What’s Wrong with the World

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The Fed's own "document dump."

Well, the Federal Reserve has, under orders from Congress, released a huge mass of data on its extraordinary interventions into the financial sector during the height of the crisis, from 2007-2009. These documents make for interesting reading. In a word, the Fed was throwing money at everything that moved. Never has “lending of last resort” been realized so radically. The variety of institutions partaking of the acronymic cacophony of lending facilities and other devices is something to behold. I was amused to see that Harley-Davidson was a regular participant in a commercial paper lending operation. Motorcycles and shadow banking: an interesting business amalgam. Then there is the sheer size of these loans to the big banks. We’re talking about firms borrowing $15 or $20 billion in overnight loans, every night, for weeks. And foreign banks no less than domestic ones were clinging to the Fed for dear life. The documents leave no doubt that the private banking system was in ruins. Here are several good summaries of the documents.

Relatedly, Martin Wolf of The Financial Times has an excellent column yesterday describing in overview the crisis in Europe. What’s going on is that private obligations are being converted into public obligations: government and finance are merging. This is a historical and global trend, most acutely evident in Europe right now.

Comments (11)

"private obligations are being converted into public obligations: government and finance are merging."

CSL wrote that it might be better to be governed by robber barons than by moral busybodies. I wonder what he'd have thought of this -- the intertwining of the two into a robber baron/busybody state?

Interesting observation Rob, the problem is that there are no "moral busybodies" involved here. Those who you would consider "moral busybodies" would have put the banks involved into resolution, ruined the shareholders, given the bondholders a serious haircut and jailed those executives who broke the law. Then they would have passed a financial reform bill that was considerably stronger and a single payer health bill and a host of other things that didn't happen.

What we have now is a revolving door between large corporations and government - a plutocracy.

"Recipients of the loans expressed gratitude. "The Fed's actions were timely and critical, and we commend them for providing liquidity and stabilizing the financial system during that period," Morgan Stanley said in a statement."

Real gratitude would involve actually participating in the economy instead of sitting on piles of cash and doing carry trades. And no bonuses.

Interesting article on ireland,


I think the kind of moral busybodies Rob has in mind are the kind who nearly put microbrewers out of business because some frat boys get sick after drinking those disgusting caffeinated malt liquor drinks:


(By the way, Al, I found that story via Steve Randy Waldman's Twitter feed, so I would ask that you kindly refrain from the usual antics.)

"What we have now is a revolving door between large corporations and government - a plutocracy"

No argument from me there. But how is that plutocracy fleshed out culturally? In the form of bureaucratic nanny-statism -- moral busybodies, IOW. The corporate Right and the cultural Left have no problem hooking up and gettin' jiggy wi' one another, provided the former gets to keep its money (and therefore power and influence) and the latter its power and influence (and therefore money).

-"I would ask that you kindly refrain from the usual antics."


The usual antics being your instinct to equate my arguments with run of the mill center-Right ones. You know, the Weekly Standard and What's Wrong with the World, peas in a pod.

Anyway, one puzzle of that otherwise excellent Eichengreen column is why he smacks around the Germans so fiercely. In fact (unless recent reporting was mistaken) it was the Germans who made the fuss about including "private investors," i.e., bank debtholders, in the haircuts or cramdowns. All anyone else could say in response to that eminently sensible proposal was that its timing was all wrong. Eichengreen ought to have noted this.

Al, I'm glad you are so confident that simply "putting the banks involved into resolution" would have worked all the wonders you ascribe to it: this confirms my suspicion of your hindsight bias.

You may recall, however, that the bankruptcy (which is a version of resolution, no?) of Lehman Brothers triggered the crisis that produced the circumstances where companies like Harley-Davidson and McDonalds had to go the Fed, hat in hand, just to find a counterparty for their commercial paper issuance. Without the Fed, in other words, they couldn't have even done things like, you know, make payroll and keep the freaking lights on at their buildings. But here comes Al to assure us that all we needed to do back then was roll up a few more banks, wipe out their shareholders and bondholders, and jail some bankers; then everything would have been hunky-dory.

Thus the wisdom of the Left, I guess.

My comments are often directed at other commenters and the views of some of the principals here would likely shock the sensibilities of your average social darwinist. Still it is my responsibility to make the direction of my comments clear and, regrettably, I must admit I do fail from time to time.

Paul, resolution is orderly; everyone knows the outcome. In resolution the dubious assets are dealt with, in a bankruptcy like Lehman's they aren't and that shakes the trust of everyone which is why the commercial paper of even sound firms finds no takers.

Here's Krugman,

"But here's the thing: The funds needed to bring these banks fully back to life would greatly exceed what they're currently worth. Citi and BofA have a combined market value of less than $30 billion, and even that value is mainly if not entirely based on the hope that stockholders will get a piece of a government handout. And if it's basically putting up all the money, the government should get ownership in return."

"Still, isn't nationalization un-American? No, it's as American as apple pie."

"Lately the Federal Deposit Insurance Corp. has been seizing banks it deems insolvent at the rate of about two a week. When the FDIC seizes a bank, it takes over the bank's bad assets, pays off some of its debt, and resells the cleaned-up institution to private investors. And that's exactly what advocates of temporary nationalization want to see happen, not just to the small banks the FDIC has been seizing, but to major banks that are similarly insolvent."

"The real question is why the Obama administration keeps coming up with proposals that sound like possible alternatives to nationalization, but turn out to involve huge handouts to bank stockholders.

Here's Luigi Zingales,

"When a large financial institution is insolvent, the IMF should take it over, guaranteeing its short-term obligations, but wiping out the shareholders and repaying the long-term creditors only after all the other creditors (including the IMF itself) are repaid. Some people would scream that this is tantamount to nationalization, but it is no more a nationalization that the US Chapter 11 bankruptcy process is."

So yes, had the government used the crisis as an opportunity to clean house things would have worked out better. As long as it was made clear that the Fed stood ready, harley, et al would have still found a market for their paper. This isn't hind sight bias as plenty of folks were suggesting this course at the time and i agreed with them. This also would have involved limiting the size of financial institutions.

"Simply" isn't the correct term as my preferred path would have quite upset the apple cart. Politicians with vision would have read things correctly and preemptively channeled the anger that was behind the Tea Party in a productive direction.

Paul, resolution is orderly; everyone knows the outcome.

What hogwash. The whole reason for the acute crisis in fall 2008 is that no one knew the bloody outcome. One possible outcome was that everyone's paychecks started bouncing like basketballs.

And what about the obvious problem of British, French, German, and Swiss banks? What institution could accomplish, over a September weekend, the orderly resolution of all these banks -- plus GE, Walmart and all the shadow banks, along with the money market funds and who knows what else?

Look, I'm not horrified by nationalization. I want the TBTF banks broken up. I agree with most everything in this post:


But I find it preposterous to assert that Swedish-style nationalization was a viable option at the point of acute crisis. Probably there was no good option.

The window for bank nationalization was several months later, under a new administration that was not a lame duck and, more importantly, once markets had stabilized.

In my opinion, the world economy is moving towards a place where the monetary functions are separating in order to allow the economy to find a new equilibrium. That is, at present the three functions of money: income, transactions/trade, and savings, are all being preformed by paper money/debt. The massive instabilities in the world economy are due to the fact that for decades debt has been the primary vehicle of world savings as well as the primary currency reserve asset, allowing the quantity of debt in the system to grow beyond all limit. We're moving towards a paradigm where the first two monetary functions of income and trade will still be carried on through the use of paper currency but people will no longer save their wealth in paper and debt but physical gold instead. The primary currency reserve asset also will no longer be paper or debt but physical gold which will float against national currencies on an international market for physical delivery. With paper still serving as transactional currency, hoarding gold will not adversely affect economic activity and the middle class will regain the ability to save for the future and this will make possible serious entitlement reform and massive reductions in federal borrowing and spending.

However, I think it's inevitable that most savings currently held in paper and debt will be lost and the longer the government props up the current system, the larger the losses will be. I suppose all of this is to say that I agree with al and that it would have been better to suffer the losses in 2008 (presuming that such an event would have moved us away from debt-based savings) than to suffer greater losses at some point in the future, given that the collapse of our current paper/debt-based economy is a certainty.

"What hogwash. The whole reason for the acute crisis in fall 2008 is that no one knew the bloody outcome."

No, nobody knew the actual value of much of the assets various institutions were using for collateral. We never know the future for sure. Read the section of the Federal Reserve Act I copied below. Between the powers of the FDIC and the FRB there were ample powers to effect the nationalization or de facto nationalization of such institutions that were necessary in order to stabilize things.

Section 13.3 of the Federal Reserve Act

"3. Discounts for Individuals, Partnerships, and Corporations
In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may authorize any Federal reserve bank, during such periods as the said board may determine, at rates established in accordance with the provisions of section 14, subdivision (d), of this Act, to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are indorsed or otherwise secured to the satisfaction of the Federal Reserve bank: Provided, That before discounting any such note, draft, or bill of exchange for an individual, partnership, or corporation the Federal reserve bank shall obtain evidence that such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions. All such discounts for individuals, partnerships, or corporations shall be subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe."

"[12 USC 343. As added by act of July 21, 1932 (47 Stat. 715); and amended by acts of Aug. 23, 1935 (49 Stat. 714) and Dec. 19, 1991 (105 Stat. 2386.]"

Tarp allowed for equity stakes and hence could have allowed for control. You are, of course, correct that this should have been done in early 2009, I am merely pointing out that it could have been done in 2008 and should have. Your '"hindsight" observation is simply wrong as there were folks, moi included, who were in favor of such action back then.

"...once markets had stabilized."

My favored recommendations would have also stabilized the markets but in a way unfavorable to the usurers and rent-seekers. We had an opportunity from late 2008 through early 2009 to wrest control from the financial malefactors and destroy their political power but we didn't no doubt due to the revolving door betwixt Washing and Wall Street that persists regardless of who's in power.

This is a coup of sorts and seems to have succeeded beyond its undoing. If that was your point, i'll grant it but not so much if we are only voicing our druthers.

The problem with Merkel, as I understand it, isn't her calling for a bondholders' haircut per se as it is with various statements that seem to undermine the whole Euro project as well as general German intransigence re; the European crisis - tight money, etc. The PIGS need to deflate but, as they don't control their currency (compare and contrast with Iceland and New Zealand), the only way do so is to cut wages and government expenditures which devastates the populace.

"...people will no longer save their wealth in paper and debt but physical gold instead. The primary currency reserve asset also will no longer be paper or debt but physical gold which will float against national currencies on an international market for physical delivery."

How is this not deflationary?

How is this not deflationary?

Because paper still serves as transactional money.

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