In All Seriousness

All snarking about this current crisis aside (which we are doing a lot of, especially in the comments and with the Comrade titles and the potshots at the nationalization of the free market), I really have no clue what is going on with the current mess. I vacillate between there being a very serious problem that needs a bailout and this being nothing more than a last minute attempt at looting on an almost hourly basis, although there may be enough evidence out there that a little bit of both is going on. Likewise, I am wholly convinced that no matter which of those scenarios is most accurate, we are in deep trouble financially at a very basic level. We are not a healthy nation.

Part of the problem with all of this is that there is so much information flying around that it might as well be in a foreign language, and to some extent to the wizards on Wall Street, that is not a bug, but a feature. LIBOR, CDS, OTC, TED, and on and on. The numbers, too, are out of the realm of imagination. Seven hundred billion dollar bailout (and if the bailout is needed, this is just the beginning. If a real bailout is needed, and this is not just looting, I would bet this will be a multi-trillion dollar affair)? Sixty trillion dollars in credit default swaps? Five hundred ninety six trillion dollars in OTC derivatives? Sorry, folks, but this is over my head.

Then you add in the rumor mill. Those trying to spread rumors to make a buck, those spreading rumors out of sheer terror, those spreading rumors out of ignorance. At a time when we need a competent press, we simply are left to our own devices to try to figure things out, all while one of the two major parties continues their petty jihad against the media in an attempt to additionally dilute the concept of truth in order to further their short-term political agenda. What we are left with is a bunch of preening frat boys on the finance channels and the masters of the dominant narrative in the rest of the media.

And finally, the real problem is one I mentioned earlier- the crisis in confidence is not limited to Wall Street and the Market. Right now, there is a crisis in confidence in Washington, and this can be pinned solely on the Bush administration and the Republicans. The repeated distortions and prevarications from these crooks, from “the war will pay for itself” to “Heckuva job, Brownie” to mumbling “Anyone who outs a CIA asset will be fired” while commuting the sentence has my confidence in government at an all time low. And don’t be confused, the rot in the GOP goes all the way down to the base. It has been both distressing and entertaining this week watching the markets meltdown and the only thing the right wing blogs are focused on are a video posted on youtube by an Obama supporter and a 20 year old kid who read some of Palin’s email.

Add to that the fact that the man charged with selling the need for bailout can’t even give three minutes of truthful testimony and lied in his opening statement, and I simply do not know what to believe. It also seems clear to me that Paulson and Bernanke are deeply, deeply scared (they were obviously unnerved during their testimony today), and are not really being open with the extent of this crisis. Once again, a little bit of honesty would really help us all out, but instead we are told that we can’t handle the truth. More than the trillions of dollars of debt added in the past few years, perhaps even more than the lives of all our troops lost in the last few years, the squandered trust of the American people is the biggest crime of the Bush administration.

So, yeah. I am skeptical. I am disgusted. I am confused. I am concerned. And I don’t know what to believe or what to trust. And that is a dangerous thing, because I am not alone- lots of us are feeling the same thing, and are lashing out at Washington this week. The reflexive desire to oppose the bailout, to extract pain, and to be petty and childish is not isolated to one anonymous member of congress. If there really is a problem, if there really is a need to act immediately, being paralyzed by cynicism could be every bit as disastrous as being paralyzed by fear or incompetence. It would be a terrible tragedy if the one time the citizenry and the Congress stood up to the Bush thugs was the time we should have trusted them.

It would, however, be the perfect ending to the shittiest eight years of governance in the history of this nation.






157 replies
  1. 1
    t jasper parnell says:

    If we want to think of this as a governance issue and not one of the Republicans are so strategically brilliant, my suggestion is this: The morons got us into this mess by asserting that their view of how “markets” work was correct and they were wrong. Consequently, should we decide to do something it ought not be bounded by their understanding of reality. Call it the Modified Costanza Theory. We need not do the opposite, give all the money to me and those like me, but we certainly ought not do what they suggest. They have been wrong about every single solitary thing they have suggested and everything they have done has turned to mud. Let us, therefore, do something else. More regulation, more conditions, and a stimulus package designed to create jobs here and now by giving someone the start up costs for an electric car or a wind-powered generator or some such.

  2. 2
    Comrade General Stuck says:

    Corporate India is in shock after a mob of workers bludgeoned to death the chief executive who sacked them from a factory in a suburb of Delhi

    Well the good news is it takes the pressure off Osama Bin Laden to destroy America and Western civilization. All he has to do now is kick back in the cave his 27 misses and watch us self destruct on CNN.

    I’m ignorant as a sack of hammers on the Wall Street asylum, but I just can’t buy the need for the government to nationalize lock, stock and barrel the heart of the American business sector. There has to be a way to fix things short of that. ANd it is worrisome, to put it mildly, that the leaders of a political party in this country, would propose the deal that Bush and Paulson have proposed, which amounts to nothing less than a coup de ta of sorts. Without review by the courts or congress or anyone else but them. It’s plain sick and thoroughly Un-American in the extreme.

    In the meantime, I am promoting myself because I can, to show allegiance to the new order. Whatever the fuck that is.

  3. 3
    Church Lady says:

    Yes, t. jasper, building an electrip car or a wind-powered generator will make all those next to worthless securities just disappear. Hey kids, after we do that, maybe we can put on a show!

  4. 4
    Comrade NonyNony says:

    I’m pretty much in the same boat. Beyond “the proposal that Paulson gave to Congress last week was so obviously shitty and one-sided ON ITS FACE that only a moron would take it as is”, I don’t know what to think. I’m not convinced that a bail out is even needed, and after watching some of Paulson and Bernanke’s testimony today, I’m not sure that THEY even believe that the bail-out is really necessary.

    The most I know is that it would be stupid to trust Paulson given the way the last 8 years have gone. Bernanke seems to be in way over his head and seems to be in pure CYA mode so that he doesn’t go down in the list of catastrophic Fed Chairmen. None of the financial geniuses are all that trustworthy because they’re soaked in the Wall Street culture that thought all of this was a good idea in the first place. My gut says that economists like Reich and Krugman have their hearts it the right place but even they couch their advice as “IF this is necessary then here’s how the deal needs to be structured” rather than really laying out if this is needed. So the guys with the information to make the case for the bailout aren’t trustworthy and the guys who are trustworthy don’t have access to the information they need.

    And frankly I don’t trust any of our Reps or Senators to know what to do. They aren’t experts in the finance system any more than most of us are, and the folks who ARE experts are, again, not trustworthy – so there’s no one for them to turn to for advice even if they want to be good faith stewards of the public good and aren’t just looking to make sure their buddies don’t fail epically.

  5. 5
    paradox says:

    So, yeah. I am skeptical. I am disgusted. I am confused. I am concerned.

    Still a good thinker’n writer, though.

  6. 6
    Hyperion says:

    Mr. Cole, you have addressed here something i am very worried about. what if this is the little boy who cried wolf? and now the wolf has really come.

    i have thought for a long time that one of the most corrosive effects of all the BS of the last 7+ years is that it has undermined everyone’s confidence in the government. and let’s face it, we need a competent government that we can and do trust. but this crisis shows that trust has pretty much fallen to zero. you can only get played so many times before you begin to see a pattern. it’s very hard not to be cynical and snarky.

  7. 7
    Redhand says:

    That these assholes (Paulson and Bernanke) oppose cuts or review of executive compensation packages and that the Secretary of the Treasury is supposed to have unbridlesd and unreviewable power deciding what to do with the $700B are both show stoppers to me. Screw the “we have to move immediately” stuff. Sorry, but to me it’s like the mushroom over Manhattan. I don’t want them to hoodwink us again.

    No question this is “the shittiest eight years of governance in the history of this nation.”

    I’m holding my breath to see if the electorate is stupid enough to elect McCain/Palin. If so, we’ll get what we deserve: four more years of what we have now.

  8. 8
    t jasper parnell says:

    Yes, t. jasper, building an electrip car or a wind-powered generator will make all those next to worthless securities just disappear. Hey kids, after we do that, maybe we can put on a show!

    Yes, of course, you are so right if the economic entities who hold the worthless paper disappear and the state takes the gignormous sums they want to spend and spend it on something else why we must all agree that economy will collapse because the only way to maintain the economy is to pump more money into the institutions that created all the worthless paper. QED. How could I have missed such an obvious point. Indeed, now that I pause and reflect on it, the economic prosperity that this country once enjoyed rested soundly on the basis of a bunch of guys buying and selling debt never once did it rest on the creation and sale of goods and commodities.

    Goodness me but the stupidity of those who assume that the economy as it is described is identical with a “natural” economic never ceases to amaze. In other words, let the fuckers who screwed over the largest economy in the world go to hell and try something else. Why not? They decided to screw over one of the largest economies in the world to try something else. Your argument would seem to be that now that they have screwed it we must protect it instead of seeking to change it into a more sustainable model. In short, you told Wilber, you told Orville and your telling me now it will never fly.

  9. 9

    Sixty trillion dollars in credit default swaps? Five hundred ninety six trillion dollars in OTC derivatives? Sorry, folks, but this is over my head.

    One thing to start with is that these figures are for notional value. With an interest rate swap, which makes up about 90% of the notional value of outstanding derivatives, that figure has nothing to do with how much money is actually at stake. Notional value makes some sense for an equity swap, but none for interest rates. You probably don’t want me to go into why that is.

  10. 10
    Gene says:

    This is easy to explain (unfortunately)…. (and please pardon the old Cat-Lick analogy … but …)

    Wall St. Bankers = 15 year old dumbmies hooked on whatever can get them the most f’d up, and caught red handed

    Easy Credit = Booze + Vitamin K, H, & V combined

    Bush Government = Children & Youth Services, plus all other busy bodies … “we must save & protect the children!”

    Most of the Body Politic = Stupid arsed parents who believe that their kid can do no wrong, no matter what has happened. Absolutely, no matter what.

    All is forgiven if you promise to call, be home by one, and never do it again.

    The rest of us who are not stupid: = Jesuits, Franciscans, SSJs, & IMHs begging to beat some sense into anyone … EVERYONE.

    Too late for anyone with a brain, I’m afraid …

  11. 11

    You probably don’t want me to go into why that is.

    Actually, right now, I think we need as much information as we possibly can get our hands on. Just like war is God’s way of teaching Americans about geography, we are all about to get a lesson in finance.

  12. 12
    Scott H says:

    My instinct, after listening to the Senate hearing, is that the Congress should go ‘all in’ against the bailout and force Paulson and Bernanke to show their cards or fold.

    This thing is all win for Wall Street – and for the Republicans who could stand to regain control of Congress in two years if it leaves the country bankrupt.

    Not saying that something doesn’t need to be done (though, certainly not as it is outlined, so far). I don’t know. That’s the showing all the cards part.

  13. 13
    raft says:

    great post john, i’ve been thinking the same things lately.

  14. 14
    Kali's Little Sister says:

    In corporate coaching programs, the importance of transparency is stressed to leaders. Trust is foundational to social contract inside and outside of business.

    So my question is, how is this not understood by Republicans, who seem particularly willing (if McCain and Bush are exemplars) to flout the rules by which trust is built, developed, and maintained?

    I often spout off that they have no conscience, but I actually am afraid they really have no conscience!

  15. 15
    Just Some Fuckhead says:

    There’s a problem, much like the Swedes went thru in the 90s, similar even in scale. Digby has a link. And the solution should be what the Swedes did – not what Paulson is proposing.

    Otherwise, banks are going to continue to fail, money is gonna get scarcer and scarcer and credit is going to dry up – credit that businesses like my wife’s rely on. Credit that also won’t be available to sell the glut of houses on the market, allowing the housing market to continue to devalue. Printing more money or lowering interest rates to make money cheaper and easier to get (which will require printing more money) is only going to cause inflation.

    The politics are what they are. If Democrats do nothing, Republicans will blame them for the decade long stagflation and recession we’ll go through. If Democrats do the right thing and essentially nationalize the failing banks and institutions – if only temporarily – Republicans will scream about us being socialists or whatfuckever.

    Fact is, good politics don’t equal good government. Of course, I’m just some fuckhead so factor that in.

  16. 16
    gbear says:

    It won’t end perfectly until Dick Cheney shoots George Bush in the face.

  17. 17
    MikeL says:

    Dr Pournelle has some relevant insights. In particular, he argues the legal immunity is necessary.

  18. 18
    dr. bloor says:

    The reflexive desire to oppose the bailout, to extract pain, and to be petty and childish is not isolated to one anonymous member of congress. If there really is a problem, if there really is a need to act immediately, being paralyzed by cynicism could be every bit as disastrous as being paralyzed by fear or incompetence

    If there really is a need to act immediately, then you’d think that even the likes of Paulson would be willing to give in to some pretty damn reasonable demands like independent oversight, CEO bonus caps/contingencies, and some chump change for folks about to lose their houses. The fact that he’s so protective of those golden parachutes for his golf buddies leads me to believe that the country isn’t burning to the ground quite as quickly as they’d like to have us think.

  19. 19

    It would be a terrible tragedy if the one time the citizenry and the Congress stood up to the Bush thugs was the time we should have trusted them.

    I’d quite like to know why, knowing full well that the ‘Bush thugs’ are all wealthy with exactly the capital investment that is most at risk in this impending trainwreck, you think we should be trusting them to do anything other than act desperately in their own self-interest.

    Seriously.

    From here it looks like a possible apocalyptic collapse of worldwide ‘imaginary money’. There’s still a lot of physical assets, goods, services etc. out there in the world. The people at risk most of all are the investment class and anyone who is heavily invested in imaginary value.

    That’s who we have laying plans, and when they talk about the world ending, they mean THEIR world. They don’t see anything else. For the rest of us, there IS gray area between modern capitalism and Road Warrior hoeing beans while fighting off biker gangs warring for precious gasoline. Do NOT look to cheesey postapocalyptic movies for your preview of what life will be like.

    If most of us end up a little hungry by and by, for a heck of a lot of us this isn’t a huge change. For the investor class, this is unthinkable catastrophe.

  20. 20
    Comrade General Stuck says:

    we are all about to get a lesson in finance.

    This is the problem with getting solid info on what is happening. It seems to me the “Experts” don’t have a clue either. About every one I’ve heard expound on the cause and cure says something different than the last one. I fear this is one of those times we will understand events only after they occur.

    I think Harry Truman said it best.

    Plain-speaking President Harry Truman once said he didn’t want economists hedging by saying, “On the one hand” and then adding “but on the other hand.” Truman said: “Bring me a one-armed economist.”

  21. 21
    jenniebee says:

    What I want somebody to explain to me is this:

    If the mortgage backed securities are next to worthless because the terms of those mortgages are so punitive that the people who hold them can’t afford to keep paying them and stay in their homes (and keeping up the payments isn’t contingent on the housing market, it’s contingent on the job market) then why not just allow everyone with a mortgage in jeopardy to enter arbitration to work out a better deal based on the original principal of the loan? The securities won’t be worth the pie-in-the-sky dollars people dreamed they might have been, but they’ll be worth more than nothing, and people get to keep their homes.

    Why not do some trickle-up bailing out?

  22. 22
    Incertus says:

    My instinct, after listening to the Senate hearing, is that the Congress should go ‘all in’ against the bailout and force Paulson and Bernanke to show their cards or fold.

    Mine too, if only because while there may indeed be a problem, the longer this goes on the more it smells like the many scenarios that Naomi Klein outlined in The Shock Doctrine. The timing is perfect, as Marcy Kaptur put it–close to an historic election, an “emergency” where no one wants to actually put any information out there, a divide and conquer strategy from the people with the most power, and most importantly, a government that’s about to be on its way out and wants one more taste of that good, good nectar.

  23. 23
    Texas Dem says:

    I have a feeling we’re fucked no matter what we do. See you guys at Thunderdome. I’ll save you a seat.

  24. 24
    ThymeZone says:

    I just can’t help but wonder what a difference that $700b could have made to the life of Teri Schiavo.

    The irony and tragedy are really more than I can bear.

  25. 25
    Will Hunting says:

    I think Robert Reich is right when he says this is a crisis of trust not liquidity or solvency. Once the trust returns, the financial markets will return to a somewhat functioning state.

    Overall, most banks globally are well capitalized right now and well run institutions. The lack of enforcement and weak regulation are the prime culprits of this current situation. The responsibility lies in many places, but I would agree with John, it lies mainly with the last 8 years of governance. The money influence in Washington is really bad – that has been going on forever, but that too got really bad the last 8 years.

    My personal opinion is that we are in for a couple of months of barely functioning capital and loan markets (on the corporate level).

    As for the bailout – the distressed assets are worth something – even the Enron equity holders got something like 22% on the dollar. Most people will not default on their mortgages and many can be restructured. The Paulson plan as proposed is terrible given the lack of oversight, but the key will be not overpaying for the assets and concurrently taking an equity stake in any firms that sells into the bailout. They also should not be allowed to sell into the deal other “weak” assets on the books (credit card debt, auto and student loans). If loss given default rates tick up a few percentage points for firms like GMAC and GE Capital, they will just have to be a bit less profitable. So be it.

    If (hoping when) Obama wins, he needs to have a heart to heart with the American people, open the books and tell them that we are going to have to raise taxes in the short term. I don’t see any other way out of the mountain of debt.

    Disclosure – I work for a bank so feel free to tell me I am full of shit if you like.

  26. 26
    ThymeZone says:

    Truman said: “Bring me a one-armed economist.”

    Win.

  27. 27
    Comrade RoonieRoo says:

    I really wish I could grasp this better. I feel completely lost but I just can’t get past my gut that this bailout can’t happen.

    I’m almost convincing myself we can survive the hyperinflation or whatever comes with this better than lettings those f’ing crooks get away with this. My imagination is running away with me of visions of this bailout passing and then 10 years down the line the uncovering of the fact that this was nothing but a looting of the taxpayer money. But I’m afraid that is just my imagination.

    I’m also starting to get a sense of what the Nixon years were like for my parents. I was very young but I remember the palatable anger in the house whenever Nixon and current events came up in coversation.

    Trust in the government? None for me, thank you.

  28. 28

    And as for businesses- never run out of cash.

    Credit is NOT cash, it is somebody who’ll front you some money to get through a tight spot and charge you interest. Credit is LESS profitable than handling your budget so that your capitalization is based on your own income, because compound interest is a harsh mistress.

    Never run out of cash. If you MUST have credit to survive, you’re presumably in some situation that is so competitive that you cannot lose any time in competing, with capitalization, against other businesses doing the same thing who are using credit against you and trying to outspend you.

    And thus you’re in the wrong business… do something which is more sustainable and less speculative, if your only chance of success comes from using credit to fight competitors who are also using credit to fight you. Geez.

  29. 29
    Incertus says:

    Dr Pournelle has some relevant insights. In particular, he argues the legal immunity is necessary.

    When your basic premise is “because some Democrats suggested that they might prosecute the Bush administration for criminal activity, you have to give Paulson immunity,” I can’t say I give the argument much credence. Sure, it’s possible that this could degrade into, as he put it, parties prosecuting each other over political differences, but in recent history, there’s only been one case of that, and it was Republicans trying to take down a Democratic president. And then those Republicans gave us the most corrupt administration in the history of the republic. You’re damn right people in the Bush administration ought to go to jail after this is all over.

  30. 30
    ThymeZone says:

    If (hoping when) Obama wins, he needs to have a heart to heart with the American people, open the books and tell them that we are going to have to raise taxes in the short term. I don’t see any other way out of the mountain of debt.

    Obama’s first year of his first term is going to be interesting, that is for sure.

    Is it too far fetched to think that the Chinese are basically demanding that we show we can scrape up $700b in cash to show that we can … or else they call all our notes?

    Just thinking out loud.

  31. 31
    Jake says:

    Excellent post Cole. I’d clicked on all but one of the links you put in it, before posting. I suspect many here had done the same.

    Just caught video of Bernanke on the evening news. He does appear to have seen a ghost.

  32. 32

    The numbers, too, are out of the realm of imagination. Seven hundred billion dollar bailout (and if the bailout is needed, this is just the beginning. If a real bailout is needed, and this is not just looting, I would bet this will be a multi-trillion dollar affair)? Sixty trillion dollars in credit default swaps? Five hundred ninety six trillion dollars in OTC derivatives? Sorry, folks, but this is over my head.

    Scale it down by dividing by 300 million, the number of people in the US.

    There’s $200,000 in funny money and $2,000,000 in even funnier money floating around for every American, due to financial game playing. They want a little over $2,300 of your money to throw at the bankers who led your country into the shit. You produce around $46,000 annually per person in the real economy. You have government IOUs of $31,700 per person. The Iraq War may wind up costing you as much as $10,000 each. You owe $50,000 to $60,000 each to foreigners.

  33. 33
    Scott H says:

    FBI probing bailout firms. [CNN Money]

    Americans Oppose Bailouts, Favor Obama. [Bloomberg]

    Goldman Gets Buffett’s Backing. [Bloomberg]

    I can understand Paulson and Bernanke on urgency. The jig is almost up, and the townsfolk are marching on the carnie,

    And if we can trust Buffett, who I do as he operates on transparent self-interest, the winners are already rising out of the mess.

  34. 34
    Comrade Scrutinizer says:

    Presuming that this is more a serious crisis and less an opportunity for one last wholesale looting binge, it’s interesting that Paulson and Bernanke are refusing to tell us lowly peons the extent of what they think our exposure is, lest we panic. One of the tenets of the so-called “free market” model they bluster about is that all the participants have perfect information about what’s going on in the market. As Comrade John points out, it’s near impossible for those of us who want to try to get an understanding of the mess we’re in to wade through the bullshit. The barriers to entry for a regular guy are just too fucking high—what we’ve developed isn’t a free market economy, it’s a private playground for financiers who take money we’ve invested in 401(k)s, retirement plans, and the like, and turn it into Monopoly money while they play their games and run their scams.

    And the people over at the GOS and other places who are all about “Just let it crash!” don’t get it. When it crashes, the Wall Street firms and the assholes who stacked the cards this high won’t take the big hit—the big hit goes to people like my Mom and Dad, who are in their 70s and 80s, living off their investments, and seeing them crash down round their ears.

    I don’t know fuck all about what’s going to happen. I’m getting the torches and pitchforks ready, though, just in case.

  35. 35
    XYZ says:

    Its a political ploy. Obama should just say he’ll deal with this after he takes over.

    Does anyone seriously think Paulson, as head of Goldman Sachs would have accepted a business plan from a subordinate which had
    1. A massive budget with no upper limit
    2. Was 3 pages long
    2. Had no documented strategy
    4. No timeline
    5. No cost benefit analysis
    6. Required that the subordinate carry out the project with no oversight other than a six-monthly report
    7. Explicitly stated that it would not necessarily follow the laws of the U.S.

    What a joke.

  36. 36
    Will Hunting says:

    Jenniebee – that is what will happen. Terms will get renegotiated and a mortgage that was worth par (100 cents on the dollar) at punitive terms will get restructured down to reasonable terms and be worth 80 cents. Many of these writedowns of asset value have already happened. What should not happen is to allow banks to unload everything in some free for all and slave the government holding the bag and handling the workouts. Banks should have to work out some portion of this themselves. They pay people that specialize in this.

    The paper is not worthless. Everyone will not default.

    Also the comment above about notional vs. at risk is right. People quote the large notional numbers to make headlines and scare people

    +5 by the way…

  37. 37
    Comrade Eleventy-Eleven says:

    My understanding, and please realize I may be full of shit, is that we have blurred the difference between a “commercial bank” and an “investment bank” (and I use quotes because, well, it’s confusing).

    In the good old days we had Glass-Steagall and this kept a wall of sorts between those who took deposits and gave credit (commercial banks) and those who invested/speculated (investment banks). When you gave your money to the bank they used it make loans (mortgages, auto loans, business loans, etc.). What they did not do was invest it risky securities. Investment banks did whatever the hell it is that they did…

    After deregulation, however, that wall started to crumble and the money you thought was safe in your sleepy commercial bank is now not so safe.

    Or… Shorter Me: Because of deregulation the investment sector can now eat the banking sector (and that’d be bad for the real economy).

  38. 38
    ThatLeftTurnInABQ says:

    Part of the problem with all of this is that there is so much information flying around that it might as well be in a foreign language.

    I felt in my gut that this was coming about 3 years ago, but without having the intellectual equipment to understand any of it in detail at the time.

    I just knew at an intuitive level that there was something wrong with the economy when middle class people who when I was a kid used to live in little houses, clip coupons, eat out once a month, and go camping as a vacation, were all of a sudden buying million dollar homes with 3 car garages, driving monster luxury cars and vacationing in Paris or Tokyo on a regular basis. It didn’t make any sense.

    I’d already read enough geopolitical history (Paul Kennedy for example) to have a vague grasp of macroeconomics and I knew that countries just didn’t wake up one day suddenly 3 times richer than they were the year before. Something really strange had happened, and I sensed without knowing the details that all this new found prosperity was borrowed somehow, and eventually the bill would come due.

    Ever since then I’ve been cramming on as much econ. and econ. related history as I could find and understand, in order to get ready for what I felt was coming.

    I honestly expected the fecal material to intersect the rotating blades in early 2007 or so, in the wake of the 2006 elections. I was wrong – I grossly underestimated how much liquidity the Fed would be able to draw on to postpone the 100-year flood. Who knew that the Chinese and the Arabs would keeping feeding us more and more of their money – I certainly didn’t.

    Anyway, it sucks to have to get caught up on a year or more worth of reading in a week or two.

    If you are looking for texts to cram, my best advice for reading somebody who is focused on the big picture and uses plain language and a lot of metaphors and analogies to make it more digestable would be Kevin Phillips.

    Grab one of his books, either Wealth and Democracy or American Theocracy or more recently Bad Money. There is a lot of overlap between them so you can probably get away with reading one of them in detail and just skimming the others. But read at least one of them thoroughly until you feel like you understand his ideas well enough to pick out the parts where you can tell he is full of crap or is cherry picking data to make his arguments look better than they really are.

    After that, start reading Yves Smith’s blog http://www.nakedcapitalism.com on a daily basis – half the stuff there is over my head but after a while some of it starts to sink in by osmosis, especially if you follow the arguments in comments. Yves is a really good writer and she posts a nice mix of news aggregation and independent analysis, and she manages to use enough jargon that you get exposed to the terms in context so you can start to absorb what they mean, without descending into total gobbledygook.

    You already know about CalculatedRisk.

    Those three sources, and links that you can follow from the last two, should get you up to speed pretty quickly.

  39. 39
    tavella says:

    As for the bailout – the distressed assets are worth something – even the Enron equity holders got something like 22% on the dollar. Most people will not default on their mortgages and many can be restructured.

    Again, this is a misunderstanding. We won’t be buying assets in the conventional sense — mortgages that are tied to an actual property. We’ll be buying the bad tranches. That 22 percent? All promised to the AAA tranches. We’ll be buying the C tranches, and they are worth _zero_. Just the shit in the shit sandwich.

  40. 40

    Goldman Sachs originated many of the CDOs while Paulson was at the helm. These CDOs would have contained language that if there were fraudulent claims in the due diligence (there were), then the originator would have to buy the CDOs back at cost. This would bankrupt Goldman Sachs and cost lots of fancy people money. Paulson could be in trouble as an individual.

    I believe that this may be why the entire cost of the bad housing loans are being pushed onto the taxpayer. If the taxpayer foots the bill, there would be no damages that the foreign bankers (and everybody else) could claim.

    No to the bailout. Go FBI.

  41. 41
    Will Hunting says:

    TZ – they can’t call the notes (I think you meant put) – they are treasuries with decades to run until maturity. They could stop buying new ones and not let us refinance the ones that are coming due.

    But who would buy their salad spinners? Given their population and labor pressures, they are stuck in a cycle that is pretty vicious in its own right.

  42. 42
    Comrade RoonieRoo says:

    I went back to watch that video of Paulson’s opening testimony. I understand what John and other commenters are saying now about the trust issue being a critical piece.

    If we honestly require this crazy bailout to prevent the mother of all meltdowns and if the complete distrust of this administration and Congress’s ability to not get hoodwinked repeatedly gets in the way of getting what we truly need, it is the Repubs fault, plain and simple.

    They created this atmosphere of fear and distrust. They cried wolf so damn many times that the whole village is sick and tired of trudging out to the woods to find out there is no damn wolf.

    I just hope and pray there still is no wolf.

  43. 43
    Ming says:

    Yes to what you’re saying, Comrades John and NonyNony — thank you for putting it so well.

    One thought I had is that the demand for $700B with no strings attached, combined with the threat that sky will fall unless we agree to this RIGHT NOW looks like an awful lot like a completely cynical negotiation tactic. When bargaining under extreme time pressure, start from an extreme position. The Bush admin is probably aiming for some “compromise” which, in any other context would look outrageous but will look remarkably sane compared to their starting position. If they were serious about getting to a workable solution quickly, it seems like they wouldn’t be wasting time posturing. “$700B right now in unmarked bills, or the economy gets it!” They would have proposed something they thought people might actually be willing to agree to RIGHT NOW. (Not touching compensation packages for executives of failing firms so that they will be willing to accept the money we’re promising to throw at their firms?? Seriously?) Their very position suggests that they’re not in quite the hurry they claim we all need to be in.

    Thought two: if the above is correct, then the appropriate response is to start from an equally extreme position. “We’re just undergoing a necessary albeit scary market adjustment — we have to trust the market to work (as you f*cks have been telling us for years).” Or something equally calm and unhurried. Let them convince us in clear, concrete, detailed terms that there really is the crisis they claim. Or propose a solution which is equally outrageous — “we think that giving every American man, woman, and child making less than $5K would go a long way toward fixing things.”

    I guess I do think there’s a crisis. It’s got to mean something when the biggest and oldest, the most solid financial institutions go down in flames in short order. What’s less clear is the magnitude and speed of the coming tsunami, what the potential solutions might be, or even whether $700B would be enough to stop it. And I guess I come down on the side of saying, I’m sorry, I understand that the economy may crash if we don’t take quick action, but the fact is you’ve cried wolf before, and if you want my firstborn you’re going to have to explain the crisis to me in clear and convincing terms, and you’re going to have to explain why sacrificing my firstborn is necessary. So start talking, and talk fast.

  44. 44
    ThatLeftTurnInABQ says:

    I messed up the link to Yves’s blog in that last comment, so let’s try that again and hope it works this time:

    nakedcapitalism

  45. 45
    lampwick says:

    Saw this today at Calculated Risk:

    Mom, I need $100.

    WHAT? I just gave you $20. What do you need $100 for?

    I want to go to the movies.

    $100 to go to the movies? Isn’t that a little excessive?

    No.

    Forget it.

    Calls friend: Sorry, can’t supply the booze this time. Try your mother now.

  46. 46
    ThymeZone says:

    They could stop buying new ones and not let us refinance the ones that are coming due.

    Okay, that. Just trying to figure out who has the power to send guys like Paulsen and Bernanke running up to the capitol to ask for $700b before the end of the month.

    It surely can’t be anybody in government. I can’t picture the tycoons who could make that call.

  47. 47
    nicethugbert says:

    Fuk me once, shame on me. Fuk me twice, meet Lorena.

    I don’t understand all this paper talk myself, in their terms. But, why would I? It’s all bullshit! How can a stack of worthless paper be worth anything? It’s not real estate, of any kind. It’s just foolishness. Who holds all this crap paper? The investment banks. Who needs them? They have no money! They wanted to play hot potato instead of doing real business. Let them burn. Let their competition pick up the spoils if there is any. Really, if you can’t write a mortgage then you shouldn’t be allowed to claim the property. Why should millions of working people, people with real jobs and real economies, have to lose out to over credentialed fools who can’t even exercise common sense?

    If the commercial banks want to sit on money and don’t want to keep real businesses open, then they have to be made to do business. I don’t think that is too much to ask of them considering that they get insanely wealthy off using our money and economy.

  48. 48
    Rome Again says:

    I just knew at an intuitive level that there was something wrong with the economy when middle class people who when I was a kid used to live in little houses, clip coupons, eat out once a month, and go camping as a vacation, were all of a sudden buying million dollar homes with 3 car garages, driving monster luxury cars and vacationing in Paris or Tokyo on a regular basis. It didn’t make any sense.

    I had this intuition as well. I had it about Iraq also.

    I may not be the sharpest tack in the bunch, but my predictions seem to be right on the money anyway. Perhaps we should have an alphabet organization of intuitives who foresee danger? I could have averted us from paying for both the Iraq War and this financial mess if someone would have listened to me.

  49. 49
    Kirk says:

    In the interest of the aforementioned desire for education, i present this. (warning, large pdf)

    “This” is the presentation made by Dr. Nouriel Roubini to the House of Representatives’ Financial Services Committee that basically predicted where we’d be and why, plus possible methods to try and stop the madness (and the reasons why they probably wouldn’t work), made February 26 of this year. His projected endstate is a financial meltdown of 1 to 2 Trillion dollars in bank failure losses, with subsequent impact on the US economy. We are at (depending on how you figure these things) step 8, 9, or maybe 10 of his 12 steps to meltdown. Throwing a bunch of money at the financial institutions is solution number two.

    Consider it a primer and road map of what’s currently the probable future.

  50. 50
    Karmakin says:

    What we’re seeing here is simply a crossroads, and a lot of very sensible people are trying to decide which road to go down, liberal moderate and conservative alike.

    Either all that paper is the foundation of the economy, and without it nothing happens, the economy grounds to a halt, it’s a huge depression, all that horrible stuff, or…it’s not. The financial firms will go out of business, but everybody else will go to work tomorrow. It’ll suck on both a micro and macro level….but not 700 billion dollars worth of suck. More like a steel company moving all operations overseas level of suck. More like an off-shoring type of suck. You know..the type of suck that happens every day to non-financial people? The type of suck that financial people made happen? Yeah.

    Personally? I think it’s the latter. But no matter which way you go its a huge gamble. There are good arguments for both sides, to be honest. And the stakes? Massive. Like I said. It’s the crossroads. And it’s NOT an easy decision. Not by a long-shot.

  51. 51
    Comrade Scrutinizer says:

    I messed up the link to Yves’s blog in that last comment, so let’s try that again and hope it works this time:

    nakedcapitalism

    Nope. That’s screwed up too.

  52. 52
    R. Porrofatto says:

    I’m with you. I read stuff like how credit derivatives are around $50 trillion, and interest rate swaps have reached around $300 trillion in notional values, whatever that means. The GDP of the U.S. is only $13 trillion and that of the entire world is about $55 trillion. Where did the “notional value” of all this paper come from, what does it exactly mean in tangible things?

    From what I’ve read and what little I’ve digested, the shadow Wall Street is like one big casino, where someone might start out with a $20 chip that’s actually worth $20 (i.e., a mortgage), but pretty soon folks are borrowing money to make bets on whether that $20 chip will win anything, and then making bets on whether those bets will make more money or less and then betting on just how much more or less, then buying and selling each others’ bets, all on borrowed money, until there’s nothing but a mountain of bets, and a mountain of debts. Then, when it turns out that the $20 chip is really only worth half that, the whole thing collapses.

    Or something like that. And now, for some reason, we have to hand over billions of our bucks to these schemers, like showering free $100 bills at the track, or their collapse screws us all. Or something like that.

  53. 53
    Will Hunting says:

    tavella – not necessarily – under a well structured plan (fingers crossed), it would not have to be like this. Your point is exactly why the paulson plan as proposed is terrible. Possible solutions are to not allow unbundling of the tranches (the high yield crap was included in the first place to give the low yield high grade stuff a kicker yieldwise and maintain the AAA rating) AND take an equity stake – with the equity stake you get to keep the upside to some degree.

    The urgency being promoted would seem to be a smokescreen then to get cover to only buy the bad stuff. This should not be allowed to happen.

  54. 54
    Comrade General Stuck says:

    I felt in my gut that this was coming about 3 years ago, but without having the intellectual equipment to understand any of it in detail at the time.

    Same here. I’d seen republican administrations come and go and they all tweak the system some toward the upper crust, but always with restraint. I just took it as a balancing exercise and probably necessary. But Bush showed no such restraint and expanded the gap between rich and poor more than the others combined. That’s why I was for Edwards because I thought he’d have the willingness and balls to knock plutocrat heads. Of course, he turned out to be a hypocrite and liar and thankfully didn’t get the nomination.
    Shows you how much I know.

  55. 55
    AkaComrade says:

    Serious comrade is serious.

  56. 56
    Scott H says:

    Next open question, credit crunch v. liquidity: does anyone know of anyone else with good credit rating not getting the lines that they require, for a fact?

  57. 57
    Comrade Cumrag says:

    Somewhere, some poor bastard is getting cuffed for a bag of weed. The world doesn’t melt for you.

  58. 58
    hilzoy says:

    John: I may post about this later, depending on when I get sleepy, but: luckily, we don’t have to decide whether to trust the administration about the existence of a crisis. (Paulson’s bailout plan is another story.) There are enough other people out there who sound genuinely terrified — Nouriel Roubini, Krugman (who wrote that he was terrified a week ago, iirc), and all the rest of the econbloggers. They know a lot more than me, and luckily for all of us have not spent the last eight years squandering their credibility. And they’re obviously not just shills for the administration, or even of one particular ideological bent.

    My sense is that no one actually knows how long we have to work this out — it depends a lot on confidence, and on how long it takes some clever people to decide to make a run on something, etc. I think it’s like wondering how long it will be before Wile E. Coyote looks down: not knowable from information like the distance to the bottom of the cliff, etc.

    One of the many things that worries me is that I don’t think people (e.g., ordinary voters) yet have much sense of how the bailout will affect their actual lives — what concrete consequences might be expected to flow from $700 billion, or whatever we end up doing. Also, that a lot of people do not seem to have begun to grasp how much of our freedom of action this administration has traded away. All that “screw you, other countries” stuff from the GOP is really not productive right now. It was a not particularly nice trait that we could afford to indulge back in the 50s and 60s. Not anymore.

  59. 59
    r€nato says:

    re: Pournelle:

    One of the reasons the Roman Republic collapsed was that the two parties simply could not refrain from prosecution of public officials after they left office. Political differences became crimes; and while few of those prosecutions came to anything important, the cost in time and money was large.

    The fucking Republicans should have fucking thought about that before they fucking impeached Bill fucking Clinton over a fucking blow job.

    It’s unlikely Bush/Cheney will be prosecuted for war crimes on 21 January 2009, but they ought to be. If you can’t tell the difference between lying about a blow job and starting an illegal war with massive lies and deception, condoning torture and pretty much shitting all over the Geneva Conventions – to which, by the way, the US is still a signatory – then maybe you ought to shut the fuck up and go back to Sunday School or wherever the fuck they teach remedial ethics.

    I don’t know who this Jerry Pournelle is (he’s not the scifi writer, is he?), but I look forward to his type losing their poisonous sway over this country and its discourse.

  60. 60
    Comrade Jim says:

    Somewhere, be it Heaven, Hell or somewhere else, Charles Ponzi is taking a bow. From the Reagan years to today, Wall Street has erected a giant Ponzi scheme dressed up in one fashion or another, and it may well be that we are finally at the point where the scheme collapses. I tend to think that while the crisis is real enough, the call for immediate action is a way to get something done without bringing attention to the culprits in all this. Which means that they will resurface, cause another bubble, and we’ll be that much farther down the path of America being a second rate power.

  61. 61
    JPK says:

    I think at this point the only thing the Bush administration could do to convince all of us that this is really, truly the overwhelming crisis they say it is (and that I worry it is) would be for both Bush and Cheney to resign immediately, and turn the executive over to Nancy Pelosi to caretake until next January. Then I think we could start to get our heads around the dimensions of it.

  62. 62
    tBone says:

    Dr Pournelle has some relevant insights. In particular, he argues the legal immunity is necessary.

    Legal immunity is necessary because of “prominent Democrats saying openly that they intend to prosecute Bush and Cheney for war crimes as soon as they leave office”?

    He closes with: “As to government by the people, clearly the smart people don’t want that: just listen to what they say about Sarah Palin.”

    Uh, yeah. Color me unconvinced by the Dr.’s argument.

  63. 63
    ThatLeftTurnInABQ says:

    Sorry about the busted link above. I guess y’all will just have to type the URL in the old way, like we used to do back in the day when we walked to school 10 miles in the snow, uphill going both ways.

    I just took it as a balancing exercise and probably necessary. But Bush showed no such restraint and expanded the gap between rich and poor more than the others combined.

    IMHO and YMMV, but I blame this more on Greenspan than on Bush. I think Mr Andrea Mitchell wanted to go down in history as the bestest Fed chairman evah, and he decided that the way to do that was to never let a recession or serious financial meltdown (LTCM for example) occur on his watch. So he did what anybody would do if that was their goal – he got out his fire extinguisher and put out every fire he could find, pronto.

    If he had been more familiar with some intellectual discipline other than econ/finance, like say one of the natural sciences or a branch of engineering, maybe he would have understood that this wasn’t such a good idea in the long run, and the long run might not take so long to show up either.

    Here’s my favorite analogy:

    It is pretty well known, especially in the Western US, that after the great forest fires of 1910 the US Forest Service went balls-to-the-wall all out to stop forest fires in their tracks. They even came up with new techniques to put little fires out as quickly as possible before they became medium sized fires or bigger, like the smokejumpers (incidentally, if you haven’t read Norman Maclean’s Young Men and Fire, do yourself a favor and make some time for it).

    This worked well at first, but it created a growing problem. All those little fires and medium fires turned out to be playing a crucial role in the forest ecology. They tended to stay as ground fires rather than crowning, and so they periodically burnt up the litter and detritus on the floor of the forest. And by not crowning, they left the larger and more mature trees alive and with less competition from understory plants and younger trees. The small fires were helping to keep the forest healthy.

    Without those small and medium sized fires (which the Forest Service was zealously putting out for most of the 20th cen.), the amount of unburned fuel kept building up to higher and higher levels. Which meant that when a fire got started which the USFS couldn’t put out, it was much more likely to become a devastating crown fire which totally destroyed vast acerages of forest all at once, burning out everything in its path.

    Now the USFS knows better than to put out every small fire – they understand the ecology of fire much better than they did decades ago – but they have a very tricky and difficult task trying to use controlled burns and small natural fires to thin out the fuel load in the forests (supplemented by mechanical removal of fuel material) while managing the risk that any kind of fire can get out of control very quickly, and meanwhile the overall fuel load is at extremely dangerous levels and it will take a generation or more to get it down to safe levels without devastating crown fires wiping out everything.

    That is why every time you go camping now, those little signs at the entrance of a national forest always say “Fire Danger: Extreme” or “Fire Danger: Very High”. They never say “Low” even if it has been raining for 2 weeks straight and the temp is 45 degrees with winds at 2 mph. That’s because the fuel load is so high there’s no such thing as a low fire danger any more. If we are lucky, our grandchildren may see it.

    So what does this have to do with Greenspan and the economy?

    Greenspan was like the 20th cen. USFS putting out fires. He failed to understand that recessions are like fires in that they come in different sizes, and by putting out all the little ones, he was just storing up more hurt for the time when the big one came along – so big that he couldn’t put it out no matter what.

    As it turns out, the big one didn’t arrive until after Ben took over (and continued Greenspan’s policies), but the result of those policies (a monster recesssion and/or depression) was entirely predictable, only the exact timing was in doubt.

  64. 64
    Comrade gopher2b says:

    Actually, right now, I think we need as much information as we possibly can get our hands on. Just like war is God’s way of teaching Americans about geography, we are all about to get a lesson in finance.

    I sincerely believe at this point that the bailout is unnecessary and for the moment will give Paulson and Bernanke the benefit of the doubt that their motives are not pure evil.

    They are nervous as hell because the only industry (investment banking) they have ever known is going under without this bailout. This is an industry, however, that is based almost entirely on paper wealth and paper credit. They’re friends and family will lose vast amounts of wealth….MASSIVE amounts.

    They probably believe that if IBanking goes under so too does the economy. Why wouldn’t they place themselves at the center of the universe. Have you ever met someone who works on Wall Street who doesn’t think he’s the best thing that ever happened to this country. Also, it’s entirely possible (and likely) that the Wall Street bankers are scaring the hell out of Bernanke and Paulson with misinformation and fear mongering for the sole purpose of getting free money.

    One data point that leave me more relaxed:

    (1) Warren Buffet doesn’t put $5 billion in Goldman Sachs unless he thinks its a bad investment. If Goldman doesn’t need a bailout, we’ll all be find and this thing is being vastly overblown.

    (2) Any bailout where the banks need to be provided “incentives” to participate is not a bailout, its a handout. And this one is of biblical proportions.

  65. 65
    Komrade Montysano says:

    Thanks for the link to Naked Capitalism…….. well, I’m not sure “thanks” is the right word.

    Finally, it is hard to escape the political implications of all this. Basically the President is trying almost to nullify the coming election by getting far reaching legislation in place that should have been left to the next Administration.

    You see, that’s what’s been running around my mind, but it seemed to paranoid to consider: is this just a $ 700B ratfucking scheme?

    Yes, the financial world is rotten, and replete with all kinds of worthless paper floating around. Has been for a while now. But why this, and why now? It’s killing McCain. Did Rove perceive that McCain was toast, so he asked the Wall Street Boyz to fiddle with the switches and make an already inevitable event occur a bit sooner, just to ensure that Obama has the biggest possible pile of shit to deal with?

    I think to myself: no one is that evil, that craven, that sociopathic. But I’ve thought that before about the neocon boys: “Surely they wouldn’t ______”. And it always turned out that they would, with pleasure, and without a second thought.

  66. 66
    Joshua Norton says:

    One of the reasons the Roman Republic collapsed was that the two parties simply could not refrain from prosecution of public officials after they left office.

    Bull and shit. I just love how righties make up convient fiction about the Romans to make stupid points. The “fall” was more to do with the Romans hiring the barbarians as soldiers in huge numbers because the Roman citizens didn’t want to be soldiers any more. When they were no longer needed they started invading from the outside.

    Blackwater is a better example of this than our tendency to call Chimpy and crew the criminals that they are.

  67. 67
    Jake says:

    New ABC Poll: Obama 52, McCain 43.

    BOOM.

  68. 68
    GSD says:

    I think Brittany Spears was right when she said we should just trust the President.

    -GSD

  69. 69
    Just Some Fuckhead says:

    Woohoo!

  70. 70
    KG says:

    then why not just allow everyone with a mortgage in jeopardy to enter arbitration to work out a better deal based on the original principal of the loan?

    Terms of loans are being renegotiated, as we speak. I know because my law firm is doing a lot of this work – it’s called loss mitigation, all the lenders (well, actually, servicers – because as we’ve all learned recently, the people you send your payments to aren’t the actually holders of the note) have huge departments for loss mitigation. The California Legislature recently passed laws that basically require attempted loss mitigation.

    There are problems with it though. First, the lenders won’t do it until you are in default. They take a very aggressive approach – basically, pay everything you owe and here’s a modest reduction for the next five years. Another problem is that a lot of borrowers simply can’t even afford the renegotiated terms. There was systematic fraud (and breach of fiduciary duties, and a ton of other shit) in the mortgage broker business the last 8 years, some places actually had “photoshop rooms” where they created counterfeit documents. Besides that, there was no oversight, not by government, not by lenders (a guy I know that use to be in the industry told me once that he could get a loan on a stated income written out on the back of a napkin).

    Keep in mind, this stuff is on a different level than the securities stuff we’re hearing about. The securitization of this bad paper is a whole other realm of crap. With lending institutions and investment institutions under one roof, there was no review of any of this stuff. In fact, as the paper got passed around, a lot of these companies avoided looking into the status of the paper so they could deny liability on the doctrine of holder in due course (an ancient legal doctrine that says a bona fide purchaser of a security isn’t responsible for fraud in the securitization process). In fact, I’ve actually seen this in the litigation setting on a couple of fraud cases.

  71. 71
    Joshua Norton says:

    the FBI is looking at potential fraud by mortgage finance giants Fannie Mae and Freddie Mac, and insurer American International Group Inc.

    Fraud? Where there’s Republicans and money involved? Whoda thunk it?

    /snark

  72. 72
    ThatLeftTurnInABQ says:

    war is God’s way of teaching Americans about geography

    BTW, I am so stealing that line.

    I’ve had that same thought before but never a pithy way to express it. Thanks, Comrade John.

  73. 73
    zuzu's petals says:

    Does anyone see any scenario at all – any at all – where we will still be able to get meaningful health care reform in our lifetimes?

  74. 74
    Martin says:

    Ok, someone tell me why this won’t work.

    CDSs are just glorified insurance policies. It’s as though there was a market that allowed everyone on this site to take out insurance policies on John Cole’s car, worth $10K, and if that car gets totaled, we all get paid. Basically we all pay premiums and we can buy and sell the things depending on how likely we think he is to crash. They’re different from an insurance policy in two ways:

    1) you can take out a policy on something you don’t own (something normally not allowed in a regulated insurance market)
    2) the policy has requirements on both the issuer and the buyer. It’s usually binding both ways.

    Now, insurance policies get cancelled all the time. Nobody freaks out because the buyer makes regular payments and receives the benefits of the policy during that time. At most you need to prorate the last payment and maybe issue a small refund.

    So, why not do the same thing here? Why not just declare them illegal unless you hold the underlying asset? Nobody can make additional premiums, the contracts expire within 3 months, and the damage is limited to the number of defaults that occur between now and the end of the year. And the problem doesn’t return. Since they’re illegal, they can’t be bought or sold either, and the actual value of the stuff, though it’s stated in the hundreds of trillions, really just dissipates because it’s not a real asset until it pays out. All you lose is a potential payout and a potential liability, but not a real one in either case.

  75. 75
    mvr says:

    I’ve been thinking we really do need to do something since even the people on the outside I trust (Krugman) are worried. But the track record of this administration is not good with respect to the truth, and even if Paulson seems to me more honest than the rest of the lot, he did himself no good today and the plan is really no plan at all — just a budget figure with more discretion than any executive ever gets. So yeah, I’ve gotten more skeptical while getting worried that nothing may be what we get when something (we know not what and can’t agree even if we knew) what we need.

    Your posting captures a lot of my ambivalence.

  76. 76
    Joshua Norton says:

    where we will still be able to get meaningful health care reform in our lifetimes?

    Yes. Elect McCain. Then when all his deregulation hijinx kicks in and the health care industry goes belly up, the Feds will have to nationalize the whole damned mess. Kind of like they’re doing right now with Wall Street.

  77. 77
    tBone says:

    I don’t know who this Jerry Pournelle is (he’s not the scifi writer, is he?)

    Sadly, yes. I had no idea his politics were so wingnutty.

  78. 78
    nicethugbert says:

    The Swedes went through this in the 90s and they bailed themselves out by having the government buy the junk in exchange for equity and punitive measures. They say it worked. Norway and Finland had to do the dame thing too.

    But, I still don’t understand why it has to be the government to buy all this stuff. Why can’t businesses buy this stuff according to the Swedish model? Why can’t Icahn and Buffet types handle this?

    I think this is totally solvable by simple regulating this shit out of existence and letting private capital prey upon these crooks. Feed them to the market!

  79. 79

    Could someone summarize the Pournelle crap. I went to the link, but I refuse to read anything by anyone who writes with a dark or colored background and with decent margins. My reasoning is that if you can’t be decent enough to your readers to use a light background and dark text and decent margins, chances are you are too much of a douchebag to bother reading.

  80. 80
    Joshua Norton says:

    Why can’t Icahn and Buffet types handle this?

    Already done that. According to the NY Times:

    The billionaire Warren E. Buffett will invest $5 billion in the investment bank Goldman Sachs, as part of the bank’s efforts to raise $7.5 billion in fresh capital, a Goldman spokesman, Lucas Van Praag, said Tuesday.

    In return, Berkshire Hathaway, the conglomerate run by Mr. Buffett, will receive perpetual preferred shares in Goldman, Mr. Praag said. The preferred stock will pay a 10 percent dividend. …

    So it’s like this. When Warren Buffett helps save their backside, he owns a piece of it. When the Bush administration wants US citizens to save their backside, it’s supposed to be an act of charity.

    Go figure.

  81. 81
    ThymeZone says:

    Okay, I have a new favorite senator: Brown, (D) of Ohio.

    He is basically telling Paulsen to shove it, don’t come in here with a 3 page bill that demands $700b and has no explanation of how you will spend it, it’s our way or the highway. We are not playing that game with the president.

    Nah gonna do it.

    I like the cut of the man’s jib. To hell with Paulsen, I changed my mind. NO to the bailout unless they fix it.

  82. 82
    ThatLeftTurnInABQ says:

    Does anyone see any scenario at all – any at all – where we will still be able to get meaningful health care reform in our lifetimes?

    If it saves money immediately or is at worst revenue neutral, then yes.

    Other than that, nope.

    IMHO Greenspan and Ben B. and Bush have between the three of them spent every dime of fiscal stimulus or spending on expanding programs that future Presidents could have looked forward to using for one purpose or another out for something like the next 20 years, and destroyed our ability to borrow money from outside the US for about the same period of time.

    We now have basically two choices: a depression, or we try to inflate our way out and risk the possibility of true hyperinflation. If we are really, really lucky and somehow manage to steer between the rock and a hard place, then we get something like 1970s USA stagflation crossed with 1990s Japanese cryogenic deflationary economy.

    With luck, we won’t get into any wars, seeing as how we can’t afford to pay for them any more. Minor historical footnote: being so broke (and unable to raise loans) that he could no longer afford to have an independent foreign policy when revolution broke out in the neighboring Netherlands was one of the things which helped to discredit Lous XVI right before the beginning of the French Revolution.

    Look on the bright side – the economic downturn will probably be enough to postpone peak oil for a decade or more.

  83. 83
    PC says:

    Ok, someone tell me why this won’t work.

    Imagine you are getting fucked. Now imagine you are getting fucked by urotsukidoji. Now imagine urotsukidoji had a cousin that was a few orders of magnitude larger and more prolific that was fucking you.

    Now you know about the great unwinding.

    Also, cocks.

  84. 84
    zuzu's petals says:

    I don’t know if anyone caught the Daily Show tonight, with Bill Clinton as the guest…

    But wow, did he have a simple, concise explanation, and some simple, concise ideas. And Stewart said what most people were probably thinking at that instant… “if only you could run again…”

  85. 85
    drag0n says:

    it is all very simple John.

    We should have listened to our parents and gone to Law school.

    I wonder how much Kelko’s book is gonna be worth.

  86. 86

    Actually, right now, I think we need as much information as we possibly can get our hands on. Just like war is God’s way of teaching Americans about geography, we are all about to get a lesson in finance.

    Okay, but I warned you.

    The notional value of a derivatives contract is not what that contract is worth; it’s what the asset underlying the derivative is worth at the spot price.

    Here.

    His example is that he has 10,000 call contracts on IBM stock, with a strike price of 110, with IBM trading at $100. The notional value of this is 10,000 (the number of contracts he has) * 100 (the number of shares represented by each contract) * $100 (the spot price of IBM at the moment). That gives you a notional value of $100 million. Of course, if you hit expiration and IBM is still trading at $100, then your 110 calls expire worthless. That $100 million in notional value got you exactly nothing.

    Do I need to explain how a call option works? (That’s not a snide comment; my mother has no idea how they work either, but she’s said she doesn’t want to know.)

    On interest rate swaps, notional value is particularly misleading. The way an interest rate swap works is that I agree to pretend that I owe you $1,000 at a fixed rate of interest, and you pretend to owe me $1,000 at some floating rate of interest. We then trade the interest payments that we would owe each other if those debts were real, netted out. If the floating rate happens to equal the fixed rate, then we owe each other nothing. People do this either because it’s cheaper for them to borrow at a floating rate, but they want to hedge the position as if it were a fixed rate. The other side wants to speculate on the floating rate.

    (My old finance professor would shoot me for that explanation, but hopefully it’s simple enough to give the general idea.)

    Notional value is particularly worthless for interest rate swaps, because it isn’t a measure of how much we owe each other in interest. Instead, it’s just the pretend value of that pretend debt. No one actually owes anyone that money. The payments are based on interest rate differentials.

  87. 87
    Martin says:

    Now you know about the great unwinding.

    Also, cocks.

    Indeed. That was a rather, ahem, educational bit of Googling I just did.

    I didn’t say that there wouldn’t be a revolt, just that it would solve the problem – and solve it without inflicting massive damage on anyone. But yeah, there are people out there just waiting for their huge payout and they’d be denied that, but I don’t think anyone in authority at this point gives a fuck.

  88. 88
    drag0n says:

    “One source said the government would be “remiss” if it didn’t look into what happened at these companies because of the financial problems they are involved in and the actions of individuals running them.”

    Remiss Indeed.. now the lawyers are going to eat it all up.

    They will probably fix it too. I hope so anyhow.

  89. 89
    Eric U. says:

    I was a big Pournelle fan, he wrote for Byte magazine and I liked some of his fiction. He did start writing the same book over and over, so I lost interest. And he’s always been a bit of a blowhard, but now all he does is write republican wingnuttery of the worst sort.

  90. 90
    drag0n says:

    The lawyers will sort it out.

    Unlike investment bankers they actually work for their money,

  91. 91
    Rick Taylor says:

    You’ve summed up my feelings and probably a lot of other peoples in your post. I’ve got feelings and opinions, but in the end I don’t understand what’s going on and I don’t trust most of the people authorized to handle it. Still since this blog is called “hot air, here are my impressions.”

    I think the crises is real. That’s largely because Paul Krugman obviously thinks it is, and while he’s hardly inerrant, he is famous economist and he’s not going to defend the Bush administration in any way unless he really does think it’s warranted.

    Paulson strikes me as being relatively competent for a Bush appointee, which is obviously a low bar. Still he worked for Goldman Sachs to sell this stuff, and it’s pretty clear his instinct on how to save the situation is the same one that kept it going; if we can just find more buyers, the bubble can keep its momentum, only now the only possible buyers left are the government.

    I like the swedish solution; give the banks aid but extract equity in return, both to recompense the country if we’re successful, and to discourage all but the institutions who truly need aid from applying for it. Does Dodd’s plan do that? Hell if I know, though Krugman seems to like that so it gives me some reason for optimism. Dodd’s plan could be the plan we need, or it could be a give-away just slightly less objectionable than Paulson’s, I’m in no position to judge it. It looks like we may actually have enough leverage to pass it over Paulson’s plan; with conservatives defecting, the Bush administration can’t play the usual squeeze.

  92. 92
    drag0n says:

    I would be scared shitless if I had anything to do with this crap.

  93. 93
    drag0n says:

    this bailout can be a good thing. Just make sure it gets spent wisely.

    If it is spent wisely it can fix a lot of stuff…

    And I must say, I look foreward to hearing from Special Agent Kelko in the future. It sounds like a lot of guys are going in the can for this.

    Hopefully it goes up to the top. It’s a good start tho!

    I gotta give you guys credit for that.

  94. 94
    Martin says:

    I’ve made a decent bit of money on options (enough to put the kids through college, I hope) and because they have a distinct termination date, the value to the buyer often isn’t fully realized until that time. Do interest rate swaps and credit default swaps work the same way, or are they open ended? I assume that they are open-ended because there are regular payments made.

    It seems to me that there needs to be a much more simple way to unravel this market than to buy it up.

  95. 95
    TenguPhule says:

    . And I don’t know what to believe or what to trust.

    Trust in this.

    If the faith in the govenment backing of American debt really falters, the only brief joy you will get is in lynching your local GOP.

  96. 96
    drag0n says:

    CNN

    “The FBI currently has 26 pending corporate fraud investigations involving subprime lenders,” Kelko said. “As we have seen, this number can fluctuate over time, however we do not discuss which companies may or may not be the subject of an investigation.”

    they will sort it out. They have no choice.

  97. 97
    zuzu's petals says:

    I think I will be okay.

    I have a sate pension for life. And Soc. Sec. of course, if it’s still there when I’m ready.

    My house will be paid off in 12 years or so. Low interest too.

    My investments are mostly in bonds and CDs, some muni money market funds (which I moved). Typical retiree, I guess, wanting to preserve principal.

    Takes a deep breath … okay, I think it’ll work. Knock on wood.

    None of this is true for my son, of course. This whole thing feels like such a betrayal of the kids…first that damn $3 trillion war, now this.

  98. 98
    Comrade radish says:

    Warren Buffet doesn’t put $5 billion in Goldman Sachs [if] he thinks its a bad investment. If Goldman doesn’t need a bailout, we’ll all be [fine] and this thing is being vastly overblown.

    I hate to break this to you comrade, but Buffett is probably bullish on Goldman at least in part because he thinks they’re going to get a good deal in the bailout. This is perfectly reasonable because the guy who’s fixing to hand out this huge fucking shitload of free cash is a Goldman guy. Buffett’s betting that when the cash gets handed out, GS is at the head of the line and ultimately gets a lot more benefit than the $5b Buffett’s ponying up today.

  99. 99
    drag0n says:

    the lynching has started.

  100. 100
    KT says:

    Question for J Michael Neil (or anyone that may know)

    I have no idea of the correct terminology so will just describe as best I can.

    If someone takes out a loan to buy my house for $300,000, the loaning bank, pays me $300,000 at the time of signing. Since it is a loan, they expect to earn interest from the buyer (I think i recall that they get roughly 3 times the worth of the loan on a 30 year mortgage) The bank sells the loan to a third party who then treats the loan as if it’s worth the 30 year full payout amount, not the actual $300,000 that changed hands.

    Since the interest is potential worth not actual worth, it would seem that any claims of loss are pure dishonesty. If the person who buys my house defaults, the loan purchaser is only really out $300,000 rather than the $900,000 they were hoping for. Is all this “bad paper” the collapse of the interest income? Or the collapse of the principle?

    If the “bad paper” is the collapse of the interest, then it would seem that the “crisis” is much smaller than we are being told. Just because an investor would like to get $900,000 on a defaulted $300,000 loan doesn’t mean that they lost $900,000. They only actually lost $300,000.

    Is the Paulson plan trying to treat the projected $600,000 interest as a real loss? Is the collapse of the interest the root of this crisis? Because if it’s only the interest we’re talking about then the “crisis” would seem to be much lees of a problem than everyone is making it out to be. The $600,000 is imaginary money and doesn’t represent a hard cash loss so why is the sky falling?

    Is that scenario in the ballpark?

  101. 101
    drag0n says:

    All those guys are fucked.

  102. 102
    Thom says:

    I don’t really think the comrade comments are all that appropriate. What it is really called when a right wing government gives massive amounts of dollars to corporations is fascism.

  103. 103
    drag0n says:

    I have to give Mueller credit. He is the only guy in the Bush admin who did a half decent job. Now he is going for glory before retiring.

    Thoee guys are FUCKED. I hope he takes it to the top.

  104. 104
    ThatLeftTurnInABQ says:

    OK before everybody passes out from the doom fumes, let’s throw in a little bit of longer term historical perspective.

    Who today has rock solid credit or great piles of cash?

    I may be wrong, but off the top of my head I’d say the Chinese, the Japanese, the Germans, and the petro-dollar regimes in the ME.

    Throw out the petro-dollar folks as a special case of irreversible resource mining, and take a look at the other three.

    40 years ago, in 1968, the Chinese were enjoying the fruits of the Great Proletarian Cultural Revolution. In which anyone who was an expert and knew anything about finances (or much of anything else for that matter) was either starving in the Laogai, being tortured to death by Red Guards, or was at best being used to clean toilets and slop pigs.

    60 years ago, in 1948, Japan was a bombed out shell of a country, occupied by a conquering army, only just barely emerging from a couple of years of post-war malnutrition and poverty so severe that several million people came close to starving to death in the immediate aftermath of the surrender in 1945.

    80 years ago, in 1928, Germany, having recently lost the Great War (WW1) with untold human and economic losses, had just experienced some of the worst hyperinflation ever, was on the cusp of the Great Depression, and further down the road lay the madness of National Socialism, WW2 and the Shoah.

    Who would have predicted at the time that any of those countries would recover from those depths (still within living memory today) to occupy the very pinnacle of economic prosperity today?

    So the next few years may be crappy here in the US, but they won’t last forever.

  105. 105
    Badtux says:

    Okay, those of you who know me know that I’m no fan of the Bushevik regime. But sad to say, the Chimp is right when he accuses Congress of fiddling while Rome burns. Yeppers, the four horsemen of the Apocalypse surely are near, Chimpy is *right*. I’ve looked at the entrails of this monetary fiasco, and I tell ya, that bird looks sick. Bad sick. As in, possible collapse and deflationary spiral transferring all the wealth of the nation to the investor class and making the 95% of us who owe money homeless and desperate poor and hungry and sick. And we know what happens after that. Bad things. ‘Nuff said.

    Now, Paulson’s proposed bailout is DOA. No Congress is going to give one man unlimited power to just hand out money willy nilly. It’ll have to be a committee, with Paulson, Bernanke, and three other folks appointed by Congress to mind the store. And they’ll probably put some strings on it, like the Feds reviving the Resolution Trust Corporation and having the RTC take majority ownershp of any outfit that gets bailed out, why in the long term the government might even make a profit out of this bailout. But deal is, it does need to be done, and done quick, because if we don’t get all that toxic sludge out of the system, bad things *ARE* going to happen. If anything, Chimpy and Paulson are *understating* the bad things… I’ve studied the period 1930-1932, and folks, we’re almost there. It won’t take much and we’re up shit creek so far that we can have a boatload of paddles and it ain’t gonna make no difference.

    — Badtux the Monetary Penguin

  106. 106
    comrade wingnuts to iraq says:

    NO BAIL OUT.

    Honestly… who is owed this money? I sure as hell don’t owe anybody shit for this, and I don’t know anyone who does. WHO IS OUT $700 BILLION?

    I’m a smart guy, and how come I don’t know this.

    Let’s start a NEW BANK.

    It’s actually a dream of mine. Let’s get it going. There’s lots of smart people on the web.

    Or maybe we could all just go to…

    Prosper.com for peer-to-peer lending.

  107. 107
    Joshua Norton says:

    Chimp is right when he accuses Congress of fiddling while Rome burns.

    Sure. Just like he was “right” about Iraq and the Patriot Act and FISA that ALL had to be done YESTERDAY or everyone was unpatriotic traitors.

    Funny thing about crying “wolf” so many times. The wolf will eventually be real, but no one is going to believe you.

    Once more we’re supposed to have complete reliance upon unseen “people in high places” who somehow know what is best for the rest of us, and belief these people will act first in our interests instead of their own.

    If there is anything the uber rich really fears, it’s that the rest of us will learn how little they actually contribute.

  108. 108

    Wow. That’s poignant. And on the mark.

  109. 109
    drag0n says:

    Mueller is going to fix it.

    Nothing like a prison cell to smarten these bozos up.

    I really am curious to see how far up this will go tho.

  110. 110
    drag0n says:

    it’s not like those torture/wire tapping leaks came out of the blue!

    He has nothing to lose.

  111. 111
    r€nato says:

    I am still absolutely gobsmacked that after, what, a week of deliberation? we might be on the verge of giving $700 billion to Wall Street and foreign banks, at a time when we are already deeply in debt, when health care has been a crisis for years, when we are entering a period where we really need to fund research into making green energy price-competitive with carbon-based energy sources, when global climate change is also a pretty severe crisis.

    I mean, if there were a Rorschach test that would tell you who really fucking runs this country and what their priorities are, this is it.

    As far as I am concerned, no bailout for Wall Street, at least nothing remotely resembling the $700 billion ransom the 3 Wall Street Stooges were demanding.

    If it’s true they need help, let’s have Congress debate it, investigate it, grill the fuck out of the greedy bastards who caused this mess, and decide on the wisest course of action, and above all, Wall Street doesn’t get the whole $700 billion (or whatever the final amount is) all in one shot, just before Bush and Paulson leave. Let’s say they get something to tide them over until January 20.

    More than anything, Wall Street types are calculating. You can be sure they have calculated that regardless of who is in the White House next year, it’s a certainty that the Democrats will have a tight hold on Congress. It ain’t gonna get any better for Wall Street lobbyists than it is right now.

    If they go to next year’s version of Congress and ask for a bailout or some similar aid, there is going to be a heavy price to pay including re-regulation. This is their last chance to drink our milkshake and have it too.

  112. 112
    Badtux says:

    Uhm, you’ll notice that I never said that the Chimp was right about Iraq, the Patriot Act, FISA, or any of that other stuff. Indeed I was a fierce opponent of all of that. I’m not relying on what “people in high places” tell me here, I’m looking at the fundamentals of how fractional reserve banking works and how that interacted with the financial system in the era 1930-1932 to create a national disaster. I am looking at indicators in the current financial system that I saw in my study of the era 1930-1932 that are looking way too close for comfort. Deflationary spirals aren’t a figment of some “people in high places”. We’ve seen them before, in the flesh, indeed until the post-WWII period the U.S. economy regularly engaged in inflationary and deflationary periods due to the vagaries of fractional reserve banking and the normal cycle of banking booms and busts in a system that did not have the flexibility of fiat currency but which did have a fractional reserve banking system to amplify any normal economic trends. So we don’t need anybody to tell us this stuff. All we need to know is history and economics, and specifically the economics of these booms and busts.

    The fact of the matter is that a *lot* of money is currently going “bust” out of the economy as these various financial instruments collapse. Now, you may not view this as money. But in economics, anything which can be traded for something else of value is basically money. Now, you say we shouldn’t have just created all this money out of whole cloth, basically bypassing the reserve requirements that apply to normal banking instruments in order to inflate the money supply by an ungodly multiplier. But the fact of the matter is that the money got created, and now is in the process of being rapidly UN-created. We know what happens then. 1930-1932. This isn’t fiction, this is history, this is real, this is something we’ve seen before.

    The current bailout proposal is DOA. The Busheviks just could not resist the urge to turn it into yet another excuse to plunder the treasury for the benefit of their cronies. But there has to be a bailout, and soon (presumably one with more Congressional oversight), because otherwise the clock strikes twelve and the ornate coach of our economy turns into a pumpkin. I don’t know when the clock strikes twelve, but I’d say that somewhere within the next four months, as I sit here scrying the monetary entrails and seeing that this bird is pretty friggin’ sick. And if we manage to crash the economy like in 1930-1932 we don’t have an FDR to get us out of it this time — Obama’s a smart guy, but FDR he ain’t, and he has to deal with thirty years of Republican propaganda that “government is the problem, not the solution” that FDR didn’t have to deal with. I hate to sound alarmist, but this has alarm bells going off big time for anybody who’s studied the economics of the Great Depression. In other words, yes, Chimpy has no credibility. But that doesn’t change the fact that, well, he’s *right* that the situation is dire and that we must act quickly. Unlike Saddam’s fictional weapons of mass destruction, deflationary spirals are real.

    – Badtux the Deflated Penguin

  113. 113
    r€nato says:

    John, here’s the summary of Pournelle you asked for:

    1) “Rule of law” really means that presidents and kings are above the law. If you prosecute presidents and kings for breaking the law then there is no ‘rule of law.’ Gratuitious reference to English history to make this nonsense sound scholarly and eminently reasonable.

    2) As for the bailout, because some Democrats somewhere said that Bush and Cheney should be prosecuted for war crimes, there must not be any oversight of the bailout, in order to restore ‘certainty’ to the markets we must act swiftly and resolutely, even if we swiftly and resolutely throw our $700 BB away, and some part of it certainly will be wasted or lost to corruption.

    (that way of thinking worked out really well in Iraq too – ed.)

    3) Also, since I can’t think of any way to oversee the bailout without there being lots of litigation, there should not be any oversight.

    4) Throwaway line about criminalizing political differences.

    5) Lie-bruhls are being mean to Sarah Palin.

    Basically, Pournelle is a somewhat less homicidal version of Adam Yoshida.

  114. 114
    The Moar You Know says:

    Shorter Pournelle: Dems are being vindictive and nasty and no good every came from prosecuting anyone in office (that’s what destroyed the Roman Empire, after all) save for that perjurer Bill Clinton.

    Jerry Pournelle is a fascist in the purest sense of the word. Both he and his butt-buddy Niven are some of the most vicious and nasty people that exist on this planet, and I can honestly feel sorry for anyone as cruel as either one of those two are.

    The $600,000 is imaginary money and doesn’t represent a hard cash loss so why is the sky falling?

    Is that scenario in the ballpark?

    Your scenario is in the ballpark but the $600,000 is not imaginary money. Let me try to explain how.

    People invest to make some money, otherwise we would call it a “piggy bank”, albeit one with good alarms and steel walls – and no interest payments. A pension fund puts a certain amount of money into an account with the expectations that in, oh, let’s say twenty years, the account will grow, and pay an amount that will pay the pensioner an expected amount in their old age.

    How does the pension fund make that money grow?

    They invest it, in various things, but mortgages – your “imaginary money” – has always been a big one as they are reliable, people tend to pay them back, and they give a very steady rate of return over time.

    So if your $600,000 of “imaginary money” goes away, that is $600,000 real dollars that does not get paid to some old guy who was counting on it for retirement. It is, for him, a real loss.

    And it will someday be a loss for anyone who wants a mortgage as well, because if pension funds and investors don’t get their $600,000 in “imaginary money” (real dollars) from the deal, they won’t be willing to lend anyone money for a mortgage. At all.

  115. 115
    r€nato says:

    …it’s also shocking how a published writer like Pournelle has such a mid-90s-looking shit of a website. He’s got everything except blinking text going on there.

  116. 116
    r€nato says:

    Pournelle also recommends a ‘nose pump’, complete with a link so you can buy one.

    ohhhh-kaaaayyyyy……

  117. 117
    r€nato says:

    …dear god, Pournelle generates his crap site with FrontPage. I’m guessing that in addition to being a totalitarian wingnut freak, he’s also tight-fisted as the day is long.

  118. 118
    Rome Again says:

    I like the cut of the man’s jib. To hell with Paulsen, I changed my mind. NO to the bailout unless they fix it.

    TZ, I’m glad you finally are on board. It makes it a lot easier to get along with you. ;)

  119. 119
    Badtux says:

    Pournelle’s behavior at sci-fi cons is notorious. He has a reputation as a violent blowhard who is full of himself. He also hates democracy and holds up monarchy as the perfect government. ‘Nuff said.

  120. 120

    fwiw (and sorry everyone, i haven’t been following the thread), i think that yes, the crisis in the financial markets is potentially catastrophic, but that the hammer is not going to fall so immediately that we can’t all just take a deep breath and think about how to make it less bad. bush and co have no credibility on this, being basically among the primary authorship of the current crisis, and i think to entrust them with implementing the fix is like fighting a fire with gasoline. they simply cannot be trusted to competently carry out the operation. i mean, look at them: they claim to have been working on their legislation for weeks and months (weeks and months that they’ve been telling us that everything is hunky-dory), and what they came up with is a three-page request for a trillion-dollar blank check over which oversight would be illegal. you can’t possibly take these jokers seriously. everybody with any sense knows that it’s going to be the next administration that cleans up this mess, so let’s not make any rash decisions or tie any hands just yet. let’s call a moratorium on foreclosures, do our best to rewrite every subprime mortgage we can so that the people who took them out can stay in their homes, maybe allocate a little money administered by an appropriate congressional committee to maybe buy the odd asset and keep the system afloat til january, and then cross our fingers and hope to hell that the guy the country picks in november is up to fixing this bullshit.

    deep breath, everybody. and vote obama.

  121. 121
    Pip's Squeak says:

    Joshua Norton Says:

    “‘ One of the reasons the Roman Republic collapsed was that the two parties simply could not refrain from prosecution of public officials after they left office.’

    Bull and shit. I just love how righties make up convient fiction about the Romans to make stupid points. The “fall” was more to do with the Romans hiring the barbarians as soldiers in huge numbers because the Roman citizens didn’t want to be soldiers any more. When they were no longer needed they started invading from the outside.”

    Nonsense. You have confused the Roman Republic with the Roman Empire. A slight matter of a couple of centuries.

  122. 122

    @J. Michael Neal:

    Thank you for that explanation. I wouldn’t presume to say that I actually get notional value as it pertains to interest rate swaps, but at least I think I understand what those concepts are now.

    So then, the notional value of interest rate swaps is pretty much just a fancy number? I can understand intuitively why it’s just not that important because no one’s going to go creating the presently fictitious assets whose value is being counted up.

  123. 123
    Dennis - SGMM says:

    Could it just be, at long last, that basing two-thirds of our economy on selling each other stuff made in other countries or “services” is an unsustainable model?

  124. 124
    TenguPhule says:

    It won’t take much and we’re up shit creek so far that we can have a boatload of paddles and it ain’t gonna make no difference.

    But at least we will feast on Republicans over an open fire.

    They taste like chicken.

  125. 125
    TenguPhule says:

    this bailout can be a good thing. Just make sure it gets spent wisely.

    And if wishes were fishes…

  126. 126
    MikeL says:

    Pournelle created the page in the 90’s. He had a blog before the term blog existed. He has had health problems lately, and is recovering from a brain tumor. He’s aware the website is old, and is not sure he can find time to do anything about it, since he’s 78.

    I read Pournelle because he represents a old-school strain of conservatism you don’t hear from much these days. I like that he does not hold to a party line, he actually does tell you what he thinks. He was very critical of the attempt to impeach Clinton for example. He also thought going into Iraq was a bad idea – he’s an old cold warrior and a containment guy. He’s also very happy Georgia was not admitted into NATO. Of course, old cold warrior means he hates Carter – all the cold warriors do.

    Look at me – I mostly disagree with him on the politics, but still feel a need to defend him. I started reading him because the science/engineering end is pretty strong.

    I think his point about political prosecutions is correct – yes, the Republicans did one on Clinton. And what came of it, other than wasting time and money, and creating a distraction? Does Bush/Cheney deserve prosecution? Sure. But if you try it, will anything come of it? I really doubt it.

    His other point was lawsuits – no immunity mean plenty of them. And with all the people who are going to be losing money soon, it’s something to be expected.

    Fact is, we are really talking about giving Someone some rather extraordinary powers. Someone is going to be pissing a lot of people off. Someone will want immunity.

    What if Bush tapped you to oversee this bailout thing? Would you accept, if the people who’s toes you step on could come after you later? Both civilly and legally? We are coming into a rough, desperate time, and that’s when the worst abuses occur.

    For what it’s worth, I think the bailout is just another market manipulation to deal with the past long history of market manipulations. It won’t solve anything, just put it off again. The last recession that the US didn’t intervene in was in 1907. It was sharp, ugly, and short. No bailout means a depression – and it will also be sharp, ugly, and relatively short if there is no government intervention. If a few months, everyone who’s going to go bankrupt will have done so, all the bad debts will be settled or wiped, and the economy will be essentially rebooted. There is in fact on old Jewish custom of Jubilee in which all agricultural and industrial activity stops for 1 year, once every 50 years, and all debts are forgiven. Basically, a self-imposed depression that reboots the economy. At least, that’s what I think is going on with that. I think this also links in strongly with the Kondratieff wave theory.

    This last bit is a pet idea I’ve had for awhile, but it still needs a lot of analysis. It’s 2 AM, so forgive me if I’m getting flaky. However, I do think this crisis is partly caused by fundamental flaws in the capitalist system we have. Attempts to discuss these flaws usually devolve into the usual left v right nonsense. Not too surprising Kondratieff was a Soviet economist – he had the luxury of discussing the flaws in capitalism.

    He disappeared into the Gulag, and was eventuality executed. Apparently he was a kulac-professor.

    This is why I ultimately think going after political enemies with the legal structure is a bad idea – this kind of thing has gotten badly out of control before, and don’t think we are immune. Crazy? A European in the 1920’s would have told you you were crazy if you predicted the Holocaust. Cultural fugue has torn nations apart before, but it was limited to nations. We have a global society now.

    Was it a mistake to link to Dr Pournelle’s thoughts? Maybe. I’m getting tired, and can’t come up with anything clever to wrap this up with. I gotta get to bed.

  127. 127

    John Quiggin on the bailout:

    But the bailout plan is something else. The possibility of a meltdown like this has been talked about, increasingly seriously, for the last couple of years. Yet Paulson responds with a three page document saying “I need $700 billion, no questions asked”. Wasn’t there a contingency plan? Or worse still, was this the contingency plan?

    Either way, Paulson should be sacked forthwith.

  128. 128
    wilfred says:

    Capitalism has failel. What does it take for people to recognize that these endemic crises are the fault of the econpmic system itself, rather than monstrous glitches to it. A lot of commenters are like Dickens – we just need better capitalists.

    Yes, Comrade, it’s time to face the music. Reagan’s insitution of cheap credit and deficit spending averted the question 20 some odd years ago – but Bush closed the deal. The populist promise of everybody living like a king just aped the promises of capitalism itself. Instead of being crucified on a cross of gold, John Q. Homelander hung himself with a noose made of easy credit.

    Me? I already headed for the territories.

  129. 129
    Bedlam UK says:

    TenguPhule Says:

    And if wishes were fishes…

    My future big house and fast car would be trout and haddock?

    Actually, thats pretty apt for you guys at the moment.

    My worry as a brit is that our finance has stabilised based on the Bailout you guys are organising, so if that rug is pulled, I assume our bankers are going to be tanked again.

    The domino effect of this situation is as scary as hell.

    I did post this question somewhere, but lost it, so if someone knows; where is this 7000000000000 coming from anyway, as your coffers are already empty??

  130. 130
    A Mom Anon says:

    It’s not just a crisis of belief in DC,or in the markets and banks and the like,but in each other. Hell,all the reveling in ignorance might as well go on the list too because now any “expert”on anything can’t be trusted unless you know their backround isn’t some political hack farm.

    This administration triggered horrendous divisions between families and friends,neighbors,communities. They helped feed every rotten,festering divide we have in this country(racial,religious,political,gender). And they did it knowingly and with absolute lust for that hatred.

  131. 131
    cleek says:

    a LIBOR is a cross between a Lion and a Boar. they are bred for their skills in magic. it’s pretty much my favorite animal, when properly grilled.

  132. 132
    Rick Taylor says:

    I did post this question somewhere, but lost it, so if someone knows; where is this 7000000000000 coming from anyway, as your coffers are already empty??

    My understanding is you guys will be lending it to us. You and China and a bunch of other countries of course. That’s why the proposal to spend the money includes a corresponding increase in our national debt limit.

  133. 133
    Karmakin says:

    Badtux:As the amount of actual liquid cash is way way way below the actual market value of all these investments…their actual value is in the prediction of future increased value. If those values are to be stable/decreasing, then frankly they tumble.

    What I’m saying is that you can’t stop the bubble from popping. Only delay it a bit. So you spend 700 billion and for what. To hold it off a month? A year? A decade? Two at most. Wait for the great 401k popping, as millions of retirees go to liquidify their holdings at a fairly rapid basis.

    Whooo boy.

    No, this shit is going to happen, one way or the other. Best to spend that 700 billion actually getting through it.

  134. 134
    Svensker says:

    I did post this question somewhere, but lost it, so if someone knows; where is this 7000000000000 coming from anyway, as your coffers are already empty??

    I heard Dubya would be doing some speaking engagements to replenish those.

  135. 135
    rococo says:

    Paulson made $500 million dollars working for Goldman Sachs.

    Jonas Salk never made close to that much and he cured polio. What the hell did Paulson bring to the world that was so valuable and irreplaceable to its residents that is worth that much damn money? Based on the value of what they bring, do the Paulsons of the world deserve society’s richest rewards?

    How is Paulson going to fix the problems of the market when he is one of its symptoms?

  136. 136
    cleek says:

    Wait for the great 401k popping, as millions of retirees go to liquidify their holdings at a fairly rapid basis.

    if that happens, Wall St, K St, and PA Ave will be well, not liquefied exactly, more like incinerated.

  137. 137
    Janus Daniels says:

    ThymeZone Says:
    I just can’t help but wonder what a difference that $700b could have made to the life of Teri Schiavo.
    > Reply: No difference, since she’d been brain dead for years… or perhaps you thought that Republicans wanted her for VP?

    MikeL Says:
    Dr Pournelle has some relevant insights. In particular, he argues the legal immunity is necessary.

    > Reply: Let’s get our insights from people who had foresight, which he didn’t; also for federal crimes, let’s demand accountability, despite Dr. Pournelle’s disapproval. For right wing wack sf writers, add Larry Niven and Orson Scott Card. I’ve met all three, enjoyed them, but let’s call them politically challenged. Better yet, let’s cite politically sane sf writers, like… nearly all of them; for starters:
    http://theangryblackwoman.com/.....e-fiction/
    http://www.tor.com/index.php?o.....038;id=578
    http://boingboing.net/
    http://craphound.com/
    http://www.kathryncramer.com/
    http://journal.neilgaiman.com/
    http://nielsenhayden.com/makinglight/
    http://paullevinson.blogspot.com/
    http://blog.wired.com/sterling/
    http://3quarksdaily.blogs.com/3quarksdaily/
    The last has a fine post about Georgia vs. Russia.
    Writing about the future does exercise our relationship with reality, if we let it.

    jenniebee Says:
    What I want somebody to explain to me is this:
    … why not just allow everyone with a mortgage in jeopardy to enter arbitration to work out a better deal based on the original principal of the loan?
    > Reply: An excellent idea, except that solution presupposes some person to arbitrate with; near worthless loans to borrowers expected to default were sliced and diced and bundled and sold and resold, at their absurdly inflated face value, in various permutations of that order, by agents who made equally absurd commissions on the transactions, to end owners who purchased based on deceitful valuations of the debt, and no contact with the original borrowers, or they’d never have made the purchase to begin with. The borrowers do have an opportunity to negotiate with debt collectors, many times removed agents of the many times removed owners. Unfortunately, rather than merely sucking our retirements down toilets, that might mean that some of those aforementioned agents (swindlers) might end up with less millions of dollars. And that would mean the terrorists have won.

    ThatLeftTurnInABQ Says:
    … I blame this more on Greenspan than on Bush.
    > Reply: You are correct, but too kind, particularly in your metaphor. Before we blame Bush for anything, we should blame the figurehead on a ship for the direction she points to. Greenspan had already been through this when he supported Keating and the whole Thrift & Loan disaster. He did again, and his crowd made billions more, and he left Bernanke holding the bag. Krugman said, at the time, something like he didn’t see how Bernanke, or anyone, could control the damage; since then he’s said it’s worse than he’d believed.

    Solution:
    http://www.buymyshitpile.com/
    “… We figured that instead of protesting this plan, we’d give regular Americans the same opportunity to sell their bad assets to the government…”
    Ultimately, the government may just print money to cover the debt, debasing the dollar beyond all meaning.

    I wish I’d written better and smarter, and I work nights, and this is my bedtime.

    If your opponent driving off a cliff counts as winning, the terrorists have won.

  138. 138
    liberal says:

    rococo wrote,

    What the hell did Paulson bring to the world that was so valuable and irreplaceable to its residents that is worth that much damn money

    One of the arguments, put forth by people who are pretty reasonable, is that by making capital markets more liquid and efficient, these guys (Paulson, hedge fund managers, etc) are doing some good for society.

    While the argument is reasonable in the abstract, my position long before the current crisis is that we’re talking about second-order improvements in efficiency over what we’d have without massive hedge funds and extremely complicated derivatives. (For example, you don’t need all that stuff for basic arbitrage.)

    Now that the sh*t has hit the fan, we can see that the second-order positive effects were ethereal, and there are actually zeroth-order negative effects.

    Thus, not only did Paulson drain $500M from the economy, he’s probably responsible for much more than that in damage.

    The solution is to realize that at its most fundamental, the financial sector is so profitable only because of privileges granted to it by the government.

    While I’m no goldbug, I do think we need to drastically revamp the credit system.

  139. 139
    Comrade SGEW says:

    All snarking about this current crisis aside (which we are doing a lot of, especially in the comments and with the Comrade titles and the potshots at the nationalization of the free market), I really have no clue what is going on with the current mess.

    Well, I don’t think anyone fully understands what the hell’s going on*. But that is, of course, no excuse for the last-minute willful power grab the Administration is trying to pull with their proposed blank check “bailout.”

    Long story short: no one (not even the wingnuts) trust Bush or Cheney anymore. The motherfucker has a 19% approval rating. I don’t think Cheney even registers outside the margin of error in the “favorable” category. They have screwed every single pooch given to them, and even morans will start to catch on if you keep kicking them in the balls**.

    It was all well and good when they screwed up New Orleans, or Iraq, or Afghanistan, or Somalia, or inner cities, or the environment, or international relations, or the rule of law, or our national ethics, or (ok I’m stopping now. this is depressing). But this is people’s precious precious money!

    No money = no teevee or electrolytes, so I iz skared now! WTF?

    Maybe it’s the last straw, and our friends the Low Information Voters will wake the fuck up.

    . . . the right wing blogs are focused on are a video posted on youtube by an Obama supporter and a 20 year old kid who read some of Palin’s email.

    When lefty sites come up against bad news disputing their world view they cringe and moan and hand wring and piss all over themselves in an orgy of derision, self-righteousness, and naivete (and snark). Righty sites just do not mention it, ever. It does not exist.

    *Except, perhaps, Mr. Buffet? But that doesn’t really help anyone else
    .**I mean, really. How many times can you say “Ow my balls”?

  140. 140
    hilzoy says:

    About CDSs, and their insurance-like nature: “So, why not do the same thing here? Why not just declare them illegal unless you hold the underlying asset? Nobody can make additional premiums, the contracts expire within 3 months, and the damage is limited to the number of defaults that occur between now and the end of the year.”

    As I understand it, the reason not to do this is as follows: a lot of the time, the reason to get insurance on your bonds is not just personal; it’s a requirement of some sort. When your investments are more risky, someone — regulators, creditors, someone who gets to tell you what to do — can say: hey, you need to have a whole lot more cash on hand than you would if you had safe investments — e.g., rated AAA. But as long as you have this insurance, from someone we trust will be able to make good on it, you can make do with less.

    For that reason, canceling all the insurance would put a lot of the people who previously held it in the position of needing to come up with a bunch of money very fast. They would, as they say, have to deleverage very quickly, or else face bad consequences, including at the least having a whole lot more trouble borrowing than they would have otherwise.

    Since the basic problem is that people are already deleveraging really fast, and selling a whole bunch of stuff in order to have adequate cash to ride this out, this would just throw gasoline on the fire. If what you want is deleveraging that happens in a basically sane, non-desperate way, this is not the way to do it.

  141. 141
    snarkout says:

    I hate to break this to you comrade, but Buffett is probably bullish on Goldman at least in part because he thinks they’re going to get a good deal in the bailout.

    My read is that Goldman needs to raise the money because they’re about to hoover up some of the busted assets from either the FDIC-seized IndyMac or from the teetering-on-the-verge-of-failure Washington Mutual as part of their transition from being a bank-bank to an investment bank. The price Buffett extracted isn’t crushing like the AIG terms Paulson negotiated (which was a reason I was willing to give him the benefit of the doubt until I saw the steaming pile of a bill his people had written), but it’s still pretty bad. Basically Buffett got an up-front payment of almost a billion dollars worth of stock warrants for a five-billion-dollar loan at 10% rates (with another 10% bonus when they pay him off, at that). The old man is a folksy, avuncular shark.

    John, if you want to kill twenty minutes getting a good layman’s explanation of this at an even higher level than what your readers are giving you (JMN’s comment up the page was great!), I recommend pages 13 to 15 of Buffett’s shareholder’s letter from 2002. We’re pretty much in the “time bomb” scenario he’s been warning about for the last ten years.

  142. 142
    liberal says:

    Bedlam UK wrote,

    My worry as a brit is that our finance has stabilised based on the Bailout you guys are organising, so if that rug is pulled, I assume our bankers are going to be tanked again.

    I don’t know about UK banks, but in terms of the housing market itself I thought the UK had as bad a bubble as the US, or even worse.

  143. 143
    liberal says:

    MikeL wrote,

    Does Bush/Cheney deserve prosecution? Sure. But if you try it, will anything come of it? I really doubt it.

    Wrong. The best selling point for impeachment proceedings of Bush/Cheney was always the discovery process that House subpoenas would bring, not the end result of impeachment itself.

  144. 144

    It would be a terrible tragedy if the one time the citizenry and the Congress stood up to the Bush thugs was the time we should have trusted them.

    I hope this was meant to be snark. They are not to be trusted, EVER! You listed some of the more egregious reasons why, but as we know, their transgressions against the American people are legion. They don’t deserve our trust and I can only hope Congress will move with studied caution.

  145. 145
    SGEW says:

    O/T

    Why are so many of the good sci-fi writers of that era such nutty right wingers? Niven, Pornelle, Card (let’s not even mention RAH) . . . total nutjobs. And their books have suuuuucked for the last 20 years. Such a shame.

    Good thing the new Stephenson book is out. Which is awesome (literally: I am awed).

  146. 146

    jenniebee Says:

    What I want somebody to explain to me is this:

    If the mortgage backed securities are next to worthless because the terms of those mortgages are so punitive that the people who hold them can’t afford to keep paying them and stay in their homes (and keeping up the payments isn’t contingent on the housing market, it’s contingent on the job market) then why not just allow everyone with a mortgage in jeopardy to enter arbitration to work out a better deal based on the original principal of the loan? The securities won’t be worth the pie-in-the-sky dollars people dreamed they might have been, but they’ll be worth more than nothing, and people get to keep their homes.

    Why not do some trickle-up bailing out?

    I didn’t see all of the hearing, but did anybody make this suggestion or ask about such a common sense, equitable solution?

  147. 147
    Fulcanelli says:

    I won’t pretend to understand the complex financial shell game instruments underlying this bailout mess, derivatives and such, but I think I have a grasp on some of the larger issues surrounding and contributing to it.

    Over the last thirty years, a process like manufacturing, which actual benefits a larger number of people in that: A lot of people throughout the process earn decent money and benefits, has been shipped overseas for cheap labor. The problem is that people focus only on the actual ‘manufacturing’ job itself, not all the other jobs and industries that contribute to the actual manufacturing process. A 1000 employee factory closing probably affects 2-3 thousand people overall.

    From beginning to end manufacturing employs and benfits (with decent wages and benefits), from start to finish, 50 times the the number of people that financial services do, I’d bet. For every manufacturing job which goes to China or the Pacific Rim, how many other jobs in the total process that aren’t needed anymore just go away. Think about it…

    The R & D people, the engineers, the office staff, the actual workers, mid-level management, brass and maintainance people for the facility. Now let’s include all the companies that supply the components and raw materials and all their employees and the trucking and cargo handling companies on both ends with all their employees. And on and on and on…

    These supply-siders aren’t looking at how shipping one $18 dollar per hour line manufacturing job making widgets which has employed 3 generations of family out in podunk America is costing the economy millions in lost earnings for hundreds of workers working in the other interelated industries that support it.

    So here we are, 28 years into the ‘Reagan Revolution’ and huge chunks of the ‘Murican workforce has morphed into a nation of information processing, paper-pushing, disposable low wage job office workers who wonder when their job will be replaced by a computer.

    Shorter version: Watch how towns panic and go under when the local Military base closes.

    Chapter 2:

    Same or even greater amount of people earning less money across the country, coupled with rising costs of everyday expenses.

    People want the ‘Murican dream of home ownership, while simultaneously, greedy Wall Street is running out of places to make money because on Main Street people don’t have the money to save or invest, giving them something to play with. Hello? The first clue…

    Voila! With no new cash coming in as investments, they invent a new toy to play with, fancy new mortgages that almost anybody can qualify for.

    Demand for housing goes up with everybody buying, prices spike through the roof.

    2 to 3 years into the frenzy, teaser introductory rates dissapear leaving homowners unable to pay higher mortgage payments and default.

    More jobs shipped to China and elsewhere, people can’t get better paying jobs because they aren’t trained, can’t afford college (like that’s an option when the mortgage is overdue) or the jobs just aren’t there.

    Wall Street makes it worse by bundling and selling these overvalued house backed, high risk, defaulting mortgages back and forth to each other, making a tidy profit each time.

    Wall Street CEO’s pat each other on the back, and reap huge bonuses for a few years and line the war chests of Congress Critters with their spare change.

    The 700+ billion is to cover the gap between what the houses and mortgages are actually worth in a sane market and what they’re on paper valued at amortized over the life of the loan, as I understand it.

    Big problem X2: No one has any idea what the actual value of the houses are because the housing market is fucked and there’s no ‘floor’, and no one has any idea what the actual value of the housing backed ‘securities’ are worth because so many are defaulting.

    Waaaaaaaaahhhhhhh, George, help us sell dumping this on the taxpayers, you know, like you did with the Iraq war, or we’ll take our ball and move to the Cayman Islands.

    US taxpayers: Uh, why are you pointing that gun at my head?

    Bush Adminisration: Just shut up and give me your wallet.

    Hey John, with all due respect, what the fuck were you thinking when you were carrying water for these evil cocksuckers on a daily basis for your entire adult life, you’re obviouly not stupid. You didn’t see what they were made of, or what.

    I’ve been watching this shit for over 30 years.

  148. 148

    Signs of Life

    The bloated, moribund corpus of American democracy twitched and flickered yesterday, actually showing promise of something close to vitality: Democrats in Congress got a backbone, demanding accountability and regulation for the absurd Big Ripoff, while…

  149. 149
    Martin says:

    As I understand it, the reason not to do this is as follows: a lot of the time, the reason to get insurance on your bonds is not just personal; it’s a requirement of some sort. When your investments are more risky, someone—regulators, creditors, someone who gets to tell you what to do—can say: hey, you need to have a whole lot more cash on hand than you would if you had safe investments—e.g., rated AAA. But as long as you have this insurance, from someone we trust will be able to make good on it, you can make do with less.

    I agree that if you hold the underlying asset that you would be able to continue using this mechanism. Insuring your stuff is a GOOD thing. Insuring other people’s stuff is a BAD thing, and most of these swaps cover other people’s stuff, and from what I understand, there’s nothing stopping there being multiple swaps covering the same debt, which is why the market is on the order of the net worth of the planet and why, if enough of it defaulted, there doesn’t exist enough money on earth to pay out.

    When you create a problem of that scale, there’s no bailing it out. You need to step back and say ‘this thing is ludicrous, we should have recognized that it was, and we simply need to unmake it – it’s the only reasonable solution’.

  150. 150
    Martin says:

    For that reason, canceling all the insurance would put a lot of the people who previously held it in the position of needing to come up with a bunch of money very fast. They would, as they say, have to deleverage very quickly, or else face bad consequences, including at the least having a whole lot more trouble borrowing than they would have otherwise.

    I should have added, the swaps wouldn’t become immediately worthless if deemed illegal, they’d simply not be able to be bought or sold *or* payments made on them unless you held the bond the insurance covered. Since these are typically paid on quarterly, we’d have 3 months of them expiring, which would be a shitty 3 months, but it does spread the pain out somewhat. What we’d be left with is a swap market that was no larger than the value of the underlying bonds – which I understand is somewhat unknown and still large, but far more manageable. The total annual home mortgage default – prime, subprime and govt. backed is less than half the size of the bailout package, and surely the market has priced in a certain default rate already. Toss in a mandatory mortgage restructuring requirement (which is being opposed because the people on the payout side of the CDSs are just aching for their payout) and it seems to me that any crisis related to home mortgages is quite well managed. Now, if there are *other* credit crises out there that they aren’t talking about, well, that’s a different story…

  151. 151
    markwilliams says:

    As a 25 year veteran of Wall Street I find it easiest to help outsiders get their minds around the situation by offering 2 scenarios. First, if we do nothing there is a high probability that the U.S. will experience a depression lasting 4-6 years (that’s the average of the past). Second, if the Fed intervenes in an attempt to take corrective action, no one knows for certain what will happen. We may still have a depression, a delayed depression or a milder recession.

    There is a moral delimia here in any case; should taxpayers be held liable for the greed and poor decision making of other taxpayers? In the past, the answer has been a resounding no! Making bad investments was considered essential to the American Dream. The outcome of transferring private risk into public hands is the real unknown in this debate.

  152. 152
    jcricket says:

    Obama’s a smart guy, but FDR he ain’t, and he has to deal with thirty years of Republican propaganda that “government is the problem, not the solution” that FDR didn’t have to deal with

    In terms of what we’re fighting, I would also add in, “Lowering taxes raises tax revenue.”, “Taxes are too high.”, “Taxes = socialism” (all the Norquist-like rhetoric). Even little things like, “I’m going to cut waste and spending” are pipe dreams because the waste is a tiny percent of the budget and no one wants the cuts in spending. If anything, except for the military, we’re spending far too little on the infrastructure and social welfare programs people need.

    If we had a pragmatic political discourse, we’d have national healthcare, reasonably progressive taxation (something like Clinton-era levels, or slightly higher) and a decent amount of regulation for all the industries that need it.

    But instead it’s an uphill climb to tell a significant percentage of the population that the magical private sector isn’t coming to save you, and that the government isn’t Russia.

  153. 153
    jcricket says:

    BTW – I think we’ll get national healthcare by “default”. Over the next 10 years, the majority of people will simply end up on covered by some form of government programs (Medicare, Medicaid, S-CHIP, etc) because they can’t afford private sector “plans”. Increases in premiums, deductibles, decreases in coverage levels and an acceleration towards high-deductible plans will only make this situation worse. Expect to see massive increases in bankruptcies due to healthcare costs. And at some point, you’ll have a significant majority of people on government systems, and you will have to raise taxes (income, payroll, corporate) to pay for it.

    Expect a massive fight from the Republicans in that scenario, who will make BS claims like McCain that what we really need is even more “free market” healthcare to make things “more affordable” (if by affordable you mean free because no one buys it).

    Blue states will tax themselves when this happens (see MA for an early example). Red states will not. Red states will be shitty places to live with bad health outcomes for anyone not rich, until the federal government steps in, raises taxes, and redirects that money to the oh-so-self-sufficient idiots in those states.

    As progressive as I am, and as much as I know it wouldn’t help the people who need it, I’m beginning to warm to the idea of giving the red-staters (collectively) what they “want”. Make it so that places like Alaska get no more money out of the government than what they put in. Let them raise taxes on their own populace at the state level if they want more services. But I’m done subsidizing the lifestyle of people that claim they are just fine on their own.

  154. 154
    Calouste says:

    The Moar You Know Says:

    The $600,000 is imaginary money and doesn’t represent a hard cash loss so why is the sky falling?

    Is that scenario in the ballpark?

    Your scenario is in the ballpark but the $600,000 is not imaginary money. Let me try to explain how.

    People invest to make some money, otherwise we would call it a “piggy bank”, albeit one with good alarms and steel walls – and no interest payments. A pension fund puts a certain amount of money into an account with the expectations that in, oh, let’s say twenty years, the account will grow, and pay an amount that will pay the pensioner an expected amount in their old age.

    How does the pension fund make that money grow?

    They invest it, in various things, but mortgages – your “imaginary money” – has always been a big one as they are reliable, people tend to pay them back, and they give a very steady rate of return over time.

    So if your $600,000 of “imaginary money” goes away, that is $600,000 real dollars that does not get paid to some old guy who was counting on it for retirement. It is, for him, a real loss.

    And it will someday be a loss for anyone who wants a mortgage as well, because if pension funds and investors don’t get their $600,000 in “imaginary money” (real dollars) from the deal, they won’t be willing to lend anyone money for a mortgage. At all.

    September 24th, 2008 at 2:13 am

    Big fail in your argument TMYK:

    The $600,000 is real in thirty years time. Now it is imaginary money (although valued as real money in accounting practices). If the mortgage is say cancelled two years in, the mortgage company gets their money back and some interest and can reinvest it for another 28 years.

    It would be completely wrong to bail out companies based on future values of these assets as opposed to current values because they have already received a premium for the long term risk they have taken, and they can reinvest the bailout money.

  155. 155
    Comrade Tax Analyst says:

    Rome Again Says:

    I just knew at an intuitive level that there was something wrong with the economy when middle class people who when I was a kid used to live in little houses, clip coupons, eat out once a month, and go camping as a vacation, were all of a sudden buying million dollar homes with 3 car garages, driving monster luxury cars and vacationing in Paris or Tokyo on a regular basis. It didn’t make any sense.

    I had this intuition as well. I had it about Iraq also.

    I may not be the sharpest tack in the bunch, but my predictions seem to be right on the money anyway. Perhaps we should have an alphabet organization of intuitives who foresee danger? I could have averted us from paying for both the Iraq War and this financial mess if someone would have listened to me.

    Now, I’m not slagging you here, but “You” and at LEAST several million other folks. It really wasn’t hard, as long as you were pretty sure that these craven liars were, in fact, craven liars. Now, I’m not saying I knew the total EXTENT of their craven-lyingness…it has surely exceeded my wildest and most paranoid suspicions, but I DID know they were full of shit. First clue? Gore v. Bush…they all talked about fairness and law and all until THE VERY FIRST NANOSECOND THEY GOT A LEAD SHOWING IN THE VOTE COUNT, at which point Bush pretty much sat down in the chair and said, “Sorry, the position has already been filled, to take this any further would cause a crisis”. What a bunch of outrageous bullshit. I knew we were screwed from that moment. Nothing I’ve seen or heard since has dissuaded me.

  156. 156
    HyperIon says:

    wow, crying wolf seems to be today’s meme.
    WaPo and others are using it repeatedly….

  157. 157
    Bedlam UK says:

    liberal Says:

    I don’t know about UK banks, but in terms of the housing market itself I thought the UK had as bad a bubble as the US, or even worse.

    How I understand it, our housing market has dropped so badly from a few reasons all hitting at once.
    Our economy is dipping due to world prices rising in Gas/Energy etc making people struggle with their mortgages, but its handleable, and most economists were not worrying about it too much, it was well within the normal realms of fluctuations.
    Then some of our banks went under due to links with bad debt bought from you guys.
    This caused a panic so banks clammed up and no-one can get loans or mortgages without a 25% deposit.
    House prices have dropped dramatically, but its not being balanced by new ‘first time buyers’ due to the banking mess.

    But we’re starting to see an upturn, our energy prices are steady, our petrol has stopped rising for a while, and food prices have stabilised.
    Economists are saying that we could see an upturn by March in the housing market once the banks start opening their doors again, as people take advantage of the low house prices.

    Unless America tanks dragging most of the West with it.

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