Paul Krugman: The 3 A.M. Call

Which of the two candidates should we trust with the economy?:

The 3 A.M. Call, by Paul Krugman, Commentary, NY Times: It’s 3 a.m., a few months into 2009, and the phone in the White House rings. Several big hedge funds are about to fail, says the voice on the line, and there’s likely to be chaos when the market opens. Whom do you trust to take that call?

I’m not being melodramatic. The bailout plan released yesterday is ... better than the proposal Henry Paulson first put out — sufficiently so to be worth passing. But ... it won’t end the crisis. The odds are that the next president will have to deal with some major financial emergencies.

So what do we know about the readiness of the two men most likely to end up taking that call? Well, Barack Obama seems well informed and sensible... Mr. Obama and the Congressional Democrats are surrounded by very knowledgeable, clear-headed advisers, with experienced crisis managers like Paul Volcker and Robert Rubin always close at hand.

Then there’s the frightening Mr. McCain... We’ve known for a long time ... that Mr. McCain doesn’t know much about economics... That wouldn’t matter too much if he had good taste in advisers — but he doesn’t.

Remember, his chief mentor on economics is Phil Gramm, the arch-deregulator, who took special care in his Senate days to prevent oversight of financial derivatives — the very instruments that sank Lehman and A.I.G., and brought the credit markets to the edge of collapse. Mr. Gramm hasn’t had an official role in the McCain campaign since he pronounced America a “nation of whiners,” but he’s still considered a likely choice as Treasury secretary.

And last year, when the McCain campaign announced ... “an impressive collection of economists...” to advise him..., who was prominently featured? Kevin Hassett, the co-author of “Dow 36,000.” Enough said.

Now,... the poor quality of Mr. McCain’s advisers reflects the tattered intellectual state of his party. Has there ever been a more pathetic economic proposal than the suggestion of House Republicans that we ... solve the financial crisis by eliminating capital gains taxes? (Troubled financial institutions, by definition, don’t have capital gains to tax.)...

The real revelation of the last few weeks ... has been just how erratic Mr. McCain’s views on economics are... Thus on Sept. 15 he declared — for at least the 18th time this year — that “the fundamentals of our economy are strong.” This was the day after Lehman failed and Merrill Lynch was taken over, and the financial crisis entered a new, even more dangerous stage.

But three days later he declared that America’s financial markets have become a “casino,” and said that he’d fire the head of the Securities and Exchange Commission — which, by the way, isn’t in the president’s power.

And then he found a new set of villains — Fannie Mae and Freddie Mac... (...Fannie and Freddie ... played little role in causing the crisis...) And he moralistically accused other politicians, including Mr. Obama, of being under Fannie’s and Freddie’s financial influence; it turns out that a firm owned by his own campaign manager was being paid by Freddie until just last month.

Then Mr. Paulson released his plan, and Mr. McCain weighed vehemently into the debate. But he admitted, several days after the Paulson plan was released, that he hadn’t actually read the plan, which was only three pages long.

O.K., I think you get the picture.

The modern economy, it turns out, is a dangerous place — and it’s not the kind of danger you can deal with by talking tough and denouncing evildoers. Does Mr. McCain have the judgment and temperament to deal with that part of the job he seeks?

Comments

[Joe Idaho]

I like McCain. I think he has a strong understanding of the issues, and that he is a strong leader who will lead us towards peace reform and prosperity. Look at how he brought everybody together to find a deal to this crisis. Its a shame the socialist democrat just want to raise taxes and give more to the nonbeliever.

I think Obama cannot be trusted because he is a muslim and a baby killer. Plus, he is an elitist snob who does not respect Christians and will take my guns away from me. We do not need this in Real America. We need to go back to the real value of the Bible and pray and hope to be on Gods side at rapture.

[Walt French]

@Joe_Idaho: Thanks, you absolutely provided that little bit of humor that Paul's piece left out.

[esb]

Joe Idaho:

I believe your daily reading list is far too limited.

Oh, and do you reside in Sandpoint or Bonner's Ferry?

[TigerPaw]

And here I had this crazy idea that issues of import were discussed here, and what's the first comment I see ... pure comedy.

Hilarious!

On a serious note, things like this make it all too clear why things are in the mess they are.

[Betsy L. Angert]

Dearest Mark . . .

Oh my gosh. John Sidney McCain is erratic on economics, the war, and more. Might we merely evaluate the last day or so. John McCain flew into Washington to save the day. What we witnessed was theatre of the absurd. His own advisers realized they must get him out of the District of Columbia before he further destroyed the currency crisis.

Theater of the Absurd. Cast of Characters; McCain Bush

Might we ponder his friendship with former Secretary of State Henry Kissinger. The thirty plus year stable relationship is no more reliable than the rhetoric each of these "esteemed" "statesmen" spew.
Bailouts Blaze; Exuberance Explodes

Do we dare imagine the decisiveness of a Presidential aspirant who chose the "experienced" Governor of Alaska to serve as his running mate?
One-On-One With Sarah Palin

There is so much to consider when we assess the stability not only of the market but the man who hopes to lead the nation, Senator John McCain. Yikes! If we thought the last eight years was bad or feared when months earlier, another Presidential candidate spoke of Economists with disdain . . . John McCain frequently reminds us there is reason to fear. I am infinitely apprehensive when I think of Senator McCain and Sarah Palin in the White House.

Betsy L. Angert

[donna]

It actually scares the crap out of me that there are so many Joe Idahos out there...

Sad, really. Just... sad.

[X Man]

"Which of the two candidates should we trust with the economy?:"

Hmmm: probably not the guy who has Mr. "Dow 36,000" as an advisor. (I'm still waiting for the sequel: "Dow 3600")

For another thing, as a member in good standing of the Eastern Elite, I wouldn't have anything to do with anyone who would have anything to do with Phil Gramm and his wife Mrs. Gramm, who, you may remember, not only played a major role in denutting the CFTC but also was on the audit committee of ENRON's board of directors went it went kablooey. These people should be kept as far as possible from Washington, D.C.

[Bruce Wilder]

I was too bored, or something, to really notice myself, but some commentator noted that in the debate, when asked about the "financial crisis", McCain chose to talk about the "fiscal crisis". In our economically illiterate news Media, it is a common enough mistake -- many editors and reporters probably don't know the difference. But, McCain wasn't just making a vocabulary error; he really did talk about the "fiscal crisis" -- "out-of-control spending" and all that.

But, thinking about it since, McCain's confusion about fiscal v. financial crises seems to grow in significance. McCain really does not have the slightest notion, what he's talking about.

[Jane Idaho]

Dear Betsy:

how dare you insult my Sarah!

You know, the greatest president of the united states of all times, Ronald Reagan, was also very inexperienced and guess what he did? He stopped the cold war!!!

Sarah Palin, with her great values and full on Christian fate, may God be at her side, the president of Iran, Ahmedinadjan, will finally meet his match! No more pantsies from the UN and wussies from France, what we need is a hockey mom that will sign the bill (using her lipstick) authorizing force to finally liberate the world from this tyran! Go Sarah! I love you!

[Bruce Wilder]

PK: "Barack Obama seems well informed and sensible"

I hope that wasn't so hard for Paul.

[Petter]

Has pk ever given a Rep. any credit for anything? Where is the grown up?

[reader X]

Petter:

There are plenty of things to be given to the Republicans after the last decade. But a more accurate term than "credit" is is "blame."

Hope that helps.

[Dunc]

...trip trap trip trap over the rickety wooden bridge etc...

[prostratedragon]

But, thinking about it since, McCain's confusion about fiscal v. financial crises seems to grow in significance. McCain really does not have the slightest notion, what he's talking about.

Sounds to me like he knows exactly when to change the subject. (See other comments on the culpability of his circle.)

[Andrew Hartman]

I think Krugman is probably right about McCain. But, in the spirit of fairness:

1) Didn't Clinton sign the bills dismantling Glass-Steagal
and putting swap contracts off the table for reglation? Did both bills have veto proof majorities?

2) Isn't it time we stop lionizing Robert Rubin? Wasn't he at
the top of Citicorp during the bad mortgage bubble? Didn't he
admit that he didn't know that RMB's could be put back to Citi's balance sheet?

3)A lot of the problem has been caused by the inability
of bank's to determine their net worth. Didn't Fannie and
Howell Raines give us an excellent preliminary lesson in
such mysteries years ago? How much bonus should
Raines and Jamie Gorelick give back?

Just asking.

[BJ Feng]

I guess the crisis is over for Krugman, it's back to politics as usual.

McCain artfully turned the question into a line of attack that Obama had absolutely no defense for. Come now, Obama was demolished in that debate, none of the commentators thought he won. We all know if the fight were close, the leftists would immediately proclaim victory, the fact that they had to fall back on the "a loss is a win" mantra, since the debate was on foreign policy, shows how badly Obama did.

The fact is it is up to Congress to write legislation and authorize regulation. The president's biggest contribution is his power to nominate the Treasury Secretary and FED Chairman. Bernanke and Paulson were both regarded as top A-list level candidates, I don't think Bush could have picked better.

I suggest everyone go back and review Bernanke's Congressional appearances before this crisis began. He was routinely grilled by Democrats who were angry at his decision to raise interest rates. They wanted him to lower rates to "help the poor", which would have prolonged and expanded the bubble.

McCain's debate performance was brilliant, he made specific criticisms knowing that Obama simply cannot do well outside of broad platitudes. Get Obama to address specifics and he stumbles and backtracks, he would tell Russia that their invasion of Georgia is unacceptable, yet he wants warmer relations with Russia. Humm, does Obama understand foreign relations? I suppose a less than one term Senator can't be expected to know much about how foreign policy works in reality. Yes in theory we can stand up against aggression, yet be friendly with everyone, convincing them of the error of their ways through a dialogue of mutual respect and cooperation. In reality, platitudes don't work, Russia has its own interests in mind and won't be budged by a feel-good speech.

[Bill Jefferys]

@BJ Feng: Well, I don't know if you only listen to Fox, but commentators on other media felt generally that Obama did pretty well.

By the way, your typepad account has been suspended for lack of payment. You might want to do something about that.

[paine]

OH GOD

the air pirate
might put us into .... a financial death spiral

if this past weekend proves anything
it proves one thing for sure:

strip off the fig leafs
and some chunk or other
of wall street ( like king kanute)
rules
the economic waves

regardless of white house mind sets
and the qualified unqualified majority "will"
of the amerikan weeble-ry

[paine]

"the leftists" bj ???

to u
the left starts at your mail box

"budge russia "

how brown cow ???

double uncle's nuke /anti nuke budget ???

[paine]

"Where is the grown up? "

those fond of
the collection of stale beer mugs
we call grown ups

oughta be ground up

[paine]

"These people should be kept as far as possible from Washington, D.C."

elite speak ???

i doubt it

my guess they're muttering

"bring em on "

[Lafayette]

Krugman: Does Mr. McCain have the judgment and temperament to deal with that part of the job he seeks?

Does he have the attention span necessary? That is the question that would worry me the most.

Reminds me of an Air Force Jock:
Fire!!!
Aim!
Ready!

[paine]

the orange county shiny suit rubes
reagan brought to town
mingled very well
with
the ivy elite

look who "done well" from that revolution

the nouveau riche lower right
is royalist
by aspiration
if not pedigree

[Lafayette]

BJF: McCain's debate performance was brilliant, he made specific criticisms knowing that Obama simply cannot do well outside of broad platitudes.

It's really kinda nice to have people like you around the forum ... for comic relief.

[paine]

laff
"attention span "

didn't reagans reign teach u anything ???

[paine]

two edged sword line of the day:

"It's really kinda nice to have people like you around the forum ... for comic relief"

[anne]

Thanks to Ken:

http://online.barrons.com/article/SB122246748703380411.html?mod=googlenews_barrons

September 29, 2008

Making A Mint
By JONATHAN R. LAING

Despite the public outcry over the bailout bill, taxpayers and the Treasury are likely to come out ahead.

[What is not clear though is how distressed debt is to be valued.]

[anne]

http://krugman.blogs.nytimes.com/2008/09/29/not-so-good-morning/

September 29, 2008

Not So Good Morning
By Paul Krugman

As of now, markets are not reassured. Three-month LIBOR at 3.88 percent, 3-month Treasuries at 0.75 percent (and one-month at only 0.16), hence TED spread at 3.1, the equivalent of a 105-degree fever.

All this shows that the flight to safety continues unabated.

We may be back to the drawing board very soon …

[anne]

http://krugman.blogs.nytimes.com/2008/09/29/21st-century-prewar-crises/

September 29, 2008

21st Century Prewar Crises
By Paul Krugman

In Manhattan, at 85th Street and West End Ave., there's an apartment building going up; the sign advertises "21st century prewar living!" which only makes sense if you spend a lot of time in New York. But I found myself thinking about that sign when reading this terrific WSJ article * about how the fall of Lehman triggered global panic.

One lesson of the article is that Paulson screwed up very badly by letting Lehman fail; it's not clear where Bernanke stood, but it seems clear that Tim Geithner of the NY Fed was on the other side.

What the article really adds, though, is the details of the chain reaction that did the damage.(More for the mixed metaphor bin: we already knew that the financial markets have melted down into a freezing crunchy squeeze, but now we know that it was a chain reaction that did it.) There's a great graphic in the print edition, which doesn't seem to be online: Lehman's fall led to (1) a run on money market funds, causing commercial paper rates to soar (2) soaring rates on credit default swaps, driving AIG over the edge and sending LIBOR sky-high.

All in all, it's the story of a massive run on the shadow banking system, the modern analogue of 1931 — a 21st-century prewar crisis.

* http://online.wsj.com/article/SB122266132599384845.html

[dd]

Goldman, Merrill Collect Billions After Fed's AIG Bailout Loans
As much as $37 billion from federal bailout loans to American International Group Inc. has gone to investment banks including Goldman Sachs Group Inc., the firm Treasury Secretary Henry Paulson used to run.
Without the government money, Goldman, Merrill Lynch & Co., Morgan Stanley, Deutsche Bank AG and other firms could have become some of the biggest creditors in a bankruptcy filing by AIG, the world's largest insurer, because of its billions in losses on subprime bonds and corporate debt.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aTzTYtlNHSG8&refer=home

[Patrick]

"the nouveau riche lower right
is royalist
by aspiration
if not pedigree"

In the transformation of Republican to Robber Baron, titles are awarded by force not by birthright. All in the pursuit of life, liberty and happiness, of course.

[dd]

Favorite factoid:
``Mark-to-market losses from mortgage-related investments and swap exposures have placed significant pressure on AIG's ability to access capital and liquidity,'' the report said.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aTzTYtlNHSG8&refer=home

At least there is some reporting on the swap exposure and the whole nuance of "mortgage-related" as in all debt is now "mortgage-related" by virtue of CDOs, swaps and CDS.

[Jennifer]

No more pantsies from the UN....what's a Pantsie??? I want to know!!!

[Sandpoint or Bonner's Ferry?]

I have actually spent some time in Sandpoint and Bonner's Ferry. They are remote towns up near the Canadian border. Not very prosperous. The biggest local industry is the railroad that runs up into Canada and is very heavily used (train traffic is almost continuous).

People work for a living in these towns doing something useful. They don't trade pieces of electronic paper for 7/8/9 digit bonuses and homes in the Hamptons. When the "profits" turn out to be phoney they don't get $700 billion handouts from Washington.

America needs a lot more places where people really work for a living and fewer places like New York, Washington, or Hyde Park.

[anne]

The response of bond investors to the rescue plan is discouraging, we have Treasury interest rates that parallel those in Japan during the deflation but there is no deflation here and now. I have no record of so defensive bond investors, though I am not sure enough of the experience during the 1930s. Still, there was deflation during the early years of the 1930s.

[anne]

Jennifer:

"No more pantsies from the UN....what's a Pantsie???"

The comment was incomprehensible and a means of striking at the false comment on Obama, but it is interesting and predictable that a disparaging false comment about Obama should elicit a disparaging false comment about the Governor of Alaska.

[paine]

btw

great post sequence here mark

thanx

[anne]

http://www.nytimes.com/2008/09/30/business/30bank.html?ref=business&pagewanted=print

September 30, 2008

Citigroup Buys Banking Operations of Wachovia
By ERIC DASH and ANDREW ROSS SORKIN

The sale would further concentrate Americans’ bank deposits in the hands of just three banks: Bank of America, JPMorgan Chase and Citigroup.

[anne]

http://www.nytimes.com/2008/09/30/business/30fortis.html?ref=business&pagewanted=print

September 30, 2008

European Regulators Move Swiftly to Rescue Lenders
By MATTHEW SALTMARSH and LANDON THOMAS Jr.

Regulators in Britain and Belgium engineered emergency rescues of two leading banks with heavy exposure to soured mortgages. Hypo Real Estate, a German property lender, said that it had secured a multibillion-euro line of credit.

[SRC]

Dow 36000

Ah, yes. Stocks are as safe as bonds. Or as unsafe.

[Bruce Wilder]

anne: "All this shows that the flight to safety continues unabated."

Everyone is worried about the hedge funds on Tuesday, and the possibility of a non-bank bank run that brings the house of cards down around our heads.

[anne]

http://krugman.blogs.nytimes.com/2008/09/29/bailout-questions-answered/

September 29, 2008

Bailout Questions Answered
By Paul Krugman

I’m being asked two big questions about this thing: (1) Was it really necessary? (2) Shouldn’t Dems have tossed the whole Paulson approach out the window and done something completely different?

On (1), the answer is yes. It’s true that some parts of the real economy are doing OK even in the face of financial disruption; big companies can still sell bonds (and have lots of cash on hand), qualifying home buyers can still get Fannie-Freddie mortgages, and so on. But commercial paper, which is important to a lot of businesses, is in trouble, and I’m hearing anecdotes about reduced credit lines causing smaller businesses to pull back. Plus there’s a serious chance of a run on the hedge funds, which could make things a lot worse. With the economy already looking like it’s headed into a serious recession by any definition, the risks of doing nothing look too high.

It’s true that we might be able to stagger through with more case-by-case rescues — I think of this as the “two, three, many AIGs” strategy; in fact, we might not be at this point if Paulson hadn’t decided to make an example of Lehman. But right now it’s not even clear who to rescue, and the credit markets are freezing up as you read this (1-month t-bill at 0.04 %, TED spread at 3.5)

On (2), the call is tougher. But putting myself in Barney Frank or Nancy Pelosi’s shoes, I’d look at it this way: the Democrats could start over, with a bailout plan that is, say, centered on purchases of preferred stock and takeovers of failing firms — basically, a plan clearly focused on recapitalizing the financial sector, with nationalization where necessary. That’s what the plan should have looked like. *

Maybe such a plan would have passed Congress; and maybe, just maybe Bush would have signed on; Paulson is certainly desperate for a deal.

But such a plan would have had next to no Republican votes — and the Republicans would have demagogued against it full tilt. And the Democratic leadership cannot, cannot, be seen to have sole ownership of this stuff.

So that, I think, is why it had to be done this way. I don’t like it, and I don’t like the plan, but I see the constraints under which Dodd, Frank, Pelosi, and Reid were operating.

* http://krugman.blogs.nytimes.com/2008/09/28/the-good-the-bad-and-the-ugly/

[anne]

The problem however is that Democrats have acted as though Republicans were dictating what they could do in terms of legislation, successful or unsuccessful, for several years as a minority and even as a majority. Democrats have repeatedly ignored legislative proposals even from prime voices in the Part, and failed to keep promises made on legislation, so that Republicans have been assured from the beginning of a Democratic compromise position that could be further compromised.

Hillary Clinton was proposing a legislative response to the mortgage crisis a year ago, but the response was either ignored by the Congressional majority or, more unfortunately, ridiculed by supporters of Barack Obama making a Democratic response months ago impossible. I know of no reasonable suggestion made by Austan Goolsbee or the like advisers.

[anne]

What is unclear is whether there are significant losses in non-financial company captive hedge funds. The managed endowment funds at Harvard and Yale have fared well through these months, as have a number of the saving-richest corporation, so it is not clear that independent hedge funds are faring poorly and dangerously frightening investors.

We just do not know about hedge funds and therein is a transparency problem that has been ignored for years through a time of explosive growth. John Bogle, as usual, has complained about minimal hedge fund transparency for years.

[ddt]

If this gets voted down by the house republicans (I'm watching CSPAN right now, and it looks like there is serious opposition from the house republicans) Democrats should immediately start to push for a Swedish approach:

Matt Yglesias -

"surveying the scene I’m seeing hundreds — hundreds — of perfectly sober-minded economists who simply don’t think that this is a good idea. At the same time, I’m seeing tons of sober-minded experts who believe that Sweden, when faced with an analogous situation, came up with the solution of temporary nationalization of the relevant institutions and that we ought to go for a Sweden-modeled solution. I haven’t heard Hank Paulson, Ben Bernanke, or anyone else even begin to offer me a persuasive argument that their model is better than the Swedish model. At the same time, their model is more friendly to the financial interests of Wall Street players. So opposing the Paulson Plan on the grounds that we need a Swedish Plan isn’t an example of wanting to harm the overall economy for the sake of spiting Wall Street; rather, preferring the Paulson Plan is an example of wanting to harm the overall economy for the sake of being more generous to Wall Street."

http://yglesias.thinkprogress.org/archives/2008/09/i_know_that_you_want_the_candy.php

Brad Delong:

"There are three options:

Do nothing.
Bailout (a la Paulson)
Nationalization (a la Sweden 1992)
Do nothing was last tried in 1929-1932. The result was called the Great Depression. Let's not do that again. Let's decide between bailout and nationalization.

Nationalization has the best chance of avoiding large losses and possibly even making money for the taxpayer. And it is the best way to deal with the moral hazard problem."

"I'm with the DeLong plan!!!!!!"
Posted by: Dean Baker"

"The only market we have right now is the market of ideas. It's about confidence, and I have confidence in Brad. Let's put it out there."
Posted by: Thomas Frank

http://delong.typepad.com/sdj/2008/09/time-not-for-a.html

Steve Waldman - Real Capitalists Nationalize:

"There's a beautiful irony here. The superficially private-sector-friendly Paulson Plan is likely to entail socializing losses and undermining the incentives that give capitalism its efficacy and its legitimacy. Outright nationalization, on the other hand, may look like a Commie statist plot, but strengthens the "invisible hand" in the long run, as long as the nationalization is temporary."

http://www.interfluidity.com/posts/1222502979.shtml

Paul Krugman:

"Brad DeLong says that Swedish-style temporary nationalization is the right answer to a financial crisis; he’s right. I haven’t been clear enough about this, it seems, but it’s where my basic diagnosis leads: the problem is insufficient capital, you want to inject capital, but you don’t want it to be a windfall to existing stockholders — hence, take over and recapitalize the failing firms. By the way, that’s what we did with AIG 10 years days ago."

http://krugman.blogs.nytimes.com/2008/09/28/the-good-the-bad-and-the-ugly/

Nouriel Roubini -

In the Scandinavian banking crises (Sweden, Norway, Finland) that are a model of how a banking crisis should be resolved there was not government purchase of bad assets; most of the recapitalization occurred through various injections of public capital in the banking system. Purchase of toxic assets instead – in most cases in which it was used – made the fiscal cost of the crisis much higher and expensive (as in Japan and Mexico).

http://www.rgemonitor.com/roubini-monitor/253783/is_purchasing_700_billion_of_toxic_assets_the_best_way_to_recapitalize_the_financial_system_no_it_is_rather_a_disgrace_and_rip-off_benefitting_only_the_shareholders_and_unsecured_creditors_of_banks

[anne]

Though I have been trained in reading the bond market, I do not know how to read this market and am less worried about how the shortest term money is being invested than in how longer term money is going to Treasuries as though with no sense of there being prospective selling for better investments in weeks or months.

[Bruce Wilder]

The liberal Democrats in Congress have never had the votes. The Democratic Blue Dogs have always been available to the Republicans. Hillary Clinton, as Queen of the DLC, was one of the Blue Dogs, and has been as much a part of the problem, as any of them. Her campaign promises on mortgages were just demagoguery. But, even more liberal Democrats have lacked imagination and a willingness to confront the full scope of the problem, or to confront the Republicans on their demands. All fear the plutocracy, and for good reason.

I think Paul Krugman mis-reads the politics on this. On politics, he's a moron, so when he says he understands the political constraints on the Democrats, you can be sure something is askew. Digby at Hullabaloo, whose political acumen and understanding of political theatre is second to none, is seriously worried:The Republicans have already set themselves up as the scourges of Wall Street and Washington perfidy, (as if they haven't been furiously servicing their Big Money bosses for the past decade like cheap, two dollar whores.) They will get some gold plated pitchforks and immediately begin running against the big spending liberals and their rich friends.

And after this week, it's going to be much easier for them to make that case. Even if it passes, it's clear that it will happen with at least a fairly large number of Republicans voting against it. (It still remains to be seen if McCain will find a way to vote against it. He's a gambler, and he may just go all in... )

The argument over this bailout is going to be with us for a long time to come and unless Democrats play this right, they are going to wind up holding the bag. The "populist Republican" meme is alredy out there and starting to take hold. They've bet on this economy getting very bad and being able to blame the hated Bush and Clinton for causing it and then blame the Democrats for throwing money at the problem and failing to solve it.

Why would the Democrats let them do that?

Right now I'm watching Pelosi and Reid, Frank and Dodd stand there all by themselves taking "credit" for this bill. They are handing out plaudits to all the others who "helped" them get it done like members of "the Hills" at the MTV awards.

The optics are all wrong. If they really feel they have to do this thing each one of them should have a Republican under each arm every time they make an announcement.

[anne]

http://krugman.blogs.nytimes.com/2008/09/29/not-so-good-morning/

September 29, 2008

Not So Good Morning
By Paul Krugman

Went out for my morning constitutional, and on return things look even grimmer. 1-month T-bill at .05, 3-month at .36. Panic on the Street.

[I do not understand.]

[I]

McCain needs another game changer. Sarah's for the women vote. He needs to appoint Ron Paul as his economy czar to gain the rest of the vote. Wanna bet this maverick does it?

[anne]

"The Democratic Blue Dogs have always been available to the Republicans. Hillary Clinton, as Queen of the DLC, was one of the Blue Dogs, and has been as much a part of the problem, as any of them. Her campaign promises on mortgages were just demagoguery."

Noticed the way is which a woman is insulted and falsely insulted at that since Clinton was calling attention to the developing mortgage crisis, especially early on in African American communities, and suggesting direct assistance to households needlessly long having been sold the most expensive mortgages. There was Clinton responding to Jesse Jackson among other community activists who were noticing the problems in African American households.

[paine]

"The sale would further concentrate Americans’ bank deposits in the hands of just three banks: Bank of America, JPMorgan Chase and Citigroup'
in and of itself no big whooop
so long as alternatives remain legal

i say this fully aware of
the neo populist small is beautiful
bruce w conjecture :
small credit orgs out perform big ones

[Bruce Wilder]

Do you know what the DLC is? Do you know what they stand for?

[James Kroeger]

Anyone care to debate with Dean Baker?That is a very frightening scenario, but this is not where things end. The Federal Reserve Board would surely step in and take over the major money center banks so that the system of payments would begin functioning again. The Fed was prepared to take over the major banks back in the 80s when bad debt to developing countries threatened to make them insolvent. It is inconceivable that it has not made similar preparations in the current crisis.

In other words, the worst case scenario is that we have an extremely scary day in which the markets freeze for a few hours. Then the Fed steps in and takes over the major banks. The system of payments continues to operate exactly as before, but the bank executives are out of their jobs and the bank shareholders have likely lost most of their money. In other words, the banks have a gun pointed to their heads and are threatening to pull the trigger unless we hand them $700 billion.

If we are not worried about this worst case scenario (to be clear, I wouldn't want to see it), then why should we do the bailout?Finally a 'Democrat Economist' worthy of the title.

[paine]

folks cut out the sweden bit

sweden is a midget
more like a polite affluent rogue state here

not the hub of the whole maghilla

[outsider]

outsider says...

Who at 3:00 a.m?

http://airamerica.com/ringoffire/blog/2008/sep/22/rfk-jr-and-pap-your -vote-safe

the HAVA act, summarized. Most interesting is "the perfect match" requirement, and a COLOR copy of State i.D. required with an absentee ballot.

These requirements seem to single out new (younger) voters who like to work remotely, and immigrants with differing spellings on documents...all most likely Democrats.

Vote
in person
don't vote early
vote paper if possible
valid I.D.
if absentee, COLOR copy of current license

[paine]

"In other words, the banks have a gun pointed to their heads and are threatening to pull the trigger unless we hand them $700 billion."

nice line indeed

but dean forgets
last time i looked...that's our head to
forget the DLC

the corporate front is broader then that

btw it is a very odd turn
to call for temporary nationalization
after scolding those about to socializes the loses
created by the blow back
from the great games that privatized the gains

saving corporate capitalism
by letting it hide out
from the enraged mob
disguised as socialism

[Zeus Y.]

The proposed 700 billion dollar bailout cannot really “work” from a system level. I know it’s real intention is to cover the butts of Wall Street investors, but you have the same problem in macro that homeowners have in micro. Nobody knows what homes are worth right now, so buyers are sitting it out. It isn’t about restricted credit (even though that is a factor). It isn’t about being too cash strapped to make a down payment (though that too is a factor). It’s about not wanting to be suckered into buying something that may still be overpriced. All the fundamentals indicate that houses have quite a bit further to dip to reach the historical mean, so that hesitation is perfectly well-founded.
Now Paulson wants to put up 700 billion dollars in sucker money to keep propping up assets that have no discernible value, and gall upon gall, is openly talking about his banking pals getting fees for managing the government’s purchase and management using this money. (These people never quit. It’s really mentally sick.) It is almost unbelievable how much these blind rats do not get it. You cannot have a financial SYSTEM that works like this, where certain people through byzantine humbuggery extract all the capital in a system for their own profit and leave nothing to others. Money needs to circulate. That’s why having a huge middle class in democratic economies is so successful and wealthy inequality is so damaging.

[anne]

Paine:

saving corporate capitalism
by letting it hide out
from the enraged mob
disguised as socialism

[Please be clearer in or develop further this particular argument.]

[Lafayette]

Coalescence

BW: But, even more liberal Democrats have lacked imagination and a willingness to confront the full scope of the problem, or to confront the Republicans on their demands.

This may be true, but what can one expect from the opposition party.

It will take a Dem PotUS to coalesce the progressive forces in Congress around a "Vision Thing", that is, a concrete set of programs that places focus on jobs and economic fairness.

And, there is much to be done in a country in which the mentality is, quite possibly, still anchored in a fear of another 9/11 -- when in fact the world is coming down around them because of Wall Street stupidity. So, go figure ...

Though the Dems may get a president in November, that fellow still needs a solid Congress behind him. Such is not all that obvious.

As for the Clintons, you may be right again. But their tenure on the political scene has always been directed by their innate ability to sniff the prevailing political winds. They will come around. The only political alternative to being "seen on the scene" is ... oblivion.

Neither will ever accept such a fate worse than death.

[paine]

anne
i beg u
please
don't find a gender motive under every rock

bruce lie myself can well claim
st hill might have been playing politics
last winter over the mortgage default crisis

promises you can never be forced to keep

--------

back to the nationalization gimmick
betwen that and this hideously smelly
rotten eggs for fresh eggs exchange ????

not a dimes macro diff
as to distribution of costs and loses

show me the money
and i mean we the weebles money
either way so far i see wish sandwitc time for us
or is it stone soup ????

taxpayers from the future coming at us like so many terminators

i'll chance that

[Bruce Wilder]

Paine: "bruce w conjecture :
small credit orgs out perform big ones"

Not a conjecture, a fact.

That's not to say that size and power cannot overwhelm. Or, that size and power may not, sometimes, be desirable, because, in some arenas, they may be necessary to special achievement or efficiency.

If we want an ecology, where small fish thrive, then we have to design the institutional support accordingly. Big and small can and will co-exist. The small fry might be an effective check and potential competition for the giants, or they might be mere pilot fish. It is a political, policy choice, a design.

My general-purpose, heuristic advice on industrial structure is to accept the reality of monopolistic competition and design for diversity.

Every business enterprise that survives and prospers has its own source of rents, its own little monopoly, its own defensible niche. Sustainable competition occurs at the intersections between such monopolies.

Homogenization is the enemy. In the American economy, people impressed by the benefits of standardization are prone to embrace homogenization. It is an error of semantic generalization, but very costly in terms of economic performance.

In the same vein, people, who are impressed by economies of scale, are easily fooled into thinking there are economies of centralization.

In finance, we were very foolish to let the mutual principle be eroded. Mutual banks and insurance companies were a useful check on for-profit organization.

And, in the genesis of the present crisis, it was a mistake to let a handful of giant mortgage aggregators take the mortgage business away from small, local banks. The giants could not manage administratively the necessary judgment and due diligence, and so they didn't. Instead, they marketed like crazy. "Pick a payment" did in Wachovia today.

[paine]

btw

show me your assumed
tax burden distribution
over the next 30 years

[Bruce Wilder]

Zeus: "Nobody knows what homes are worth right now, so buyers are sitting it out."

au contraire Everybody knows homes are worth less than what many paid, or borrowed.

Buyers are waiting, if they can, until potential owners come to their senses, on realistic values. But, those values are predictable enough.

If there are enough forced sales of REO, there might be some overshoot on the downside.

[anne]

"Don't find a gender motive under every rock."

Hillary Clinton is not to be described at the Queen of the DLC. Simple. Find another insult.

[anne]

"as the Queen of the DLC."

There has been a special way of demeaning Clinton, a special sort of calculated language.

says...

Hillary Clinton is not to be described at the Queen of the DLC

That would be Barney Frank

(sorry, couldn't resist)

[paine]

bruce as usual good comment

conjecture in this sense
no logical proof exists at this point

facts can be partial things
at any rate the nub here:

"The giants could not manage administratively the necessary judgment and due diligence, and so they didn't"
correct
and the result ??
the originators became commisioned used car salesmen not anal retentive loan officers

but that fact alone hardly proves the case for lower systemic costs

nor does te lack ofegulation ofthese new originator types
or the regulation of new security design
or new trading markets or absence of new trading markets..etc etc

[paine]

bruce

of course i favor these stream lining hyper integrating org morphs
i vote for a green light to anything
that sharpens the struggle
and hastens the final socialization
of the whole ball of wax

[anne]

Remind me never ever to look at stock indexes during the day, which I never as a rule do but happened to now. Never ever.

[paine]

anne
my point is simple enough

those of us like me
who are in quest of a higher better faster more economical
model for socialism
ought perhaps to notice when the corporate hegmons
hyjack nationalization pro temp
and by doing so demonstrate
the superiority of
a further socialization of
the production systm's credit grid
only to restore
the old private profit regime once
the mop up is over

the mob hardly realizes what's going on here
its furious knows its getting f ed
but has no coherent wiring diagram
that for example
draws a line between
the fiscal budget
and its direct effect on the production system and its hiring rate
and largely self insolating
balance sheet fiddles additions and subtractions
like this 700 bill bail

[anne]

Paine:

my point is simple enough

those of us like me
who are in quest of a higher better faster more economical
model for socialism
ought perhaps to notice when the corporate hegmons
hyjack nationalization pro temp
and by doing so demonstrate
the superiority of
a further socialization of
the production systm's credit grid
only to restore
the old private profit regime once
the mop up is over

[Clever.]

[dd]

anne, if you really want heartburn look into the future via the gambling titans of the cme-mini:
http://finance.yahoo.com/q/fc?s=ESZ08.CME

[dd]

It seems Republicans have determined to hold markets hostage to their free market fantasy ideal that never existed but will work its magic today.

[Vlad L]

Give me Liberty or give me Market Socialism! Market Socialism is groovilicious! Free markets are not. Too risky. People lose money. Thats harsh. Market Socialism is what comes after capitalism. The Central Planning Committee doesnt have a good handle on the capital markets yet. Maybe Comrade Shiller can help. Just give them a little time. Theyve got it.

We cant do anything about it anyway, besides lobby, or contribute to candidates, or get elected, or hire a PR firm to promote a propaganda campaign, that sort of thing. Or can we? So we suggest accepting the inevitable. The experts are managing it. Its their job. Why hassle them? Besides, they never listen. So we advocate a return to the womb. Float in the amniotic sac of market socialism. Open your umbilical cord to the state. They will provide. Remain calm. Theyve got you covered.

[James Kroeger]

BREAKING NEWS: House votes down bailout! link

In honor of this development, I thought I'd present a comment I made on another thread yesterday:I wonder if Congressional Democrats realize that the House Republicans have now given them the political cover they need to start considering alternatives, like those suggested by Brad DeLong, Paul Krugman, and the Swedes. You see...before, when "The Republicans" (in the form of Paulson/Bernanke and the Bush Administration) approached the Democrats, begging them to go along with their plan, Congressional Democrats sensed that if they were perceived to be obstructing the plan, the Republicans would crucify them as being responsible for the destruction of the economy.

But now, House Republicans sense that there just might be a way for them to get re-elected in November----in spite of the worthlessness of the Republican brand---if they take a populist position opposing the bailout in the interest of the taxpayers, tapping into the popular resentment they're hearing in emails and polls. Political desperation is driving them, but what this does for Congressional Democrats is make it impossible for Bush Republicans to blame the Democrats for raising objections. The political ground shifts, and both parties are suddenly free to compete for the support of The Little Guy on Main Street.

To me, that means there's hope. There is no guarantee that whatever the senior leadership agrees upon by tomorrow, is going to be approved by the House assembled, not if most Republicans decide to vote against Wall St. and a good many Democrats agree to do the same. If, as Pelosi is throwing up her hands, DeLong and Krugman and Stiglitz and a few other "Democrat Economists" start endorsing a variation of the Swedish Option, Congressional Democrats may begin to realize the opportunity they have to insist on some profound changes in the interest of the taxpayer and economic justice.

The stock market may start trying to crash while this is unfolding, but then the Fed has all the resources it needs to bail out just about anyone in the near term, by simply buying up equity. If the Dems are smart, they may actually succeed is destroying the the perceived credibility of Republican Economic Mythology for at least a few generations....

[anne]

http://www.nytimes.com/2008/09/30/business/30markets.html?hp&pagewanted=print

September 29, 2008

Stocks Plunge as House Rejects Bailout: Rescue Plan Defeat Sends Shares Down
By MICHAEL M. GRYNBAUM

As voting began on the bailout bill in the House Monday, the Standard & Poor’s 500-stock index and the Dow Jones average dropped sharply from their already depressed posts.

[House Rejects Bailout Plan, 228-205.]

[paine]

"Homogenization is the enemy....very costly in terms of economic performance "

bruce assuming you mean rate of innovation here
not efficiency of operation...how late 80's of you

".... people, who are impressed by economies of scale,
are easily fooled into thinking there are economies of centralization "
indeed

lenin looked at the german war economy
and
extrapolated the ultimo in centralization
soviet inc
but then he implemented the nep
leaving it to stalin et al
to impelement
the greatest centralization up to that date

surely there's a range of both scope and scale
inside which class choice may operate
and outside of which
the limits of our latest
mechanical hearts are discovered
and
----here cometh my on the other hand addition ----
the un necessary burdens of preserving
our worn out
insufficient "natural " hearts emerge as well

[anne]

Using italics at length, makes a comment hard to read at speed at least for me so I tend not to.

[kthomas]

I can't wait for Super Tuesday!!!

[paine]

"both parties are suddenly free to compete for the support of The Little Guy on Main Street"

and what a brain trust jury we are too ???
decades of public dis information
out of both party elites
leaves a weeblery outraged indeed
but without a clue
where the high road might be

[paine]

vlad
i may have a purchase on your head quarters location now

just another ersatz
gosplan survivor
giving us
the old babbit university rasberry
in your heart
are u crying " bah humbug " ???

[James Kroeger]

Using italics at length, makes a comment hard to read at speed at least for me so I tend not to.Sorry about that Anne. If you click on the link, an un-italicized version can be viewed.

[im1dc]

anne says...

"1-month T-bill at .05, 3-month at .36. Panic on the Street."

"[I do not understand.]"

The current market/fedgovt bailout uncertainty = abject fear by market participants.

IMO, the result: Flight to safety chaos.

For those here who may not know, 'flight to safety' means buying of FedGovt Bonds, Bills, Notes over corporate issues, muni issues, equities, etc.

People are doing in effect what Will Rogers said during the Great Depression: "I'm more worried about the return of my money than the return of on money."

The greatly increased buying pressure translates to higher prices for the instruments, which in turn means Lower Yields (Interest Rates) of the Bond, Bill or Note.

It's FEAR, anne. FEAR, in Capital Letters, is driving the market today, not trading, speculation or investing.

Anyhow, that's my take.

[Lafayette]

BW: If there are enough forced sales of REO, there might be some overshoot on the downside.

I figure it is more than just some.

Any repurchase of toxic waste properties is liable to be at a significant discount to original transacted value. The market values have depreciated since then, by how much, 20 to 30%?

The Federal government, if it ever does get Congressional approval, will buy them at less than that. Perhaps at 50 or 60 cents on the dollar. And, simply reselling them at those prices would depress the market further.

So, they will have to sell them at a premium of 10 cents on the dollar over the price paid, meaning 70% of original transaction cost -- which is present market value? It will take a year of more to deplete the entire stock. During which time prices will remain below original market values of two to three years ago.

People will be living in negative realty valued residences. That's not nice, but what other way is possible?

[anne]

Thank you, James.

IM, I understood the fear reflected by the early bond markets values, but the fear seemed irrational and in that sense I was obviously wrong. Investors count Congressional votes with considerable accuracy.

[anne]

Paine, why should the size of the Swedish economy matter in terms of using Sweden's experience in the 1990s as a model for a plan for us? I also have been impressed at how Spain has controlled a severe decline in housing prices with relatively little effect beyond housing.

[im1dc]

The latest from Paul Krugman:

September 29, 2008, 3:02 pm

OK, we are a banana republic

"House votes no. Rex Nutting has the best line: House to Wall Street: Drop Dead. He also correctly places the blame and/or credit with House Republicans. For reasons I’ve already explained, I don’t think the Dem leadership was in a position to craft a bill that would have achieved overwhelming Democratic support, so make or break was whether enough GOPers would sign on. They didn’t.

"I assume Pelosi calls a new vote; but if it fails, then what? I guess write a bill that is actually, you know, a good plan, and try to pass it — though politically it might not make sense to try until after the election.
For now, I’m just going to quote myself:

"So what we now have is non-functional government in the face of a major crisis, because Congress includes a quorum of crazies and nobody trusts the White House an inch.
As a friend said last night, we’ve become a banana republic with nukes."

[outsider]

outsider says...

"Upon request of a financial institution" Section 102 (3) of the current plan may guarantee up to but no more than 100% (principle of and interest on) troubled assets.

I hope we buy at a fraction of that!

[BJ Feng]

I think the most shocking news I woke up to was the collapse of Wachovia, one of the largest banks in the nation and one I thought would be able to ride out the storm. I guess we know now why Morgan broke off talks to merge with Wachovia. Still the speed of the collapse was very surprising, usually we have a day or two of rumors before the inevitable like with Washington Mutual, Wachovia disappeared over the weekend, and I was going to transfer my Washington Mutual checking account to Wachovia for the free checking. Oh well, there aren't many options left for free checking now, at least not with banks with closeby ATM and branches.

[paine]

anne

okay
i agree there must e a version of total nationalzation
of the commanding heights of the financial system
can be done without the wall street elite losing their sense of empowerment

but if it's found and used
it'll be a very sorry excuse
for the notion of whole nation institutionalizing
where social return and social justice
march forward
arm in arm

unless the plan makes wall street hollow ...

now will it ???

let's face it
the emergency is precisely
a call by wall streets elite
to bail out ...wall street

do you think they will lose the handle on this deal ???

take the war measures of fdr
i so much admire
now that was nationalization
a time when in fact when
the us production system was effectively
under a 4 year plan
and grew its real output capacity
like never before or since.....
it ended with a return to bizz as usual
my guess
alas
the road back to privateering
after a sweden banking holiday
will prove toxic
to further progressive measures

just
as what morphed out of the arsenal of democracy
proved to be
from the very first few years of truman
a sorry pattern of retreat retrenchment reversal
from the high line of national production planning
a pattern
that showed us who's boss
and proved once again
what's best business
is whats good for us all

after re-privitization
comes a taboo zone

[paine]

save free checking

what a battle cry fengula

[me]

McCain's track record suggests that when he is taken hostage by the financial interests he will stand up well under torture, wink and smile at other prisoners when being walked through the halls, and stay a prisoner until everyone ranking below him is released or dead.

What this has to do with running the country is left to the imagination.

[Jim]

We could construct an economy that employed (upon vetting) our current leaders as servers of beverages. We do need a medium of exchange. Printed currency units would be acceptable if they are not easily diluted. Dollars, regrettably, are not.

[Lafayette]

anne: I also have been impressed at how Spain has controlled a severe decline in housing prices with relatively little effect beyond housing.

Then you may not have seen its latest unemployment rate - 11% of the active population.

Ouch!

[Lafayette]

Land of the Free ... checking account

BJF: and I was going to transfer my Washington Mutual checking account to Wachovia for the free checking.

The word "free" is so disabused in the US its use should be forbidden.

Free Anything is a "word hooker" to attract the bargain hunter. It's like walking on water or defying gravity, almost never true -- unless its your mother doing the giving.

[ken melvin]

It'll not be 50-60 cents on the dollar. If 'twere the $150k house in Cleveland that sold for via sub-prime for $150k, but ... The combination of sub-prime loans and speculation means that $150k tract homes in LA sold for $450-600K. Take a brave soul to buy those mortgages for more than 25 cents on the dollar. Braver one yet to hold on to them expecting the price to rise to the $450-600k level anytime soon.

[R. Miller]

Obama is "well-informed and sensible?" The man actually thinks the Iraq War caused high gasoline prices! Obama probably never took more than one economics course in his entire education. He knows NOTHING about economics.

Paul is guilty of some revisionist history here.

It's quite a long stretch to blame the vague concept of "deregulation" from more than 25 years ago to explain this crisis. I'd start looking a little closer to the present.

The roots of THIS crisis go directly back to Clinton's National Housing Policy in 1995 which created the subprime and adjustable-rate products currently in use. He gave Fannie "affordable housing" credits to expand the use of the products for the people MOST LIKELY TO DEFAULT. Then, Clinton expanded the Community Reinvestment Act with strict lending quotas for banks. Fannie and Freddie pushed the securitization of mortgages to provide even more liquidity for the great housing push and transferred all the risk to the financial sector. Once the money started rolling in to Fannie and Freddie, nothing was stopping it.

When Clinton left office IN A RECESSION, the Fed lowered interest rates to combat that, sparking the flame which started the fire.

George W. Bush proposed regulation of Fannie in 2003 and was rebuffed by Democrats who said there was no insolvency problem. Meanwhile, Fannie had a multi-billion dollar accounting fraud scandal underway with Democrats Jim Johnson, Franklin Raines, and Jamie Gorelick at the helm. John McCain co-sponsored a regulatory bill in 1995 which never made it out of committee under the Democrat Senate of 1996.

Even in the 2008 Foreclosure Prevention Act, the Democrats added MORE "affordable housing" impetus and funnelled money to ACORN which has been guilty of assisting vote fraud. The bill also lowered insurance premiums (which they call 'origination fees') on reverse mortgages which will make that actuarially sound system an insolvent one in the future.

Bill Clinton, Henry Cisneros, Andrew Cuomo, Jim Johnson, Franklin Delano Raines, and Jamie Gorelick are the chief villains here - all Democrats, and many still closely associated with Barack Obama.

Keep listening for Obama talking about "affordable housing." That will only deepen and prolong this crisis.