Paul Krugman: The Face-Slap Theory

Paul Krugman explains the problems financial markets are facing, and why he is doubtful that the Fed's interventions will be enough to prevent further problems:

The Face-Slap Theory, by Paul Krugman, Commentary, NY Times: Friday’s employment report ... was bad news. But it was actually less disturbing than what’s going on in the financial markets. ... To understand the gravity of the situation, you have to know what the Fed did last summer, and again last fall.

As late as August the favorite buzzword of financial officials was “contained”: problems in subprime mortgages, we were assured, wouldn’t spread...

Soon afterward, however, a full-fledged financial panic began. Investors pulled hundreds of billions of dollars out of asset-backed commercial paper, a little-known but important market... This de facto bank run sent shock waves through the financial system.

The Fed responded by rushing money to banks, and markets partially calmed down, for a little while. But by December the panic was back.

Again, the Fed responded by rushing money to banks, this time via a new arrangement called the Term Auction Facility. Again the markets calmed down, for a while.

But again, the respite was only temporary. Last month..., the $300 billion market for auction-rate securities..., suffered the equivalent of a bank run. ... Even Fannie Mae and Freddie Mac, the giant government-sponsored mortgage agencies long regarded as safe places to put your money, are now having trouble attracting funds.

One consequence of the crisis is that while the Fed has been cutting the ... Fed funds rate — the rates that matter most directly to the economy, including rates on mortgages and corporate bonds, have been rising. And that’s sure to worsen the economic downturn.

What’s going on? ... JPMorgan Chase ... described what’s happening as a “systemic margin call,” in which the whole financial system is facing demands to come up with cash it doesn’t have. (A financial joke making the rounds, via the blog Calculated Risk: “Who is this guy Margin that keeps calling me?”)

The Fed’s latest plan ... is — as ... interfluidity.com cruelly but accurately describes it — to turn itself into Wall Street’s pawnbroker. Banks that might have raised cash by selling assets will be encouraged, instead, to borrow money from the Fed, using the assets as collateral. In a worst-case scenario, the Federal Reserve would find itself owning around $200 billion worth of mortgage-backed securities.

Some observers worry that the Fed is taking over the banks’ financial risk. But what worries me more is that the move seems trivial compared with the size of the problem: $200 billion may sound like a lot..., but when you compare it with the size of the markets that are melting down — there are $11 trillion in U.S. mortgages outstanding — it’s a drop in the bucket.

The only way the Fed’s action could work is through the slap-in-the-face effect: by creating a pause in the selling frenzy... And to be fair, that has worked in the past.

But slap-in-the-face only works if the market’s problems are mainly a matter of psychology. And given that the Fed has already slapped the market in the face twice, only to see the financial crisis come roaring back, that’s hard to believe.

The third time could be the charm. But I doubt it. Soon, we’ll probably have to do something real about reducing the risks investors face.

A plan to restore the credibility of municipal bond insurance would be a start... I also suspect that the feds will have to get explicit about guaranteeing the debt of Fannie and Freddie, which really are too big to fail.

Nobody wants to put taxpayers on the hook for the financial industry’s follies; we can all hope that, in the end, a bailout won’t be necessary. But hope is not a plan.

Comments

[save_the_rustbelt]

Carlyle Capital, a unit of the Carlyle Group, is melting down in Europe, apparently it holds, you guessed it, subprimes.

The avalanche is picking up speed.

[Expanded GSE]

I would guess that expanded GSEs will have to guarantee most new mortgages for a long time to come. Foreign savers will not loan money for them otherwise. Even the Fed can't create 12 trillion new dollars for banks to loan to aspiring homeowners. At least not without completely destroying what is left of international credibility in the dollar.

Munis are a thornier issue, since foreign savers don't reap any tax benefits from them.

[Lafayette]

Article: In a worst-case scenario, the Federal Reserve would find itself owning around $200 billion worth of mortgage-backed securities. Some observers worry that the Fed is taking over the banks’ financial risk.

Unless I am wrong, this is what the Japanese did when they were faced with the same sort of crisis that emerged from the property market in the 1990s. They just parked the toxic waste in a some public companies and never touched it. But that is Japan, where the links between the state and business are even tighter than the US.

If there is a panic-in-the-making, why are banks taking hits on their balance sheets and writing of the bad stuff? This is what a company does when it owns up to bad risk it has taken, isn't it?.

Why should this lead into rush on banks, whose balance sheets are nowhere near collapse after the losses are taken? Why are some banks managing the mess by not foreclosing on properties and letting owners finance lower rates?

Why is all the above not working and why should we panic? Any answers Mr. Krugman?

Or should I short banks on my portfolio? Just wondering ... 8^(

[save_the_rustbelt]

Carlyle Capital, a unit of the Carlyle Group, is melting down in Europe, apparently it holds, you guessed it, subprimes.

The avalanche is picking up speed.

[Winslow R.]

Break the bank monopoly that leads to over leverage. Open the TAF to all U.S. citizens. Level access to liquidity creating a real market for debt, not some artificial construct.

No one, especially corporations, should be given preferential access when infinitely scalable technology makes 'microlending' possible.

We don't need banks to make loans to citizens. The TAF could level the playing field.

Banks are cutting off funding new student loans.

Why make a student find a bank willing to lend when TAF access would work just fine and remove the middle man?

Could it be anymore 'wasteful' than the situation we currently have?

[Not Insured]

L..."Why should this lead into rush on banks..."

Only 4 trillion out of 12 trillion in bank assets are FDIC insured. The other 8 trillion is getting nervous. Beyond this, the much larger bond market has few buyers, and the even larger exotic market has completely lost confidence in valuation models. Many people want out, all the way out However, almost no one wants to buy them out, so they can't get out. This puts many into a state of panic.

[Louis Cheung]

It seems to be a vicious circle. The worse is the situation in the credit market, the more fear, and the situation will become even worse. I wonder how much money does the Fed have to put into the market in order to contain the problem. Yes, 200 billion looks a lot, but consider the size of the market, 200 billion isn't that much. Also, what about the risk of accelerating inflation and even weaker dollar if the Fed keeps putting money into the market?

[reason]

I don't understand how you discuss all this without referring to the trade deficit. The problem with trying to reinflate is that it flows out the trade deficit. The real problem (US insolvency) can't be solved by lending the debtor more. Trying to solve the (deleveraging) deflation problem eventually risks hyperinflation. The two are much closer to one another than is realised. The trade deficit picture is the big difference with the situation in Japan in the 90s which was the last run of the financial bubble begets deflation story. The Yen didn't crash.

[reason]

To put it more positively we need a serious effort from G-8 to rebalance international financial flows. The problem has been that the US has inflated the financial sector to try to keep the US economy afloat, and the stimulus has flowed out the trade balance. The US needs to save more and export more and this process (which has started) needs to be strong enough to restore the (wavering) solvency of the US consumer. Internally, the US needs a redistributive budget, single payer health insurance and light inflation (5%?) in order to reduce the indebtedness of the average Joe. A balanced federal budget would help. This is not a liquidity crisis, it is a solvency crisis. It is not as though there was no warning (I've been reading warnings since about 2000).

[Lafayette]

WR: Open the TAF to all U.S. citizens

And what, pray tell, is the TAF? Taxpayers Against Fraud? LSU Tiger Athletic Foundation. Those are what came up on Google ...

C'mon, this blog is international ... please describe an acronym whilst employing it. (Yes, yes, we know US means United States.)

[reason]

Interesting response from Dean Baker

http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=03&year=2008&base_name=face_slap_or_punch_to_the_head

[Lafayette]

A self-fulfilling prophecy

NI: Many people want out, all the way out However, almost no one wants to buy them out, so they can't get out. This puts many into a state of panic.

Which means that, with time, cooler heads should prevail.

Hotheads-who-panic should not have got into this market in the first place. (Or, they should not have put all their eggs in one basket.) It will be a salutary lesson, separating the chaff from the wheat.

And, this is neither the first time nor the last. It simply shows that amateurs are playing a professional game ... and losing. Of course, some will say they never should have believed the valuations. True enough, but valuations have never been a 100% sure thing either. Others will say that cooler heads should have prevailed at the Fed long ago -- and they would be right.

And, I think your assessment is exaggerated. The risk takers want out, they can't get out ... so they jump out a window? Not yet, anyway.

All of this feeds a self-fulfilling prophecy ... that the Conventional Wisdoms says we are headed into a serious recession ... so people pull back on spending. So, we do indeed head into a serious recession.

The Great Financial Failure of 2008 is just unjustified suspicion for the moment. And, I am plainly surprised that a well-considered Princeton professor should want publicly to participate in such conjecture.

[Lafayette]

reason: This is not a liquidity crisis, it is a solvency crisis.

Yes, quite right. And more so, it is a crisis of faith.

It is not as though there was no warning (I've been reading warnings since about 2000).

Cassandra's abound, especially amongst talking heads in the media. "I'm (on TV/in print), therefore I exist!"

It took a particular conjuncture of factors to bake this cake: (1) chronic deficits, (2) a stupid war that broke the camel's back (pun intended) and (3) a criminal fraud in the Credit Markets of massive proportions.

The third of the above was the tipping-point. The holders of risk are beset by the doubt that the US can pay its way out of the debt hole. I suggest that it can and will, with time.

But patience is in short supply. Greed has taken its place.

[Bruce Wilder]

Term Auction Facility (TAF) - The Fed auctions off $50 billion in 28 day money (up from an original $20 billion and then $30 billion), every other week (so $100 billion will be outstanding by the end of March); there's a separate $100 billion in 28 day repo available (for the asking? -- have no idea how that works).

Krugman avoided the jargon, but that's what he's talking about, as far as the Fed intervention is concerned.

[Bruce Wilder]

I was sort of fascinated by Krugman's claim of a universe of very large numbers, so I did a little quick blog research to gather some of these large numbers, to test his hypothesis.

A housing price decline of 30%, which I assume but don't know, means peak (in late 2006) to trough (presumably, 2009 at the earliest) would wipe out .30x20T = $6 trillion. Considering only mortgaged homes, 30% is pretty close to the average equity; roughly 20 million homes would be "underwater". That 20 million includes, I think, the 8.5 million or so homes that are already "underwater" (worth less than their mortgages).

Ten million foreclosures on mortgages with an aggregate nominal value of $3 trillion, at a typical loss of 40%, would mean a loss on mortgage loans of $1.2 trillion.

But, that's a big enough splash to drown Fannie Mae, and maybe even Freddie Mac. But, we are not even close to that eventuality.

At the moment, if I understand the situation correctly, the problem is the de-levering. As various entities collapse, mortgages offered as collateral are coming to the banks, who cannot afford to sell them. Hence, the reference to margin calls. On Friday, JPMorganChase was estimating the margin calls alone would cause the banks losses of $350 billion.

The total equity capital of U.S. banks might on the order of $2 trillion, so a $350 billion loss is not trivial. But, it made me realize that, while the drop in house prices is driving this, much of that drop, and its consequences, remain prospective. The immediate problem is the de-levering, which has been forced by the loss of liquidity, which has followed on the loss of faith in guarantors.

A sensible person would assign a decidedly non-zero probability to a failure by Citigroup or Fannie Mae. In the meantime, the general philosophy appears to be, "trust no one" (except the U.S. Treasury).

I just hope word doesn't get out that Bush is re-reading, My Pet Goat.

[hari]

There is a confluence of Fed policy mistakes by not recognizing (since last Aug rate cut) the magnitude of the mortgage and credit cruch involved in the financial security market, including its impact abroad ( as we know it now).

A dispassionate discourse on policy alternatives would come to the salient conclusion(s)

*Fed allows the downside to correct the contagion.

*Fed tries to avoid a meltdown in the credit market by intervention.

In case of Asian/Latin American States currency meltdown the medicine prescribed by the same policy holders was not to allow state intervention -ie. free market must be allowed to function, and thereby correct the contagion. OK!

My question is WHY Fed is so obsessed with interfering in the free market mechanism? We know invariably the limits of monetary intervention during such a crisis...and frankly who are they trying to bale out?

[ndd]

Fannie and Freddie really are too big to fail, and Joe Taxpayer must step up and empty his wallet on behalf of the speculation that put them in this fix.

Why don't we just sign all of our assets over to Wall Street and get it over with quickly?

Here's a recommendation: since the present Administration will contemplate no restrictions on financial speculation, DO ABSOLUTELY NOTHIING until January 20, 2009.

[anne]

Notice the precise and clear explanation, scary as it is but wonderfully done and complete with a technical argument with Brad DeLong:

http://krugman.blogs.nytimes.com/2008/03/09/why-sterilization-matters/

March 9, 2008

Why Sterilization Matters
By Paul Krugman

Brad DeLong, * commenting on my last post, ** misses the point, I think:

* http://delong.typepad.com/sdj/2008/03/small-financial.html

** http://krugman.blogs.nytimes.com/2008/03/08/whats-ben-doing-very-wonkish/

http://delong.typepad.com/sdj/2008/03/delong-smackdow.html

March 9, 2008

DeLong Smackdown Watch: Effects of Sterilized vs. Non-Sterilized Policy Moves
By Brad DeLong

[ozajh]

s-t-r,

From other blogs, I gathered that the significant factor in the Carlyle Capital implosion was that they did NOT hold subprime.

[anne]

http://www.nytimes.com/2008/03/07/business/07cnd-carlyle.html

March 7, 2008

Carlyle Capital’s Lenders Liquidating Securities
By JULIA WERDIGIER

LONDON — Carlyle Capital, the investment fund linked to the private equity firm Carlyle Group, said Friday that it was “considering all available options” after it received further margin calls, prompting some analysts to warn that more funds could struggle to meet increasingly tighter margin requirements.

The fund, which invests mostly in triple-A rated mortgage debt and whose investors include Carlyle Group managers, issued the statement after some of its lenders called in loans and then liquidated the collateral. Shares in the fund were suspended from trading on the Amsterdam stock exchange on Friday after dropping 58 percent the day before.

Increasing volatility and concern among banks about leverage levels, combined with fear that the global credit crisis could worsen, mean some lenders are asking for more securities as they question the value of even the highest-rated securities. Peloton Partners, a London-based hedge fund set up by some former Goldman Sachs partners, was forced last week to liquidate a $1.8 billion fund that invested in top-rated debt. The fixed-income fund of Kohlberg Kravis Roberts & Company was in talks with lenders last month about delaying some debt repayments.

“This phase has been driven by liquidation, and it raises the question, are others vulnerable, too?” said Vivek Tawadey, a credit analyst at BNP Paribas in London.

The Carlyle fund, which invested about $22 billion in mortgage debt issued by Fannie Mae and Freddie Mac, said on Thursday that it had missed four of seven margin calls worth a total of $37 million and said it expected to receive at least one more default notice.

But the company said Friday that it had subsequently received additional margin calls and was told by its lenders that further calls and “increased collateral requirements would be significant and well in excess of the margin calls it received.” Such additional requirements “could quickly deplete its liquidity and impair its capital,” it said....

[JRip]

The issue is LEVERAGE.

Carlyle Capital had leveraged $670 million in equity 32 times to finance a $21.7 billion portfolio of highly rated mortgage-backed securities

[save_the_rustbelt]

Will check the Carlyle Group more today.

Remember, most of the subprime was "highly rated" when packaged as an investment vehicle - for awhile.

Will look for a more detailed media report.

[save_the_rustbelt]

Found a more detailed report at Forbes.com.

This is even more interesting that a subprime crash, being a margin call on a AAA portfolio (assuming this report is accurate). I should research more carefully when taking cold medicine.

Capital asks for standstill from lenders
03.10.08, 5:11 AM ET

AMSTERDAM, March 10 (Reuters) - Carlyle Capital Corp, an affiliate of private equity firm Carlyle Group, said on Monday it has asked lenders for a standstill agreement as it faces more than $400 million in margin calls.

Dutch-listed Carlyle Capital Corp (CCC), 15 percent owned by the private equity group's managers, said earlier on Monday it was still in talks with its lenders who believe the company is in default under financing agreements.

CCC said its lenders had significantly reduced the amount they were willing to lend against the company's portfolio of U.S. government agency AAA-rated residential mortgage-backed securities due to recent turmoil in that market.

CCC warned on Friday that its cash could run out, and its shares were suspended on Amsterdam's stock exchange after closing at $5, having lost more than half their value.

Regulators said on Monday trade in CCC would resume pending further material information from the company..............

[anne]

What is happening is beyond credit quality, but concerns credit extension as such and an unwillingness to extend credit on significantly leveraged portfolios. Fine quality bonds in a highly leveraged portfolio still have to be carried by continued borrowing, if leverage is considered a risk lending can disappear forcing liquidation of high-quality debt which however cannot cover the amount of portfolio leverage.

I have not found a time in the last several decades of such repeated-persisting credit scares; there was always enough credit avaliable to Japanese financial companies in the 1990s.

says...

"My question is WHY Fed is so obsessed with interfering in the free market mechanism? We know invariably the limits of monetary intervention during such a crisis...and frankly who are they trying to bale out?"

"Do as I say, not as I do"

ughh...........wall st?

[anne]

http://www.federalreserve.gov/newsevents/press/monetary/20071212a.htm

December 12, 2007

Today, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing measures designed to address elevated pressures in short-term funding markets.

Federal Reserve Actions

Actions taken by the Federal Reserve include the establishment of a temporary Term Auction Facility (approved by the Board of Governors of the Federal Reserve System) and the establishment of foreign exchange swap lines with the European Central Bank and the Swiss National Bank (approved by the Federal Open Market Committee).

Under the Term Auction Facility (TAF) program, the Federal Reserve will auction term funds to depository institutions against the wide variety of collateral that can be used to secure loans at the discount window. All depository institutions that are judged to be in generally sound financial condition by their local Reserve Bank and that are eligible to borrow under the primary credit discount window program will be eligible to participate in TAF auctions. All advances must be fully collateralized. By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress....

[anne]

The TAF is designed to allow financial companies to trade assets with the Federal Reserve, so that assets in a portfolio will be considered completely secure by lenders.

[anne]

Warren Buffett, as John Bogle, was wary of and warned of derivatives for years, however in increasing Berkshire Hathaway's catastrophe insurance business Buffett bought a major European insurer which turned out to hold a fair amount of derivatives. Immediately the derivative positions began to be unwound and sold off by Berkshire, but what is important to understand is that it took years for Berkshire to rid itself of the positions even with a financial depth that is beyond almost any other company's.

[Jose Padilla]

"My question is WHY Fed is so obsessed with interfering in the free market mechanism?"

Because it is concerned with a systemic Bank Failure, as in the Great Depression.

[dd]

The private sector's regulatory and tax arbitrage risk shifting/profit producing model has caused tremendous instability throughout the financial system and across asset classes. Confidence can only be restored through swift re-assertion of regulatory authority (not only the Fed; but the SEC, CFTC, OCC); but the political regulatory landscape still touts "market" solutions most probably because the regulators have no ability and little information regarding unregulated opaque instruments and hedge funds. Without reliable information and knowledgeable regulators no meaningful solutions or legislation can be crafted; hence the stream of ineffective stop-gap measures and no doubt there will be many more such proposals.

[Andrew]

Monetary policy is great for slowing down the economy.I recall the learning phrase 'pushing on string' to describe the Fed's tools to help in a recovery. We have been seeing a lot of string pushing lately.

[hari]

If you consider the cumulative figs Bruce Wilder has posited (above) the question which arises is can Fed go on printing money ....without some serious consequence. And, here, I'm mainly thinking about ECB, China and India, oil exporting kingdoms with their dollar fixed asset reserves.

From a text book, like my old Samuelson on Fed governance, may be Mark or someone here should address this policy problem. There must be a limit to how far Fed can go....

Recall German DM notes in 1000 denomination! That was not such along time ago either. The printing press was working overtime to keep the DM in supply!

[dissent]

For anyone following this closely I highly recommend the
'naked capitalism' blog,
http://www.nakedcapitalism.com/

[anne]

http://krugman.blogs.nytimes.com/2008/03/10/in-praise-of-expected-inflation/

March 10, 2008

In Praise of Expected Inflation
By Paul Krugman

Real rates go negative [Chart]

There has been a lot of hand-wringing over the fact that interest rates on some TIPS — Treasury Inflation Protected Securities, which are indexed to consumer prices — have gone negative. It’s said to be a sign that inflation expectations are getting out of control. And it’s true that the implied 5-year rate of inflation has risen a fraction of a percentage point over the past few months.

But I think these worriers are missing the main point: mainly, what we’re seeing is an economic environment so weak that real interest rates need to be negative for a while. Why “need”? Well, the decline in medium-term interest rates could be pronounced excessive if anyone expected lower rates to produce a runaway boom — but nobody expects that. In fact, the question is whether falling rates will even be enough to offset the effects of slumping investment demand and consumer spending.

And given that a negative real interest rate is necessary, we should be thankful that it’s possible. If we had come into this slump with zero expected inflation, we’d be up against the zero lower bound right now. It’s only because we had an inflation buffer that the Fed even has a chance of avoiding a Japan-type trap.

So let us all praise expected inflation. Without it, we’d already be in deep sushi.

[TigerPaw]

Isn't the Carlyle Group or some portion thereof the bunch that Daddy Bush had some of the family silver in? I seem to recall he and others like Baker were involved with them. Perhaps Junior will finally get told to smarten up since now it's their own money involved.

[robertdfeinman]

The current situation seems beyond rational discussion. The facts on the ground aren't known. We don't know which institutions are holding what sorts of assets, we don't know how they are valued nor how liquid they are.

In addition there is no agreement on what sorts of steps governments should take to settle the markets, nor even what the goals of such intervention should be. Are the goals aimed at keeping people in their homes, keeping banks solvent, bailing out hedge funds, boosting employment, fighting inflation or promoting consumption? There is no consensus.

The total incompetence of the present US administration on everything from foreign policy to consumer protection doesn't give one much confidence that they can do any better managing a financial panic. It's all well and good to focus on the Fed, but, ultimately the bailout will fall on congress. They will have to pass some sort of legislation which protects the interest group(s) they wish to favor. I see no leadership or wisdom on that front either.

A few lame ideas about tweaking mortgage rates or repayment schedules aren't going to do it.

As I've said before this is the first truly international crisis since the world went off the gold standard, and I don't think anyone has any ideas of what should be done. Even the definition of money is unclear.

Those who freely offer suggestions on what steps to take are much more self confident than I am; I have no idea what a proper course of action should be, or even how one can protect existing assets.

[Oupoot]

I find this unfolding crisis truly fascinating. It will be analysed for at least the next decade by economists, policy makers, financial analysts, and thousands others, with new models developed to try and explain why the markets reacted the way it did. The repurcussions of whatever actions the various actors take or dont take will be felt for the next 10 to 20 years.

IMHO, the CCC is basically private sector debt default, and the tip of the iceberg. In the free market, an insolvent firm gets liquidated if it cant repay its debts. If the CCC is liquidatd, it would put many of their investors also on the brink of insolvency since the value of the investors' assets/investments would basically disappear. This has already happened with many smaller investment companies, while the larger companies with diversified asset bases are still able to absorb the losses/bad debt through write offs. The spiralling effect this is having will continue until the risk of debt ratio is reestablished. Why should the govt get involved? To stop the rot from getting out of hand - it is worth saving the good assets from firesales. Besides, govt cannot be liquidated. Loans could be rolled over, refinanced, or if the govt is lucky, written down by the debtor. Even the ANC govt in South Africa accepted that it had to repay the debt accumulated by the apartheid govt - it took about 10 years or so.

An obscure example for anyone to do comparisons is the South African debt standstill in 1985/6, where international lenders just simply refused to lend to South Africa and recalled outstanding loans. The impact of the initiatives undertaken by the then govt were still felt 15 to 20 years later.

IMHO, the basic premise for policy makers in the US is to take the long term view about getting the US consumer out of the debt trap. It wont be easy, but for the long term health of the US, a necessary step.

[TigerPaw]

Oupoot - it might be a good idea for US policy makers to take the long view, but I would submit that they are basically incapable of that. For decades they have been trained (programmed?) to only look as far as the next quarter. And moreover they're now focused on the US election date in November. To expect them to look past that is a dream. A quick patch is all that can be expected, particularly by the current bunch. Of course a quick patch will likely make things worse, but they expect that their spin machine will likely enable them to avoid the blame.

Besides to get them to look further into the future they might have to do things that will hurt the masses (and the monied classes), and the masses are also incapable of looking past the football game coming next weekend. They have been brainwashed into believing that all problems in life can be fixed in 30 minutes (well, 22 minutes, leaving out time for commercials).

Boiled down there are no adults at the steering wheel anymore. Only children that insist on constant and instant gratification.

[anne]

Oupoot:

"An obscure example for anyone to do comparisons is the South African debt standstill in 1985/6, where international lenders just simply refused to lend to South Africa and recalled outstanding loans. The impact of the initiatives undertaken by the then govt were still felt 15 to 20 years later."

Please explain further.

[Lafayette]

BW: ... roughly 20 million homes would be "underwater".

The reports I get off of French TV, by economists, is that 3 million homes are going to foreclose this year in the US/ These number variances are unnerving.

Still, it is not the magnitude of the numbers that scare us, but how the mess is managed/non-managed.

By lowering payment rates, the debt holders will avoid the need of foreclosure. That means they repair the damage they have called, make no or little profit from existing loans and put profits off till the economy rebounds in six to nine months (and they get back to profitable lending).

But, foreclosing systematically will put that rebound out even further, stalling any resale of the property. I don't see how that is the better option financially for creditors.

[Bruce Wilder]

L: "Still, it is not the magnitude of the numbers that scare us, but how the mess is managed/non-managed."

Yes. But, bad management is not some recent or incidental phenomenon. It is has been by design. From the beginning.

This is what unopposed class warfare by the rich against the many looks like: crumbling Empire.

[save_the_rustbelt]

Last I heard Daddy Bush was out of Carlyle Group, as was the Bin Laden family.

CG is diversifying (I watch there health care involvement very carefully).

Still some Saudi money in CG I think, hard to tell.

[Lafayette]

BW: But, bad management is not some recent or incidental phenomenon. It is has been by design. From the beginning.

I think this attributes to "them" (the designers) more intelligence than they have.

Electing public leadership is serious business. But, as long as politicians can get to the helm with catch-phrase rhetoric and sound-bite political notions, then don't expect anything like responsible management from them.

The other fact remains that for as long as there is this much money floating about, allegiances will be made between those in power and those who contributed to put them in power.

I cannot imagine that the founding fathers ever thought that half a billion dollars would be spent to elect a PotUS. They'd roll over in their graves if they knew.