Paul Krugman: Betting the Bank

What happens if the Fed fails to stabilize financial markets? Paul Krugman says in that case, which looks more and more likely, "The next steps will be up to the politicians":

Betting the Bank, by Paul Krugman, Commentary, NY Times: Four years ago, an academic economist named Ben Bernanke co-authored a technical paper that could have been titled “Things the Federal Reserve Might Try if It’s Desperate” — although that may not have been obvious from its actual title, “Monetary Policy Alternatives at the Zero Bound: An Empirical Investigation.”

Today, the Fed is indeed desperate, and Mr. Bernanke, as its chairman, is putting some of the paper’s suggestions into effect. Unfortunately, however, the Bernanke Fed’s actions — even though they’re unprecedented in their scope — probably won’t be enough to halt the economy’s downward spiral. ...

These days, it’s rare to get through a week without hearing about another financial disaster. Some of this is unavoidable: there’s nothing Mr. Bernanke can or should do to prevent people who bet on ever-rising house prices from losing money. But the Fed is trying to contain the damage from the collapse of the housing bubble, keeping it from causing a deep recession or wrecking financial markets that had nothing to do with housing.

So Mr. Bernanke and his colleagues have been doing the usual thing: printing up green paper and using it to buy bonds. Unfortunately, the policy isn’t having much effect on the things that matter. Interest rates on government bonds are down — but financial chaos has made banks unwilling to take risks, and it’s getting harder, not easier, for businesses to borrow money.

As a result, the Fed’s attempt to avert a recession has almost certainly failed. ... So now the Fed is following one of the options suggested in that 2004 paper, which was about things to do when conventional monetary policy isn’t getting any traction. Instead of following its usual practice of buying only safe U.S. government debt, the Fed announced this week that it would put $400 billion — almost half its available funds — into other stuff, including bonds backed by, yes, home mortgages. The hope is that this will stabilize markets and end the panic.

Officially, the Fed won’t be buying mortgage-backed securities outright: it’s only accepting them as collateral... But it’s definitely taking on some mortgage risk. Is this, to some extent, a bailout for banks? Yes.

Still, that’s not what has me worried. I’m more concerned that despite the extraordinary scale of Mr. Bernanke’s action — to my knowledge, no advanced-country’s central bank has ever exposed itself to this much market risk — the Fed still won’t manage to get a grip on the economy. You see, $400 billion sounds like a lot, but it’s still small compared with the problem.

Indeed, early returns from the credit markets have been disappointing. Indicators of financial stress ... are a little better than they were before the Fed’s announcement — but not much, and things have by no means returned to normal.

What if this initiative fails? I’m sure that Mr. Bernanke and his colleagues are frantically considering other actions that they can take, but there’s only so much the Fed — whose resources are limited, and whose mandate doesn’t extend to rescuing the whole financial system — can do when faced with what looks increasingly like one of history’s great financial crises.

The next steps will be up to the politicians.

I used to think that the major issues facing the next president would be how to get out of Iraq and what to do about health care. At this point, however, I suspect that the biggest problem for the next administration will be figuring out which parts of the financial system to bail out, how to pay the cleanup bills and how to explain what it’s doing to an angry public.

Comments

[bullbust]

Officially, the Fed won’t be buying mortgage-backed securities outright: it’s only accepting them as collateral... But it’s definitely taking on some mortgage risk. Is this, to some extent, a bailout for banks? Yes

What nonchalance! Without any democratic input, the Fed is bailing out the banks. But that's not all a problem.

The problem?
I suspect that the biggest problem for the next administration ... how to pay the cleanup bills and how to explain what it’s doing to an angry public.

Ripping off the public is not the problem, explaining to the public why they are being ripped off, while the execs keep their bonuses and shares, is the problem.

Does this man have any principles now?

[esb]

Paul, you solve the problem when you catch the falling knife, falling prices of residential RE.

The incomming Obama Administration will attempt to do exactly that (and it will succeed) with subsidized lending, property taxes and property insurance for those who have never had a seat at the table and have never had a table at which to sit, the first time buyer. Truly a bottom up methodology, and one that is completely consistent with the core beliefs of the Senator.

It will be extremely expensive, and it will be extremely popular and resisted by very few. Even paine's plutocrats, fearing a dissolution of their wealth, will (somewhat grudgingly) sign on.

On that I will pledge my life, my fortune and my sacred honor.

Well, perhaps not my life.

This will be the first administration in my lifetime where the flow of the benefits truly is directed to those "on the outside, looking in." Frankly, I find it intellectually invigorating.

Ten months left to wait for a restoration of pride in what we are as a people.

Oh, and as for paine's plutocrats, they will find that by helping the invisibles, they will have saved their fortunes.

How 'bout that.

[Oupoot]

Just hike the tax rates for the rich to get them to pay for the clean up bill - it is mostly them that created & benefitted from this big house of cards they build.

[Cyrille]

Gee, I wonder where the idea that Obamania was personality cult came from!

(on a side note, this is a perfect program to help the rich -who already own, and more than one house- while getting the poor to pay -inflated house prices).

[johnchx]

Paul Krugman writes:So Mr. Bernanke and his colleagues have been doing the usual thing: printing up green paper and using it to buy bonds.

Except that he hasn't. Go count the green pieces of paper. I'll wait.

See? The monetary base is almost exactly the same size that it was back in July 2007, just before the crisis began. That is, the Fed has injected -- to a very good approximation -- zero liquidity into the system since July.

[An Interesting Experiment]

FDIC insured domestic deposits, $4 trillion. Outstanding mortgages $12 trillion. There is already a negative $8 trillion mismatch, and we haven't even gotten to business loans, auto loans, credit cards, etc... The zero bound has nothing to do with this particular problem. Decreasing the short rates to 1/2%, and inflation to high single digits, will not solve it.

During the Great Depression, there was plenty of domestic savings, but people were keeping it at home in the form of cash. FDIC restored confidence in bank deposits, and a bit of inflation encouraged people to deposit cash in banks so the interest would maintain purchasing power.

Now, we have completely inadequate domestic savings, a net negative savings rate depleting what little there is, and negative real bank interest rates to further discourage domestic savers from putting money in banks. After this, part of the already inadequate inflation adjust is taxed away.

This has made the US almost completely dependent upon foreign savings. Foreign savings are notoriously quick to move into and out of countries at the drop of a hat. Funding virtually an entire nation's credit on such volatile funds is an interesting experiment. Current policy is designed to further reduce domestic saving, so we may be able to examine this experiment in greater detail as time goes on.

[a]

I'd agree with bullbust here. Krugman seems to think that *of course* we need to bail out the financial system, which is a short way of saying that yet again all of us need to be made poor helping the rich stay rich. Well we don't. The U.S. government should come in to set up new banks to replace the old, and hire the more compentent of the recently-unemployed bankers to run the show.

[James Kroeger]

...the Fed announced this week that it would put $400 billion — almost half its available funds......but there’s only so much the Fed — whose resources are limited...Macroeconomist and monetary policy expert Mark Thoma: Can you confirm that these comments by Paul Krugman are, in fact, true?

In the past I've spoken with two different economists employed by the Federal Reserve who admitted that when the Fed buys bonds---or anything else---there is no account of limited size that is debited in order to process the transaction, that the Fed simply keystrokes the money into existence and notes the moment by crediting its balance sheet with Treasuries that cost a certain amount of money.

Is this true? I think it really matters in pursuing any discussion related to this topic. If it's not too much trouble, could enlighten the Great Unwashed with the Final Answer to this question? Thanks...

[anne]

Understanding a presidential candidate's economic policy proposals is always important, as Paul Krugman repeatedly wrote about in 2000, more important than ever currently. So far there have seemingly been no proposals from Barack Obama on handling the housing-mortgage crisis, and this is surprising and disappointing.

says...

Isn't the problem simply that the banking system is undercapitalized, because the losses, both currently and in the foreseeable future, are so great that they've wiped out the banks' capital?

If so, then the answer must be to find a way to recapitalize the banks, and the real difficulty (which is, yes, political) is that some folks would rather see the entire world financial system implode than countenance the government providing assistance to someone in need, and would prefer to see the government look for bad actors to punish rather than actually solving the problems we face.

(There are bad actors a-plenty, of course, and it would be nice if we could find a way to mete out justice to them in the process, but we'll find it difficult to apply the rod if we can afford to own a rod.)

So here's a modest suggestion: require the banks to recapitalize themselves by year-end, while simultaneously recognizing the real extent of their losses and expected losses (which, in my opinion, are much larger than the amount of write-downs taken so far). If they don't get the capital in, then require them to issue shares to a government-sponsored corporation that is in the business of buying those shares and then eventually selling them to the public in an orderly way. The price would be set according to the government's calculation of the value of the bank's equity after taking into account the losses, and would be in an amount sufficient to recapitalize the bank. The intention is to make the eventual government "bail-out" so unappetizing that the banks will be incented to issue new shares to private investors before they get pushed into the not-so-warm embrace of the new government corporation, even though (again) existing shareholders get massively diluted. I believe it is the avoidance of this dilution, or rather the unwillingness to face up to the need for this dilution, that is preventing the banks from recapitalizing now.

Meanwhile, the public could feel assured that the banks would be getting their houses in order. The reality of the losses would be recognized instead of being put off, and we could then move forward with a banking system that is no longer paralyzed by the need to conserve cash and distrust of their fellow banks' soundness.

One little detail: this plan envisions that private investors have enough capital available to recapitalize the banks. They probably don't have it, today. That's why the other thing we need to do is to embark on a ten-year trillion-dollar spending program to rebuild America's infrastructure, and to pump new money into the economy.

Won't that cause inflation? Yes! And that's a good thing, so long as housing prices continue to fall. The fact that so many homeowners are "upside down" on their mortgages, and that so many are unable to sell their homes for anything like what they paid for them, is a terrible problem in its own right. We need some general inflation throughout the economy so that prices on non-housing items can catch up to the prices of houses. The alternative is stable prices on other things (maybe) while housing prices fall, which will be far more painful, as we re-price the value of various things throughout the economy. Think of it as "hair of the dog" to cure the hangover we're now suffering through, after the 15-year bender we've been on with Goodtime Alan.

[prostratedragon]

I read yesterday at TalkingPointsMemo that there is to be at least one more debate between the Democratic candidates. Perhaps there will be an opportunity to submit questions to them. If so, this would be a good topic.

FWIW Prof. Krugman doesn't sound nonchalant to me. More like "no time for emoting now, dammit!"

[ken melvin]

Wrongs to make rights and messiahs, is this what we've come to?

[dd]

It seems the Fed through the swaps is gathering an inventory of the worst paper and that is good as much of the problem is knowing the situs of the problem paper. It is time to transfer the paper to a Mortgage Trust Resolution Corporation....a government agency empowered to investigate every aspect of the mortgage crisis, work with the FDIC to target insolvent banks, give struggling homeowners priority and work-out solutions to avoid bankruptcy, pursue fraud, sue for recovery and punitive damages and have a special DOJ team to work the criminal end. This is a political solution but if the Working Group proposed it then it would move forward. It was a bit disconcerting that the Working Group didn't even hint at this successful solution (the Resolution Trust Corporation saved banks in the last housing disaster). Paulson's influence must have carried the day and the result was yet another non-proposal proposal.
It's not just the mortgage mess eroding confidence but the stunning lack of leadership and crisis management.

[CathyG]

says -

There are huge market areas in California, to pick just one of the states which are experiencing dramatic downward price adjustments in housing, like Orange County, San Diego County and the Central Valley, where price drops from peak are already at or approaching 20 percent. They will need to drop another 10 to 15 percent, perhaps more, to get in line with median incomes in the area.

It would be immoral to impose enough inflation on the rest of the country with accompanying huge drops in purchasing power to allow prices to catch up. That kind of widespread pain simply won't be countenanced by the public. Why should retirees on fixed incomes and the middle class which has had no meaningful wage increases in three decades, sacrifice the real value of their pensions, what little savings they have, and purchasing power to rescue people who were improvident enough to buy more house than they can afford and to use equity from their homes to fund their lifestyles and other real estate investments? There will be rioting in the streets first.

Right, wrong or indifferent the great American middle class, who have been subjected to ever increasing institutionalized income inequality and financial stress, will resist widespread attempts to use government funds and agencies to bail out banks, brokers, investors and financially less than responsible homeowners who are perceived to be the cause of the crisis. This includes Rep. Frank's plan.

The public can't really imagine the consequences of full economic collapse, but many of us can remember double digit inflation and most of us, including the third of American households whose mortgages are paid off, have senses of justice which would be enormously violated by many of the proposed fixes.

[Andrew]

PK-to my knowledge, no advanced-country’s central bank has ever exposed itself to this much market risk

Nonsense. Recall the genius of the Mississippi Company. Speaking of which, I wonder what John Law is up to these days. Seems to me he could pick up right where he left off 300 years ago.

[dd]

Does this amount to the Fed taking a stake in Bear Stearns as this reads like a private equity funding deal? This isn't unprecedented as Fed took this type of action back in 1987 to funnel money to failing brokers; but it is not a good sign.

JPMorgan, NY Fed to provide Bear Stearns financing
http://www.reuters.com/article/businessNews/idUSN1438968020080314

[hari]

I don't think Paul is telling us all he knows...he still wants Bernake to succeed ...inspite of the uncertainty.
Politicians are the last one's to understand what went wrong. The solution to this crisis is to allow the market to dictate...and find the bottom. Then, and only then, we might get to understand the extend of Feds (own) moral hazard in rate cutting, so far.

[dd]

Speaking of confidence; exactly where is the SEC in this mess?
SEC Abandons Hedge-Fund Probe Tactic After Complaints
"The agency stopped using a 27-page questionnaire, sent to some hedge funds in August, seeking details of ``unethical or possibly illegal'' investments and lists of employees' relatives at brokerages and public companies. The questionnaire, which the U.S. Chamber of Commerce criticized, will be replaced by a letter asking funds to describe systems for preventing misuse of confidential information, SEC official Lori Richards said."
http://www.bloomberg.com/apps/news?pid=20601087&sid=aEHnDyK9iIMA&refer=home

SEC Aims to Let Firms Explain Crunch Thorns
"Just as companies are closing their books on another tumultuous quarter, regulators are working on a plan that would let them tell investors that things may not be as lousy as they seem."
http://online.wsj.com/article/SB120545073858135101.html?mod=hpp_us_whats_news

[Winslow R.]

jhonchx wrote: "See? The monetary base is almost exactly the same size that it was back in July 2007, just before the crisis began. That is, the Fed has injected -- to a very good approximation -- zero liquidity into the system since July."

An important point.

The Fed has adjusted who it buys bonds from, but not the amount of reserves.

Reserves are 'green pieces' of paper held by people or banks. The Fed can 'force' banks to hold more of them but not people.

To change the level of reserves held by people the Fed can lower the rate of interest paid on them to zero so it doesn't matter if a dollar is in your pocket or at the bank.

This may be happening soon.

[dd]

For anyone interested Gillian Tett at the FT does a nice analysis. The FT's outside perspective has been far more informative than Murdoch's WSJ.
Insight: Election drapes ‘bail-out’ in a politically incorrect shade
excerpt:
"Instead, what is really worrying investors, ahead of the release of broker results next week, is the risk that serious capital pressures will emerge at some banks if they are forced to mark their books to (ever falling) market prices. There is also growing concern about the capital position of housing behemoths, such as Fannie Mae and Freddie Mac, as mortgage defaults rise.
Thus the trillion-dollar question haunting the markets is where on earth will the capital to plug these potential gaps come from? Will private sector investors (such as sovereign wealth funds) step to the plate again? Or will the next chapter in this saga entail the US taxpayers footing the bill, through covert or overt means?"
http://www.ft.com/cms/s/c09e9d6a-f123-11dc-a91a-0000779fd2ac.html

[anne]

During the unfolding of the Japanese deflation Paul Krugman wrote freely because the use of and willingness to immediately use fiscal policy to protect the economy always was a cushion for the Japanese. Where most analysts criticized Japanese government spending policy through the eflation, Krugman praised the policy and wondered whether we would so readily use such cushioning spending policy.

During the unfolding crisis in Argentina, Krugman was fart more cautious in public analysis since Argentina was more at risk economically than Japan. Whether Krugman is being cautious now for fear of being at all disruptive, is unclear. I would hope there is no perceived need for such caution.

[save_the_rustbelt]

JP Morgan Chase is trying to prop up Bear Sterns, but my not succeed.

Bush to give optimistic economic speech in NYC today.

Reality has not set in, obviously.

[dd]

"The solution to this crisis is to allow the market to dictate...and find the bottom."

hari, that would turn the "crisis" into a collapse and there would be no market. Regulators got a collapse in 1987 and the market reaction was very similar to 1929's downward spiral. Broker margin calls caused investor collapse and that in turn collapsed the brokers and that in turn threatened their banking creditors. No one wants to re-live that crisis as it threatened the entire financial structure. Does anyone want to revert to money in the mattress and a gun in the bedstand?

[dd]

Actually, STR it is the Fed funneling money to JP Morgan (probably a prime creditor) to funnel to Bear Stearns. Memory is fuzzy but the sequence in 1987 was Fed funneled money to Continental Bank then funneled to its client (think it was Bear Stearns then too; but it was long ago).

[robertdfeinman]

I'm glad Krugman has finally come to his senses and agrees with me (wink!).

I've been saying all along that only congress can fix this mess. I don't know what form the fix will take or if those who will lose the most as the value of money gets adjusted down will be those who caused the problems or those without powerful lobbyists.

It would seem that there are several stakeholder classes.

The working classes with few assets. How they will ultimately fare depends upon how well wages will track inflation. During the 1970's unions still had enough influence that wages didn't lag too far behind inflation. Non-union sectors were forced to match wage increases as well. With little union power this time, the prognosis is unclear.

Middle class homeowners. Eventually housing prices will increase again as population pressure restores demand. For those who can weather the storm they will see their net worth increase (at least nominally). Whether they will be impoverished in old age depends upon their prudence in saving for retirement.

Wealthy asset holders. There will probably be some stories of ruined millionaires, but those will mostly be the nouveau riche who thought the music would never stop. The real monied classes don't gamble with their money, they invest it in relatively secure things like commercial real estate. They also diversify internationally.

Most bailouts in the past have aimed at protecting the interests of the wealthy. That the New Deal also addressed the needs of the working class is what made it so revolutionary. For all the bluster since then we have not seen a repetition of this attitude, that's why the working class has been lagging behind for the past 30+ years. Will a Dem administration be more concerned with the fate of the working class?
The jury is still out.

[bullbust]

save_the_rustbelt:
JP Morgan Chase is trying to prop up Bear Sterns, but my not succeed.

WRONG. WRONG. It's the Fed doing the prop up.

http://biz.yahoo.com/bw/080314/20080314005430.html?.v=1

JPMorgan Chase & Co. (NYSE: JPM - News) announced that, in conjunction with the Federal Reserve Bank of New York, it has agreed to provide secured funding to Bear Stearns, as necessary, for an initial period of up to 28 days. Through its Discount Window, the Fed will provide non-recourse, back-to-back financing to JPMorgan Chase. Accordingly, JPMorgan Chase does not believe this transaction exposes its shareholders to any material risk. JPMorgan Chase is working closely with Bear Stearns on securing permanent financing or other alternatives for the company.
....

Who do you think is at risk fro this non-recourse loan? It's not JP Morgan

If you don't know who the sucker at the table is, it's YOU

[hari]

@ dd -

Don't tell me about Oct 1987!
I lost my total portfolio...
I was driving to Vienna that Fri
night and my broker in Bxl couldn't
reach me at all. I retrieved what I
could next market day...and to boot
I was also managing a family portfolio...
and I was able to rescue it!

Fed is not equipped to manage the long term
problems which are becoming more and morte
manifest now in our forum. That's why I know
Paul is right...but he ain't coming out and
telling all he knows yet.

[johnchx]

James Kroger asks: Can you confirm that these comments by Paul Krugman are, in fact, true?

You're both right. What's confusing is that the Fed's capabilities are asymmetrical: the Fed has an unlimited ability to buy bonds, but a finite ability to sell them. This is because the Fed has unlimited authority to create money (with which to buy bonds), but no authority at all to create bonds. It can only sell (or lend) bonds it has previously purchased.

The strategies Krugman is talking about involve either selling bonds (to offset the liquidity created by the TAF) or lending them (via the new TSLF). Currently, the Fed has about $703 billion in bonds in its "inventory". When those are sold or lent, the Fed is "out of ammo".

(Just in case it's not clear: yes, the Fed can buy Treasury securities -- by creating money -- then sell or lend them; but that doesn't increase the supply of Treasuries in the hands in the public, so it doesn't accomplish the goal. For this to work, the Fed needs to be a net seller of Treasuries.)

[dd]

hari, I was at the SEC; so a different perspective. Sorry about your losses.

[dd]

hari, agreed Fed can not do this alone as this is much bigger than 1987 and much more complicated.

[hari]

@ rdf -

I don't TRUST the politicians to understand this mess which will eventually be claimed to be the making of Fed under Bernake!

And don't be surprised if Fed goes to 1 or even 0 -
at this rate of their internal analysis model output.

Talking about risk and uncertainty of macroeconomic models and econometric analysis (Mark's portfolio!) leaves a lot to be desired...Robert! There's no way you're going to get the politicians with their background/experience to appreciate the impact of the downturn.

I'd rather, at this critical juncture, and based on Paul's analytical summary of the situation in which the Fed finds itself, not summon the politicans to the drawing board. Let the hi fi market find its bottom. There will be loosers and winners, you can be sure.

[esb]

In an entry earlier this week over at econobrowser I indicated that in my opinion BSC was insolvent.

Well, it seems that it is, and the earlier statements of its CEO are clearly not consistent with the facts. Whether they are fradulent misrepresentation s of material facts I will leave to the boys and girls with esq following their names.

Several, in fact many other IBs and MCBs are also insolvent, and I believe that GMAC is as well.

If GMAC enters bankruptcy, I believe that a GM filing will follow almost immediately, as I indicated here on an earlier thread.

And as I said on that thread, "fix that."

The CDS "credit ring" (of counterparty entities) has broken, as SoS Paulson informed the Decider several days ago, and there is simply no good historical antecedent for the event.

I feel no shame whatsoever in simply stating that a clear understanding of the events to come over the next several weeks simply exceeds the capacity of my intellect,

and perhaps that of any observer and/or participant.

[Winslow R.]

"For this to work, the Fed needs to be a net seller of Treasuries.) "

Here is another take from a few years back. I'm not sure if this went anywhere.

"Officials began soliciting comments earlier this year and, in August, said the Treasury would work towards a proposal that would, in effect, make it the market s lender of last resort. Any plan would be aimed at easing strains on the repurchase, or repo, market where securities are borrowed in exchange for cash by issuing extra securities on some occasions when the original supply has become scarce....

A backstop lending facility would turn this on its head: the Treasury would be issuing securities not because it needs money, but because market participants need securities.

The issue has arisen following a number of significant fails which have disrupted the market. A fail occurs when bonds are not delivered or returned as agreed. ...."

http://news.ft.com/cms/s/7bf10bb6-4a4b-11da-b8b1-0000779e2340.html

[johnchx]

The agency with the "ammo" to lean in a meaningful way on the spread between Treasuries and Agencies (and Munis) is not the Fed but the U.S. Treasury. At last count, the Treasury held (in the OASDI "trust funds" and employee retirement funds) about $4.1 trillion in Federal debt. Debt held by the public was about $5.3 trillion.

Shifting, say, $1.0 to $1.3 trillion out of Treasuries and into high-rated Agencies and Munis would increase the global supply of Treasuries in the hands of the public by 20% - 25%, while providing (a) cheap financing for a portion of the national debt (have you seen the interest rates on Treasuries these days?); (b) providing a stable liquid market for high-rated Agencies and Munis; and (c) provide a respectable upside to the Federal "trust funds" (have you seen the effective interest rates on non-Treasuries these days?).

[save_the_rustbelt]

Yes folks, I know the Fed is involved, should have been more precise. Calm down.

Either case, I don't think it works.

CEO of Bear told reporters on Tuesday there were no liquidity problems. Hmmmm.

[save_the_rustbelt]

Bush speech to stream at CNBC site at 11:15 EDT.

[dd]

CEO of Bear is being technically truthful; not a liquidity problem...it's a solvency problem (attempt at humor). In the olden days that would be a material misrepresentation but apparently not under the Cox SEC that is easily swayed by the big bad Chamber of Commerce (see above) and AIG:

AIG urges ‘fair value’ rethink
American International Group is urging regulators to change controversial accounting rules on asset valuations to stem the tide of writedowns that have wreaked havoc on Wall Street."
http://www.ft.com/cms/s/0/1a0328fe-f12d-11dc-a91a-0000779fd2ac.html

[James Kroeger]

...the Fed has an unlimited ability to buy bonds, but a finite ability to sell them...The Fed can always be the lowest price seller of any bonds it possesses if that is what it wants to do. It is only when there are few/no buyers at all that this selling option can fail the Fed. Of course, the only times when the Fed wants to suck money out of the economy with such sales is when the economy is running at full productive capacity and hyperinflation is threatening.

The prescription for right now is to increase the lending and borrowing of money and that is something the Fed can easily do. I am fond of saying that the Fed has the power to maintain interest rates at its target even if all savers across the country were to pull all of their deposits out of the banks in a week's time.

It could do this by simply buying up every sort of debt instrument imaginable in the economy, starting with U.S. Treasuries. If this buying spree were not enough to maintain the interest rate the Fed desires, it could always buy land or buildings or anything else it wishes.

As a matter of fact there is never any reason to fear that the Fed might reach a limit in its ability to pump liquidity into the economy. Of course, in the desperate scenario I've described above, nearly all of the nation's loanable reserves that banks would be lending would be money that no saver ever saved.

[esb]

The BLS work product out today is not a fluke but a fraud, an intentional fraud designed to give "cover" to a runaway central bank determined to generate a "gap event" in the dollar, a gap event which probably will never "fill." It is this impending debacle that is the subject of the conference calls within the IBs this morning, not the BSC debacle.

For the United States of America, this is another event without a good historical antecedent.

[hari]

@ dd -

Explain why SEC has been non-existent under Bush. Was it a deliberate WH directive or what?

[anne]

The Federal Reserve cannot create Treasury securities, so the Fed is limited in debt transfer by the Treasury securities already held or by tranfers in a variety of manners from the Treasury. Robert Rubin exchanged Treasury securities for Latin American debt even against attempts by Congressional Republicans to prevent the exchange; the transactions immediately eased Latin American credit problems and the Treasury was paid in full with interest for the debt during the subsequent recovery.

[John V]

Anne,

Being that one of our few areas of strong agreement is Cuba, I thought you might like this posting.

[dd]

Dollar Rises on Speculation Central Banks to Buy the Currency
"The dollar strengthened from a record low against the euro and gained versus the yen as securities firms speculated central banks will collaborate to support the U.S. currency for the first time in 13 years."
http://www.bloomberg.com/apps/news?pid=20601101&sid=aZWj5TA0nawc&refer=japan

[esb]

Now the (almost) end results of an insanely loose monetary regiem are painfully apparent to all with IQs on the high side of 89 (and to some possessing numbers below).

And what does the intellectual enabler of the Greenspan monetary regime present to us as the global solution to the debacle?

You guessed it, more of the same, in the belief, perhaps, that the only earlier error was in not keeping rates low permanently.

dd, you will have your gap event soon enough, not in Q3 as I had earlier remarked to you.

[johnchx]

James Kroger writes: As a matter of fact there is never any reason to fear that the Fed might reach a limit in its ability to pump liquidity into the economy.

True but completely irrelevant. Go back and re-read Krugman's column until you understand that he does not say that the Fed's ability to create money is limited. It does little good to "disagree" with him when you don't seem to understand what he's saying.

[dd]

hari,
The SEC has been devolving since RR. Was there then and quit because the system changed away from big complex cases to quick hits. Actually there was quite an internal struggle ie the regions versus headquarters. The independent regions lost and our work load was then judged by numbers rather than quality. Attorneys experienced in the long-slog complex investigations and litigation left for greener pastures or happy retirement :)

[dd]

@esb...don't want the gap and hadn't thought it could happen; but your prior post (a week ago?) re your conversation with Chinese official spurred much researching. Brad Sester is really on top of the issue (but I bet you know that).

[anne]

Suppose Robert Rubin was right, and that "a strong dollar is in America's interest." Rubin recited this continually, and the dollar was strong through his term at Treasury and Lawrence Summer's term. I never understood Rubin's thinking, and asked why but the answer was that a strong dollar was a reflection of a strong economy. The answer was circular, especvially as Rubin had intervened in currency markets to foster and keep a strong dollar.

Brad DeLong when I repeated Rubin's answer and asked why a strong dollar policy was in America's interest, answered that Rubin was defending market stability. I wonder though.

[hari]

@ John V -

Thanks for the bit on Cuba!
EU has developed a policy of full engagement/trade
with Cuba, in order to bring it out of isolation.
It's in the interest of Caricom (island-states) that
Cuba is fully integrated into the global system.

I'm looking forward to ending of US blockade under a
new Admin in 2009!

[James Kroeger]

The Federal Reserve cannot create Treasury securities, so the Fed is limited in debt transfer by the Treasury securities already held or by tranfers in a variety of manners from the Treasury.Actually, I'm not aware of any statute that limits the Fed's ability to 'create' debt instruments (call them Federal Reserve Notes) of any kind of maturity it wishes. If it were to do this, it would be able to increase long-term rates any time it wishes. It would simply buy them back whenever it wants to drive those rates down. The People's Bank of China does this with its 'sterilization bonds', does it not?

[anne]

[Thank you, John. The Cuban reference was helpful and kind, especially when there are diplomatic tensions to be aware of from Argentina on north. Laura Bush happens to be in Haiti.]

[Winslow R.]

Financial Times: "A backstop lending facility would turn this on its head: the Treasury would be issuing securities not because it needs money, but because market participants need securities. "

BTW, the Treasury has never 'needed' to issue securities because it needs money.

The Treasury sells treasury securities to 'sterilize' its spending. It does not sell treasury securities in order to spend.

The Treasury manufactures tsy secs out of thin air just as the Fed manufactures reserves. Some economists consider the two forms equivalent.

The main difference:

Reserves pay no interest. Treasury securities do.

There is a movement afoot to remove even that difference.

[hari]

Anne is right in reminding us that Paul was there in Japan and also the Asian meltdown. I recall the mess in KL (Kula Lumpur). He has a lot of data base from which to navigate this policy constraint facing Fed right now. So, we've to take his base line that politicians have to take it over now...without defining the terms of what's required to do.
Nationalization or what?

The Japanese downturn was not only long term but disastrous to the banking industry.

[James Kroeger]

Go back and re-read Krugman's column until you understand that he does not say that the Fed's ability to create money is limited.I'm quite aware that he did not explicitly state this, but he did say/suggest that the Fed's 'resources' are limited. I'll admit that I did hazard a particular guess as to what he meant by 'resources', but your response suggests that you believe I am wrong. Perhaps you would be kind enough to enlighten me, since you apparently understand with clarity just what he was talking about.

Please?

[dd]

More troubles:
Gross, SEC Fail to Break Auction-Rate Bond Paralysis
"Billionaires Bill Gross and Wilbur Ross and the U.S. Securities and Exchange Commission failed to restore confidence in the $330 billion auction-rate bond market, as borrowing costs for states and municipalities rose.
Auctions for borrowers from San Francisco to Houston were unsuccessful even after Gross, who runs the world's biggest bond fund, and Ross, who invests in distressed companies, said they were buying municipal debt to take advantage of rising yields."
snip
"The SEC said it may let borrowers bid on their own auction- rate securities to help end the freeze and avoid breaking laws against market manipulation."
http://www.bloomberg.com/apps/news?pid=20601014&sid=a_hBd2IhbirY&refer=funds

[Patricia Shannon]

It sounds like a huge increase in the national debt.

[dd]

Not just disastrous for banks but for wages too:
Bloomberg March 12:
"Prime Minister Yasuo Fukuda this month asked companies to raise pay for workers, whose wages have fallen about 11 percent in the past decade. He asked Economic and Fiscal Policy Minister Hiroko Ota yesterday to develop measures to shore up the job market and help smaller companies hit by rising costs.
Toyota Motor Corp., Japan's biggest automaker, today said it offered workers an increase of 1,000 yen ($9.70) in monthly pay.
``A thousand yen? That's a black joke. Is that going to buy you a new TV or a new DVD player? I don't think so,'' said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo. ``The cost of living is obviously rising. That means real income is actually dropping.''
http://www.bloomberg.com/apps/news?pid=20601087&sid=aPIxyZzcY9rI&refer=home

[hari]

@ Paine -

Today is 125th birthday of Karl Marx born in Trier, Germany, 1883. There was a commentary on German Radio about the Man and his Life.

[esb]

I am told (and believe) that the debate within the Treasury today is over whether to "just let this damned thing clear" next week (which the markets are now once again set up to do) or to continue to attempt to "walk the damned thing down" one painful step at a time, probably for years to come.

This is a decision ideally matched to the towering intellect of the "Decider."

Perhaps he will instruct that the markets be allowed to clear immediately one painless step at a time.

The problem for Paulson (trader that he is) is that he has invested so much pontificatory hot air in holding the S&P 500 above the -20% print, so as to avoid the "bear market" headlines, that it will be nearly impossible for him to just "let go."

Oh how I kid the Decider and his gang.

They're just the best.

[Winslow R.]

James, most times I agree with you....

In this case you seem to be willing to blur the lines between monetary and fiscal policy.

While it may be interesting to speculate, I don't think 'extreme Fed action' is something that should be advocated. Fiscal policy has failed. That failure has shown the weakness of 'normal Fed action'.

If we allow monetary policy to take over for fiscal policy failure, the damage will continue to grow as monetary policy is not designed to make societal decisions on a microeconomic level.

Real change is required in the microeconomic way we organize our society. Using normal monetary policy to avoid having to make those changes for another 9 months, I find acceptable. But to use extreme monetary policy to avoid needed fiscal change is not in our economy's long-term interest.

The question is will normal monetary policy, at 300 basis point above the zero bound, even buy us 9 more months?

[Patricia Shannon]

CathyG says...

says -

There are huge market areas in California, to pick just one of the states which are experiencing dramatic downward price adjustments in housing, like Orange County, San Diego County and the Central Valley, where price drops from peak are already at or approaching 20 percent. They will need to drop another 10 to 15 percent, perhaps more, to get in line with median incomes in the area.

It would be immoral to impose enough inflation on the rest of the country with accompanying huge drops in purchasing power to allow prices to catch up. That kind of widespread pain simply won't be countenanced by the public. Why should retirees on fixed incomes and the middle class which has had no meaningful wage increases in three decades, sacrifice the real value of their pensions, what little savings they have, and purchasing power to rescue people who were improvident enough to buy more house than they can afford and to use equity from their homes to fund their lifestyles and other real estate investments? There will be rioting in the streets first.

Right, wrong or indifferent the great American middle class, who have been subjected to ever increasing institutionalized income inequality and financial stress, will resist widespread attempts to use government funds and agencies to bail out banks, brokers, investors and financially less than responsible homeowners who are perceived to be the cause of the crisis. This includes Rep. Frank's plan.

Many of the people you castigate for buying more house than they could afford did so because of the lack of housing at prices that they could afford. With rising house prices, and "experts" proclaiming that rising house prices would continue, and the mobility of the population in order to find jobs, I can see why so many people thought it was a good idea to buy a house, even though it was higher-priced than was comfortable for them. I didn't think it was a good idea, but then, I'm a realist, not an optimist.

[dd]

The Decider thinks it's just a little "tough times" and that the all clear has been sounded:
Bush Sees a ‘Tough Time’ on Economy
“Every time, this economy has bounced back better and stronger than before,” Mr. Bush said, showing his optimism about the resiliency of the economy."
snip
“Today’s events are fast moving, but the chairman of the Federal Reserve and the secretary of the Treasury are on top of them and will take the appropriate steps to promote stability in our markets,” Mr. Bush assured his audience.

http://www.nytimes.com/2008/03/14/business/apee-bush.html

[Zoned Out]

"...did so because of the lack of housing at prices that they could afford..."

In the case of CA, this was primarily because of absurd zoning regulations. Now the whole world has to suffer because of the greed of a few local zoning boards for more property taxes.

[dd]

Well found this in UK paper; will search for US reference:
US faces severe recession-NBER's Feldstein
BOCA RATON, Florida, March 14 (Reuters) - The United States is in a recession that could be "substantially more severe" than recent ones, National Bureau of Economic Research President Martin Feldstein said on Friday.
"The situation is very bad, the situation is getting worse, and the risks are that it could get very bad," Feldstein said in a speech at the Futures Industry Association meeting in Boca Raton, Florida.
"There's no doubt that this year and next year are going to be very difficult years."
http://www.guardian.co.uk/feedarticle?id=7384728

[dd]

re: Feldstein
CNBC reference:
http://www.cnbc.com/id/23629967

[esb]

A simle way to think of the CDS event that is about to unfold.

Imagine the IBs and MCBs (and many "industrial" corportions
with large "financing" operations such as GM/GMAC, GE, F/FMCC, CAT and the like) as a row of men(and women) in $2000 suits on a yacht.

Now imagine that row being chained to a piano,

a piano that has just been thrown overboard.

[SGC]

Winslow 8:56 AM

If you are going to quote from an October 2005 newspaper article, you should make it clear that that is what you are doing!

While your quote may well be relevant to the current discussion, it's confusing because it makes it sound as if the Treasury is involved in today's Bear Stearns action, when it is not!

[James Kroeger]

But to use extreme monetary policy to avoid needed fiscal change is not in our economy's long-term interest.I don't disagree with this, Winslow.

I only mention the extremes to highlight the Fed's ultimate power over the supply of money and interest rates. I'd prefer to allow every financially-challenged bank in the country to go bankrupt in order to fully punish those who destroyed the industry. Then Congress should immediately buy all of the assets of the failed banks at fire sale prices, recapitalize them, and incorporate them into a National Bank Of America, owned by the people of the United States.

The risk takers would be punished fully by the economy for their recklessness and there would be no further collapse of the banking industry. To stimulate the economy: Tax and Spend. Tax rich savers and spend the money on Public Investments. Radical monetary policy would not be necessary...

[Callahan]

Go 'head n bet the bank. I'm a bettin that richie rich (gill bates) will git all the H1 visas he's a askin for in congo where they fawn, and coo, and lay praise all over mr rich.

[hari]

On SWFs - Decision by EU Summit (13-14 Mar 2008)
================================================

EU Summit concludes there is need for a common EU approach based on five principles:

*Commitment to an open investment environment;

* Support for ongoing work in the IMF and the OECD;

*Use of national and EU instruments if necessary;

*Respect for EC Treaty Obligations and international commitments;

*proportionality and transparency.

Agrees on the objective of a Voluntary Code of Conduct for SWFs and defining principles for recipient countries at international level.

[hari]

Add - on SWFs ...

Source: EU Commission Info

[dd]

@esb
Any chance the anchor is in shallow water? Maybe JPM/Chase is BS major counterparty on CDS risk and if it "purchases" BS posistions will net out or Fed will make up the difference? The Fed is catching a falling knife; but maybe it can withstand the cuts.

[Jay]

"So Mr. Bernanke and his colleagues have been doing the usual thing: printing up green paper and using it to buy bonds. Unfortunately, the policy isn’t having much effect on the things that matter."

PK hasn't been paying attention to the price of oil, gold, the EURO/$ exchange rate?

[Spectator]

One thing we can't accuse Helicopter Ben of is a lack of transparency. After some wishful thinking on my part about whether he could be serious about printing presses and helicopter drops, I woke up and took some action. The gold I bought has done quite well. Thanks for the transparency.

Only wish I'd been more cynical and bought a lot more.

[don]

'An Interesting Experiment' says we are dependent on foreign lending. I would say rather that Asian central bank lending has forced our trade deficit (and net foreign borrowing), like you stuff a goose to get pate de foie gras. As U.S. demand falls from levels needed to support our own production as well as Asia's, U.S. voters might take a dim view of such artificial currency manipulation. Part of our de-industrialization comes from natural comparative advantage. But part of it comes from deliberate attempts by Asian governments to keep their currencies undervalued. When U.S. capital inflows are the result of high domestic investment demand, all is fine and well. That is the way markets are supposed to work for global efficiency. But our excess spending now appears to be setting us up for a very big problem, sooner or later. Thank heavens we are no longer being fooled into believing that our houses are making us rich enough to support spending beyond our means at current rates. The policy responses to the current slowing of demand (try to boost private borrowing, and if that doesn't work, increase government borrowing) are not long term solutions.

[Lafayette]

Article: ... no advanced-country’s central bank has ever exposed itself to this much market risk

Well, that's a safe bet.

How many CB's are there that potentially could be exposed to such a risk. Only the ECB and risks of this nature aren't about to happen anywhere in the EU.

Not by a long-shot.

[ddt]

U.S. faces severe recession: NBER's Feldstein

http://biz.yahoo.com/rb/080314/usa_economy_feldstein.html?.v=1

[esb]

Funniest thing I heard today (so far)

is

"BSC is like a patient with a flat EEG on a perfusion machine."

I can see BB at the controls, working them, brushing off an assistant who tells him,

"He's dead, Ben. Just let him go."

"Not on my watch he's not" is the reply.

[Lafayette]

Mission Improbable

Article: ... what looks increasingly like one of history’s great financial crises

Well put.

And let's not forget why. We left the Finance Industry to police itself and, in mad pursuit of of the almighty buck, it did a very, very stupid thing. It unlinked debt from the debtor by reselling it. Leaving unpaid debt with only residual realty value (i.e., empty houses for sale).

So, American taxpayers are supposed to not only bail out the industry by accepting risky collateral but the banks will pay back the debt once the economy allows them to offload the property?

OK, so the obvious question is: How risky is the collateral. If housing is a major component of GDP, what should make me think that this backlog will not be ultimately resold. All it takes is for people to borrow money, isn't it?

And they borrow money based upon their salaries, don't they? So, it seems to me that we square the circle by stimulating the economy to create jobs.

And, we do that by old-fashion (but neo-Keynesian) fiscal stimulation -- which means lowering interest rates and increasing government spending.

The former is a forgone conclusion and the latter ... is a bit difficult to do given that the budget is so stretched as it is. Of course, getting the hell out of Iraq and demobilizing the Armed Forces would give it some slack.

So, it is not Mission Impossible. Just Mission Improbable.

[ddt]

"esb says...
Funniest thing I heard today (so far)

is

"BSC is like a patient with a flat EEG on a perfusion machine."

I can see BB at the controls, working them, brushing off an assistant who tells him,

"He's dead, Ben. Just let him go."

"Not on my watch he's not" is the reply."

GW: "Benny, you're doing a heckuva job."

[esb]

Lafayette:

The problem is that there are no more suckers left in the system.

And there are none left outside of the system.

The FMs (or the PMs) in the major world powers will need take decisions this weekend ... to cut the USA loose now and take whatever hits ensue, or to permit the con men to generate another mountain of paper of fictitous value, doing even greater damage to everyone in the future.

This thing is hanging by a slender thread this moment, and my bet is that you will shortly hear the sound of a "snip."

[xfire]

JPMC borrows non-recourse from the Fed and lends it with recourse to BSC .
If BSC fails , JPMC might end up owning BSC.
In effect, JPMC has bought BSC with our money , via the Fed.
What a great country !!!!

[xfire]

Finally, S&P cuts BSC ratings !

See:
http://www.reuters.com/article/marketsNews/idUKN1421183820080314?rpc=44

[save_the_rustbelt]

xfire:

I think JPMC is first in line to buy Bear, so the deal makes some sense - unless you are right and they use our money.

Even that may be better than some of the alternatives, like a stampede after Bear collapses.

Coyote ugly, this is.

[James Killus]

Ah, when the man falls from the building, or perhaps he jumped, one wishes him well, hopes that he hits the awning, or even that the laws of physics will suspend themselves and he will stop in mid-air, hovering, and not hit the pavement.

One does not take pleasure in the coming sound, the awful thud of flesh striking the ground. But had the laws of physics temporarily decided to save the man's life, there would be that clutch in the throat and the sense of the unnatural seeping along the spine. Gravity always works, and we would be fearful if it failed.

So we do not applaud the fail and the crash; we do not enjoy it. But we expect it, as our experience says that it must occur.

It may also be said that there is at least one part of the "angry public" that will demand to know how all of it is Bill Clinton's fault, since he is the only person that they know how to blame. But perhaps they will shift their ire to immigrants, liberals, and Muslims. After all, it has worked so far.

[James Killus]

Oh, I can report one other odd note: I had a brief conversation with my stock broker this morning, and, unprovoked, he went off on a tirade against naked greed. Something strange is afoot when stock brokers rant against greed.

[ddt]

the revulsion seems pretty universal. Head over to dealbreaker if you want to see the reaction of self-described greedy ibankers. It seems that even they have a better sense of ethics than the professional interventionists for whom this is a wet dream come true.

[SGC]

Winslow:

I owe you an apology. This morning I was trying to figure out what was going on and didn't have any time, so I was buzzing through things quickly.

I have now had time to go through the thread properly and it was definitely "My bad" that I didn't pick up the fact that you were quoting an old FT article.

Once again, I apologize. These wild financial events get me kind of worked up.

[robertdfeinman]

As I said originally, this is the key part of Krugman's essay:
The next steps will be up to the politicians.

The only response I got to my noting this so far was by someone who didn't think they were up to the task.

So what are the alternatives? The Fed is shooting blanks, according to some. The big boys should take in on the chin, according to others.

Something will have to be done, even FDR understood that the banking (now finance) system needed to be kept functioning. If not congress then who?

And if congress, then how?

[anne]

http://krugman.blogs.nytimes.com/2008/03/14/evil-in-my-heart/

March 14, 2008

Evil in My Heart
By Paul Krugman

Wow. I’m spending spring break in an undisclosed location, and spent most of the day getting here. So I didn’t know about the Bear Stearns story * until a little while ago.

But when I did learn about it, I also learned that some evil lurks in my heart. I shouldn’t be feeling even a touch of glee over seeing a firm that has been such a major source of really nefarious economic nonsense ** get in trouble.

* http://bloomberg.com/apps/news?pid=20601087&sid=a2GF1oqbNCM0&refer=home

* http://bigpicture.typepad.com/comments/2008/03/malpass-ass.html

[anne]

http://krugman.blogs.nytimes.com/2008/03/14/my-friend-ted/

March 14, 2008

My Friend TED
By Paul Krugman

The TED spread * is the difference between the interest rate banks charge each other on 3-month loans (3-month LIBOR) and the interest rate on 3-month U.S. Treasury bills. It’s a measure of financial jitters. If banks believe that their peers are solid, they should be willing to lend each other money on almost the same terms as money lent to Uncle Sam. When they start demanding a big interest rate premium, that’s a sign of fear.

After dipping a bit — but not enough — on news of the Fed’s new policies, the TED spread has now shot up again in the wake of Bear Stearns. Things are not going well.

Still spreading [Chart]

* http://www.bloomberg.com/apps/quote?ticker=.TEDSP%3AIND

[piglet]

"Today is 125th birthday of Karl Marx born in Trier, Germany, 1883."

How apt then that he wrote about the "ghost of communism" in 1848 ;-) Or maybe not.

Karl Heinrich Marx was born May 5, 1818 in Trier and died March 14, 1883 in London. Thanks for the reminderthough. I'm sure the current woes of capitalism won't insult his reputation.

[anne]

Though, I am completely confident in Ben Bernanke, whose historical studies have been similar to Krugman's. I would wish however a combination of Rubin at Treasury and Bill Clinton as President to make clear how readily Treasury will directly support Fed policy and propose further stimulus. Currency intervention may be useful, such as Japan used last decade. I am thinking here of strengthening the dollar. I find no reasonable stimulus address from Treasury, which may have little leeway from the White House.

[Spectator]

Is there anyone who does not think it's a world of trouble to leave it to the politicians? And the genius with bombastic prescriptions for Japan is suggesting exactly that.

Exposing the moral bankruptcy of the economics establishment may be the one silver lining here. But I realize that's too much to hope for.

[anne]

Enough slandering nonsense, Paul Krugman and Mark Thoma have been pointing to and discussing and analyzing these mounting issues for years.

[SGC]

rdf,

Is there really any concern at this point that the banking system (i.e. deposits and capacity for traditional lending by regional banks) is at risk? It seems to me that the FDIC has prevented this crisis from seriously impacting the lower echelons of the banking system -- at least so far. What we are seeing is a crisis of high finance.

Non-jumbo mortgages have been issued throughout the crisis, though credit standards have tightened -- which is a good thing. As long as the Federal Home Loan Banks keep operating, the mortgage market will probably continue to function.

Despite the serial "crises" we've been seeing (bond insurers, auction rate securities destablizing municipals, fannie and freddie yields), I think the only real problem is the credit default swap (CDS) market and the bond insurers.

According to Accrued Interest, a bond trader, municipals are recovering and there's plenty of retail interest in standard long term munis, so the localities can finance out of their auction rate securities. I'm not convinced the Fannie and Freddie scare is anything but a short term sell off.

And I think we can safely say that the CDS problem is a problem of high finance. "The big boys should take in on the chin." At least, until it becomes clear that their taking it on the chin is going to affect retail banking, I say let them go.

All the current action does is give "the big boys" a little time to work on the CDS problem.

[Bruce Wilder]

rdf: As I said originally, this is the key part of Krugman's essay:

The next steps will be up to the politicians.

The only response I got to my noting this so far was by someone who didn't think they were up to the task.

So what are the alternatives?

Why the collective anonymity of "the politicians"?

George W. Bush and the Lemming Caucus, or, alternatively, 10 months, stand between crisis and effective action. Do you think the Decider-in-Chief is up to the job? Would you trust any sort of massive bailout/institutional restructuring to the man who did such a bang-up job with Iraqi Reconstrution or Katrina Reconstruction?

This is the guy, whose endorsement has proven to be the kiss-of-death to every thing from compassionate conservative faith-based initiatives to a Mission to Mars. Healthy Forests, Clear Skies, No Child Left Behind.

I honestly think it may be time to call a Constitutional Convention, and adopt a Parliamentary system, but as to the current financial crisis, we are not just up the creek without a paddle, we don't have a canoe.

[Bruce Wilder]

SGC: "Is there really any concern at this point that the banking system (i.e. deposits and capacity for traditional lending by regional banks) is at risk?"

Funny you should mention it, but, yes, as a matter of fact, there is. I am feeling too lazy to look up a link for you, but the FDIC warned a few weeks ago that medium-sized banks appeared to be over-invested in commercial real estate and commercial construction. The overinvestment in residential real-estate by a few big players pushed the regionals to overemphasize commercial real estate lending. Commercial real estate does not appear to be as big a bubble on graph paper, but the potential for a recession to expose commercial real estate lending to huge losses is very, very large.

[dd]

anne, believe that is correct. There is no administration leadership. At the same time Bush was saying: "Every time, this economy has bounced back better and stronger than before,” Mr. Bush said; Feldstein was saying: "The situation is very bad, the situation is getting worse, and the risks are that it could get very bad," Feldstein said in a speech at the Futures Industry Association meeting in Boca Raton, Florida. "There's no doubt that this year and next year are going to be very difficult years."
This as the Fed was launching a Bear Stearns bailout and the day after Paulson announced the Working Group proposal. The Fed is doing the best it can with the tools it has; but something must be done about political non-leadership otherwise things will spiral out of control as they did in New Orleans.

[anne]

Though I have closely studied financial history I do not well understand this rippling financial crisis, but my worry is still more of recession and lack of preparation for coping with a recession, even shallow, that is fairly lasting. Another reason to look closely to Japan is to understand how relatively well insulated the Japanese middle class was against deflation and recession from 1995 on.