do was very much questioned by a heck of a lot of people. If the pilot tells you to set the plane on fire, you don't do it just because it's an emergency. And it's a sensible thing to do only if, at a minimum, it's not going to make things worse in the medium-term.

Moreover, there ought to be objective facts of the matter about these things, about whether it's going to make things better, worse, or about the same in at least the medium-term, and possibly also in the long-term (if we have reason to think one way or another on that), and our lawmakers are not only permitted but obligated to get the best fix they can on these, not just to treat what someone in Paulson's position says as very nearly by definition the right thing to do. Your earlier comments, Zippy, sounded to me like you were saying, "This was the right thing to do because Paulson was in charge, Paulson said we were going to do it, and in the exceedingly short run, the markets found what he said sufficiently subjectively reassuring that the run on the money markets stopped. That is all ye know on earth, and all ye need to know." Now, that way of using the concepts of "trust and leadership" is just too darned postmodern-sounding for me. It doesn't seem to me that this can just be automatically right if it calms the money market run temporarily because people feel more trustful.

Actually, I'm making the argument that we need to crush a lot of banks, as a consequence of getting rid of the mortgage derivatives, before we can fix the capitalization problem. So long as the banks that are already bankrupt can't be told from the ones that have a chance, there will be no recapitalization.

I am generally in favor of the free market too. But the free market can only work if the information about risk/reward is out there. Investors may be gamblers, but good gamblers and good investors always know the odds. People who invest without knowing the odds don't have enough money to fix this problem, for some reason.

If Paulson and Bernanke had come out and said "We'll pay 50% (or some other arbitrary percentage) of the hold-to-maturity price of any derivatives", I would have agreed to this bailout. Not the best approach, but it could work. The banks that were too far over the edge couldn't take advantage of the offer, because they would become visibly, as well as technically bankrupt. The ones that could, would dump them, and immediately be able to re-capitalize.

The weaker banks would then be subject to a proctoscope-style FDIC audit, and likely be forced into a merger, a la Wachovia and WaMu. At which point, much of their garbage would likely be forced into federal hands as well. Too bad for the shareholders and bond holders, but that's not the taxpayer's problem.

Once the securities are in a single set of hands, they can be unwound and the individual mortgages extracted, and bought and sold the way they did in the 20th century.

We are not a monarchy, and from me your anti-democratic feelings elicit only a good old Irish póg mo thóin.

Zippy wrote:

But yes, when leadership and trust are a central issue in an emergency where something has to be done immediately, and you have a leader who says that we are going to do X where X is a sensible thing to do, it becomes presumptively the thing that should be done. Failing to do it undermines trust and leadership, which are part of what is at the core of the problem. What is so bloody outrageous about that?

Thus, everybody was right in voting for the Iraq War way back when.


Lydia wrote:

That's it? That's all? No more factual basis, no more evidence for predictions of what will happen as a result, than that is needed for us to "shut up and row" and follow Mr. Paulson into billions of dollars of additional national debt?


Hold on, here; before you continue your rebuke on Zippy; weren't you for the Bailout?

Back then, when I had voiced my very opposition to the bailout, you had implied that I cared not for the innocents who would suffer as a result of not having the bailout pass:

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? Posted by Lydia | September 26, 2008 8:13 PM

Even though your statement here did not accurately reflect the actual reasons for why I had disagreed with the approach of the bailout; it was clear then within the context of that thread that you were more for it than against.

Danby,

Actually, I'm making the argument that we need to crush a lot of banks, as a consequence of getting rid of the mortgage derivatives, before we can fix the capitalization problem. So long as the banks that are already bankrupt can't be told from the ones that have a chance, there will be no recapitalization.

You do know that this is not at all a unique argument.

In fact, there is one chief economist I know who actually said that one of the bad reasons for this bailout (among others he listed) was that the bailout would save the bad banks (banks that should fail) instead of just the good ones that should be saved. Absent a bailout, we would sooner get rid of these bad banks whereas the good ones would actually be saved through market forces, not unlike that we saw with rescues from BofA, JP Morgan, and now that of both Citi v. Wells, which should provide further confidence in the ability of the market rather than this panicked run to the government.

"Moreover, there ought to be objective facts of the matter about these things,..."

Objectivity. Transparency. Accountability. All 3 were missing during the deregulated run-up to the melt-down. By all means insert them now, but know its kind of like introducing chastity into a brothel's business plan. Its going to take awhile for practical application to kick in. And it you meet any economist who claims a firm grasp of the objective facts regarding this crisis, run, don't walk for safety.

It doesn't seem to me that this can just be automatically right if it calms the money market run temporarily because people feel more trustful.
Well, yes, but that is, I would hope obviously (but who knows?), a really awful caricature of what I said. Nevertheless, since I'm personally well capitalized I'm going to stop wasting time here and go work on a new option strategy I'm cooking up for just this kind of environment.

Zippy wrote:

Nevertheless, since I'm personally well capitalized I'm going to stop wasting time here and go work on a new option strategy I'm cooking up for just this kind of environment.

I was wondering when Zippy was going to do just that --

I mean, if I were as financially wealthy & independent as this bloke, I'd be making a killing at the market -- especially today of all days -- given these firesale prices!

Schadenfreude besides!

Aristocles,

I'm not for the bailout, but I do find your "Let It All Burn!" attitude rather disturbing.

Blackadder:

I'm not for the bailout, but I do find your "Let It All Burn!" attitude rather disturbing.

If you didn't catch it, I was making a parody of a caricature folks had of me just because of how in another thread I was against the bailout and, therefore, I was deemed heartless because of their false "he's against the bailout; therefore, he cares not for the innocents who would be hit" analogy.

Aristocles, you misunderstood me. I went from skeptical and unhappy about the bailout to definitely against, given what little I know. When I asked you that question, I was really just trying to find out where you were coming from. I wanted to draw you out. I wasn't rebuking you.

Zippy, I was chiefly reacting to this:

Yes, that is exactly what I mean. First and foremost, it is the best thing to do because it is what he actually promised to do, the promise which halted the bank panic. So if there is a reasonable financial case for it at all, which there is, it is presumptively what we should do, even if there are theoretically better alternatives, since the core issue is trust.

To me, what you say is "first and foremost" just doesn't sound like it should be first and foremost. "First and foremost" should be, "It was the right thing to do because there was exceedingly strong evidence that it was not only absolutely necessary to avoid a disaster but also was highly likely to accomplish its goal without doing more harm than good." (Rather like just war theory.) And if not, then not. Then it wasn't the right thing to do.

There seems to me to be a tension between "shut up and row" (a phrase you've used several times in this thread) and your excoriation of the House for being negligent and being responsible to know, because theirs was the decision. What if members of the House, not wanting to be negligent, realizing that they had a responsibility here, went and worked on the thing as best they could and decided that the plan didn't have a sufficiently reasonable financial case for it, that the people were probably right who said it was a bad idea, or even that there wasn't a good enough case for it to justify that large of a commitment and that much government intervention with all its drawbacks? Then they would understandably argue and vote against it. If your idea is that the decision was just supposed to be up to Paulson, with the responsibility of Congress being simply to avoid (heaven forbid) undermining the financiers' trust in Paulson (!) then it seems to me it follows from that that it _wasn't_ the responsibility of the congressmen to know. They should just have left it in Paulson's hands. But once you start telling them they have to know what the right thing is to do, I'm afraid you have to accept the fact that they may end up disagreeing with Paulson and with you.

So yeah, swallowing the "bailout" is a bitter pill, and it is unfair, and it sets terrible precedents, and it will be abused and misused in every conceivable way (even though run properly, with less interference by Congress rather than more, it could be profitable and could reduce the national debt), and all that. It was the worst thing to do, except for all the alternatives.

It will probably start to mature, if it works, around the time that Obama and the Democratic Congress have had a chance to implement many of their policies, if Obama wins. Thus this allegedly conservative success will be quite reasonably be triumphed as proof that the liberal, anti-market policies of the Democrats work while free market economics don't.

As history has shown, this will do nothing to decrease the size of the national debt. Even when we were "running a surplus," no effort was made to make payments then, so why would Congress in the next 3-5 years do something it hasn't done in many decades? No offense, Zippy, but I think you're being very naive here as this bill will rightly be regarded as a failure of conservatives since the only people who will benefit are the left. If it fails, they'll get to blame it on conservatives. If it succeeds, it'll just be proof that capitalism is a failure without the heavy hand of government regulation.

Your analysis fails to consider that perhaps allowing these businesses to fail might have set a far more useful precedent that might have prevented some of these future problems.

Mike T wrote:

It will probably start to mature, if it works, around the time that Obama and the Democratic Congress have had a chance to implement many of their policies, if Obama wins. Thus this allegedly conservative success will be quite reasonably be triumphed as proof that the liberal, anti-market policies of the Democrats work while free market economics don't.

Indeed!

In fact, there have been those who have argued that it was the actions of the previous Bush Sr. administration that consequently took its effects in the subsequent Bill Clinton administration which all led up to the boom during the latter.

If anything positive turns up from all this, Bush Jr. will continue to suffer the blame whereas Obama & the socialist democrats will be hailed as its saviours.

If anything positive turns up from all this, Bush Jr. will continue to suffer the blame whereas Obama & the socialist democrats will be hailed as its saviours.

Bush deserves the blame. It was under his watch that the regulators stopped regulating, the bank examiners stopped examining, and the government ratcheted up the pressure on banks to make bad loans. If Obama and his team can pull the economy out of this mess, they deserve the credit. I don't think they can, but give them a chance.

Frankly the problem with the whole libertarian laissez faire approach to the economy is that while Libertarians may love free markets, corporations don't. Anything they can do to game the market, whether it's lying, hiding information, extracting favorable government treatment, outlawing their competitor's product, or just scaring the bejesus out of the public, they will do. That's why regulation is needed. What we have now is what happens when the regulators stop regulating.

Danby,

If Obama and his team can pull the economy out of this mess, they deserve the credit.

I don't think you understood (at all) what Mike T or I was saying.

In other words, you're saying if the bailout works, Obama should be the one hailed as Saviour of the World?

Also, aren't you even aware of the fact that it was the Democrats who shot down regulation time and time again when it came to such things as Fannie & Freddie?

Though, I wonder why that was? ? ? ?

Could it be that they were giving "favorable government treatment" to these because of the ties they had with them a la Obama, Barney Frank, Chris Dodd, and the like????

Bush deserves the blame. It was under his watch that the regulators stopped regulating, the bank examiners stopped examining, and the government ratcheted up the pressure on banks to make bad loans.

It was under Clinton that this process began via changes to the laws like the Community Reinvestment Act which encouraged (or is that subtly coerced?) banks to give loans that they shouldn't have.

Frankly the problem with the whole libertarian laissez faire approach to the economy is that while Libertarians may love free markets, corporations don't. Anything they can do to game the market, whether it's lying, hiding information, extracting favorable government treatment, outlawing their competitor's product, or just scaring the bejesus out of the public, they will do. That's why regulation is needed. What we have now is what happens when the regulators stop regulating.

What you've mentioned are some of the very last reasons why regulation works. Regulation often ends up being the stick with which corporations beat little companies to death. Case in point, software patents and the Digital Millennium Copyright Act.

The lesson from this debacle, brought to us by Barney Frank, is that regulators and the regulated will often end up in bed together.

The Burkean response is through gradual, evolutionary changes that do not cause massive social and economic upheavals

At some point you will have to stop bailing out corporations that fail. At that point, you'll cause some localized massive social and economic upheaval. At what point are you going to finally bring yourself to do what should have been done a long time ago when we had the choice of scaring the ever loving excrement out of Detroit by letting Chrysler go bankrupt?

Frankly the problem with the whole libertarian laissez faire approach to the economy is that while Libertarians may love free markets, corporations don't. Anything they can do to game the market, whether it's lying, hiding information, extracting favorable government treatment, outlawing their competitor's product, or just scaring the bejesus out of the public, they will do.

If the problem with corporations is that they tend to capture government and use it to disadvantage their competitors, then I fail to see how increasing the size and scope of government would help matters. One would think doing so would make the problem worse, no?

If the problem with corporations is that they tend to capture government and use it to disadvantage their competitors, then I fail to see how increasing the size and scope of government would help matters. One would think doing so would make the problem worse, no?

As I said before:

NO MORE FATSO!!! HE NEEDS A DIET!!!


The Nanny Socialist State is nothing but a "Na-na-na-na-na! You can't catch me!!!" Game perpetrated by crooked villains behind the scenes who know how to play the game at Washington who surreptitiously steal taxpayer's monies to use for their own advantage rather than the citzenry!

If you don't believe me, look at the PORK in the Bailout bill!!!

Among other ludicrous things:

$6 MILLION for CHILDREN'S ARROWS

$128 MILLION for RACE TRACKS

$19 MILLION for RUM

$33 MILLION for SAMOAN CORPORATIONS!


OINK!

O.k., to summarize the lessons we've learned from the deleveraging crisis is as follows;
* we need less, not more regulation.
* Repeat. Rinse. Repeat again;we need less, not more regulation
That's pretty much it.

"...we had the choice of scaring the ever loving excrement out of Detroit by letting Chrysler go bankrupt?"

What great sport that would be! I never understood why so many thought an "information age economy" was so vastly superior to a manufacturing based one. Maybe your goal is to reduce moral hazard by letting Chrysler croak, but not sure how culling our banking system down to 3/4 institutions achieves that goal. In fact the prescriptions here all point to greater moral hazard warping our system.

Zippy:

That I am authoritarian in temperament and skeptical of democracy is not a mystery to anyone who has followed my writing. (Fascist, eh? I suppose that is supposed to be a scary heresy or something? Maybe we should take up the subject of authority and Catholicism with King St. Louis IX, rather than digressing here).

Just so.

Kevin to Wall Street: "DROP DEAD!"

Ari, where did I say that?

If your idea is that the decision was just supposed to be up to Paulson, with the responsibility of Congress being simply to avoid (heaven forbid) undermining the financiers' trust in Paulson (!) then it seems to me it follows from that that it _wasn't_ the responsibility of the congressmen to know.
More false dichotomy. The role of Congress and Paulson in this is akin to the role of a board of directors and a CEO.

I haven't said "the Will of the Great Leader is All". I've said - especially in a crisis where leadership and trust are crucially central to begin with - that the leader's commitment takes priority over an infinite public second-guessing brainstorm over all possible plans, simply because it is the leader's plan, given that the leader's plan makes sense, which it does. The benefits of doing something different have to outweigh the crisis of confidence caused by undermining the leader. In this case it didn't. I'm sure people criticized Guiliani in the middle of the 9-11 crisis, while the buildings were burning, though I don't actually remember it happening. Anyone who did deserves a good a**-whooping for it. I don't like him a bit, precious, oh no, but I would certainly hold my tongue while the building are burning and he is marshalling firemen.

Congresscritters who voted against this should be ejected from public life and permanently banned from any responsibility greater than dog catcher. (And Nancy Pelosi should go with them, for her despicable partisan rant at the time, though in her case also for many other reasons unrelated to this crisis).

At some point you will have to stop bailing out corporations that fail.
This wasn't a bail out of corporations which failed. This is protection of the deposits of lots of otherwise healthy corporations - all of them really - with cash deposits in these banks.
This is protection of the deposits of lots of otherwise healthy corporations - all of them really - with cash deposits in these banks.

And you actually think the FDIC wasn't sufficient enough for that?

The FDIC doesn't protect money market deposits. Your personal savings accounts have been protected (with upper limits) by the FDIC since the Depression. The money market accounts which are the equivalent of savings accounts for corporations are (that is, as of a week ago Thursday were) not government guaranteed at all. Paulson's promise to backstop money market deposits is one half of this plan; the other half is to sop up all the illiquid derivative paper to restore trust, because with that derivative paper out there, no matter what draconian regulations you try to pass (as apparently favored by most of the interlocutors here), banks are always going to be scared of getting screwed by one another and left holding the bag. If the illiquid paper is literally off the table that is no longer an issue: transparency is restored in interbank relations. Danby wants to just write it all down to zero right now and send the banks out of business; others want to just leave it in circulation and let it continue to corrupt interbank relations. Neither is either fair or effective. Paulson is smarter and better informed than all his critics.

Zippy,

Let's say that the bailout was the correct thing to do; however, what if the $700 Billion wasn't actually enough?

What if the amount was something upwards of, say, $5 Trillion? What then?


Take, for instance, this bit:

Bloomberg Analyst: $700 Billion Bailout Could Balloon to $5 Trillion

Marc Faber Ltd. director calls initial cost estimates a 'drop in the bucket,' says real solution is to bring down overleveraging.

By Jeff Poor
Business & Media Institute
9/26/2008 11:09:16 AM


Conservative House Republicans and economists warn about the toll a $700 billion federal bailout of the financial sector would have on the taxpayers footing the bill. But according to Bloomberg TV analyst Marc Faber, the actual cost could be closer to $5 trillion.

Faber, author of the “Gloom Boom Doom” report, appeared on Bloomberg TV’s Sept. 26 broadcast of “Bloomberg Today” and noted just how small the proposed $700 billion bailout is compared to the overall U.S. credit market.

“So now they try to solve the problem by having this credit bubble actually extended and I think the $700 billion will be like a drop in the bucket because the total credit market in the U.S. is something close to $60 trillion, then you have the CDS market – credit default swap – of around $62 trillion. Then you have the whole derivatives worldwide worth about a notional $1,300 trillion. So the $700 billion is really nothing and the Treasury is just giving out this figure when actually the end figure may be $5 trillion.”


SOURCE: http://www.businessandmedia.org/printer/2008/20080926110602.aspx

Ari:

That I don't know. I don't have a 'crossover' point in mind where I am sure that the damage of inaction becomes less than the cost of action. But I know we are quite a long way from there right now.

A little back of the napkin work: right now we are talking about (with the $700B) the market capitalization of (just spitballing from memory) Microsoft, Google, GE, and Apple. That's it, no more. I don't know what total public + private market capitalization we are protecting, since the kind of accounting that would be necessary to know is simply not done. But $700B is chump change in comparison. People compare the $700B to the $13 trillion or so GDP, but it is an inapt comparison: GDP is analogous to P&L revenues, whereas what we would really need to know is shareholder's equity in the entire US economy, which has to be many, many times that $13 trillion. So we are investing (not spending) $700 billion to protect (say) a hundred plus trillion in shareholder/stakeholder equity. It's a no-brainer.

Kevin,

I believe you should look into this person's analysis of things, which I had the benefit of looking over in my attempt to balance both sides of the issue.

WSJ Online A Better, Cheaper Economic Plan Article

Franz Kafka could not have come up with a more bizarre scenario for this financial "crisis." As pointed out very succinctly on your pages by Brian Wesbury ("How to Start the Healing Now," op-ed, Oct. 1) and Holman Jenkins ("Mark to Mayhem?," Business World, Oct. 1), there exist rational, inexpensive steps that can be taken to solve major elements of this problem. Changing the mark-to-market rule would finally eliminate the institutionalized panic write-offs of perfectly good, albeit discounted, assets.

These "toxic" mortgage loans are not toxic. They are just worth less than their face value but are not worthless as the mark-to-market rule requires them to be accounted. Reinstating the uptick rule would also help. Short selling is an important self-regulating mechanism but allowing unrestrained short selling is a way to game the market into financial panic. These two changes enacted now would not help Lehman Brothers and Bear Stearns; they are already gone. But they would, combined with some real leadership, restore much needed confidence, far more than another huge government, big-spending scheme that makes it look like politicians are doing something. Speaker Nancy Pelosi and the Democrats like to rail against the deregulation that got us into this mess.

Dumb regulation, not deregulation, created this mess and made it worse. Let's address the problem, not paper over it with more debt larded onto our grandchildren.

These "toxic" mortgage loans are not toxic. They are just worth less than their face value but are not worthless as the mark-to-market rule requires them to be accounted.
This is true, as I have been saying all along, but not particularly helpful in itself. You can't just dump mark-to-market, because that makes things less transparent and therefore worse: now one bank has absolutely no idea what another may be hiding. You can't require mark to market, because it does not reflect reality for illiquid assets. And you can't come up with an alternative simple rule that everyone can adhere to, so that we have both transparency and reality, because the problem with these things is that there is no simple rule that everyone can apply to all of them. So a rule change in itself ain't gonna do it.

Zippy,

In conjunction with Kevin's voiced appreciation to you in another thread, I've gotta say that along those same lines, I am rather thankful for all your posts & input here as regards the current crisis.

As to your latest comments, I must say that the Business World article that was cited makes fairly a strong case for such an action -- at least, in our present predicament where it seems it has become one of the principal elements causing it:

Mark to Mayhem? ...Now recall that accounting is a language of abstraction. In the normal case of a public company, whatever method it uses to value its assets, it merely provides a benchmark for investors to make their own judgments. Nobody takes accounting values as the final word.

Banks, though, are subject to regulatory capital standards and therefore can be rendered insolvent overnight based on an accounting writedown. At the moment, many banks are clinging to "market" values for loans that are higher than probable fire-sale values, and doing so on tenuous grounds. In kibitzing over the Paulson plan, indeed, one knotty question was how Treasury could buy such loans at a price "fair to taxpayers" without propelling the sellers into federal receivership.

Because of all this, the regulatory state finds itself in a somewhat absurd position -- its own rules could render many financial institutions insolvent in a manner inconvenient to the state.

We choose the adjective advisedly. These institutions are guaranteed by the federal government, implicitly or explicitly, so questions of solvency are largely academic -- except as to the value of their equity. In fact, much of the ferocious argument over mark-to-market really is a political battle between CEOs and short sellers for control of the stock price. Washington wishes they'd just shut up before savers and lenders join the argument -- because, in present circumstances, we'd call that a "bank run."

Then there's a third group on the sidelines who attribute religious or ethical superiority to mark-to-market. Their sentiments are simply misplaced. Mark-to-market and its alternatives all have their uses -- a rose by any other name. A savvy analyst looks at them all with the same gimlet eye.

But usefulness is not what we're talking about here -- we're talking about a regulatory trap for equity, created as an unintended consequence of a well-meaning accounting rule. Short sellers see this trap and try to exploit it. Uninsured lenders and depositors see it and worry about not getting paid back. That fear is why banks have all but stopped lending to each other -- and why Henry Paulson launched his plan, and why the SEC made its move yesterday.

Accounting straddles the real and unreal, so it's hard to guess how much difference getting rid of mark-to-market might really make. The only way to find out is to try.

A mere accounting rule change won't reduce foreclosures or raise home prices -- then again, if spared drastic writedowns, banks might be more willing to lend, raising home prices and reducing foreclosures.

A mere accounting rule can't alter the underlying economics of a lending business -- then again, no longer worried about insolvency-by-accountant, investors might discover new confidence to inject capital and improve the underlying economics of a lending business.

No accounting rule is worth $700 billion. Then again, the essence of the Paulson plan was to raise the value of bank assets to help banks escape the regulatory equity trap. Does that mean we can change an accounting rule and save Congress from having to appropriate $700 billion? Let's find out.

Ari,
"Accounting straddles the real and unreal..."

Ain't Gnosticism grand?

Modernity's epitaph will have to include similar phrasing;"We created our own reality and it proved false.", or something like that.

an infinite public second-guessing brainstorm over all possible plans

Zippy, we're talking *a week and a day* here, and *nothing* else was tried as an actual alternative. Moreover, there have been plenty of people who think this wasn't even prima facie sensible. Hardly a matter of "infinite" second-guessing brainstorming of "all" possible scenarios as an alternative to a plan which was self-evidently reasonable.

Right. In defibrillator time, that is 20 years.

So when the government and financiers do crazy, irresponsible things, set up a reality-free market bubble that people _know_ is doomed to burst and then don't change it over a period of years, and when suddenly, one fine day, the corporations start a "run" on the mutual fund stock market as a result, it is absolutely imperative that the government throw billions and billions and billions of taxpayer dollars at the problem within a couple of days (after saying that they will do so on the _same day_), and Congress is irresponsible to think about it for a week.

Well, I'm sorry, but that sounds nuts, indeed, wildly irresponsible, and _I_ care about how it sounds, because it's what I have to go on.

Zippy:

No one else, anywhere I have seen, has yet made the case against sustained opposition for Hank Paulson's bailout with such cogency and panache. Mr. Paulson should have wished to hire you as a speechwriter. In any event, I no longer feel entirely sure that you are not right.

Sarah Palin says, "Drill, baby, drill!" but that can no longer be my motto, no precious. "Row, baby, row!" one must henceforth cry.

Bravo.

I would note that the bailout has, so far at least, had no discernible success in unfreezing credit markets.

No doubt this is due entirely to the fact that the bill was passed on Friday, rather than Wednesday.

Howard:

Thanks. I hope. :)

Lydia:

People say "mutual funds" when referring to money market accounts, but they really are the corporate equivalent of a savings account. That is why asking "Wall Street to bail the banks out with its own cash" doesn't make any sense. It is like asking savings account holders to bail the banks out -- with the money in their savings accounts.

And trading floor time is like dog years, only a whole lot moreso. That's just the way it is. If folks want to change that we should work to change it, but don't shoot the messenger.

Zippy, if the severe economic dislocation we have witnessed was so "invisible" how come evidence for a "healthy" economic expansion is also?

Why in the three decades since I graduated college, is the third world mired in deeper deprivation and misery than when I was born? What do we people of faith say to Jesus Huerta de Soto's arguments published today
at [ http://www.mises.org/story/3138 ] that the LACK IN A DROP of prices for the basics belies the fiduciary inflation that led to the awful GLOBAL bubble bursting and wreaking the attendent havoc playing out in markets the "world over live"? Things were NOT as invisible as you claim: our international brethren saw this impending doom and warned us. Why where we Americans not aware that we ourselves posed the greatest threat to our way of life, not the terrorists?

Could the sins of presumption and greed have not a little to do with it?

Good old King St. Louis IX.

Jew-hater, heretic-killer, military incompetent extraordinaire.

They don't make'em like that, anymore.

Clare:

I'm trying to figure out which comments of mine your post is addressing; but I'm baffled. The only thing I said was "invisible" - to everyman on Main Street - was the bank panic of a week ago Thursday: invisible specifically and literally because there were no physical lines outside of bank branches, only computerized lines outside of network connections.

what we're experiencing isn't so much a classical capital-flight bank run as rather a lemmings-like run away from the incarnational truth about human flourishing, self-abnegation: "Economic theory teaches us that, unfortunately, artificial credit expansion and the (fiduciary) inflation of media of exchange offer no shortcut to stable and sustained economic development, no way of avoiding the necessary sacrifice and discipline behind all voluntary saving. (In fact, particularly in the United States, voluntary saving has not only failed to increase, but in some years has even fallen to a negative rate.)"

Rather than face the discomfort of existential reality of personal autonomy, many are convinced that herdlike conformity to an illusory idealogy of "exceptionalism" is the heroic thing to do. Bah humbug to such heroics!

Beware faith in that FDIC backstop promise - its "leveraged" at hair-raising ratios right now (about 60-to-1 or 1.5% by law, currently only a fraction of that 0.2% is being put aside in the budget for the newly increased sums, that's 500-to-1 for $100K or 1250-to-1 for $250K) which means the government has cash for every thousandanth customer - the only thing that would actually cover all deposits would be Zimbabwe style hyperinfation (printing the dollar bills the government claims to be able to reimburse you) and bankrupt the USA as we know it.

"...a lemmings-like run away from the incarnational truth about human flourishing, self-abnegation."

This phenomenon began several decades ago and laid the groundwork for this crisis. We have an economy based on consumption and the incessant stimulation of dubious and insatiable desires.
We're in this position due to the faulty assumptions that have formed our personal, social and economic arrangements for quite some time.

Blackadder,

No doubt this is due entirely to the fact that the bill was passed on Friday, rather than Wednesday.

WTF ? ? ?

Dude, what is wrong with you????

I guess coverage of the House voting on whether or not to vote for the Bailout at all Friday morning and, later, their voting on the actual bill itself were all figments of my imagination!

Not to mention, the Treasury barely announced this afternoon after closing solicitations for bids by Wed., Oct 8th!

Gee, I wonder what actually happened on Wednesday?

Perhaps you should study a basics Civics course about the House and Senate!

You're Totally Clueless...

Zippy, I'm saying that I think it's obvious that fiscally conservative congressmen could not have done due diligence, taken responsibility for their actions, and come to the exceedingly counterintuitive conclusion that the Paulson plan was wise and right within the time period you are giving them. To make an analogy, when an honest atheist comes to me and says, in essence, "I've for a long time considered this miracle stuff to be all nonsense, evidentially, but what's the best that can be said for it," I would never tell him, "You have to get this right within 48 hours."

Given your view that this really needed to be done within a much shorter time space than Congress took, I think you really ought, in fairness, either to drop the negligence charge against congressmen who disagree with you and treat the delay as some sort of tragic and understandable inevitability or else, for your position to hang together better, take more of a Great Leader approach to Paulson and say, in essence, "What the congressmen were responsible to do lickety split was to realize that they had to leave the decision to Paulson and let him do whatever he thought best." And I think that latter is going to be hard to convince people of. I certainly don't find it plausible at all, and I realize you have not said it.

Lydia:

I really don't think it is excusable. The House of Representatives is, under the Constitution, where all appropriations bills originate. If a particular representative deemed himself unqualified or not informed enough to make a prompt decision in a financial emergency of this magnitude, he should stay out of the way. If he deemed himself qualified and acted to block the emergency action, he was negligent.

Note that I'm not saying this about people in general at all: I am completely sympathetic to the 99% Main Street opposition to this at the time. Completely.

I am saying it specifically about members of the House of Representatives. If you accept a leadership job, you have the leadership responsibility.

Ask a pilot what the first thing to do is in an emergency, and he'll tell you "wind your watch".

Not to quibble too terribly much, but when I started taking flying lessons they said something a wee bit different. In the event of an emergency, the very first thing a pilot should do is "fly the damned plane!" I'm just sayin'....

That I am authoritarian in temperament and skeptical of democracy is not a mystery to anyone who has followed my writing.

And, if I'm not mistaken, Aristotle would agree with this. Zippy is in decent company.

Zippy is just being Zippy (which is a good and grand thing). He is not going to change his mind so why do y'all keep badgering him ?

The B.O. was obviously wrong and most of us know that to be true deep down into the marrow of our bones. It will only make every thing worse.

Do you need Zippy to agree with you before you feel secure in your opinion?

I just got back from a Willie Nelson Concert in Lepier's Fork, Tennessee (it was a benefit for a disease or had something to do with Nashville's Sequin-Shortage, I guess).

In any event, while in the area I went to Spring Hill and caught The Country Ham Festival and ate the best Pork Sausage ever.

http://www.earlysgifts.com/

Nothing can be down about the crisis confronting us because those charged with setting right what is wrong are those who put wronger what ain't been right for a long time anyways.

So, order some Pork Sausage (it's called Poke Sausage) and once you get it, fry it up, eat it, and forget about arguing with Zippy.

Eat Early's Poke Sausage while you read Yates' "Second Coming". That's out future

Sorry about the spelling. It is Leipers Fork.

http://www.leipersforkvillage.com/

This wasn't a bail out of corporations which failed. This is protection of the deposits of lots of otherwise healthy corporations - all of them really - with cash deposits in these banks.

"Tohmato, tuhmato." The point is, a lot of companies would have failed because they weren't more conservative with the placement of their money. If the federal government's policy were simply "nothing short of the country being ravaged by Armageddon-level natural disasters and/or total war will cause the transfer of a single dime from the Treasury," the business culture would adapt as new problems rear their heads. Adaption may be hard in the short run, but it teaches the survivors useful lessons that make the market safer.

It must be nice to be able to steal about $10,000 or more per tax payer to cover one's bad choices.

I really don't think it is excusable. The House of Representatives is, under the Constitution, where all appropriations bills originate. If a particular representative deemed himself unqualified or not informed enough to make a prompt decision in a financial emergency of this magnitude, he should stay out of the way. If he deemed himself qualified and acted to block the emergency action, he was negligent.

There is a sweet irony in your arguments, Zippy. If Congress had acted as quickly as you had suggested, they would have almost down to a legislator acted with the sort of devil-may-care attitude toward the fine print that got many investors in trouble. Not to mention a certain, onerous piece of legislation that was passed without having been even read in Bush's early term.

You act as though trusting $700B to Henry Paulson, one of the guys who helped make this possible, was something that they should have either understood with uncanny prescience, or simply passed purely on faith.

Furthermore, if every member of Congress who was undecided or had concerns had taken Zippy's advice, it's unlikely that the House would have even had a quorum to vote on the bill.

If Congress had acted as quickly as you had suggested, they would have almost down to a legislator acted with the sort of devil-may-care attitude toward the fine print

It was only 3 pages long. Even I can read a 3 page document.

How many senators took the time to read the 410 page document they actually passed? How many House members? Talk about a devil-may-care attitude...

It was only 3 pages long. Even I can read a 3 page document.

So can most people. However, 3 sentences or 300 pages, a bill that allocates $700B at the current value of the USD is not something to be rushed. It's something to research, talk to constituents about, pray about, etc.

So now "conservative" means "incapable of acting in an emergency", eh?

I'd love to continue this, but I'm going to be very busy for the rest of the week. Thanks everyone for the spirited discussion.

So now "conservative" means "incapable of acting in an emergency", eh?

What you're advocating is for conservatives to behave like liberals and jump on or jump out of the way of radical decisions. Considering the stakes here, both with market and the ramifications of a $700B bailout, rushing into this could have precisely the economy-crippling effect that you worry about.

It is reassuring to remain fixated on the surface of these events. Each part of the Big Business – Big Government Hydra can roll-out their favorite shibboleths and avoid any real in-depth exploration of root causes or structural defects that might subvert their precious ideological biases. Each side has more in common than either would like to admit. Both hold the economic sphere as distinctly separate from culture and independent of the spiritual realm, despite rote and vague denials.

The incentives attached to modern economics seem to encourage a relaxation of traditional standards. For example; bankers lend money in the pursuit of self-interest and profit. It is how most are compensated and the scale upon which they are judged. The sub-prime racket had to be a boon demanding participation by even the most virtuous of men. And I don’t see earthly rewards lavished upon those who practice the self-abnegation Clare alluded to earlier. Those that do are still dependent on, and vulnerable to the practices and results dictated by an obscure maze of interlocking instruments and institutions. Identifying special interest interference by Congress or, under-regulation by the Executive as the real culprits, is obviously a distraction. The real question is; can human beings operate within, much less direct (and thereby rescue) a monstrously large and infinitely complex system that runs on an inhuman logic all its own?

I'd love to continue this, but I'm going to be very busy for the rest of the week. Thanks everyone for the spirited discussion.

There goes Zippy -- off to make more millions!


Zippy,

How much exactly is enough??? ;^)

Stop your whining and sanctimonious belchings. Where would the mediocre many be without the genius of the risk-taking few? Millions were enriched by what you ignorantly scoff at as "bubbles", but what are in reality, wealth-creation projects underwritten by people both smarter and braver than the antiquarian book-sellers and church ladies that frequent this site. As you wallow in self-pity and bemoan the losses to your 401K's, better people than you are busy installing the next quantum leap in human development. Their labors, energies and inteligence will allow you to live the affluent lives you haven't earned. As soon as the waters get a little roiled, the parasites dial up Big Brother on their IPhones and tap into the class envy canard. Full of Puritanical rage, some aren't satisfied until everyone is as miserable as they are. So, go ahead, put on your gray jump-suits and line-up for a job at the public works adminsistration. Those of us unafraid of success amd unashamed to be alive will enjoy the just desserts of our labors and ingenuity;

"A week after the insurance giant, the American International Group, received an $85 billion federal bailout, its life insurance subsidiary, AIG General, held a weeklong retreat for its top sales agents at the exclusive St. Regis Resort in Monarch Beach, Calif. Expenses for the week, lawmakers were told, totaled $442,000, including $200,000 for hotel rooms, $150,000 for food and $23,000 in spa charges.

In addition, the former A.I.G. executive who led the London-based division whose implosion is largely blamed for the insurance giant’s downfall, Joseph J. Cassano, continues to receive $1 million a month from the company, on top of the $280 million he received in the last eight years."

Stop your whining and sanctimonious belchings. Where would the mediocre many be without the genius of the risk-taking few? Millions were enriched by what you ignorantly scoff at as "bubbles", but what are in reality, wealth-creation projects underwritten by people both smarter and braver than the antiquarian book-sellers and church ladies that frequent this site.


John Galt:

It appears you don't know Zippy. at all.

He happens to be one of the people you actually described here; an entrepreneur of the Tech Boom who ended up retiring at a very young age with substantial wealth who does practically nothing now but fly helicopters and God knows what with his army of investment bankers.

My, what a killing I'd be making had I his resources at the moment!

John Galt is surely a parody. His comment brought a genuine smile to my face.

Well, sorry, but I'm not much of an Ayn Rand fan.

Surely the Galt comment is a parody, and yet... I have actually heard libertarians hold forth and declaim in precisely that vein, almost down to the locutions themselves, as though giving free rein to some hitherto repressed impulse to fall in supine obeisance before some Great Man, or, perhaps, as if to intimate a desire to be worshiped as such a man. There was something to Chambers' condemnation of Rand, and such parodic utterances demonstrate as much.

Zippy, I take it then is the panic-stricken hysteric angling to recoup his lost investments
through the bailout bill. Why does he play to the plebeians in the audience with a lip-trembling snivel about the necessity of the
"bitter pill"? Yes, we know, its the doddering pensioners in Sarasota that he really cares about. Personally, I feel no need to get misty-eyed as I help myself to the widow's mite. The fact that he does suggests, he is like most men who rage against modernity, either a guilt-ridden aesthete living off the family heirloom, or an unemployable ex-seminarian drifting along on the Christianist social circuit. As for his army of i-bankers, I'm confident my plants drink more expensive vintage. What though, is one to make of his coterie of camp followers and their utter lack of gratitude towards producers, innovators and inventors? The sum total of their contribution to man's quest for excellence and dominion is in siring hideous off-spring who can be easily exploited for profit by the entertainment and fast-food industries. Instead of displaying the good manners of previous proletariats, we have to suffer their wailing over "transfers of wealth to the rich." Imagine, after years of being bled white by these leeches, the entrepreneurial class rightly demands a return of some portion of their expropriated property and all we get are lectures on theft. From shameless thieves no less. Needless to say, I will not be posting any Help Wanted advertisements on a site that caters to ingrates and malcontents. Too bad, you could have used the revenue to restock the pantry at the local Soup Kitchen. The cupboard will soon be bare.

Whoever is behind the John Galt posts is hysterical. Well done.

"Finally, much as people quite rightly disparage Goldman Sachs for not caring a whit for anything but returns, they care a whole lot about fiduciary duty: that is, they don't much care who loses as long as the investors whose money they are investing win. Paulson's 'investors' right now are the taxpayers, and I find it perfectly believable that Goldman's ruthless attitude toward fiduciary duty is still with him in his government post. Otherwise I don't know why he would have tried to do the difficult thing here rather than the easy thing. One thing he is most definitely not is financially stupid.

Heck, even "once you turn the money over to me, I'm in charge and I'll make you a killing" is typical Goldman.

Mind you, it isn't crazy to distrust pretty much all of the people involved. Someone is going to manage our funds, though, and we could do a heckuva lot worse than to have Paulson doing it."


...And with that & the sly parody of Kevin Galt, we should simply surrender to each of the demands of the noble patricians of our day who have, I'm sure, but our best interest in mind if we only submit to their mere promise of "Trust Me".

Never mind the 65 years Plebs suffered the sheer Tyranny of similar "Trust Me"s of earlier patricians in the period after the Kings; never mind the Law having only binding effect then where only the Plebs were concerned whereas the noble Patricians were all but immune! (Yes, never mind Lex Hortensia and all that!)

It is no different today!

It is but the Oath that preserves us -- that & continued vigilance lest we Plebs submit ourselves once again ever so easily to yet another false promise perpetrated by no other than yet another Patrician of the day!

Dignitas? Gravitas?

Liars All!

Your cursus honorum consists of nothing more than going from asp to basilisk!

No matter.

The Mighty Shall Be Put Down from their Thrones!

The Rich Will Be Sent Away Empty!

The Poor Shall Inherit the Earth!

You cannot serve God & Mammon!

Your Avarice & Deceit Over the Masses Will Ultimately Be Your Own Undoing!

Selah!

Is Aristocles' comment at 6:10 p.m. on October 7 true? Or just a joke?

True. Other than the part about mostly doing nothing now. And 'squad' might be a better term than 'army', etc.

Steve Burton:

Is Aristocles' comment at 6:10 p.m. on October 7 true? Or just a joke?

At least somebody finally noticed something peculiar in those remarks. I thought its subtle purpose would have gone unnoticed (though the manner in which it was executed was surely poorly done that it escaped most, if not, all but for one perhaps).

Although, I do hope should its true purpose & those it concerned be found out, please accept my sincerest apologies in advance & know that I only wished to communicate that no matter the skill, eloquence & seemingly logical appeal of a Demosthenes either then or now; it should be quite understandable to any person (common or otherwise), especially given the chief causes of the critical crisis in our times, that I (like those amongst the populace) would not concede to any such proposal with such facile credulity especially from the likes of a Patrician or an agent thereof -- no matter the esteem one might hold for a person of the latter who, perhaps with good intention, had actually our best interest in mind this time.

If anything has been learned from the principal elements responsible for our current Crisis, the mere promise of "Trust Me" is surely one of them.

Aristocles:
Now I have no idea what you are talking about. My background is in my w4 bio, and I am not aware of any conflict of interest here. If I had PR goals I'd be using the media, not commenting among my friends here. This isn't exactly the mainstream or business press.

So are you making some sort of accusation? If so, what? If not, and you have a question,why not ask it?

Zippy,

No accusation at all nor calumny.

I was only attempting to provide a view from which to look at things so that you might be able to understand that no matter how logical, how well-put -- indeed, how perhaps even true & valid your arguments are -- for the plan (for that matter, the same can be said for aspects of the plan itself); it shouldn't be at all surprising why certain folks might look at things such as this with an eye of stark skepticism marked with extreme caution, especially given the history.

And given that the actions of folks in the upper echelons of society, those who were entrusted with such high responsibility (both in government & in the private sector), outstandingly failed their noble calling resulting in such catastrophy for the citizenry; it is no wonder that many of the commonfolk would essentially be ever more the cautious lest they fall victim yet again to another bite of the snake, so-to-speak (referring here to a Chinese version of that cliche about 'Twice Bitten' etc).

At any rate, the hesitance in accepting the plan is not merely one of a failure in understanding the situation & how the plan would seek to rectify it; but also one of distrust that is quite understandable.

Ah, I see, and agree: I've said from word one that Main Street mistrust here is completely warranted. That is part of what makes the whole cocktail especially dangerous. As others have suggested, we have a "boy who cried wolf" scenario, except that the wolf is about to eat the whole village.

(Zippy, I was also attempting in that one comment to tactfully express that there is perhaps greater trepidation being experienced by the commonfolk that is more pronounced as opposed to the well-to-do, which added to the behaviour. That's all. Except, I didn't know exactly how to say it without offending both parties concerned. Although, this topic, admittedly, has more than run its course. It's a wait-and-see game now with all the world as its extended participants.)

please i want to what bank panic is and how it can be related to its faliure

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