The Geithner Plan

The reviews are in on the leaked Geithner plan, and we are going to do something different here for a change. We are not going to listen to people who have been wrong about everything, and instead are going to listen to people who have been more right than wrong. The administration might learn from this approach. First up, Yves at Naked Capitalism:

And notice the utter dishonesty: a competitive bidding process will protect taxpayers. Huh? A competitive bidding process will elicit a higher price which is BAD for taxpayers!

Dear God, the Administration really thinks the public is full of idiots. But there are so many components to the program, and a lot of moving parts in each, they no doubt expect everyone’s eyes to glaze over.

Calculated Risk:

With almost no skin in the game, these investors can pay a higher than market price for the toxic assets (since there is little downside risk). This amounts to a direct subsidy from the taxpayers to the banks.

Oh well, I’m sure Geithner will provide details this time …

Krugman:

The Geithner plan has now been leaked in detail. It’s exactly the plan that was widely analyzed — and found wanting — a couple of weeks ago. The zombie ideas have won.

The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

If this were a medical emergency, it appears it would look something like this:

The Illness- reckless and irresponsible betting led to huge losses
The Diagnosis- Insufficient gambling.
The Cure- a Trillion dollar stack of chips provided by the house.
The Prognosis- We are so screwed.

If these guys are right, this will be the undoing of the Obama administration. Better enjoy this four years, libs.

227 replies
  1. 1
    Svensker says:

    Better enjoy this four years, libs.

    You mean, fellow libs, right?

  2. 2
    wilfred says:

    This amounts to a direct subsidy from the taxpayers to the banks

    Who then have to borrow it back and go further in debt to save Homeland. Yeah, we’ve over this already.

    Trust your President.

  3. 3
    robertdsc says:

    Trust your President.

    I do in many ways, but when it comes to economics, not anymore. This is sickening.

  4. 4
    geemoney says:

    I wonder what Al Giordano will say about this? That post you linked to was scalding.

    As I remember, Krugman talked a lot about how the Obama administration may need to do more than what most people think is necessary, rather than what is perceived to be politically possible. I think he may have been right.

    I believe, though, that there must be a backup plan. There is a backup plan, right?

  5. 5
    Dennis-SGMM says:

    These assets are fundamentally sound, people. If we’d just stop whining about them they’d be worth a ton of money.

    Meanwhile, Hillary Clinton breathes a sigh of relief. Sarah Palin, Bobby Jindal, and Mark Sanford hire a better class of speech writers.

  6. 6
    oljb says:

    The thing is, as I understand it, there is actually more inherent value to the "toxic waste" than the market will currently support. It’s not as though every mortgage that was repackaged into a mortgage backed security is going to vaporize. The issue is that no one wanted to own them once they started losing some of their value instead of providing high returns. But I’m not convinced that they won’t be worth more in the end than whatever price is settled upon for them.

    The same issue is affecting most asset classes. If no one believed that the assets represented by stocks had any inherent value, then everyone would have dumped them. Many people did, hence the price is down. But, like the MBS, equities are backed by actual assets whose value is likely above the asking price.

    If the value winds up ultimately being lower, then we’re probably all screwed anyway.

  7. 7
    demkat620 says:

    Yeah, Geithner is a poor choice imho. But this thing is such a fucking mess. Is it possible there is no fix except to burn it down and start over?

  8. 8
    ploeg says:

    @geemoney:

    The backup plan, such as it is, is for the Congressional dems to throw the Obama administration over the side of the boat when the stimulus proves to be insufficient and the people who voted for Obama see that we’ve blown so much time and money for no good purpose.

    I don’t generally trust Krugman’s political instincts, but he’s almost certainly right when he says that this is Obama’s one shot at cleaning up the financial mess we’re in, and he won’t be allowed another one. The Republicans will revolt, and they’ll take enough Dems along with them to make it stick.

  9. 9
    robertdsc says:

    I wonder what Al Giordano will say about this? That post you linked to was scalding.

    Al’s political acumen is incredible, but I always wince when he dismisses Krugman. I think he does so because Krugman’s political readings aren’t as sharp as his economic ones, but on a subject like this, I’d be much more inclined to take Krugman’s word over Girodano’s.

  10. 10
    Libby says:

    We are well and truly screwed. On the bright side, Wall St is likely to love it and the Dow will probably will have a good day on Monday.

  11. 11
    Karmakin says:

    There is no other plan.

    I’m pretty sure if there was one, they probably would have went for it. I really doubt that Obama himself is "in the pocket". He KNOWS how bad it looks, and he doesn’t like it one bit. Which is why he’s taking the blame for it instead of trying to deflect it.

    But he doesn’t see another option. Neither do I.

    Can’t let the entire financial markets collapse, and the asset holders won’t go for anything that doesn’t make them whole at least mostly. And without their buy-in, you can’t force them to do anything. Well you COULD, but the financial markets would collapse if the sanctity of the public markets were threatened too severely.

    Or maybe you could let the entire financial market system collapse as it really doesn’t mean anything for the real economy. Of course, if you said this before 6 months ago you’d be seen as a real crank and someone not to be taken seriously.

    That’s not to say that there’s not serious problems. It’s plain as day that there are serious moral hazard issues at play when this much money as at stake in the short term. But I’m not sure how you realistically deal with them. This is a cultural issue as much as it is a political one. We tend to overvalue our own worth, as well as the worth of those like us.

    The real answer is probably to choke the money going into the high finance speculative sector via the tax code. But that’s a long-term solution, and won’t deal with the current problem.

  12. 12
    Betsy says:

    Ugh. That wasn’t the cute cat pic I was hoping would brighten my Saturday morning.

  13. 13
    Rick Taylor says:

    The Obama administration isn’t acting alone. It’s possible for congress to tell them this unacceptable, come back with something else. If the people who oppose it can get it branded as a give-away to investors, perhaps they can piggy-back on the recent anger against AIG. I’m not saying that’s the right thing to do, but at the least the game isn’t over yet. They’ve floated the same idea in different forms and its been shot down each time. We’ll see what happens. At the very least, Obama is going to have to address all of us and explain to everyone why all these people are wrong, and this is the best way we have to address the current crises. No more Paulson running in and shouting I need 700 billion now to give to my friends in the financial industry, or the economy is going down! If the administration makes its case, I’m willing to listen; while I pretend to know what I’m talking about when I post in this blog, I’m pretty ignorant of both economics and finance.

  14. 14
    Montysano says:

    @ploeg:

    The backup plan, such as it is, is for the Congressional dems to throw the Obama administration over the side of the boat when the stimulus proves to be insufficient and the people who voted for Obama see that we’ve blown so much time and money for no good purpose.

    And their alternative will be what? Tax cuts? Balanced budget? Or maybe:

    1. ???
    2. ???
    3. Fixt!1

  15. 15
    woody says:

    If these guys are right, this will be the undoing of the Obama administration. Better enjoy this four years, libs.

    Like you think somehow this wasn’t the Plan, all along?

    The Pukes threw the ’08 election. they eidn’t even TRY to steal it, as they did the previous two occasions.

    they wanted nothing to do with what they KNEW with utter certainty was coming: Clusterfucking Disaster.

    So they passed the buck to the Dims, who happily ponied up a Black candidate, so as to propel the ‘change’ meme, which would then inevitably be betrayed by events that the Dims and obama had no way of altering, or addressing.

    SO, in 4 years, the Pukes can safely say the Dims, and especially those ‘strange’ candidates like Obama (or Hillary, who would have worked just as well for the Pukes’ plans), have failed. Liberalism is dead, and they can triumphantly march back into complete, and enduring power…

    This all seemed pretty obvious to me, even before the Pukes selected Palin as the final nail in their electoral coffin this year. But these nails are easily withdrawn, and i n the perpetual dusk of the Puke future, they needn’t fear the sun…

  16. 16
    Karmakin says:

    @Rick Taylor: The problem is the first decision.

    You either make the decision that the financial sector is important enough to the overall economy that it NEEDS to be sound and healthy, or you make the decision that the sector is such a minor player, a blip on the system, so you just let it run its course, and all that.

    Virtually everybody who’s everybody made the decision early on (back when the whole mess started), that it was the first option that was chosen.

    Once that decision was made, IMO, there were very few other decisions left to make. Everything else flows pretty naturally from that point of view.

  17. 17
    Rick Taylor says:

    @Montysano:

    And their alternative will be what?

    There have been a number of alternate plans floated. They all come down to creating a standard for which banks are insolvent, taking them over, splitting off the viable parts, and figuring out what to do with the bad parts. It’s expensive, but it has the upside that we do not have to pretend these institutions in their current form are fine and therefore must pay 100% on all their obligations no matter how acquired, and if some of these investments do turn out to be more valuable the market thought, we the people can benefit.

    Fundamentally it seems there are two approaches. In one, we view the financial system has fundamentally sound, but needing large temporary infusions to get it through a tough patch. In the other, we view it (or at least parts of it ) as fundamentally broken, needing radical reorganization.

  18. 18
    ploeg says:

    @Montysano:

    We all know where the problem came from, and those of us who are paying attention know that the Republicans don’t intend to help at all. The voting public is also likely to be forgiving of mistakes that Obama and his people make along the way, provided that they are the right kinds of mistakes.

    This is not the right kind of mistake.

    If things don’t improve for the general public, and the general public sees that the people who got us into this mess are getting bushel baskets of money from the government, they’re likely to throw the bums out and take their chances.

  19. 19
    geemoney says:

    I just finished reading the Taibbi piece.

    I think that if Obama can get over the cries and lamentations of the Village, as many have said, sunlight may be the best medicine. I am perversely thankful that I don’t have much money, so I haven’t lost much, and I still have a job, but it really seems to me that right now we are throwing a lot of money at a problem that we don’t really understand. (I’m not talking about the root causes, which Taibbi lays out nicely, but the current risk of not acting, and where the most critical areas are in our economy.)

    We are in the poor position of having to do something, but feeling pressured to avoid picking up the rocks and rooting around. Maybe if we can take some time to really understand where to inject funds in a much more targeted manner, we would have a much more effective "plan". It could also be, no snark, that I Just Don’t Get It.

  20. 20
    Comrade Stuck says:

    Seems to me what Obama/Geithner are going for is short term gain for the quickest way to unfreeze credit which greases the wheels of commerce as it is currently designed. Therefore, It is is more a political plan for recovery than a long term plan for economic reconstruction, and actually lessons the immediate political hazard for Obama. The overwhelming percentage of the public does not care much for long term reform and simply wants the good times to roll again. They may be outraged that people who caused the problem, are getting made whole again, but that will be a shallow concern compared with a higher DOW and a return to easy credit and more jobs.

    The problem is, that it is setting the stage for another disaster likely worse than this one down the road, unless the business model is changed as the Krugman’s of the world are rightly demanding. Far be it from me to guess accurately what Obama is thinking, but maybe he figures he can reform an economic engine better and with help from congress, if it is actually running and not dead as now. Krugman wants the changes now, but he is not a politician and doesn’t factor in the reality of politics into the equation as a limiting factor on a presidents elbow room for passing legislation.

    I will have hope if this plan is followed up with brisk new regulations and necessary structural changes to our econ model, that is if temporary economic improvement doesn’t once again breed complacency.

    A layman’s take

  21. 21
    Rick Taylor says:

    @Karmakin:

    You either make the decision that the financial sector is important enough to the overall economy that it NEEDS to be sound and healthy, or you make the decision that the sector is such a minor player, a blip on the system, so you just let it run its course, and all that.

    Now that’s not true. No one I know of is arguing the financial is a minor sector and can be allowed to run its course, except for a few libertarians and occasionally a few pontificating Republicans. You’ve set up a straw man.

    The debate isn’t whether the financial sector needs an intervention, the debate is how that intervention should take place. Now maybe the people advocating taking over failing institutions and re-organizing them (at great expense and covering most or even all of their debts) are misguided, but you are mis-characterizing their position.

  22. 22
    Bill H says:

    Wasn’t an auction part of the Paulson Plan? I think it was a different auction, but if people remember that little fact, "Paulson had an auction and Geithner has an auction," that might stir up some shit.

    OT only slightly, how many noticed Obama’s little moment of honesty on Leno when he was talking about "what happened" in the runup to the crisis? He said that people noticed when the mortages started defaulting and here was the financial industry with "thirty dollars of debt for every dollar of mortgage." I’ve never heard anybody admit that before, although I’ve never doubted it. Given that little truth, how do those "toxic assets" ever become anything other than toxic?

  23. 23
    PeakVT says:

    Argh. The correct solution was clear back in September.

    If these guys are right, this will be the undoing of the Obama administration.

    A lot of little things will be improved, but allowing this finance fiasco/farce to continue will sink any chance for big-ticket improvements (health care and energy, mainly).

  24. 24
    gnomedad says:

    @Karmakin:

    There is no other plan.

    I’m pretty sure if there was one, they probably would have went for it. I really doubt that Obama himself is "in the pocket". He KNOWS how bad it looks, and he doesn’t like it one bit. Which is why he’s taking the blame for it instead of trying to deflect it.

    I think you are essentially correct. I can’t believe Obama is simply clueless or "in the pocket".

    @woody:

    The Pukes threw the ‘08 election.

    I doubt it. They love power too much to calculate like that.

  25. 25
    bootlegger says:

    @Comrade Stuck: I’m with you, this is their short-term fix. The question isn’t "what is the backup plan" but "what is the long-term plan". If this is just to shore up the levies, and the next move is to redesign a better levy system then it will work. But without the redesign we are well and truly fucked.

    Oh, and the R’s are too fucking stupid to pull off the strategery suggested above. They would have paddled the raft right into the maelstrom but without any sense that they needed a better boat.

  26. 26
    Rick Taylor says:

    I doubt the administration is going to try to sell this on its own. Being politically savvy, and given the anger boiling over against individuals in the financial industry making money from this catastrophe, surely they’ll need to pair it up with reform? And while I’ve been critical of the administrations bailout plan, from what I’ve heard, they have all the right ideas about reform and creating new regulations to prevent his from happening again. If I’m right, if the administration pairs up the bail-out with regulation, it will be interesting to see if the financial industry will go along. It would be insane not to, but I can’t help but thinking they’ll lobby against the new regulations even as we’re trying to shower them with government money to try to bail them out of the mess they created. That would go over well.

  27. 27

    Can Somebody Please Take the Damn Economy Away from Geithner?…

    by Damozel | Paulson’s gone, but it’s deja vu all over again? Why is Obama letting this happen? Why won’t he consult people outside his little circle — economists such as, say, Nobel prize-winning economist Paul Krugman? Why? Why? Why? Sadly, there…

  28. 28
    Rick Taylor says:

    The one thing I’m wondering is does this plan disarm the CDO’s? Is there someone here who unlike me knows what they’re talking about who could answer that? What happens to one of these guarantees on mortgage-backed securities if the mortgages default, but the value of the security doesn’t go below a certain level because a private investor bought it?

    Speaking as an financial ignoramus, it sounds like this plan doesn’t address the problem of CDO"s at all. If it does, I might concede it has some value, but if it doesn’t I don’t see why we’re even considering it.

  29. 29
    TheOfficialHatOnMyCat says:

    Right off the top of my head …which is where everyone is at the moment, especially the people who wrote the blurbs cited in the top post here …..

    I don’t read that bidding for the assets is the wrong move, at all.

    The goal here is not to "get" the assets at the best price. The goal certainly is to shore up their value at the back end. If that weren’t the goal, then these assets would be disposable and this plan would not be necessary in the first place.

    The idea that our goal, as taxpayers, should be to "get" these assets (for our matching contributions) at the lowest price just strikes me as somewhere between insane and bone stupid to the point that I wonder how anyone who could think that would have the balls to be writing things that other people might see?

    The idea is not to make the toxic assets go away, the idea is to shore up their value to those who currently hold them, is it not? Otherwise, why not just declare them all worthless, let the shock waves ripple through the system, and enjoy our five-year financial winter?

    In other words, why not do nothing, which is basically what the Republicans want to do?

    WTF, over?

  30. 30

    "The backup plan, such as it is, is for the Congressional dems to throw the Obama administration over the side of the boat when the stimulus proves to be insufficient and the people who voted for Obama see that we’ve blown so much time and money for no good purpose."

    "And their alternative will be what? Tax cuts? Balanced budget?

    Expanding the army and invading Czechoslovakia.

  31. 31
    Karmakin says:

    @Rick Taylor: Yeah there’s the nationalization plan, you’re right. I shouldn’t ignore that.

    I tend to overlook it because it’s much risker, both economically and politically. It’s basically socialism. Which I’m fine with. A lot of other people are not fine with it. I don’t think it would stand a chance of passing Congress.

    I’m not convinced the markets would be anything other than apocalyptic in the face of government take overs, plus when you started with a few, the ripple effect very well could take down them all.

    Politically and culturally, Obama doesn’t have many options. He needs to protect market value and he needs to do it fast.

  32. 32
    Olliander says:

    The Countrywide bigshots have already moved on and are already making lucrative investments buying up toxic assets for pennies and selling them for dollars.

    Tim Geithner’s "plan" amounts to nothing more than "allowing" his hedge-fund pals, of which he has plenty thanks to his Summers-Rubin lineage–get in on the fun. The Obama Treasury is sadly in over its head. This is not a plan–its a transfer of wealth, as Krugman alludes to, and just makes the inevitable jettisoning of Geithner come right on schedule.

    It’s not very often I agree with Krugman on anything, but he’s spot on here. Citigroup, at least, is insolvent. They have a hole in their balance sheet that you can drive a tank through. Its being propped up for political reasons, not for financial ones.

  33. 33
    Karmakin says:

    And right. The real story is the long-term fixes. You can argue about the fixes for the current situation all we want, but the real story is how the next financial meltdown is going to be prevented/mitigated.

  34. 34
    Olliander says:

    If these guys are right, this will be the undoing of the Obama administration. Better enjoy this four years, libs.

    Never underestimate the ability of Republicans to shoot themselves in the foot at the most critical moments.

  35. 35
    John Cole says:

    It would be insane not to, but I can’t help but thinking they’ll lobby against the new regulations even as we’re trying to shower them with government money to try to bail them out of the mess they created. That would go over well.

    You have to be kidding me. THEY. DON’T. GIVE. A. SHIT.

    They really don’t. They will take every penny we give them, fight every single bit of regulation, and then if regulation does pass, they will flood whatever sector of the market they can find that is least regulated or unregulated.

    For christ’s sakes, the FIRST thing they did with TARP money in the fall was to set up conference calls to plot how to inflict pain on organized labor.

    We are not dealing with patriots, people who care about the country, or people who think about the impact of their behavior. We are dealing with sociopaths.

    I say again. THEY. DO. NOT. CARE.

    How many times do we have to remark on the Wall Street response to things is going to be negative as long as the fix is to shower them with cash and hold none of them responsible for everything. Remember when the market tanked a couple weeks back when Geithner came out and spoke about his plan. Remember why it tanked? Because Geithner didn’t list how we were going to unload the remaining 350 billion dollars of TARP money, so the welfare queens were PISSED.

    Again. We are dealing with sociopaths. They can’t even admit they did anything wrong- they just think this was a cold the market caught and spread.

  36. 36
    TheOfficialHatOnMyCat says:

    It’s not very often I agree with Krugman on anything, but he’s spot on here. Citigroup, at least, is insolvent. They have a hole in their balance sheet that you can drive a tank through. Its being propped up for political reasons, not for financial ones.

    Absolutely disagree.

    It’s being propped up, along with other key pieces of the house of cards, to prevent a collapse of confidence and security within the loop between institutions and the rest of us.

    A run on the banks …. a worldwide run, carried out electronically, not by a mob of pitchfork-waving panicked depositors in the street — and a collapse of all middle-tier business credit and consumer chutzpah … will cause a downward cycle that will crush the employment rate, smother the GDP and kill the middle-tier economy (the small business economy) for years.

    It doesn’t matter if we "like" Citibank. What matters is that the infrastructure does not appear to be falling apart right now. Again, if that were not the point, then last fall, the TARP, and everything that has followed has all been a giant waste of time. The right thing to do would have been Nothing-Just-Let-Em-Fail, a la the GOP talking points, and just sit back and enjoy the carnage.

    You save the infrastructure you have, not the one you childishly wih you had.

  37. 37
    John H. Farr says:

    Obama is finished, and so are we all. I honestly thought he was smart. This one thing (which is freaking HUGE) pulls the rug out from everything, absolutely everything.

    Is there no one in the government who can do anything?

  38. 38
    John H. Farr says:

    The problem with the "run on the banks" scaredy-monster thing is that it ignores the fundamental IMMORALITY of rewarding failure and stealing from people who have done no wrong.

    In other words, the Treasury plan is doomed to fail, because it is not just. Expediency doesn’t cut it with the Universe. We will all be crushed unless we get out of the way of this doomslide.

  39. 39
    TheOfficialHatOnMyCat says:

    @John Cole:

    You know, John, your fauxrage would make sense if you were writing a novel, a la Ayn Rand. Boy, the INJUSTICE of it all! Yeah! Fuck em!

    But this is not an exercise in writing a novel. It’s real life, and the penalty for standing back and bitching like petulant teenagers while the thing goes over a cliff is going to be years of wreckage and pain.

    We’re operating a fire department, not a social services trauma team. This isn’t about whether we like the potatoheads who got us into this mess. It’s about what measures have to be taken quickly to prevent their mistakes from fucking us in the poopchute for years to come.

    Eye on the ball, for crissakes. Forget who threw the ball at your head. Put your glove on and play.

  40. 40
    valdivia says:

    A few of you said this above and I am of the same mind–this is the short term fix and separate from restructuring the financial sector. Krugman et al think nationalization is the only way out and that this kills two birds with one stone–deal with the financial assets change our financial sector and how it is regulated. I come from a region where everything was at a time nationalized and it is no easy out. Just ask the FDIC guy who was in charge of the Continental Bank nationalization (a tiny bank compared to all the banks the US would have to take over) and it took them over 7 years to clean it up and sell it again. I distrust this idea of the ‘magic bullet’ which is always proposed by economists (even smart ones) who think you can fix things with one model. Sorry the real world ain’t that way.

    For me the most important thing is how we regulate going forward. To me this is the way to fix the banks as they stand now, the restructuring will come later.

  41. 41
    someguy says:

    I’m tired of Krugman’s reflexive Democrat bashing on behalf of the finance industry. Who funds his seat and sends their kids to his school and pays his consulting fees? I guess that’s what you can expect from a center-right rag based in Manhattan like the NY Times though. The real problem is you all just aren’t used to seeing real, mature leadership and intelligence in action. I’m sure that soon enough the adults’ intelligence and competence will shine through. We’re only 11 weeks into the new administration and you fools are already falling for the Repig talking points. After 8 years of having stupid, inarticulate, greedy children in control, it’s just not enough time for the grownups to have straightened out our backwards ass country. Give it time.

  42. 42
    TheOfficialHatOnMyCat says:

    @John H. Farr:

    Luckily for us, the president and his people know that self indulgent outrage is the most dangerous enemy in the street right now.

    The only things that matter right now are (a) will there be credit flow to small and medium sized businesses, and (b) where will the unemployment rate peak out, and when?

    That’s it. Justice? Fortunately, you have a president who is smart enough not to let the country cut off its nose to spite its face.

    If you wanted a pitchfork government, you should have voted for Sarah Palin.

  43. 43
    TheOfficialHatOnMyCat says:

    For me the most important thing is how we regulate going forward.

    If we say that the most important thing after we prevent the worst possible collapse is regulation, yes. If we don’t do the former, the latter is not going to be all that comforting.

  44. 44
    Rick Taylor says:

    And notice the utter dishonesty: a competitive bidding process will protect taxpayers. Huh? A competitive bidding process will elicit a higher price which is BAD for taxpayers!

    One of the questions people who’ve criticized the idea of buying up toxic paper have had is how the hell do we price the damn things? This is an attempt at an answer. The downside risk private investors take buying the securities will be severely limited, but it won’t be nonexistent (or so I understand). So private investors will have an incentive not to bid up the prices beyond the value they will actually return at maturity.

    Of course that brings up the question why would these private investors have a better idea than anyone else what these securities will return? I thought the problem was that these securities are so complex and opaque that no one really knew what they’d be worth. I’d hope that this plan if implemented would be coupled by requirements that the owners of these assets open them up to detailed investigation so the private investors would have some basis for making their decision.

    It’s interesting that a supposedly radical socialist administration has come up with such a market-oriented solution. People making highly leveraged purchases (five cents on the dollar) will decide what these things are worth; we can trust their decisions because they’ll be acting in their own self interest. It worked out so well last time, right? Of course the difference this time is it’s not a huge insurance company that’s backing up their bets anymore, it’s the US government. Time to dump the "comrade" titles, we are all AIG now.

  45. 45
    Karmakin says:

    @John H. Farr: The only solution is to do whatever it takes to get past the current crisis, then put forward the needed changes to prevent this from happening in the future.

    The Universe doesn’t care about what is just. What is simply is.

    Cole is right ‘tho. What is needed is a new aggressive stance recognizing that they are sociopaths and will ALWAYS flood to the place of least resistance regardless of the actual value, legality or morality of what they are doing. So you basically have an active, hostile regulatory group that acts on a quick fashion to discover these basically fake transactions and shut them down as they arise.

  46. 46
    Brachiator says:

    Krugman is such a tool. While his criticisms may have point, you would think that he might be able to offer a hint as to what a more viable plan might be. Instead, he and the other bloggers prefer to whine about the inadequacy of the Treasury plan. Hell, I can get this kind of thing from Republicans.

    As an aside, The Krugman piece also underscores why I sometimes hate NPR. They reported on the Treasury plan, but they largely just cribbed Krugman’s post. And like lazy-ass Krugman, they referred to "non-recourse loans," even though it is unlikely that anyone without a tax or accounting background knows what this means.

  47. 47
    Comrade Stuck says:

    @John Cole:

    You have to be kidding me. THEY. DON’T. GIVE. A. SHIT.

    Absolutely damn right. They will have to be strapped down and force fed any new rules that could potentially lower the worshiped bottom line. Always been that way, and always will be. That’s why Obama must have some success in his efforts along the way, to have the political capital for making the shitasses and their GOP defenders do the right thing for the country.

  48. 48
    The Raven says:

    Or perhaps the House will throw it over. We have now arrived at a state where doing nothing is worse than this. Write your Congresscritter.

    Krawk!

  49. 49
    Karmakin says:

    @valdivia: I don’t think one has to do with the other IMO.

    I don’t think the nationalization people are talking about by itself, which is a temporary measure, will result in the change that is needed. I understand the concept, that the threat of nationalization will be enough to keep companies on the straight and narrow. But I highly doubt it.

    As long as short-term interest trumps long-term interest, nothing will change. You need to find a way to make long-term interest relevant to the upper class.

    Good luck.

  50. 50
    Comrade Stuck says:

    @John H. Farr:

    Obama is finished,

    Rumors of this are greatly exaggerated.

  51. 51
    TheOfficialHatOnMyCat says:

    So you basically have an active, hostile regulatory group that acts on a quick fashion to discover these basically fake transactions and shut them down as they arise.

    Pretty much, that is the way regulation always works, when it works.

    "Active and hostile" are taken to mean, not passive, and not in bed with the regulated entity. In other words, independent and enforcement-focussed.

    Fine and dandy. But you can put that in place today, before noon, and have done nothing to stave off the potential collapse and pile of rubble that will result if remediation is not undertaken immediately.

    There is time to fashion the new regulatory framework once that is done. There is not time to do focus on it now. If we are the government, that is. A budget needs passage, a short term fire drill needs implementing, and all of this has to be done while the people you thought were on your side are running around waving their arms and stamping their feet like a bunch of damned fools.

  52. 52
    jon says:

    I’m a conservative who actually thinks this is a good plan. Yes, the Treasury is loaning out the cash on very favorable terms, but it accomplishes what Krugman et al have been screaming about: fixing the bank’s bottom lines by draining them of the assets that are killing them(and by indirect plan, the CDSs down the line). The banks/mortgage lenders will be re-regulated so that they can’t pull this crap again, and the treasury will see their money back in the first quarter of 2012(along with taxing the hedge funds on the inevitable profits they’d make). And the hedge funds that buy up the bad mortgages won’t mind giving the mortgage holders lower rates(ie cramdowns) since they didn’t give out the mortgages in the first place. So, in summary:
    1-The banks get the bad paper off their books, and they get re-regulated.
    2-The mortgage holders who can realistically still afford their mortgage stay in their homes at a better rate.
    3-The hedge funds, who have been sitting on cash or parking them in T-bills, have a no brainer investment for them to pursue.

    I believe Dr. Doom was complementary of this plan went the details leaked last month.

    The only other plan is to nationalize the banks, kick out a 1 million or so home owners and hope the GDP doesn’t fall through the floor.

  53. 53
    Napoleon says:

    @Brachiator:

    Krugman is such a tool. While his criticisms may have point, you would think that he might be able to offer a hint as to what a more viable plan might be.

    It may help if you read him regularly before you post about him because he very clearly has a plan.

  54. 54
    ericvsthem says:

    Again. We are dealing with sociopaths. They can’t even admit they did anything wrong- they just think this was a cold the market caught and spread.

    Exactly right. What is a sociopath? Someone who is incapable of remorse (failure to admit wrongdoing) and empathy (millions in taxpayer dollars in bonuses to executives). Timmeh will never understand this simple truth about his Wall Street dinner buddies, just like they will never understand that they are sociopaths. That Timmeh would operate this way should be a surprise to no one. That Obama would agree to go along with this is deeply depressing.

  55. 55
    bootlegger says:

    @Comrade Stuck: Right on. I’m thinking a choke collar attached to a very short chain with a ball-gag to keep ’em from whining. If that makes ’em want to go Galt, thats fine with me. I’m sure there are plenty of takers for those jobs and the current Lords of Finance are not particularly impressing us with their intelligence.

    I agree with Hat that we need to chill and see the Big Picture, but Cole’s point is also valid in that the sociopaths need strong drugs and straight jackets.

  56. 56
    TheOfficialHatOnMyCat says:

    And like lazy-ass Krugman, they referred to "non-recourse loans," even though it is unlikely that anyone without a tax or accounting background knows what this means.

    It’s like the old bromide: When you owe a small amount and can’t pay, you have a problem. When you owe a very large amount and can’t pay, the lender has a problem.

    But isn’t the real relevance of the classification of the debt at tax time, and when figuring the cost basis for the property?

    Also, just to stay on this for a second …. isn’t there a real and present danger of collapse of property value in a situation like this, resulting in the loss of collateral value and therefore greater injury in the event of a foreclosure … creating an unstable situation in which once you let any air out, the whole thing falls down? And isn’t that the kind of imperative that is driving the government response right now? More importantly, isn’t that the correct thing for government to be doing?

  57. 57
    Seretse says:

    It is truly remarkable how uniformly simpleminded this comments section has been.
    First of All, Yves Smith is categorically wrong. A higher price for toxic assets IS NOT necessarily bad for tax payers. Higher priced assets are more likely to be sold by Banks who will, in turn, be more likely to extend cheap credit, which relieves the burden on smaller businesses and allows them to feel more comfortable in making capital investments which create jobs and generate income. It is so unbelievably stupid and amoeba-brained to say Higher priced toxic assets = Bad for tax payer. The way the system works is far more complex than that. Yves made a dishonest statement, which is just another unfortunate note in her shrill scale of "commentary".

    Really guys? Do you genuinely trust the judgments of a few penny ante bloggers over Tim Geithner who has actually been in the trenches and has experience diffusing economic crises? Granted Krugman has far more weight than the other two, I find that his attempts to make fair assessments of an extremely complex policy in 750 words to be lacking. These bloggers live in a world that is limited only by the abstract walls that surround their theories. They have no idea that policy needs not only be theoretically sound, but also politically palatable. There is Krugman’s perfect world, and then there is the possible.

    Simply speaking, the guys pulling the levers are more experienced, probably smarter, and more resourceful that Yves et al. They have a keener understanding of how to get the best policy possible through a daunting political environment.
    My money is with Geithner.

  58. 58
    TheOfficialHatOnMyCat says:

    Some of you guys act like you just yesterday discovered the phrase "laugh all the way to the bank."

    Did anyone here really think that banks and insurance companies were saintly and put in place by the Baby Jesus to make your lives better?

    They have always been run by predators. The correct posture toward them is to try to harness their predatory tendencies for good and not evil, via appropriate regulation. Once we let the Phil Gramms of the world talk us out of the regulation part, the jig was up.

    Spilt milk. Cease weeping, and get to work. Fix it.

  59. 59
    John H. Farr says:

    Chilling is out of the picture. This is fundamentally immoral and doomed, period. You don’t get to be healthy by eating a pile of shit. Not even "just once, open your mouth," will do it. It’s a crock. It’s a pile of hooey. They don’t even believe it themselves.

    This is just pathetic, utterly pathetic. They had an opportunity to do something meaningful and they’re kicking the can down the road instead. Won’t work. Metaphysically doomed… They are eating our souls.This will only guarantee what would have happened if they’d done nothing, only the landing will be horrendous.

    Sure, I’m an ignorant sumbitch layman hysterical shit-for-brains. But I have a heart and I know what’s right. This isn’t!

  60. 60
    Comrade Stuck says:

    We are dealing with sociopaths.

    If they are this, then we made them that way, by treating what is simply a method of barter and trade called Capitalism, like it was some theistic creation directly ordained by God. They are not and it is not supernatural, as we are seeing, functioning as an unfailing and self contained entity capable of self governance, such as the wingnuts and many dems have been preaching all these years.

  61. 61
    TheOfficialHatOnMyCat says:

    @John H. Farr:

    In theater, what you are doing is called chewing up the scenery. Overacting.

    Don’t blow your cover, you almost had a few people fooled.

  62. 62
    Rick Taylor says:

    @TheOfficialHatOnMyCat:

    "We’re operating a fire department, not a social services trauma team. This isn’t about whether we like the potatoheads who got us into this mess. It’s about what measures have to be taken quickly to prevent their mistakes from fucking us in the poopchute for years to come."

    To use your favorite metaphor, imagine there’s a huge forest fire threatening to engulf a village. Suppose the village, unprepared for a fire of such a huge scale, uses up it’s entire water supply, and it has to tap into the city’s water supply on an emergency basis (yes I know, I’m stretching a nice simple metaphor into oblivion). The city representative speeds into the village to see what they’re doing, and he spots a fire truck using the hoses to fill up a millionaire’s pool. He gets irate, but the local fire company tells him that back when water was plentiful they made a profitable deal to keep that pool filled, and they need to honor their contract.

    Now part of the reason the city representative is irate is a populist reaction. This rich bastard is living it up on our water while other people are sacrificing and working to fight the fire. But the other part of the reason is that water that’s going to fill that pool isn’t going to put out the fire! If there were unlimited amounts of water, this might be fine, but while we don’t want to haggle or plan how much water to throw on the fire in advance (except to say every bit it takes), we do want the water to go to putting out the fire!

    Now perhaps the amounts being wasted are too small to take seriously. Certainly that’s true in the case of the bonuses to AIG employees. Objectively speaking, the amounts involved were tiny and will have no bearing on the recovery efforts, and while anger was understandable, the amount of hours and effort going to retrieve them was ridiculous. But what about money going to to hedge funds that bet against the market? Will that be lent out again to small businesses to get the economy moving? And how much is involved. I admit it’s difficult to think clearly when there’s so much anger, and it may be affecting our reasoning.. But the arguments people like Krugman are making isn’t that this rewards bad people, it’s that he thinks it won’t be effective. Now he could be wrong. I certainly hope he’s wrong. I hope I’m wrong. But that is the argument.

    At the same time, I’ll admit if the choice is between doing nothing and doing something, I definitely choose something. Despite some of the things I’ve written, this plan has some advantages, especially if at the same time we can address the issue of CDO’s. Propping up these securities directly seems at least better to me than propping them up by honoring every CDO contract at 100%, and since they’re addressing the same issue, I’d hope if we’re going to do the former, we can at least drop doing the latter. I don’t think rewarding hedgefund investors is an effective use of our money to help the economy recover.

  63. 63
    valdivia says:

    I guess my point is that when a group of economists all think there IS a magic bullet, there isn’t. Not that I putting full faith in Geithner, Summers, Romer and Golsbee but the fact that some economist seem to think nationalization is easy or better. Look the countries int he South were at the receiving end of lectures by economists in the past two decades that they knew exactly what needed to be done and in the end the countries that followed mixes of different approaches did better. I am not an economist but I have seen the aftermath of the economists certainty imposed on countries and am highly skeptical of it. For all I know Krugman may be right but it may be that the proposed approach may also work no?

  64. 64
    Karmakin says:

    @TheOfficialHatOnMyCat: BTW. I think we’re pretty much in complete agreement.

    Hostile wasn’t the correct word. What I was more thinking of is adversarial, like the legal system.

    And yes. A lot of people are acting like damned fools. There ARE bigger points there, IMO, but they’re too busy flailing to recognize it.

  65. 65
    Ash says:

    I don’t trust ANY damned economist. They’re all wrong as far as I’m concerned, and I’m ready for a shit show. That in my mind was put in stone 15 years ago, and this is just the pre-ordained ending.

  66. 66
    TheOfficialHatOnMyCat says:

    @Comrade Stuck:

    Just this once, and hoping that Baby Jesus will forgive me, I have to sort of agree with you.

    I don’t totally agree on the chicken-egg part though. I think that, a la Gordon Gekko, greed is good …. when properly supervised, regulated, and constrained.

    Without that drive to make something out of nothing, capitalism would just be an obscure academic reference.

    The problem with greed-lovers is that they see greed as being the whole point. Whereas, greed is just a tactic, in a properly constructed system.

    One of many tactics, working in harmony and controlled and managed.

    Something that pitchfork-wavers don’t get any more than the Gordon Gekkos get.

  67. 67
    bootlegger says:

    @Rick Taylor: If I may further torture your metaphor, the reason we’re filling the rich guy’s pool is because we expect him to use it to help fight the fire.

  68. 68
    Comrade Stuck says:

    @Seretse: @Seretse:

    It is truly remarkable how uniformly simpleminded this comments section has been.

    Since myself and some others generally agree with your main points, the hyperbole is not warranted. As for Geithner, he is in fact one of the many architects of this disaster and his knowledge for dissembling the bomb he helped build is acknowledged, but not revered. My guess, he is under close supervision to stay on the path of pragmatism and out of the mine fields of his prevailing free market beliefs.

  69. 69

    Another way to look at it: This is the worst reward of the rich for their speculation since Alexander Hamilton’s assumption actions.

    CAT: In case you’re not reading, which appears to be the case, this ain’t gonna fix anything.

  70. 70
    TheOfficialHatOnMyCat says:

    @Rick Taylor:

    I think your analogy is pretty good.

    I hereby appoint you the ghost writer for my posts for the rest of the day.

    Gotta run, while I still have a job, I have to work this morning and stave off the wrath of my employers.

    Kick it around the campfire until it is thoroughly cussed and discussed. See you all later.

  71. 71
    blahblah says:

    This is about wholesale asset theft by market volatility. The financial houses and central banks set the interest rates, control how much money circulates in the economy, and even engage in open fraudulent insider trading. That the government is bailing them out and propping them up with taxpayer funds only goes to show the other side of the scam. The rich break our critical financial infrastructure and then a bought off government pays off the crooks with tax money. This is just like the S&L crisis, only writ larger. After the third such bubble in twenty five years, one can only assume it was planned.

    Thus, debt now does not foster investment in productive activity. Instead, it exists as a means to break the backs of every small business and individual property owner through volatile interest rate changes and asset valuations. Drive prices up and the masses swing to buy in. Shock prices back down and buy up those assets bought at high prices on the cheap. Repeat again and again. With each cycle more assets are consolidated into fewer and fewer hands until all assets everywhere are owned by only a few; economic productivity be damned. Because one thing we all know is the monopolies and the landed elite are not productive. And what is created can not be called a "market" when the general populace does not have enough to buy anything but basic necessities.

    This should be viewed as a wholesale international rip-off with the intent of extra-national worldwide subjugation via debt-slavery.

    I’m sorry, but if Obama can’t stop this nobody can. And if he wants it, then my vote was sorely misplaced.

  72. 72
    AhabTRuler says:

    What is the world coming to?!

    What can I expect when Teez is the most calm, rational, and reassuring voice in the thread, patiently extinguishing brush fires as they pop up? ;-)

    Thanks.

  73. 73
    Ditka says:

    The problem with allowing a run on the banks is the fundamental IMMORALITY of letting EVERYBODY suffer for the sins of a few. Big picture please.

  74. 74
    TheOfficialHatOnMyCat says:

    @Comrade Stuck:

    Again, with the good analogy. Stop saying stuff I agree with, please, I am begging you.

  75. 75
    bootlegger says:

    @TheOfficialHatOnMyCat: Precisely. When Wes Clark was running for president I heard him answer a question in town hall meeting where some Free Marketeer asked him the big soc-ialist question. Clark replied that the market is not a god, it is not an inherent arbiter of good and evil. It is a tool and like any tool it can be used well and it can be used incorrectly. The axe and pitchfork are both tools, but in the wrong hands and for the wrong intentions both are lethal weapons.

    (I wonder how many metaphors we’ve used on this thread).

  76. 76
    TheOfficialHatOnMyCat says:

    @AhabTRuler:

    Aerodynamic pigs, my friend.

    Cover your car.

  77. 77
    Comrade Stuck says:

    @TheOfficialHatOnMyCat:

    and hoping that Baby Jesus will forgive me, I have to sort of agree with you.

    Gives meh the heebee geebees

  78. 78
    bootlegger says:

    @blahblah: I believe he’s working smart, which I suppose is better than working dumb (see W).
    Don’t panic, but POTUS is 49th of 50 in the Balloon Juice tourney pool. Let’s hope he has more luck with the markets.

  79. 79
    ploeg says:

    @TheOfficialHatOnMyCat:

    Bankers and insurance companies did act somewhat differently, back in the day. It wasn’t because they were more virtuous back then. It was because they were better regulated, but more importantly, it was because they were held responsible for their actions. If you screw up, you will pay for it in some way.

    All this talk about "moral hazard" and "holding them responsible" isn’t so much academic hot air. It is essential for any worthwhile, lasting reform of the economic system. If you can make up any stupid financial game you want and then get bailed out in the end if you lose, you’re going to make up stupid financial games. Regulations are too slow, and they usually come only after the damage is done.

  80. 80

    Comrade Stuck @ 65. "Pragmatism"? Where? Show me.

    CS @ 57: "We" didn’t "Make" them become sociopaths or anything. Agreed on "capitalism," though.

    Adam Smith’s "invisible hand" stems from his Enlightenment Deism, a theology shot to hell since his time by the Napoleonic Wars, two World Wars, the Holocaust, n

    Cat @ 49 – Sure, you really believe Team Obama will get to reregulation "someday"? The EU will eventually act on its own, having been burned by BushCo promises, if The One doesn’t head the G20 warnings from earlier this month. (Which I don’t think he will.) If you really believe T.O. will get to reregulation, I’ve got some CDSs sitting in Arizona swampland to sell you. Or Cassano’s resume.

    Seretse @ all your comments: If you really believe Timmy G. is dedicated to helping anybody besides his G. Sachs BFFs, etc, you’re an effing idiot.

    John H. Farr: Sorry you were deceived, or self-deceived, about The One. He’s a tool himself, as much as Geithner et al. That’s why I voted Green; I knew that last year.
    Since you DO believe that, you’re an effing idiot.

  81. 81
    Brachiator says:

    @Napoleon:

    It may help if you read him regularly before you post about him because he very clearly has a plan.

    He could have mentioned his plan again. The NY Times could have provided a link to the earlier post which laid out his plan (the InterTubes permits this kind of thing, you know). I’ve read a lot of his stuff before, and some of his alternatives are either contratdictory or need to be modified to match current conditions.

    In short, he’s still a tool. I know he’s all smart and all, but he is as stuck in an insider mindset as are many of the folks at Treasury.

    TheOfficialHatOnMyCat — RE: [non-recourse loans.] But isn’t the real relevance of the classification of the debt at tax time, and when figuring the cost basis for the property?

    No. Absolutely not! In California, for example, the original mortgage loan on a residential property is, by law, non-recourse. This means that if there is a foreclosure, the lender can take back the property, but cannot go after any of the home-owner’s other assets. This is a good thing. It also means that if the outstanding loan balance is greater than the fair market value of the property, there is, also by law, no cancellation of debt income, so the homeowner does not have to report "phantom income" on his or her tax return. This is also a good thing. And we have not even got to the cost basis of the property yet.

    And golly gee, what might be good for a homeowner might also be good for investors in some circumstances, and the Treasury plan might be good. If Krugman or the other blogger goons had provided more info about their alternative plans, it might be easier to evaluate the plans. But for Krugman, snark means never having to supply anything substantial. And while Krugman is very good on a grand view of economic theory and policy, he is largely useless on nuts-and-bolts areas and doesn’t have a clear idea of how his views would have impact in the real world, or how they can be turned into concrete, workable policy.

    Also, just to stay on this for a second …. isn’t there a real and present danger of collapse of property value in a situation like this, resulting in the loss of collateral value and therefore greater injury in the event of a foreclosure …

    Short answer: No.

  82. 82
    The Raven says:

    I don’t think this is going to make it through Congress in its present form–both liberals and conservatives have reasons to hate it. That’s the good part. The bad part is that that means that nothing is likely to get done for at least a year, which means at least a year of hard times.

    Oh, well. More food for corvids. Krawk!

  83. 83
    Rick Taylor says:

    Trying to make sense of all this, I found an article by someone who appears to know what he’s talking about. Read the whole thing.

    John Hempton wrote a very brilliant essay on what it means for a bank to be solvent. If you haven’t read it, go do. Hempton’s definitions 2 and 3 of bank solvency — current accounting value (which implies mark-to-market valuation for many assets) and economic value as an ongoing enterprise — diverge because the cost of funding for investors in risky bank assets is unusually high. Under these conditions, Hempton reasonably suggests, private fund managers will be unable to bid assets up to their best estimates of "hold-to-maturity value", less a "normal" risk premium, because investors are desperately unwilling to hold anything other than government guaranteed securities. Definition 3 is a very generous view of what it means for a bank to be solvent, because it implies that the actual market risk premium is wrong, that an estimate of hold-to-maturity asset values by a reasonable analyst, even accounting for risk, would put those values above current market bids. But in evaluating bank solvency we should be generous: Since an insolvent bank must be nationalized (reorganized, received, conserved, preprivatized, whatever), we should try to avoid declaring as insolvent banks that do have positive economic value, since that would amount to a capricious expropriation of private property.

    But generosity in evaluation is distinct from a generous cash gifts from taxpayers to banks and investment funds. What is required to get a generous but still accurate evaluation of bank solvency is inexpensive funding, so that analysts willing to bet on what a "toxic asset" is worth can borrow the funds they need to back their spreadsheets with shekels without giving away all the upside to nervous lenders. What is not needed, what is in fact positively counterproductive, is to give investors a special bonus in the form of a free option if they buy the asset. This guarantees that assets will not be accurately priced (they will be overpriced), and reduces analyst incentives to value assets carefully and generate reliable market prices.

  84. 84
    Comrade Stuck says:

    @SocraticGadfly:

    That’s why I voted Green;

    Anyone who voted for Cynthia Mckinney to be president is, by all measure, an effing idiot.

    That is all.

  85. 85
    passerby says:

    @Rick Taylor:

    They’ve floated the same idea in different forms and its been shot down each time.

    Yes. It’s not only a trial balloon, but a very useful tactic designed to have specifics effects.

    I am certain that the administration–and the bank folk and congress folk–are acutely aware that to continue with the current financial system would just be setting us up for another bust down the road. The element of greed is argument enough for new regulations.

    I think that each time they float these ideas it sparks more discussion, reveals more futility, and forces all players to choose sides. The system allowed reckless gambling, was unregulate-able, and clearly unsustainable. How could any sane individual want this to continue?

    So I think, in such a way Obama’s team is methodically separating the wheat from the chaff. And the public outrage that accompanies this process gives them the political clout they need to justify the coming reforms.

    We first need to understand how well and truly screwed we are and I think these "leaks" serve that purpose.

  86. 86
    bootlegger says:

    Glenzilla has an interesting take on the public’s outrage, kind of dovetailing Taibbi’s masterpiece.
    My sense is that Greenwald is correct and we need more, not less, public interest in the Goings On because it is only Us that can hold Them to account. But I also know that pure rage causes bad thinking, hell I have personal experience with it.

    Yeah we should be pissed, but we gotta have a level head when we try to take down the Greedheads.

  87. 87
    Comrade Stuck says:

    @TheOfficialHatOnMyCat:

    I don’t totally agree on the chicken-egg part though. I think that, a la Gordon Gekko, greed is good …. when properly supervised, regulated, and constrained.

    Don’t believe my comment made a statement on a definition of greed.

    So, to further rock your world today, I agree fully with your above quote.

    I liken it to gasoline being good when poured into an engineered and controlled combustion engine, but not so good on your bonfire.

  88. 88
    gwangung says:

    Yeah we should be pissed, but we gotta have a level head when we try to take down the Greedheads.

    Yeah, that’s one of two things I can agree with on these threads, with absolutely no hesitation.

    The other is that we’re fucked beyond all measure.

  89. 89
    kay says:

    Is it true that we nationalized IndyMac and lost $10.7 billion dollars on the sale? Receivership, whatever. I don’t know. We appear to have done that. Is that the test case?

    Can we get a number on what nationalization might cost? I’m not interested in vengeance, and I think the way to reform the regulatory structure is to…reform the regulatory structure. In other words, I think there can be one approach to stabilization and another going forward. Stabilize then reform. That’s plausible.

    Is there a number floating around for what it might have cost to nationalize? We know what it cost to NOT nationalize, so far anyway. Is " we must nationalize" ever going to be quantified? Other than in a moral sense, I mean.

  90. 90

    I suppose if anyone gave a shit, we’d be talking about the FIRST deregulation meltdown (the S&L meltdown of St. Ronnie of Ray-Gun’s deregulation) — which ended up being the largest transfer of wealth in human history.

    I didn’t buy any S&Ls. Did you?

    Oh, which we’re still paying for.

    The point here is that the model being adopted is based on the model used for the S&L mess, which "worked." The current practitioners of the Dismal Science were reared in the shadow of that edifice, which is seen to have "worked."

    Yes, I believe that the fundamental assumptions here are all wrong — e.g. that it is the constant flow of CREDIT (your promise to pay) that is the essential ingredient in an economy in which NO ONE keeps that promise, the wealthy least of all, as in the case of Sam Zell, who bought the Tribune Company on credit, even though he had the CASH to pay for it outright, and, thus the Tribune is in Chapter 11 bankruptcy.

    But I also believe that perhaps this is not the time for a fundamental restructuring of the system. It will take a complete collapse, and I’m not sure that’s what we really want.

    So: the proof of this pudding will be in the eating, no matter what the Nobel Laureate economists here are saying, and Obama gets, pragmatically, one shot.

    If it works, the philosophical substrate won’t matter; if it doesn’t work, the philosophical substrate won’t matter.

    It’s clear the tack that Geithner’s taking. Let’s see if it works, however much back seat driving we’d like to do.

    If it doesn’t work, well, we know what happens.

    I apologize in advance.

  91. 91
    guest says:

    @woody:
    SO, in 4 years, the Pukes can safely say the Dims, […] have failed. Liberalism is dead, and they can triumphantly march back into complete, and enduring power…

    and what’s the rightwing prescription to fix everything? tax breaks for the wealthy? that’s not going to fly. are people going to forget who loosened to pins that allowed the financial structure to collapse in the first place?

  92. 92
    tavella says:

    I think that people who think "we have to swallow this, but it’s okay, because now we’ll get real regulation!" are dreaming. What’s happened so far on the law front? Well, any attempt to allow cramdowns, that is to allow homeowners to stay in their homes while repricing realistically — that is, taking the phantom money out in a way advantageous to the ordinary citizen — has been quickly crushed. While again and again the treasury has sought to not only take the phantom money out in a way advantageous to the financials, but *actually make it real money*. Any attempt to limit or control salaries and/or bonuses has brought hysterical wailing from Treasury about how we can’t let the bankers suffer, they are precious snowflakes who must be protected and cossetted at all costs. And a quick and silent killing of any limits.

    And once they’ve been given trillions more to lobby Congress with, you actually think *real regulation* will happen? Dream on.

  93. 93
    guest says:

    @gnomedad: I doubt it. They love power too much to calculate like that.

    i don’t know if they did or not. but i was expecting more electoral interference. perhaps stealing 3 elections in a row would have been too obvious and they sensed it wouldn’t be tolerated yet once again.

  94. 94
    liberal says:

    @Karmakin:

    But he doesn’t see another option. Neither do I.

    Of course there’s another option.

    Nationalization/preprivatization/good bank/controlled bankruptcy/receivership/whatever you want to call it.

    I.e., what should have been done last fall, and the method likeliest to succeed given the data from world financial history.

  95. 95
    kay says:

    @guest:

    I agree with him. Either Obama "fixes" the economy or conservatives are back in power. "Fix" just means vastly different things to the average voter and to Paul Krugman. Krugman can object to this (and will) even if it "works" in the estimation of the average voter.
    Krugman will then do one of two things. He’ll say that his approach would have been faster and cheaper, or he’ll say that this was a short-term fix. Both of those things could be true, although I don’t know how Krugman ever proves "faster and cheaper" re: an approach not chosen.
    If it actually massively and completely fails, well, we all know what everyone will say.

  96. 96
    Comrade Stuck says:

    @tavella:

    Treasury about how we can’t let the bankers suffer, they are precious snowflakes who must be protected and cossetted at all costs.

    I know it appears that way, but if they are being treated as "precious snowflakes" it is only because the big ones are holding a gun to the heads of life savings and retirement plans of millions of average Americans. Reality bites, but there you have it. Letting them fail would be the surest way of bringing down the Obama government and letting the wingnuts take control again. If this were to happen, any fantasies of an opportunity for Hillary are pipe dreams, unless she changes parties for 2012.

    And can we now throw the bonus populism under the bus when discussing substance on fixing the economy.

  97. 97
    liberal says:

    @kay:

    Can we get a number on what nationalization might cost?

    That completely depends on how much of a haircut bondholders take.

    You could take over a bank and convert all the debt to equity, I suppose; that way, it would cost taxpayers nothing.

    (Not that that’s actually a viable solution, in terms of consequences downstream, sovereigns like China getting pissed, etc. But the greater the haircut, the less it costs taxpayers.)

  98. 98
    guest says:

    Better enjoy this four years, libs.

    when the going gets tough, john cole abandons ship.

  99. 99
    nyx says:

    I now have zero trust in the government and Wall Street. Geithner, the tax cheat, is shilling for his guys in Goldman Sachs and Obama thinks he is doing an excellent job. Okay, great. Thinking Timmy is doing a good job either requires massive stupidity or massive lack of courage.

  100. 100
    passerby says:

    @tavella:

    take the phantom money out in a way advantageous to the financials, but actually make it real money.

    This hocus pocus would not be possible if our currency was backed by gold. Just because we don’t hear a whisper about this option from politicians or from the media doesn’t mean it can’t happen.

    And once they’ve been given trillions more to lobby Congress with, you actually think real regulation will happen?

    Yes, because I doubt that those trillions will have any worth.

    Dream on.

    I fully intend to. Please, don’t get me wrong. I’m as jaded and cynical as the next guy. But the more we, the American public, understand how we’ve been had, the more power we have to affect change in our congressional leadership. Someone said on this site and I’ll repeat it because I believe it’s true:

    The voting booth is the new pitchfork. (and/or: The voting booth is the new guillotine.)

    They cannot lobby a good old boy congressman who is no longer in office.

  101. 101
    Ella in NM says:

    @TheOfficialHatOnMyCat:

    It’s about what measures have to be taken quickly to prevent their mistakes from fucking us in the poopchute for years to come.

    Does anyone else see a pattern here? This was their intent folks, the Republican Uber-class, to enrich themselves while creating unsolvable problems that will take the most heroic of leaders down in flames.
    This is the same story with Iraq. From the moment we let Rummy and Cheney and Bush stick their stinky little fingers in that country, we created a situation in which NOTHING we could do would be enough–everything had a huge downside. Now we are left behind cleaning up a mess that will haunt us for generations. And this nation of morons will blame the cleaners for what happened in the short-run. If we let them.

    Eye on the bouncing ball, folks. Lets just get past this "crisis" now, or we won’t be able to make any of the long-term changes we need later.

  102. 102
    John Cole says:

    Just going to state that I agree with anyone and everyone who are frustrated by the fact that Krugman never offers a plan, and just criticizes.

    Also, I have no idea what this means:

    You know, John, your fauxrage would make sense if you were writing a novel, a la Ayn Rand. Boy, the INJUSTICE of it all! Yeah! Fuck em!

    First, there is nothing fake about any and all outrage. Second, I am well beyond outrage and into grim acceptance. Third, I wasn’t calling for some sort of populist revolt, I was merely noting that anyone who thinks these guys will have any problem both taking money and the very next minute opposing any and all regulations designed to stop the next meltdown is just crazy. You simply can not factor in what these guys want when you are designing regulations. What they want is immaterial, because what they want is to do whatever they want until they need a bailout, and then they want as much money as they “need” and you aren’t allowed to ask any questions why or for what or allowed to punish them. If you think I am kidding, try to find out where all the Fed loans went. We just last week learned who some of the AIG counter-parties were.

    That isn’t “fauxtrage.” That is just how it is, and I defy you to explain how I am wrong. Cassano is in a million dollar house in England. Phil Gramm is still on my tv all the time. I haven’t read of one conviction. I haven’t read one person straight out come out and say “we screwed up and there need to be tighter controls of how we do business.” The closest I have seen was Greenspan’s “mistakes were made” dribble from a few weeks ago.

  103. 103

    Comrade @ 83, nope:

    You’re the effing idiot squared for believing the left side of the two-party duopoly, with a Prez candidate whose No. 1 contributor most of the year was Goldman Sachs, would actually do anything about this clusterfuck.

    As Cole said, enjoy the next four years.

    As a left-liberal, I’ll be mourning the denialism.

  104. 104
    John Cole says:

    @guest: How exactly have I abandoned ship? We better enjoy these four years, because if this goes forward as is and fails, you better get used to mooseburgers.

  105. 105

    Kay @ 94: In other words, you mean enough of a cosmetic "fix" to get Obama re-elected, and not a actual fix.

    Gotcha.

  106. 106
    guest says:

    @passerby:

    But the more we, the American public, understand how we’ve been had, the more power we have to affect change in our congressional leadership.

    hegemon pointed to a piece arguing that:

    What the country really needs right now from Congress is facts instead of rhetoric. Instead of these “raise your hand if you took a private jet to get here” exercises of outraged populism, we need hearings that educate and illuminate. Hearings like the old Watergate hearings. Hearings in which knowledge is accumulated over time, and a record is established. Hearings that might actually help us get out of this crisis. It’s happened before. In 1932, Congress established the Pecora committee, named for its chief counsel, Ferdinand Pecora. It was an intense, two-year inquiry, and its findings — executives shorting their own company’s stock, for instance — shocked the country. It also led to the establishment of the Securities and Exchange Commission and other investor protections.

    i used to think a 9/11 commission type investigation into how we got here would take place once the economy regained some steadiness. now i think hearings are needed to help restore confidence.

  107. 107
    passerby says:

    @Comrade Stuck:

    …the big ones are holding a gun to the heads of life savings and retirement plans of millions of average Americans.

    Also too, Comrade Stuck, do we know who holds the pensions for member of congress?

    They may be holding that gun to the heads of the good ol’ boys also.

    Hmm…

  108. 108
    tavella says:

    @Comrade Stuck: And can we now throw the bonus populism under the bus when discussing substance on fixing the economy.

    Except, of course, bonuses are at the heart of the problem. The people involved profited according to how much money flowed through them, whether it was real money or not. The more churn, the more cash for them, and if it all blew up they already had the money. "I created a mortgage bond for 100 million, and I put in a CDS for 100 million with AIG. So pay me the bonus on 200 million. Oh, yeah, and I made 1000 million in bets on whether it would fail or not, so pay me bonuses on that too. "

    The fact that the underlying mortgages were lunacy, the fact that should all that pretend money become real it would blow the economy apart — it didn’t matter to them, because they had real money now.

    I know it appears that way, but if they are being treated as "precious snowflakes" it is only because the big ones are holding a gun to the heads of life savings and retirement plans of millions of average Americans.

    In other words, the worse they behave, the more power they have and the more immune they are from any consequences. And you think that after we bleed the real economy dry to pay them off, transfer trillions to them to lobby and bribe with, that somehow they’ll not do this again?

    Again, dreaming.

  109. 109
    ploeg says:

    You want Krugman’s solution, you got it:

    If you think it’s just a panic, then the government can pull a magic trick: by stepping in to buy the assets banks are selling, it can make banks look solvent again, and end the run. Yippee! And sometimes that really does work.

    But if you think that the banks really, really have made lousy investments, this won’t work at all; it will simply be a waste of taxpayer money. To keep the banks operating, you need to provide a real backstop — you need to guarantee their debts, and seize ownership of those banks that don’t have enough assets to cover their debts; that’s the Swedish solution, it’s what we eventually did with our own S&Ls.

    Now, early on in this crisis, it was possible to argue that it was mainly a panic. But at this point, that’s an indefensible position. Banks and other highly leveraged institutions collectively made a huge bet that the normal rules for house prices and sustainable levels of consumer debt no longer applied; they were wrong. Time for a Swedish solution.

    Click here for the whole thing.

  110. 110
    wilfred says:

    Capitalism has entered Teri Schiavo territory. All the reactions I read here recognize this.

    If this is what it takes to keep it alive, it’s better to send it off with a little dignity

  111. 111
    Comrade Stuck says:

    @SocraticGadfly:

    As a left-liberal, I’ll be mourning the denialism.

    Cynthia! Cynthia! Cynttttthia!

    YAWN to all Nihilists.

  112. 112
    John Cole says:

    What I don’t understand is that there isn’t even any agreement about whether or not we are at the bottom of the housing bubble, and if there is agreement, it is that we aren’t there yet. Calculated Risk says we have a way to go still, if I remember correctly.

    If housing prices are going to fall more as many expect, doesn’t that make this plan even worse that we are doing it before we hit bottom?

    I just hate being this ignorant.

  113. 113
    guest says:

    @John Cole:

    just the tone was so damn flippant. it implied "this is your problem now" when we’re all in the same ship. we need to patch the boat together.

  114. 114
    passerby says:

    @guest:

    now i think hearings are needed to help restore confidence.

    And I hope we get them, guest. Yes, the AIG House hearings had a whole lot political, populist style grandstanding by the committee but hey, that’s their schtick. But some of the questioners did good job illuminating the chicanery inherent in the system.

    My concern is that they’ll save the good stuff for their behind-closed-doors hearings.

    p.s. Thank god for C-SPAN.

  115. 115
    guest says:

    @passerby:

    are you implying aig holds congress’ pension? maybe it’s true, i don’t know, but i heard a washington post reporter deny that allegation.

  116. 116

    Karmarkin said:

    >>"There is no other plan.

    >>I’m pretty sure if there was one, they probably would have went for it. I really doubt that Obama himself is "in the pocket". He KNOWS how bad it looks, and he doesn’t like it one bit. Which is why he’s taking the blame for it instead of trying to deflect it.

    >>But he doesn’t see another option. Neither do I.

    >>Can’t let the entire financial markets collapse, and the asset holders won’t go for anything that doesn’t make them whole at least mostly. And without their buy-in, you can’t force them to do anything. Well you COULD, but the financial markets would collapse if the sanctity of the public markets were threatened too severely.

    >>Or maybe you could let the entire financial market system collapse as it really doesn’t mean anything for the real economy. Of course, if you said this before 6 months ago you’d be seen as a real crank and someone not to be taken seriously."

    And still should be, but a lot of folks don’t see that.

    >>"That’s not to say that there’s not serious problems. It’s plain as day that there are serious moral hazard issues at play when this much money as at stake in the short term. But I’m not sure how you realistically deal with them. This is a cultural issue as much as it is a political one. We tend to overvalue our own worth, as well as the worth of those like us.

    >>The real answer is probably to choke the money going into the high finance speculative sector via the tax code. But that’s a long-term solution, and won’t deal with the current problem."

    A lot of people seem to think that taking out Geithner is the cure. Let’s assume for the sake of argument that this would wind up doing more good than bad — as opposed to holing Obama below the waterline the way the Clinton health-care-reform debacle permanently crippled his administration.

    With whom do you replace him? (Knowing from the get-go that nobody who is popular in the lefty side of the blogosphere would survive a Senate confirmation hearing.)

    One of the reasons Obama went with the people he did was because he knew they were the ones that were the most palatable choices Senate Republicans would allow. (If the Senate Republicans had their way, we’d be looking at guys like Phil Gramm or Newt Gingrich as SecTreas.)

  117. 117
    passerby says:

    @guest:

    are you implying aig holds congress’ pension? maybe it’s true, i don’t know,

    No. I don’t know either. It’s a damn good question though.

    Anybody know?

  118. 118
    Comrade Stuck says:

    @tavella:

    In other words, the worse they behave, the more power they have and the more immune they are from any consequences

    Like Cole said, outrage is real and justified, don’t compound it by being stupid. In the REALITY of the situation, the "them" you refer to as bankers are holding the "us" we as citizens hostage. You want to rush in to kill ever body, because the bankers deserve it. I kind of like the dead banker part (metaphorically speaking) but think overall it is a bad idea. If you won’t acknowledge the reality of the situation, you are wasting my time debating from ideology. That is fine when done over tea and crumpets, but the house is on fire, so what are YOU prepared to do?

    And I don’t oppose nationalization in cases where it is the last resort, such as AIG (likely), and some other big banks (maybe).

  119. 119
    valdivia says:

    Sorry for the rant but being a newly minted American I am feeling a little frustrated.

    The thing that I do not get, at all, is how there is such certainty from all quarters that what the administrations is doing is wrong and what they are advocating is right and now that this has come to pass, 2 months in, the Republicans have won and are a shoe-in for 2012. The stim money has not started to flow yet, we have not seen for sure how all the pieces come together but it seems the reflexive assumption is that everything is doomed. Maybe I am very credulous but having lived through and survived a few killer economic downturns as well as military repression like the US has never known I am willing to give this team at least a year, if not a bit more, before making any bets either way. Granted my country was a little more insignificant in monetary terms and power than the US, so maybe the comparison is not very good, but I keep thinking back to when my country, Chile, was pushing its way back to democratic governance, if any of the progressives committed to democracy had taken the ‘all is doomed’ approach so early on the road to recovery and freedom we would have accomplished nothing. Perhaps a bit more long-term assessment is what we need instead of jumping up and down about the utter disaster things are without having any way by which we can actually measure this right now

  120. 120
    Just Some Fuckhead says:

    Any plan that doesn’t include the tar and feathering of Phil Gramm is insufficient. Surely we can all agree on that.

  121. 121

    The Obama administration isn’t acting alone. It’s possible for congress to tell them this unacceptable, come back with something else.

    Sort of. Here’s one thing that all the people objecting to this plan are missing. The alternatives they are offering, such as nationalization, would all require a lot more money up front. Money that Congress would need to appropriate in order to go forward. Meantime, Congress has indicated that they have no intention of appropriating another dime.

    So, please tell me how the Obama administration is supposed to implement nationalization?

  122. 122
    Comrade Stuck says:

    @valdivia:

    but being a newly minted American I am feeling a little frustrated.

    Frustration is the prevailing condition of every American, newly minted or not. It is what gets us out of bed in the morning.

  123. 123
    passerby says:

    @Just Some Fuckhead:

    Any plan that doesn’t include the tar and feathering of Phil Gramm is insufficient. Surely we can all agree on that.

    (to add) yes, please…televised, please.

  124. 124
    gwangung says:

    Any plan that doesn’t include the tar and feathering of Phil Gramm is insufficient. Surely we can all agree on that.

    No, I don’t agree with that.

    Tarring and feathering is FAR from sufficient. Not enough pain.

  125. 125
    valdivia says:

    @Comrade Stuck:

    funny. why is there no warning about this before one takes the plunge with Homeland Security and jumps through hoops? Surely the motto should read ‘Welcome to the land of the frustrated’ instead of the other stuff they tell us about!

  126. 126
    Comrade Darkness says:

    @John Cole: What I don’t understand is that there isn’t even any agreement about whether or not we are at the bottom of the housing bubble…

    You are expecting way too much here. No one ever knows where the bottom of anything is except in hindsight. And this one is even more tangled than most. The market decides the bottom, and access to credit determines the market. Even if the market is at the sustainable level now, it will be undershooting due to the unemployment piling on. CR’s been providing nice charts on this.

    I don’t see political or economic cataclysm from this plan, because there is no good possible plan. It’s too late for good plans. The time for them was 2002 or so. The taxpayer is going to be on the hook, in the end, anyway. It’s delusional to dream otherwise. The gov just wants any help from the private sector that it can finagle. Any at all. And the longer the hold, the more likely the assets will return *something* and the only player that can hold them that long is the government because it does not have to charge itself to borrow money, technically.

    I’ll reserve judgement on the outcome off all this when I see how the dems decide to restructure the entire industry. If they make it impossible for any financial institution to get to big to fail, then I’ll call the path getting there good, no matter what the path was. Until they get out of firefighting mode, it’s impossible to know where we’re actually heading.

  127. 127
    ploeg says:

    The idea that Steve Waldman puts here is also interesting:

    I actually think having the government offer cheap, full-recourse loans on a maturity-matched basis to investors willing to bear the risk of holding currently disfavored assets is a clever idea. ("Maturity-matched" means investors don’t have to worry about margin calls: as long as they get the long-term values right, they can ride out any tempests in mark-to-market prices.) We do need a market in these assets, and if it is true that funds’ availability for people willing and able to bear the risk of ownership is preventing such a market from arising, then by all means, that’s a "market failure" the government can correct.

    Of course, this would not help at all if the investments themselves are crap and nobody wants to bite, which is what Krugman thinks (and my bets at this point are on Krugman being right).

  128. 128
    Comrade Stuck says:

    Time for B-ball.

    The collapse of the world economy and end of mankind, along Obama’s certain demise (the 326th one) will have to wait till later. GO Bruins, though only cause I picked them.

  129. 129
    eemom says:

    "I haven’t read of one conviction."

    True, but before convictions there must be charges. Before charges there must be investigations. Those are quietly ongoing and likely to take some time in messes of this magnitude.

    The angry mobdom over the AIG bonuses has been worded to death the past few days, but IMO it’s the best damn thing to happen to this country since…… I dunno, since. Look how it forced action — misguided action, maybe, you can debate that, I personally like the idea of taxing the shit out of those motherfuckers — but people are pissed, and for once, that got results.

    That is what we need more of.

    As it was beautifully, ominously said in one of my favorite novels ever
    (The Good Earth, by Pearl S. Buck), "There is a way, when the rich are too rich."

  130. 130
    AhabTRuler says:

    @valdivia: Perhaps a bit more long-term assessment is what we need instead of jumping up and down about the utter disaster things are without having any way by which we can actually measure this right now

    As a new American you should understand that we don’t do that. We specialize in the no forethought and instant gratification stuff. Its kinda how we got where we are now. Tee-hee.
    [/Fiend]

  131. 131

    Krugman’s Plan: But if you think that the banks really, really have made lousy investments, this won’t work at all; it will simply be a waste of taxpayer money. To keep the banks operating, you need to provide a real backstop — you need to guarantee their debts, and seize ownership of those banks that don’t have enough assets to cover their debts; that’s the Swedish solution, it’s what we eventually did with our own S&Ls.

    Okay, aside from the problem of coming up with the money for this, Krugman is creating faux-objection here. This isn’t one plan; it’s two plans. Nationalization is one of them. Guaranteeing the liabilities is the second. They do not necessarily follow from one another. You could do either one without the other.

    Of course, this proposal being floated by the administration is the second plan. This is pretty much a complicated way to guarantee the debts. It doesn’t preclude nationalization. We still have the stress tests coming up.

    This is my huge problem with Krugman. He loves to criticize so much that he creates a lot disagreement where there really isn’t that much. His comment that he is tempermentally unsuited to being Treasury Secretary, or any other job in Washington, and doesn’t want the job, is very telling. He wants the power to criticize without having to take any responsibility. That’s fine, but we should discount his comments appropriately. He’s a bomb thrower, not a solver. We need bomb throwers, but we also need to avoid confusing them for problem solvers.

    Krugman has a history of this, particularly with Obama. He made it clear a year ago, with his cheap shots at Obama on a number of issues, including health care, that he doesn’t like him. Fine. Again, though, the rest of us need to discount his comments. We know that he has no interest in being fair to Obama.

    The last thing I would caution here is to avoid conflating economics with finance. They both deal with money, so people have a tendency to think that they are the same thing. They aren’t. As academic disciplines, they have very different foundations. Economics is about equilibria. An econ professor is conditioned to see things balancing. That’s what they do. It’s useful for a lot of things. For finance, though, it has a problem. In finance, things don’t necessarily balance. Risk considerations mean that you can have substantial imbalances. Krugman is an economics professor, and one whose specialty, international trade, really isn’t much like finance. He’s not an expert here.

  132. 132

    John Cole: If housing prices are going to fall more as many expect, doesn’t that make this plan even worse that we are doing it before we hit bottom?

    Not really. The long run value of the assets in question doesn’t change by the question of whether you implement the plan before or after reaching bottom. It matters where the bottom is, but not on the timing. They get paid back in the same percentage either way.

  133. 133

    ploeg: Of course, this would not help at all if the investments themselves are crap and nobody wants to bite, which is what Krugman thinks (and my bets at this point are on Krugman being right).

    This is certainly possible. Of course, if no one bites, then we haven’t actually wasted any money, because none is committed. All we have lost is time. While I think time is important, if Congress is going to piss away its effort raging about the bonuses rather than funding a program for resolving the crisis, then it’s not like we could have accomplished anything with that time anyway.

  134. 134

    […] ended up with an extra piece. Anyone who thinks I have any idea what I am talking about regarding the financial crisis should keep that in mind, as I am clueless and frustrated and just trying to figure things out, which is harder and harder […]

  135. 135
    passerby says:

    Speaking of Graham and his deregulation posse, last night Maddow had a 7 minute segment on the deregulations that allowed AIG’s growth to behemoth size.

    She highlighted two key de-regulations: The Graham-Leech-Blighley (sp) Act of 1999 and The Commodity Futures Modernization Act of 2000.

    She avoided mentioning that both of these Acts were sign into law by President William Jefferson Clinton** nor did she elaborate on how many Democrats (and which ones) voted in support of these bills.

    Maybe we can haz a Tar and Feathering Festival.

    **I don’t trust the Clintons as far as I can throw the Clintons.

  136. 136
    valdivia says:

    @J. Michael Neal:
    just wanted to say thanks because I find your posts very illuminating and clear, without the jargon that often obfuscates the points being made, and how often the economists are criticizing a straw man.

    @AhabTRuler:
    yeah, I guess I am one of the last romantics who in spite of fore-knowledge about all the things that drive me crazy about this country I am very very happy I finally got my citizenship. I actually think of it as an honor. And now my responsibility is to rant about all the things that drive me mad, like the impatience at the long haul of policy and good governance.

  137. 137
    ploeg says:

    @J. Michael Neal:

    There’s a difference between taking on the bank and guaranteeing all the debts of the bank (and potentially getting some of the upside from the good part) and guaranteeing only the debts with which the banks are willing to part (read that: the shitty debts).

    (Added text to further clarify the point. Probably will need to explain further later, but oh well.)

  138. 138
    gnomedad says:

    @guest:

    perhaps stealing 3 elections in a row would have been too obvious and they sensed it wouldn’t be tolerated yet once again.

    I am naive enough to believe we wouldn’t tolerate banana republic "99% of the vote" elections, so here you can only steal close ones. Obama just gave them a beating they couldn’t steal.

  139. 139
    liberal says:

    @John Cole:

    What I don’t understand is that there isn’t even any agreement about whether or not we are at the bottom of the housing bubble, and if there is agreement, it is that we aren’t there yet. Calculated Risk says we have a way to go still, if I remember correctly.

    Pretty reasonable predictions can be made by looking at the price-to-income ratio, plus considerations of inventory, etc.

  140. 140
    liberal says:

    @J. Michael Neal:

    He wants the power to criticize without having to take any responsibility. That’s fine, but we should discount his comments appropriately. He’s a bomb thrower, not a solver.

    Nonsense.

  141. 141
    ploeg says:

    @J. Michael Neal:

    Well, it would certainly be interesting to see whether the proposal is closer to what Waldman proposes or to what the Times says it is.

  142. 142
    liberal says:

    @Phoenix Woman:

    A lot of people seem to think that taking out Geithner is the cure. Let’s assume for the sake of argument that this would wind up doing more good than bad…With whom do you replace him? (Knowing from the get-go that nobody who is popular in the lefty side of the blogosphere would survive a Senate confirmation hearing.) One of the reasons Obama went with the people he did was because he knew they were the ones that were the most palatable choices Senate Republicans would allow. (If the Senate Republicans had their way, we’d be looking at guys like Phil Gramm or Newt Gingrich as SecTreas.)

    [Sorry—took out paras cuz of messed up blockquoting here.]

    Left-blogosphere or not, what we need is a T Sec who isn’t a complete whore to the financial sector. In fact, many of the people sounding the right notes aren’t particularly left or liberal.

    So…you’re conjecturing that the set of (a) capable (b) non-whore candidates who (c) can get through the Senate is nearly empty.

    The problem isn’t the Republicans per se; it’s the fact that Congress (and Obama, too) is largely in the pocket of the FIRE sector.

    I think it’s possible we could get someone good, but it’s not a matter of Dems vs Republicans this time. It’s a matter of getting Congress and Obama to start looking past those nice juicy FIRE sector donations and start thinking about the nation’s welfare.

    Normally, it would be an easy call: they’d all whore themselves out to the FIRE sector. But given the amount of anger out there, it’s not so clear anymore.

  143. 143
    liberal says:

    @J. Michael Neal:

    Krugman has a history of this, particularly with Obama. He made it clear a year ago, with his cheap shots at Obama on a number of issues, including health care, that he doesn’t like him. Fine. Again, though, the rest of us need to discount his comments. We know that he has no interest in being fair to Obama.

    At some point, when the election was over, I strongly recall him being very fair towards Obama.

    Right now he’s being critical of Obama because Obama—who should never have appointed Geithner and Summers in the first place, given their histories—deserves to be criticized.

  144. 144

    […] Krugman (and a few others) points out, the government since the Henry Paulson plan proposed last Fall has been treating this […]

  145. 145
    mey says:

    Oh boy. Here comes our lost-Japan-decade. We are screwed. And those of you arguing that this is the only thing we can do, you are either a crook or a fool, or both.

  146. 146
    liberal says:

    @J. Michael Neal:

    Krugman is an economics professor, and one whose specialty, international trade, really isn’t much like finance. He’s not an expert here.

    Your reasoning is completely fallacious.

    Dean Baker is a non-finance economist, and he was one of the few people, expert or not, who called the housing bubble.

    I’m not sure I agree with everything Krugman says—IIRC he underestimates the degree to which a solution that is both workable and equitable will necessitate forcing a haircut on the bondholders—but he’s lightyears ahead of anyone who gives any credence to Geithner’s "avoid nationalization at all cost" blundering.

  147. 147

    There’s a difference between taking on the bank and guaranteeing all the debts of the bank (and potentially getting some of the upside from the good part) and guaranteeing only the debts with which the banks are willing to part (read that: the shitty debts).

    This is essentially the nationalization part of the question. You are confusing guaranteeing the debts with buying the assets. Those are different things. Admittedly, I glossed over the distinction in my comment, but it’s important.

    This plan is about buying assets. The banks can use that money to, among other things, pay off their debts. From the perspective of the bank (rather than the bank’s creditors) there is no such thing as good debts and bad debts. They’re all just debts, and the bank has to eventually pay them all off or be in default.

    In order to be able to pay off the debts, the banks need to be able to convert assets into cash. At the moment, they can’t do that, because no one is buying the assets. So, they are forced to just sit on the assets, and see how much cash rolls in through the inherent cash flows of the asset.

    There are a number of problems we face, but one of them is inherent to the nature of the banking business: duration mismatch. Banks borrow short and lend long, and take advantage of the fact that long term rates are higher than short term rates. There are a couple of risks involved in this. One of them is that they need to be able to roll over the short term debt they have, because the principle they loaned out is tied up long term.

    Over the last year, rolling over that short term debt has proven to be very difficult. The banks are stuck owing money now, while they can’t get paid back on the asset. So, in order to get cash, they need to sell the asset. That’s where this plan steps in.

    Now, the above described liquidity problem isn’t the only problem. There is also the problem that the assets aren’t worth what they were originally, and may well be worth less than what the banks owe in debt. That’s the solvency problem.

    If you want to guarantee the debts, then you are going to have to pay more than the assets may well be worth. There isn’t any other way to do it. If you pay less than the amount of the debts, then you aren’t guaranteeing the debts. So, any attempt to guarantee the debt necessarily involves the possibility of a bailout.

  148. 148
    Zuzu's Petals says:

    Amazing discussion.

    No wonder this is my favorite blog. I learn something every time I come here.

  149. 149
    passerby says:

    @J. Michael Neal:

    Economics is about equilibria. An econ professor is conditioned to see things balancing. That’s what they do. It’s useful for a lot of things. For finance, though, it has a problem. In finance, things don’t necessarily balance. Risk considerations mean that you can have substantial imbalances. Krugman is an economics professor, and one whose specialty, international trade, really isn’t much like finance. He’s not an expert here.

    I like to echo the thanks to you for contributing clarity to the discussion. The above block quote being particularly informative.

  150. 150

    Left-blogosphere or not, what we need is a T Sec who isn’t a complete whore to the financial sector. In fact, many of the people sounding the right notes aren’t particularly left or liberal.

    So, who do you propose that wants the job?

    He wants the power to criticize without having to take any responsibility. That’s fine, but we should discount his comments appropriately. He’s a bomb thrower, not a solver.

    Nonsense.

    Yes, he is. He flat out admitted that he isn’t capable of actually doing the job of Treasury Secretary.

    At some point, when the election was over, I strongly recall him being very fair towards Obama.

    In some respects, yes. On others, no. We do know that he has an established history of being unfair to Obama. You argue that we have to keep Tim Geithner’s track record in mind in assessing how we think he’s doing his job. Fine. If you make that argument, though, then you can’t ignore Krugman’s track record when assessing whether he’s making fair criticisms of the Obama administration.

    Well, you can, but it’s intellectually dishonest.

    Dean Baker is a non-finance economist, and he was one of the few people, expert or not, who called the housing bubble.

    Noting that there was a housing bubble was an economic question. This doesn’t advance your argument that there is a distinction.

  151. 151
  152. 152
    guest says:

    @eemom:

    beautifully ominous

    swoon/

  153. 153
    Zzyzx says:

    The problem here is that the people who were right are also people who love to predict the worst case scenario all the time. In this case they were right and that gets them points but no one is going to be right all the time when dealing with something as complex as the economy.

  154. 154

    @J. Michael Neal:

    "So who do you propose that wants the job?"

    That’s the rub. We must take the following issues into account:

    1) The guys who are the heroes of the leftysphere — Krugman, Roubini, Stiglitz etc. — are a) generally not interested in the job (Krugman certainly isn’t, and Stiglitz already turned down a job offer from Obama), and b) highly unlikely to survive a Senate confirmation hearing.

    2) Replacing Geithner would, in the best-case scenario, take several weeks and likely leave the economy rudderless for that length of time. This as the house fire is still raging.

    3) And again, bear in mind that nobody who is revered by the leftysphere is going to survive a confirmation hearing, so we’d probably get a figure who most of the leftysphere is going to hate even more than they hate Geithner. All at the expense of several critical weeks, maybe months, during the most dangerous time in the past seventy-five years to be rudderless.

  155. 155
    liberal says:

    @J. Michael Neal:

    So, who do you propose that wants the job?

    Someone else on this blog or another blog made the same absurd argument. Do you really think there’s NO ONE OUT THERE who could be appointed Treasury Secretary who wouldn’t take a Paulson-esque/Geithner-esque approach.

    Ridiculous.

    You argue that we have to keep Tim Geithner’s track record in mind in assessing how we think he’s doing his job. Fine. If you make that argument, though, then you can’t ignore Krugman’s track record when assessing whether he’s making fair criticisms of the Obama administration.

    I’m afraid to say that that’s an idiotic argument.

    Krugman favored Hillary in the primaries, yes, but his critique of Obama’s health plan was reasonable. [NB: I supported Obama in the primaries and gave him a considerable amount of money.]

    After Obama won, I recall pretty strongly that Krugman did not go out of his way to attack Obama. Can’t remember the issue, maybe it was the stimulus plan.

    Furthermore, Krugman’s critique of Obama is CORRECT, unless you actually think that the current moronic tack of avoiding nationalization is the right one.

    As for Geithner, it was clear, is clear, and always will be clear that he’s entirely unfit for this job and has considerable failings.

  156. 156
    liberal says:

    @J. Michael Neal:

    Noting that there was a housing bubble was an economic question.

    LOL! Let’s see what you wrote above:

    In finance, things don’t necessarily balance. Risk considerations mean that you can have substantial imbalances.

    What was the housing bubble, if not an enormous systemic imbalance?

  157. 157
    Brachiator says:

    @ploeg:

    You want Krugman’s solution, you got it:

    Interesting how Krugman mixes things up. For example, What we did with the S&Ls is not quite the same thing as the "Swedish Solution." During the S&L crisis, for example, some folks went to jail, and ultimately (and unfortunately) the S&L sector contracted significantly. The S&L crisis involved about 747 banks and cost the goverment $160 billion, less than the first part of the recent bank bailout.

    The NY Times had a good piece on the Swedish Solution, which was not quite nationalization. And a healthy debate over whether a modified Swedish approach would work in the US can be found here.

    Here’s the heart of what the Swedes did:

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

    That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well….

    Sweden spent 4 percent of its gross domestic product, or 65 billion kronor, the equivalent of $11.7 billion at the time, or $18.3 billion in today’s dollars, to rescue ailing banks. That is slightly less, proportionate to the national economy, than the $700 billion, or roughly 5 percent of gross domestic product, that the Bush administration estimates its own move will cost in the United States.

    But keep in mind that AIG is not a bank, and the massive amount of crap debt instruments floating around makes for some significant differences between Sweden’s situation and the current global crisis.

  158. 158
    liberal says:

    @Phoenix Woman:

    The guys who are the heroes of the leftysphere—Krugman, Roubini, Stiglitz etc.—are a) generally not interested in the job (Krugman certainly isn’t, and Stiglitz already turned down a job offer from Obama), and b) highly unlikely to survive a Senate confirmation hearing.

    False dichotomy. You’re implying that the choice is someone in that set—say, the set of people in the vanguard of public critics—and the set of people like Geithner.

    Flat-out absurd. I claim there are lots of people who are "respectable" and who also have basically the right ideas. And I don’t need to produce a long, long list of candidates to make that claim. It’s obvious, unless you’re going to counterclaim that the ONLY people who have the right ideas are the "prophet" types like Krugman, Roubini, etc.

    2) Replacing Geithner would, in the best-case scenario, take several weeks and likely leave the economy rudderless for that length of time. This as the house fire is still raging.

    Unless Geithner has some kind of epiphany—and people in his position rarely do—there won’t be any progress until he’s dumped.

  159. 159

    Someone else on this blog or another blog made the same absurd argument. Do you really think there’s NO ONE OUT THERE who could be appointed Treasury Secretary who wouldn’t take a Paulson-esque/Geithner-esque approach.

    I’m saying that, until someone can actually propose someone, this isn’t as easy as you want it to be. Pony up a name, and let us examine his/her downside as well as the upside. No nominee is perfect, and discussing replacement purely in the abstract obscures that problem.

    I’m afraid to say that that’s an idiotic argument.

    Okay. You have no interest in intellectual integrity. You are simultaneously arguing that Krugman is credible because he’s right, and that you know that he’s right because he’s credible. If you are going to argue the first, then you can’t use Krugman in an appeal to authority, as you are.

  160. 160

    Liberal, again: Who do you propose that wants the job? If you’re going to pick someone, it’s gotta happen now if not last week, as it takes a while to push nominations through the Senate.

    As I said earlier:

    1) The guys who are the heroes of the leftysphere—Krugman, Roubini, Stiglitz etc.—are a) generally not interested in the job (Krugman certainly isn’t, and Stiglitz already turned down a job offer from Obama), and b) highly unlikely to survive a Senate confirmation hearing.

    2) Replacing Geithner would, in the best-case scenario, take several weeks and likely leave the economy rudderless for that length of time. This as the house fire is still raging.

    3) And again, bear in mind that nobody who is revered by the leftysphere is going to survive a confirmation hearing. All of those folks are academic types with little or no real-world experience. However, the folks who do have real-world experience (Jamie Dimon is a name I’ve heard being floated — which is one more name than I’ve heard you float so far) are of course Part Of The System, and likely to be hated by the same folks who wonder why Krugman wasn’t picked.

    And yet again, this is all at the expense of several critical weeks, maybe months, during the most dangerous time in the past seventy-five years to be rudderless.

  161. 161

    What was the housing bubble, if not an enormous systemic imbalance?

    Yes, it was. It’s an economic problem, or at least subject to an economic analysis, because it was an imbalance that couldn’t persist. It was going to have to come back into balance, so economists recognized it as a problem. In fact, it’s a problem that someone with an econ background is more likely to recognize than someone with a finance background. The latter is not inherently biased against an argument that involves an ongoing imbalance. Someone in finance could make a credible argument that house prices were more solid, and that risk really had been dispersed, than someone in econ could.

    I’m not saying that finance is inherently better than econ. I’m saying that they are effective at different problems. The problem of how investors are going to react, and how banks can be rebuilt, is more of a finance problem than an econ one.

  162. 162

    If replacing Geithner were so easy, you’d think that it would have been possible to fill the Treasury Department’s positions by now. There is no Deputy Secretary. There are almost none of the Assistant Secretaries. All of the evidence suggests that getting people into the Treasury is very difficult right now.

  163. 163
    liberal says:

    If you are going to argue the first, then you can’t use Krugman in an appeal to authority, as you are.

    I’m not making an appeal to authority. I agree with Krugman here, insofar as he thinks that the Paulson/Geithner tack is either going to be insufficient or egregiously unfair.

    Insofar as he thinks we can nationalize and get away with not giving the bondholders a haircut, I disagree with him.

    You have no interest in intellectual integrity.

    Time to look in the mirror…

  164. 164
    liberal says:

    @J. Michael Neal:

    All of the evidence suggests that getting people into the Treasury is very difficult right now.

    That’s true, but the most important factor is Obama’s ties to the FIRE sector.

    If he didn’t have such ties, he would have never put Summers in his administration, given his role in the late 1990s in setting the ground for the current disaster.

  165. 165
    liberal says:

    @J. Michael Neal:

    It was going to have to come back into balance, so economists recognized it as a problem.

    Actually, no, AFAICT most economists did not recognize it as a problem. Certainly not the profession as a whole.

  166. 166
    liberal says:

    @Phoenix Woman:
    Do you usually think that just repeating yourself is a way to counterargue?

    I’m claiming that there set of people who (a) have the right (non-Paulson/Geithner-esque) ideas and who (b) are "respectable" is not empty.

    I think that’s pretty obvious, and that the onus is on you to show it’s false.

    Replacing Geithner would, in the best-case scenario, take several weeks and likely leave the economy rudderless for that length of time. This as the house fire is still raging.

    If Geithner’s at the helm, he’s pushed the tiller far to one side, and the boat is going in circles. If he’s a fireman, he’s either completely incompetent or downright crooked.

  167. 167
    John Cole says:

    For those of you who have no idea what liberal means when he/she keeps saying the FIRE sector, go here.

  168. 168
    droog says:

    The USA is an amazing nation. It has finally defeated the two superpowers of the Cold War.

  169. 169
    SBWs says:

    Liberal,

    Thanks for your excellent comments.

    I would also like to ask J. Michael Neal– though I have a feeling he/she may not answer — what your profession is, and what type of firm you work for.
    You have an incredibly strong — almost lobbyist-like — bias in favor of the financial sector. Though I don’t think you are the same person, you remind me of a commentator on the Big Picture — always saying ‘Geez, I wish it wasn’t this way, I hate it, but we have to stay with experienced people, the status quo’ — and later did admit he worked on Wall Street. Very familiar.

    What is you background? Do you work for the FIRE sector?

    And yes, I do think it’s fair to ask. I’m in earth science (and IT), and you better damn well believe a geologist working for an oil company will be scrutinized more about global warming pronouncements more than someone say, in academia. I am actually curious what your angle is.

  170. 170
    SBWs says:

    By the way, I of course think you are wrong, but I want to make sure it’s clear I don’t accuse you of arguing in bad faith. It’s more of the environment affecting belief.
    I used to be in the Marine Corps, and during that time period everyone in that environment usually thought of solutions within the box framed by the military culture, although there were other solutions available. I have also been in academia, and it’s similar. So what environment are you in?

  171. 171
    guest says:

    for people convinced geithner is nothing but a complete slave to wall street, here is something that suggests otherwise. as early as 2004, he warned about the dangers of credit default swaps and tried to reign them in.

    http://www.businessmirror.com......rust-.html

    that, to me, shows a degree a prescience and in instinct for reform.

    was krugman warning about derivatives back then? did clinton? or rubin?

  172. 172

    @J. Michael Neal:

    If replacing Geithner were so easy, you’d think that it would have been possible to fill the Treasury Department’s positions by now. There is no Deputy Secretary. There are almost none of the Assistant Secretaries. All of the evidence suggests that getting people into the Treasury is very difficult right now.

    Exactly.

    And now, look at the GOP Senate Caucus. The shellshock of Obama’s win and nomination have worn off, and they’re feeling feisty again — and feeling like that they could make political hay by opposing Obama. Let’s face it: They could have blocked the stimulus and the 2009 budget, but they didn’t dare because opposing a guy with approval ratings in the high 60s/low 70s is a dicey proposition. But now, now that they think they’ve found weaknesses in his popularity armor, they’re going to be much less accomodating. MUCH much less accomodating.

    Remember how they kept shooting down Clinton AG nominees until they finally allowed Janet Reno to be seated? This is going to be much worse — and at precisely the time when we need somebody in place to do something. The Republicans have already shown, as John here has documented so very well, that they don’t give a shit if the economy tanks so long as they can use it to win in 2010, 2012, etc. They are going to be more than happy to treat Geithner’s prospective replacements like cat toys until they get what they want, which is the second coming of Phil Gramm.

    And it will take several weeks, if not months, for this to play out.

  173. 173

    @liberal:

    Do you usually think that just repeating yourself is a way to counterargue?

    I do when you refuse to answer the questions I brought up. As you continue to do.

    As I just noted, the Republicans, who have been reluctant to oppose Obama and his high approval ratings (they could have stopped the stimulus and the 2009 budget, but didn’t because they didn’t dare do so), are being emboldened by the hoo-ha around Geithner (who as Guest pointed out was hollering about the dangers of CDSes long before Krugman) to use this to ensure that they get somebody that they like in place — even if it means wasting several weeks as the world economy goes further into the dumpster. (They’re also going to use this to jettison Obama’s 2010 budget, which has the things we all like in it, such as the tax increases on the $250k-and-up set.)

    That’s what I see coming if Geithner’s toppled. That’s why Obama is going to resist the calls to dump him.

  174. 174
    guest says:

    @J. Michael Neal:

    this guy at treasury does bother me:

    http://www.motherjones.com/pol.....pay-reform

    was he acting on instructions or did he go rogue?

    david corn will be on cspan’s morning show sunday.

  175. 175

    SBW: Clicking on J. Michael Neal’s username takes you here: http://idonotlikeyoueither.blogspot.com/

    Does that help?

  176. 176
    Worthington's Law says:

    "I guess my point is that when a group of economists all think there IS a magic bullet…" – valdivia

    F#@! a bunch of baby jesuses! Does anyone have a criticism not based on a straw man?

  177. 177
    SBWs says:

    No, nothing on that blog lists an occupation nor professional experience.

  178. 178

    I would also like to ask J. Michael Neal—though I have a feeling he/she may not answer—what your profession is, and what type of firm you work for.

    I’m unemployed. I have worked as an options trader, and am currently studying for the CPA exams.

    You have an incredibly strong—almost lobbyist-like—bias in favor of the financial sector.

    Apparently, you’ve missed all of my comments saying that we need to completely restructure the financial industry such that there are no longer these kinds of opportunities to make lots of money. Given that I say that quite often, I’m not sure how.

    Look, I’m as outraged as anyone. That’s no excuse for not thinking. So far in this thread, liberal yells loudly, but doesn’t actually come up with any specifics. He wants Geithner replaced, but he has no idea with whom.

    There is a short term problem, and a long term problem. There are a lot of people who don’t keep them straight, and think that the solution to the long term problem is the same as the solution to the short term one. We need to make the financial industry much simpler, much more transparent, much more boring, and much less lucrative. Unfortunately, right now, it’s not simple, transparent, or boring. There are lots of opportunities for unintended consequences, and lots of opportunities for us to get fucked. AIG’s positions are a mess. They are really complicated, and no one has a very good idea what they are. Given that, there are a lot of opportunities for someone to trade against them, and sink them farther. I want good people involved in helping to unwind them. Those responsible for digging the hole are almost all gone now, and I think that punishing those that are there is a really bad idea.

  179. 179

    was he acting on instructions or did he go rogue?

    It would be awfully hard for him to go rogue given that he wasn’t employed by anyone pushing the bill at the time.

  180. 180

    […] In condemning Geithner’s “bank rescue” plan, Paul Krugman notes that – yet again — it enables great benefits for the richest investors, with the public protecting them from the risk of losses (privatize gains; socialize losses), and concludes: “The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system.”   When it comes to its primary challenge, the administration elected on a platform of ”change” is, above all else, viciously devoted to preservation of the status quo.  Read John Cole’s summary of expert reaction to Geithner’s banking plan. […]

  181. 181

    I’m noticing that no one has taken up the challenge of explaining how the Obama administration should pursue nationalization without Congress appropriating the money.

  182. 182
    guest says:

    @J. Michael Neal:

    sometimes old loyalties die hard.

  183. 183

    sometimes old loyalties die hard.

    I’m not even sure what loyalties you mean. You, frankly, don’t have any idea where my loyalties lie.

    Okay. That’s not true. If you read much of what I write, you know I’m a Minnesota Golden Gopher fan. So, you probably know that that’s one of my loyalties. I’m just not sure how that’s relevant to this discussion.

  184. 184
    bootlegger says:

    @J. Michael Neal: I know, a bake sale!

    What? We do our education system that way.

  185. 185

    @bootlegger: Put me in for a box of shortbread cookies, and two boxes of those things with the caramel and coconut.

  186. 186
    bootlegger says:

    @SBWs: JMN and I ran this through the other night, he’s definitely not an apologist, but a pragmatist and the boy knows his shit. You can disagree with him and argue that we should turn the outrage up to 11, but we’ll get a bunch of bad laws from our Congresscritters and in the end we’ll still be well and fucked. The Lords of Finance are not Polyanna and it will take nerves of steel for us to take them down. Stick to the facts and step away from the hysteria ejector switch.

  187. 187
    bootlegger says:

    @J. Michael Neal: What, no peanuts?
    Since moving to the south I’ve discovered the cake sale, with something called a *red velvet cake* that should be illegal or at least come with a health warning.

  188. 188

    @bootlegger: Nuts in cookies are just wrong, and that holds even though peanuts aren’t actually nuts.

  189. 189
    bootlegger says:

    @J. Michael Neal: Have to disagree with ya there, I loves me some chocolate macadamia.
    Does this mean we have to go back to cussin’ each other?

  190. 190

    As a follow up, there is something people need to understand about my background. I was a trader. Traders hold just about everyone else in finance in contempt. Brokers? They’re pantywaists that don’t actually take on any risk. Salesmen? Please. Executives? They go soft the moment they leave the trading floor. All of this is further emphasized because I was a market maker. So, my personal biases don’t lie with a lot of the people involved in this mess.

    It’s also the case that I wasn’t a very good trader, even before I had a nervous breakdown. I’ve seen what it takes to be a success at it, and it’s far more challenging than most of you realize. We’d be a lot better off if that wasn’t true, but that’s something to change for the future. In the present, we have to deal with it.

  191. 191
  192. 192
    bootlegger says:

    @J. Michael Neal: Trader or traitor?

    But seriously, since you mention health, what’s your take on Taibbi’s article.

    The most galling thing about this financial crisis is that so many Wall Street types think they actually deserve not only their huge bonuses and lavish lifestyles but the awesome political power their own mistakes have left them in possession of. When challenged, they talk about how hard they work, the 90-hour weeks, the stress, the failed marriages, the hemorrhoids and gallstones they all get before they hit 40.
    "But wait a minute," you say to them. "No one ever asked you to stay up all night eight days a week trying to get filthy rich shorting what’s left of the American auto industry or selling $600 billion in toxic, irredeemable mortgages to ex-strippers on work release and Taco Bell clerks. Actually, come to think of it, why are we even giving taxpayer money to you people? Why are we not throwing your ass in jail instead?"

  193. 193
    guest says:

    @J. Michael Neal:

    the old loyalties i’m talking about is the former goldman sachs lobbyist now working at treasury. i posted the mother jones article about him that highlighted his former advocacy. david corn seems to be suggesting he’s the guy who was the go between treasury and dodd.

  194. 194
    bootlegger says:

    @J. Michael Neal: Thanks, but I’m married and don’t swing that way ;-)

  195. 195
    Emma Anne says:

    I *really* don’t understand the Krugman hate here. Is it just because he supported Hillary in the primaries? Because he has been very right about economics for a very long time. He wrote a book called The Great Unravelling way before it all started to unravel. He was the first guy I heard warning about the housing bubble (there were others, but they were more obscure). He explained in detail that Bush’s numbers were impossible and dishonest when practically everyone else in the press was having a good time making fun of Al Gore. That’s when everyone started calling him "shrill". And furthermore, he *does* have a plan he advocates, and has for a long time.

    In my view, Krugman is right more often than almost anyone when talking about economics (as opposed to politics) and, as I say, I really don’t get why people here don’t see it that way. And he does a lot of background discussion and education on his blog, so if people (looking at John) want to know more about what is going on in the financial system, they could learn quite a bit by reading there.

  196. 196
    Emma Anne says:

    @someguy:

    I’m tired of Krugman’s reflexive Democrat bashing on behalf of the finance industry.

    This, for example. Is that just a typo? Because Krugman is not especially tactful, but I can’t see any basis for saying he reflexively bashes Dems, and particularly on behalf of the finance industry??

  197. 197
    cleek says:

    In my view, Krugman is right more often than almost anyone when talking about economic

    is there a resource i can look at which will quickly tell me all the things he’s been right about, in the last ten years vs. all the things he’s been wrong about ?

    with all due respect to Krugman, we can assume he is not privy to all the info that the administration is, so his criticisms are necessarily made in ignorance of at least some of the facts.

  198. 198
    SBWs says:

    bootlegger,

    Pragmatist? So was Gorbachev, for what good it did him. You can continue claiming all that matters is the technical detail, but Americans are not Japanese, this isn’t the 1930s, and mass poverty combined with grotesque double-standards for the finance industry — and those who work for it — will cause serious damage.

    Yes, it is a double standard to get bonuses in a failing company even if you personally are doing a good job. Believe it or not, that does not happen outside of finance. People get laid off regardless — the fact that some of you don’t realize this is an indication of how sequestered you are.

    This is a constitutional democracy. If the government does not respond to the will of the people — that dirty, dirty populism! (and I think the TARP bonus bill will be considered constitutional) — it will lose legitimacy. And you’re worried about populist outrages. Amazing.

    Again, perhaps you are isolated, because I’m far more concerned about the reactions of the people when the government doesnot respond. I don’t think there is anything in modern American history that has prepared anyone for this.

    But of course, I think a lot of other things– like free trade — will also get blown apart in the next decade.

    Finally, J. Michael Neal — Nationalization costs — but of course all the money to purchase those trash assets is going to come from…?

  199. 199
    guest says:

    @cleek:

    my complaint with krugman is that he assigns motivation and makes assumptions about obama’s thinking that have no basis in fact. it borders on crystal ball gazing territory. and since he’s never steered legislation through congress, makes it sound easier than it is.

  200. 200
    woody says:

    As a follow up, there is something people need to understand about my background. I was a trader. Traders hold just about everyone else in finance in contempt. Brokers? They’re pantywaists that don’t actually take on any risk. Salesmen? Please. Executives? They go soft the moment they leave the trading floor. All of this is further emphasized because I was a market maker. So, my personal biases don’t lie with a lot of the people involved in this mess.

    It would be cheaper and easier on the rest of us if they’d just turn all you/those A+/aggressor types loose with real guns somewhere where you could mutually reduce you populations but you’d be the only people you could hurt…

  201. 201
    passerby says:

    @cleek:

    we can assume he is not privy to all the info that the administration is, so his criticisms are necessarily made in ignorance of at least some of the facts.

    Hear hear. And that doesn’t just apply to Krugman. I’m willing to bet that 99% of the talking heads suffer this kind of ignorance too.

  202. 202
    SBWs says:

    @cleek:

    we can assume he is not privy to all the info that the administration is, so his criticisms are necessarily made in ignorance of at least some of the facts.

    Hear hear. And that doesn’t just apply to Krugman. I’m willing to bet that 99% of the talking heads suffer this kind of ignorance too.

    So the solution:

    1) bash Krugman, or Stiglitz (nationalization fool alert!), and praise President Obama for being so wise as to withhold information from us children, not being fellow citizens or anything,

    — or hold a second, here’s an idea–

    2) more transparency in government.

    Here’s what I guess — more transparency reveals much more incompetence and criminal actions within the financial industry, with government knowledge.

  203. 203
    Jonny Amplesack says:

    Don’t say nuthin’ bad about Obama!!!

  204. 204

    I really don’t understand the Krugman hate here. Is it just because he supported Hillary in the primaries? Because he has been very right about economics for a very long time. He wrote a book called The Great Unravelling way before it all started to unravel. He was the first guy I heard warning about the housing bubble (there were others, but they were more obscure). He explained in detail that Bush’s numbers were impossible and dishonest when practically everyone else in the press was having a good time making fun of Al Gore. That’s when everyone started calling him "shrill". And furthermore, he does have a plan he advocates, and has for a long time.

    I don’t hate Krugman. My ywo points are this:

    1) He has a history with Obama. You can’t ignore that.

    2) This isn’t his area of expertise. He won a Nobel prize for work on international trade. Being right on that, or even macroeconomic matters, isn’t the same as being right on this. Again, just because they both involve money doesn’t mean that you should assume that these are the same things.

  205. 205

    But seriously, since you mention health, what’s your take on Taibbi’s article.

    Actually, a lot of that is not a particularly good description of trading. Most of the folks I worked with spent 45-50 hours in the office. I got there about an hour and a half before the markets opened, and left within two hours after the closed, except on options expiration dates.

    The stress is high. Basically, I spent six and a half hours a day living with the possibility that someone would get news a half second before I did, and pick me off. More, you are going to screw up; there’s no way to avoid it. In a lot of ways, it’s similar to being an NFL cornerback: you simultaneously have to have no memory while also learning from when things go wrong.

    The people who are good at it know how to handle stress. The ones who are really, really good at it have something wrong with them, because they don’t feel stress at all. One of the two best guys in our room would doze off, and I could never figure out how he could always react instantly.

    The CDS shops probably don’t have quite the same dynamic. I’ve never been in one, but I’d guess that they don’t have the same constant worry about small price moves. Mortgage backed securities don’t trade like stocks and options do. I’m sure that there’s a lot more ability to stop and think if you’re trading over-the-counter stuff rather than exchange trades. Still, you’re talking about things where a small screw up costs a lot of money.

  206. 206

    @SBWs: Huh. As I’ve said an several occasions, I’m in favor of nationalization. The problem is that saying that doesn’t contain any information on the more difficult problem of what counter-parties you pay off. You can nationalize paying them all off, paying none of them off, or just about anything in between. If you don’t answer that question, your solution lacks critical details.

    Further, save for selling cookies, no one has told me where the administration is getting the money that would be used to nationalize.

  207. 207
    TheOfficialHatOnMyCat says:

    @John Cole:

    I defy you to explain how I am wrong.

    I did, but you never listen.

  208. 208

    @TheOfficialHatOnMyCat: Not listening to you is usually a sign of intelligence.

  209. 209
    SBW says:

    J. Michael Neal,

    My mistake then, I misread the intent of your nationalization comment.

  210. 210
    fp says:

    If these guys are right, this will be the undoing of the Obama administration. Better enjoy this four years, libs.

    I wouldn’t count on the Republicans being able to take much advantage of this. If they were smart, they could, but they’re not. See how many Republicans are defending the AIG bonuses? Check out their latest favorability ratings.

  211. 211
    Delia says:

    If this were a medical emergency, it appears it would look something like this:

    The Illness- reckless and irresponsible betting led to huge losses
    The Diagnosis- Insufficient gambling.
    The Cure- a Trillion dollar stack of chips provided by the house.
    The Prognosis- We are so screwed.

    Well, John, I’ve been surfing around, and I do believe you’ve won the internets today with this post.

    Congratulations.

  212. 212
    tony colucci says:

    i voted for mr obama, but now i,m sorry,he sure can talk nice, but he sure as hell can not run a gov.look at his lady from california, whats her name,grace who?her and that dumb ass from vegas, what a pair, and they pass a bill that is more than a thousand pages that no one read,and look were it got us(the tax payers)deeper in debt than in the history of the usa, i would like president obama to fire all his staff,and start new,i think if he did that, we might have a shot of pulling out of this mess—–god bless america,and all its true god loving ,stand up and fight for us americas, because it dont look like he has the right people in there that is willing to fight for this country (usa)

  213. 213
    kay says:

    "The Treasury also intends to ask Congress to pass legislation that would provide the government with the authority to take over large nonbank financial firms on the brink of collapse. Government officials said that if they had such powers last fall, they could have seized AIG and wound down its troubled businesses at far less cost to taxpayers."

    Interesting, if true. Does the government have the authority to seize "non-banks"? I don’t know, but it might be helpful if the government would just lay out what it can and can’t do, under existing law. We would then know why they are NOT doing some of these things.

  214. 214
    Comrade Nimrod Humperdink says:

    I’ve never had much of a head for economics, so that’s why I read Brad DeLong. I’d suggest giving this a look: http://delong.typepad.com/sdj/.....n-faq.html before yelling that the sky is falling. There are no good options now, and while I prefer nationalization, it’s probably as risky as this plan is, just in different ways. Obama is always cautious, that’s his first instinct. This plan seems awfully cautious given the situation, and does seem like a bit of fairy clapping (everybody gets something good out of this at the end and we all live happily ever after) but that’s what we’re reduced to, here. We’d have to do a lot of clapping if we nationalized, too.

  215. 215
    gwangung says:

    i voted for mr obama, but now i,m sorry,he sure can talk nice, but he sure as hell can not run a gov.look at his lady from california, whats her name,grace who?her and that dumb ass from vegas, what a pair, and they pass a bill that is more than a thousand pages that no one read

    Why is this utter stupid point making the rounds of right wing nimrods? Have they ever paid ANY attention to law making at any level? Or what it entails????

  216. 216

    […] John Cole, on the other hand, deals in the larger concepts at play here: […]

  217. 217
    TheHatOnMyCat says:

    @tony colucci:

    Again, a reminder that when you can’t tell the spoofs from the stupid idiots, the spoofs win.

    Although really, you are trying way too hard. Try to take down the bad grammar and bad writing act just a notch. If you can’t form a sentence, why would anyone want to listen to you, amirite?

    I mean, is I right (correct)?

  218. 218

    […] ended up with an extra piece. Anyone who thinks I have any idea what I am talking about regarding the financial crisis should keep that in mind. I am clueless and frustrated and just trying to figure things out, which is harder and harder to […]

  219. 219

    […] In condemning Geithner’s "bank rescue" plan, Paul Krugman notes that — yet again — it enables great benefits for the richest investors, with the public protecting them from the risk of losses (privatize gains; socialize losses), and concludes: "The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system."   When it comes to its primary challenge, the administration elected on a platform of "change" is, above all else, viciously devoted to preservation of the status quo.  Read John Cole’s summary of expert reaction to Geithner’s banking plan. […]

  220. 220

    […] Cole breaks down the skinny on Geithner’s plan: The Illness- reckless and irresponsible betting led to huge losses The Diagnosis- Insufficient […]

  221. 221
    mash says:

    @Dennis-SGMM: What does "sound" mean? That’s a bit of a squishy word. If you mean these assets have some unknown market value then yes, I don’t think anyone is arguing that. If "sound" assets means the value held for the asset is the fair market value then I think the next question would be "so what is the problem?" Obviously, these "sound" assets are upside down.

    The objections I hear to the plan are around the mechanism by which the market determines the value. The Obama plan rigs the market in favor of the people who created the whole problem in the first place and puts us all into debt to these people. Its the worst of capitalism married to the worst of socialism.

  222. 222
    Susan says:

    Or maybe you could let the entire financial market system collapse as it really doesn’t mean anything for the real economy.

    After a few more months of these shenanigans, the financial systems WILL collapse.

  223. 223
    cleek says:

    @SBWs:

    praise President Obama for being so wise as to withhold information from us children

    i am all for more transparency in government.

    and you might consider that there may be legal reasons (contracts, non-disclosure agreements, etc) that prevent the government from telling us the details of everything that goes on inside AIG.

    more transparency reveals much more incompetence and criminal actions within the financial industry, with government knowledge.

    that could be. it could also be that the situation inside AIG is so bad that telling the world about it would do the kind of damage Obama’s trying to avoid by propping AIG up. it’s pretty clear that they think AIG is too big to fail, so it shouldn’t be a surprise that they’re taking unusual measures in keeping it alive.

    and it could be a mixture of many things.

  224. 224

    […] (Alex Knapp) Regarding the moral harzard of TARP 2.0, I believe that John Cole has put it best: If this were a medical emergency, it appears it would look something like […]

  225. 225

    […] can the date of separation be traced back to yesterday, March 21, 2009 — a day when John Cole said this: If these guys are right [about Obama’s bank/bad debt plan], this will be the undoing of the Obama […]

  226. 226

    […] I read of the plan over the weekend — the leaked report to the NY Times, various reactions from observers (esp. Krugman) — and the official explanations and reports on Monday (plus another reaction — […]

  227. 227

    […] John Cole of Balloon Juice sums up: “If this were a medical emergency, it appears it would look something like this: […]

Trackbacks & Pingbacks

  1. […] John Cole of Balloon Juice sums up: “If this were a medical emergency, it appears it would look something like this: […]

  2. […] I read of the plan over the weekend — the leaked report to the NY Times, various reactions from observers (esp. Krugman) — and the official explanations and reports on Monday (plus another reaction — […]

  3. […] can the date of separation be traced back to yesterday, March 21, 2009 — a day when John Cole said this: If these guys are right [about Obama’s bank/bad debt plan], this will be the undoing of the Obama […]

  4. […] (Alex Knapp) Regarding the moral harzard of TARP 2.0, I believe that John Cole has put it best: If this were a medical emergency, it appears it would look something like […]

  5. […] Cole breaks down the skinny on Geithner’s plan: The Illness- reckless and irresponsible betting led to huge losses The Diagnosis- Insufficient […]

  6. […] In condemning Geithner’s "bank rescue" plan, Paul Krugman notes that — yet again — it enables great benefits for the richest investors, with the public protecting them from the risk of losses (privatize gains; socialize losses), and concludes: "The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system."   When it comes to its primary challenge, the administration elected on a platform of "change" is, above all else, viciously devoted to preservation of the status quo.  Read John Cole’s summary of expert reaction to Geithner’s banking plan. […]

  7. […] ended up with an extra piece. Anyone who thinks I have any idea what I am talking about regarding the financial crisis should keep that in mind. I am clueless and frustrated and just trying to figure things out, which is harder and harder to […]

  8. […] John Cole, on the other hand, deals in the larger concepts at play here: […]

  9. […] In condemning Geithner’s “bank rescue” plan, Paul Krugman notes that – yet again — it enables great benefits for the richest investors, with the public protecting them from the risk of losses (privatize gains; socialize losses), and concludes: “The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system.”   When it comes to its primary challenge, the administration elected on a platform of ”change” is, above all else, viciously devoted to preservation of the status quo.  Read John Cole’s summary of expert reaction to Geithner’s banking plan. […]

  10. […] Krugman (and a few others) points out, the government since the Henry Paulson plan proposed last Fall has been treating this […]

  11. […] ended up with an extra piece. Anyone who thinks I have any idea what I am talking about regarding the financial crisis should keep that in mind, as I am clueless and frustrated and just trying to figure things out, which is harder and harder […]

  12. Can Somebody Please Take the Damn Economy Away from Geithner?…

    by Damozel | Paulson’s gone, but it’s deja vu all over again? Why is Obama letting this happen? Why won’t he consult people outside his little circle — economists such as, say, Nobel prize-winning economist Paul Krugman? Why? Why? Why? Sadly, there…

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