Paul Krugman: Crisis Endgame

"The big buyout is coming":

Crisis Endgame, by Paul Krugman, Commentary, NY Times: On Sunday, Henry Paulson, the Treasury secretary, tried to draw a line in the sand against further bailouts of failing financial institutions; four days later, faced with a crisis spinning out of control, much of Washington appears to have decided that government isn’t the problem, it’s the solution. The unthinkable — a government buyout of much of the private sector’s bad debt — has become the inevitable.

The story so far: the real shock after the feds failed to bail out Lehman Brothers wasn’t the plunge in the Dow, it was the reaction of the credit markets. Basically, lenders went on strike...

This flight to safety has cut off credit to many businesses, including major players in the financial industry — and that, in turn, is setting us up for more big failures and further panic. ...

And the Federal Reserve, which normally takes the lead in fighting recessions, can’t do much this time because the standard tools of monetary policy have lost their grip. ...[T]he interest rate on Treasuries is already zero, for all practical purposes; what more can the Fed do?

Well, it can lend money to the private sector — and it’s been doing that on an awesome scale. But this lending hasn’t kept the situation from deteriorating.

There’s only one bright spot...: interest rates on mortgages have come down sharply since the federal government took over Fannie Mae and Freddie Mac, and guaranteed their debt. And there’s a lesson there for those ready to hear it: government takeovers may be the only way to get the financial system working again.

Some people have been making that argument for some time. Most recently, Paul Volcker ... and two other veterans of past financial crises published an op-ed ... declaring that the only way to avoid “the mother of all credit contractions” is to create a new government agency to “buy up the troubled paper”... Coming from Mr. Volcker, that proposal has serious credibility.

Influential members of Congress ... have been making similar arguments. And on Thursday, Charles Schumer, the chairman of the Senate Finance Committee ... told reporters that “the Federal Reserve and the Treasury are realizing that we need a more comprehensive solution.” Sure enough, Thursday night Ben Bernanke and Mr. Paulson met with Congressional leaders to discuss a “comprehensive approach” to the problem.

We don’t know yet what that “comprehensive approach” will look like. There have been hopeful comparisons to the financial rescue the Swedish government carried out in the early 1990s ... that involved a temporary public takeover of a large part of the country’s financial system. It’s not clear, however, whether policy makers in Washington are prepared to exert a comparable degree of control. And if they aren’t, this could turn into the wrong kind of rescue — a bailout of stockholders as well as the market, in effect rescuing the financial industry from the consequences of its own greed.

Furthermore, even a well-designed rescue would cost a lot of money. The Swedish government laid out 4 percent of G.D.P., which in our case would be a cool $600 billion — although the final burden to Swedish taxpayers was much less, because the government was eventually able to sell off the assets it had acquired, in some cases at a handsome profit.

But it’s no use whining (sorry, Senator Gramm) about the prospect of a financial rescue plan. Today’s U.S. political system isn’t going to follow Andrew Mellon’s infamous advice to Herbert Hoover: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” The big buyout is coming; the only question is whether it will be done right.

Comments

[degustibus]

Why is it that no one seems concerned that the buyout is being orchestrated by the same administration that has mismanaged Iraq, mismanaged Katrina, mismanaged the economy. Heckuva job, Bernie, Pauly.

[a]

"Andrew Mellon’s infamous advice to Herbert Hoover: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” "

Always fighting the last war.

[elvis]

Is it time to buy gold? or has that time passed already?

[Bruce Wilder]

pk: "the only question is whether it will be done right."

U had to ask. [see degustibus, above]

Of course, after rescuing banking and Wall Street, we will be told we cannot afford Social Security or Universal Health Care. Losing another war in the Middle East, however, is always affordable.

[elvis]

after rescuing banking and Wall Street, we will be told we cannot afford Social Security or Universal Health Care.

Mission Accomplished!, only this time they won't announce it from the flight deck....maybe at a members-only club.

[Michael McKinlay]

The Solution ? :

A Public Central Bank that creates money without debt. Why should we borrow our own money to pay interest on it ?

A Must Read ;
It's the Derivatives, Stupid! Why Fannie, Freddie, AIG had to be Bailed Out by Ellen Brown
http://globalresearch.ca/index.php?context=va&aid=10265

Adam Smith on interest free currency :
Adam Smith wrote of the Pennsylvania currency in his famed 1776 work The Wealth of Nations:

The government of Pennsylvania, without amassing any [gold or silver], invented a method of lending, not money indeed, but what is equivalent to money to its subjects. [It advanced] to private people at interest, upon [land as collateral], paper bills of credit…made transferable from hand to hand like bank notes, and declared by act of assembly to be legal tender in all payments...[the system] went a considerable way toward defraying the annual expense…of that…government [low taxes]. [Pennsylvania’s] paper currency…is said never to have sunk below the value of gold and silver which was current in the colony before the…issue of paper money.
http://en.wikipedia.org/wiki/Colonial_Scrip

It is time, past time, for Americans to take back their Constitutional right to create money bearing no interest for the Common Good. Hundreds of billions if not over a trillion dollars a year can be created this way with no implications for inflation if done correctly !

[hari]

Wecome to American Social Democracy - finally in the making!

It'd be difficult to change the mindset (of laissez faire capitalism) to think Social Democratic principles/policies can (also) fit American Capitalism (now) in throes of its final struggle to survive from drowning....

Good days are ahead. No time to blink. I was thinking (not long ago here!) of Paulson as a surrogate of a Social Democratic ethos/principles, and he's proving beyond my disbelief that free man is capable of change and discovery of *new* truth(s) about economic/social meaning of life and its survival.

The larger problem is are the representatives of the sovereign capable of changing current course or not?

[Lafayette]

A walk down Memory Lane

Here are excerpts from an article written (in 2001) about Japan’s situation during its real estate crisis that laid low the country for a decade. (Read the article, here.)

The truth is that the banks themselves do not know the scale of their bad debt problems. Japanese banks do not have accurate credit risk assessment capabilities, and internal information is of poor quality.

Prime Minister Koizumi started his leadership with a promise to clean up the bad loans, but little has happened in the months since he took office. The reason for delay is simple to understand politically: closing bad loans means shutting down businesses. Among these, the worst cases are Japan's big construction companies, which are the biggest employers in the nation, accounting for about 10 percent of all jobs. Unemployment would rise sharply if bad loans were closed out. Closing down bad loans would also necessitate government takeover of some banks, or new injections of public money into the banks. If the government fails to act, some big banks will eventually collapse, bringing collapse of additional companies and even higher unemployment.

But even if banks were willing to lend, bank loans are unsuitable for new startups, or for restructuring existing businesses. What is needed is equity capital and new sources of financing with instruments of lengthy maturity, to get businesses going, or get them past the current problems and into new modes of operation.

Seem familiar, any of that …. ?

And the article’s author’s conclusion:

Among the most important lessons, I responded, was that restructuring the American economy was not done with bank loans. It was done with innovations in the financial market that channelled non-bank funds into the revitalization of America. In the 1980's we had the rapid emergence of private equity and venture capital, high-yield bonds, securitization of debt, derivatives, and myriad other new financial instruments, which enabled companies to take bold steps without the continuing pressure of debt service obligations. This opened the way for dramatic changes in M&A activity, buyouts, mezzanine financing, incubation of startups, bundling of distressed assets, and many other essential steps on the path to restoring the competitive strengths of the U.S. economy.

Well, that got us where? Without regulatory controls, American Finance is like a bull in a china shop.

Many in Japan, in 2001, took the US crisis of 1980 as the “benchmark experience” towards which a solution could be found. So, the Japanese swept the bad debt under the rug by funneling it into a government organization and getting rid of it in dribs and drabs. (The Swedes did much the same.) Some of it, the Japanese state just swallowed – tantamount to the taxpayer paying for the sins of inept risk management.

So, the US Multi-MegaBailout of 2008 is nothing new.

But, who is going to lend to America in order to prime it out of the economic quagmire it finds itself? And, at what money price? Wouldn’t it be like throwing good money after bad? After all, just look at the US's indebtedness here. Yep, around 7.5% of GDP, one of the highest for a developed country.

All questions that the next PotUS is going to have to consider. And, they expect a “sprightly McBush” to have the mental wherewithal to meet this enormous challenge in righting America? We'd to better to ask Father Christmas.

2008 is not 2001. The chronic deficit of the US plus this present debacle has changed subtly but permanently attitudes. Those holding American debt will no longer be walked over and any silly nonsense such as “I owe the bank $10,000, I’ve got a problem; but if I owe the bank a million dollars, the bank has a problem” is America’s proverbial way of sticking its head in the sand.

[BJ Feng]

I think it's fortunate we have Paulson running the show at the Treasury. Unlike some past Treasury Secretaries, he has direct, hands-on knowledge of what the new products are and how Wall Street works. And as the past few deals have shown, he's been able to strike a harsh deal for companies who need government help, the stockholders have been just about wiped out in every case. He knows who is competent and who isn't, so he can tap former execs and install them as interim CEOs of bailed out companies. We could have a lot worse than Paulson, you might not trust him, but at least he's knowledgeable.

And he's paired with Bernanke, an academic who studied the Great Depression in depth and stated such a thing wouldn't happen today due to the new tools the FED has. Well he's being tested, but at least we have someone at the helm who studied the very problem we're facing and understands the situation.

No, these aren't political hacks like Brownie was and Chris Cox is turning out to be. If you had to pick two people to head Treasury and the FED in this crisis, you couldn't do much better than those two. To recruit Paulson, Bush had to ask three times and call personally to convince him.

[anne]

http://krugman.blogs.nytimes.com/2008/09/18/comrade-paulson-seizes-the-economys-commanding-heights/

September 18, 2008

Comrade Paulson seizes the economy's commanding heights
By Paul Krugman

Marketwatch: *

"Top U.S. financial officials emerged from a briefing with congressional leaders Thursday night with an agreement to work quickly toward a broad-ranging fix for the crisis roiling U.S. and world financial markets.

"Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke briefed House and Senate leaders to hash out a solution to the massive downturn in global markets and the failure of several financial firms.

"Treasury spokeswoman Brookly McLaughlin said in a prepared statement that Paulson, Bernanke and congressional leaders 'began a discussion … on a comprehensive approach to address the illiquid assets on bank balance sheets that are … the underlying source of the current stresses in our financial institutions and financial markets.' "

* http://www.marketwatch.com/news/story/us-congress-leaders-plan-financial/story.aspx?guid=%7B2AFBCA80%2D6A5F%2D4740%2D9C4B%2D2210564344DF%7D

[anne]

http://www.nytimes.com/2008/09/19/world/19nations.html?ref=world&pagewanted=print

September 19, 2008

U.N. Study Finds More Women in Politics
By NEIL MACFARQUHAR

UNITED NATIONS — Women have entered politics in greater numbers than ever in the past decade, accounting for 18.4 percent of parliament members worldwide, according to a study released Thursday by the United Nations Development Fund for Women.

The proportion of women has increased by seven percentage points since 1995. Much of the increase was driven by women realizing that they needed to attain power rather than just lobby for change, said women who spoke at a ceremony for the study’s release.

“We need to convince women that the only way to really make a change is to stop complaining and just be the owner of power,” said Senator Cecilia López Montaño, the speaker of the opposition Liberal Party in Colombia. “It is a huge fight because men have been controlling power for centuries.”

If the rate of change holds constant, it will take until 2045 for women to reach parity in the developing world, which the study by Unifem, as the development fund is known, defined as holding 40 percent to 60 percent of elected parliamentary seats. The report also examined how women were affected by economics, the courts and crime, among other issues.

Quotas that reserve seats for women have proved instrumental in increasing their numbers. In elections held in 2007, women in countries with some form of electoral quota captured 19.3 percent of the seats, as opposed to 14.7 percent in countries without such quotas, the study said. Of the 22 countries where women constitute more than 30 percent of the national assembly, 18 have some form of quota.

Provisional election returns from Rwanda, announced in news reports on Thursday, indicated that its Parliament, which reserves 24 of 80 seats for women, will become the first in which women hold a majority, with 44 seats.

The genocide in Rwanda was also a crucial factor in galvanizing women to get more involved politically during the country’s reconstruction, said Inés Alberdi, the executive director of Unifem.

“If you are in a secondary position, you can never fight for women,” she said.

The study found a high correlation between the number of elected women and legislation related to women’s issues, including agriculture services, day care and street lighting for security. It also cited British research that women turned out in higher numbers to vote in elections when there was a female candidate.

In addition, the study suggested that women held far fewer party leadership posts than their membership in the rank and file would suggest. A Latin American study quoted in the United Nations report said that while 47 percent of party members in Paraguay were women, they held just 19 percent of leadership positions. In Mexico, 52 percent of party members were women, compared with 31 percent of the leaders. In Panama, the numbers were 45 percent and 19 percent.

“You have to be three times more intelligent, you have to be four times more transparent, you have to have everything more than men,” said Senator López, of Colombia. “We still have a male chauvinist society.”

It will continue this way, she said, until the “democratic deficit” is closed, meaning equal representation for men and women.

[anne]

Wrong thread, I am sorry.

[dd]

No anne, not wrong thread. There needs to be a knowledgeable woman in their with Paulson and Bernanke representing investors. I nominate Elisse Walter, just confirmed SEC Commissioner who has not only a fine math mind (Yale cum laude) and a wonderful legal mind (Harvard, cum laude) but a long history in the regulatory field including a much lauded stint at the SEC.
An experienced regulator with an institutional history is needed and from her resume, this is the person.
There is a way out of this disaster without sacrificing SS and Medicare; part of the way out is that finally it's been acknowledge that indeed government is the essential "node" for individual citizens and business. Instead of a liquidation institution why not a sort of Tennessee Valley Authority for finance? It is possible to have a positive outcome if there's someone with enough insight; although granted with those in charge a disaster is more likely.

[Hidden Problems]

"Basically, lenders went on strike..."

This is not surprising, since lenders still have no way to know who is actually solvent. If information on shaky institutions is going to be kept hidden, then the entire system will have to be de facto guaranteed. With no way to know which institutions are viable, no one will lend otherwise.

[Low]

"The Swedish government laid out 4 percent of G.D.P., which in our case would be a cool $600 billion..."

So is being virtually the only nation on earth to offer low down payment mortgages really worth it?

[Imported Loans]

"This flight to safety has cut off credit to many businesses..."

We effectively import all of our savings, and foreign savers will only loan so much. We can't afford to waste the limited quantity of imported savings on excessive consumption. We can't afford to trash our nation's credit rating by issuing high default loans.

We are completely and utterly at the mercy of strangers, so we must maintain our reputation for integrity in dealing with foreign savers. Otherwise, no loans for business, and things shut down.

Of course, we could try to restore the confidence of domestic savers, and not have to import all savings.

[Blissex]

«It'd be difficult to change the mindset (of laissez faire capitalism)»

A commenter on another blog said that the USA have instead "laissez fairy" capitalism.

Where that fairy is called at various times Alan or Ben.

«The big buyout is coming; the only question is whether it will be done right.»

Right for who? is the better question. It will be right for the winners, not for the suckers.

«Why is it that no one seems concerned that the buyout is being orchestrated by the same administration that has mismanaged Iraq, mismanaged Katrina, mismanaged the economy. Heckuva job, Bernie, Pauly.»

Mismanaged? They have managed it in the best way possible for their campaign donors! Lots of very profitable contracts for one thing. Their campaign donors have MADE A LOT OF MONEY, and that's what matters. Remember the TEN BILLIONS in bonuses Lehman gave its management in 2007.

Also this is the administration whose party discipline is quite notable, and the party's current goal is to do whatever it takes to ensure that the Republican candidate wins the elections, or if he loses, that the problems will blow up in the face of the Democratic winner.

«Of course, after rescuing banking and Wall Street, we will be told we cannot afford Social Security or Universal Health Care. Losing another war in the Middle East, however, is always affordable.»

Well, Social Security does not make anybody's executive bonus increase, and universal health care might make the pharma executive bonuses shrink, but wars do substantially help with executive bonuses. Medicare was expanded only because the administration found a way to do so that would result in bigger pharma executive bonuses.

Anyhow the cost of servicing the debt for the bailout and of the wars and medicare part D will be spread among everybody over the decades, especially the bottomost unproductive 80%, as one cannot reduce the incentive to perform for the productive rich, especially in difficult times, when the top 1% must be incentivized to their best, so prosperity may again trickle down...

Anyhow the continuing war in Iraq and little wars in Georgia have proven to be very useful not just for executive bonuses. One of my favourite quotes on the subject:

http://news.FT.com/cms/s/2817d81c-b067-11da-a142-0000779e2340.html

«Such is the depth of anxiety that one-fifth or more of Americans believe they will personally be victims of a future terrorist attack. This number has not budged in the last four and a half years."»

«Mr Bush has consistently received a much higher public trust rating on the war on terror than the Democrats.

Without this -- and without the constant manipulation of yellow and orange terror alert warnings at key moments in the political narrative -- Mr Bush would almost certainly have lost the presidential race to John Kerry in 2004.»

Did you ever wonder why the USA-sponsored and armed Georgian army attacked unprovoked the contested areas on the Georgia/Russia border a few weeks before the USA elections? Perhaps voters needed reminding that the world is a dangerous place and one of the candidates has a lot more military experience?

[anne]

DD:

No, not wrong thread. There needs to be a knowledgeable woman in there with Paulson and Bernanke representing investors. I nominate Elisse Walter, just confirmed SEC Commissioner who has not only a fine math mind (Yale cum laude) and a wonderful legal mind (Harvard, cum laude) but a long history in the regulatory field including a much lauded stint at the SEC.

[Elisse Walter, right.]

[dd]

Looks like Treasury just guaranteed money market mutual funds. Will try to find cite.

[dd]

Treasury Announces Guaranty Program for Money Market Funds
The U.S. Treasury Department today announced the establishment of a temporary guaranty program for the U.S. money market mutual fund industry. For the next year, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund – both retail and institutional – that pays a fee to participate in the program.

President George W. Bush approved the use of existing authorities by Secretary Henry M. Paulson, Jr. to make available as necessary the assets of the Exchange Stabilization Fund for up to $50 billion to guarantee the payment in the circumstances described below.

Money market funds play an important role as a savings and investment vehicle for many Americans; they are also a fundamental source of financing for our capital markets and financial institutions. Maintaining confidence in the money market fund industry is critical to protecting the integrity and stability of the global financial system.

http://www.ustreas.gov/press/releases/hp1147.htm

[methinks]

No one at the Treasury or the Fed saw this coming? Were Hank and Ben brought in to engineer this bailout? Is it coincidental that this crises is occurring just in time to handcuff the next president?
This crises and "solution" will concentrate wealth even further and insure that no money is available for Medicare, Medicaid, or any social welfare program. This reminds me of Norquist's "starving the beast."
Has anyone read Naomi Klein's "The Shock Doctrine?" It's about how policies get implemented during "crises" that would never have a chance of passing during ordinary times. Think of Bush's police state program.

says...

http://www.nytimes.com/2008/09/20/business/20moneys.html?hp&pagewanted=print

September 19, 2008

Treasury to Guarantee Money Market Funds
By NEW YORK TIMES

The Treasury said it would back the funds temporarily up to $50 billion to ensure their solvency.

[Well done.]

[anne]

The determination of the Treasury and Federal Reserve are impressive, but Mark Thoma was long ago making clear the need for fiscal action taken to limit the slowly and predictably mounting mortgage problems that were increasingly threatening credit systems. Early political-economic proposals to protect households were however strikingly few and that should be taken as highly disappointing in a mounting problem so transparent for so long. Barney Frank and Hillary Clinton and Jesse Jackson and Paul Krugman and Alan Blinder deserve notice.

Darn, that was me, and my computer, forgetting who I am.

[anne]

http://economistsview.typepad.com/economistsview/2008/03/links-for-20-21.html#c107962884

March 22, 2008

On Financial Market Stress
By Mark Thoma

To summarize my position: I doubted that conventional monetary policy would work from the start and called for fiscal policy very early, earlier than most I think, but when it was evident nothing meaningful would come on the side of the equation - we got what we got - I began to explore non-conventional monetary and fiscal policy. I have worried - from the start as well - that a HOLC * type program could not get through congress quickly enough in an acceptable fashion, and again that was the reason for pushing monetary policy in unconventional directions.

[Still, I think it's useful to continue to push the full array of responses as one never knows how the politics will turn, particularly given the potential for economic and financial market volatility.]

I believe - and I seem to be fairly alone on this - that speed is of the essence and anything involving congress and the president is unlikely to come in time, if at all. Because speed will be of the essence if there are any further signs of deterioration, I began pushing the asset trading/risk reduction strategies (assuming the Fed has the authority to do this). If someone can find a better way to intervene quickly and effectively, then I'm listening.

* Home Owners Loan Corporation

[Whatever]

Would it have been cheaper to have government just pay off the all home loans? That would have erase all the bad debt and all that deleveraging will vanish in an instant. What is wrong with this picture?

[anne]

What was especially ignored as mortgage failures mounted, as though too embarrassing politically, was the early effect on African American households and neighborhoods. The effect was obvious since African Americans had been needlessly but openly sold the highest coast mortgages for years, and only a slowing of home price increases or a weakening of the economy was sure to bring defaults. The effect however was limited to the "usual" complaints by Jackson and save for Clinton generally ignored.

The problem was however understood to be serious enough by shrewd investors that hedge fund money was expressly and openly raised to bet against companies issuing higher cost, riskier mortgages. The higher mortgage cost alone created excess risk, though as housing prices increased ordinary cost mortgages were necessarily becoming riskier.

[Mark]

This was inevitable. Now, we have to place our trust in Congress to ensure that the burden is distributed fairly. [INSERT DEITY HERE] help us.

[anne]

Essentially, a New Deal emphasis on insulating the household against any combination excessive cost mortgages, gradually falling home prices, and an eventually weakening economy especially in terms of the well-being of ordinary workers, was dismissed early on. Markets were not to be interfered with, though they had actually been steadily interfered with by mortgage companies avoiding regulation or simply proper discretion. The Roosevelt legacy had been whittled away philosophically.

[dd]

Notice how the unregulated system free-rode the regulated system into oblivion. Now the entire system needs a bailout but I'm not confident that the current administration is up to the task of balancing citizens interests against the political donors. There is a worry this will be used as an opportunity to consolidate power to the Fed and Treasury, the power they are now using without any checks and balances. The euphoria of "safety" comes at a very high price in terms of democracy and determining who will pay and how that burden will be distributed.

[elvis]

The problem was however understood to be serious enough by shrewd investors that hedge fund money was expressly and openly raised to bet against companies issuing higher cost, riskier mortgages.
Some Republican campaign managers have taken note, too. vide the Thursday DemocracyNow.org broadcast. Plans are afoot to challenge the votes of people whose addresses are in default in Macomb Co. Michigan.

they're killing two birds with one stone. Milk them dry and steal their vote. slick.

[...]

I'm surprised that Krugman actually thinks this is the crisis endgame.

The idea seems like just so much wishful thinking.

[anne]

The political or philosophical matter is being able to fairly consider a Roosevelt-Keynes legacy again. Interestingly, yesterday, public television economic news presented Barney Frank and John McCain in agreement on the need for a form of New Deal-Home Owners Loan Corporation mortgage purchase policy.

[anne]

DD:

"Notice how the unregulated system free-rode the regulated system into oblivion."

What an interesting comment to think through. Please continue.

[Dunc]

It's not so much laissez fairy as Alan Greenspan's famous Goldilocks capitalism: grow fat on stolen porridge until you get eaten by bears.

[No More Private Loans]

Domestic citizens will no longer loan to domestic borrowers. Foreign citizens will no longer loan to domestic borrowers. Even foreign central banks will no longer loan to domestic citizens. Foreign central banks will only loan to our gov, which then in turn loans it to domestic citizens. Even money market funds have to be guaranteed by the gov now.

The policy of ripping off savers with negative rates and high defaults isn't working out too well. No one will loan any more money to citizens. I guess it will keep working as long as foreign central banks will still loan to the gov, which then loans to citizens.

[Winslow R.]

pk wrote :"here’s only one bright spot...: interest rates on mortgages have come down sharply since the federal government took over Fannie Mae and Freddie Mac, and guaranteed their debt. And there’s a lesson there for those ready to hear it: government takeovers may be the only way to get the financial system working again."

There's another lesson about top down vs. bottom up government solutions.

Paulson with his bazooka capable of creating a bottom up solution by dropping mortgage rates below 5 % only gets mortgage rates down to 5.75% and then seems to stop.

Paulson takes his bottom up bazooka solution and replaces it with a top down thunderstorm approach where the government funds are funneled directly into financial corporations, allowing the continued failure of millions of American households and everybody celebrates.

[im1dc]

Barry Ritholtz's take on what's happening:

"The "New" New Deal

Posted by Barry Ritholtz on Friday, September 19, 2008 | 10:02 AM

I am having a hard time keeping up with all of the bailouts and special facilities created for dealing with this crisis. Am I missing any?

- Bear Stearns
- Economic Stimulus progam
- Housing Bailout Program
- Fannie & Freddie
- AIG
- No Short selling rules
- Fed liquidity programs (Term Lending facility, Term Auction facility)
- Money Market fund insurance program
- New RTC type program

If you are a fan of irony, consider this: The conservative movement has utterly hated FDR, and his New Deal programs like Medicaid, Social Security, FDIC, Fannie Mae (1938), and the SEC for nearly 80 years. And for the past 8 years, a conservative was in the White House, with a very conservative agenda. For something like 16 of the past 18 years, the conservative dominated GOP has controlled Congress. Those are the facts.

We now see that the grand experiment of deregulation has ended, and ended badly. The deregulation movement is now an historical footnote, just another interest group, and once in power they turned into socialists. Indeed, judging by the actions of the conservatives in power, and not the empty rhetoric that comes out of think tanks, the conservative movement has effectively turned the United States into a massive Socialist state, an appendage of Communist Russia, China and Venezuala.

To paraphrase Floyd Norris , we have become Marxists, but of the Groucho, not Karl, variety . . ."

[Price Too High]

"...there’s only one bright spot...: interest rates on mortgages have come down sharply..."

This is really bad news for buyers, since prices will now go even higher. Prices were already unaffordable, requiring taking on more debt than buyers could afford. Increasing prices even more is a disaster.

FDR mandated reasonable cost homes be built and funded by his programs. This nonsense of driving prices up to ever more unaffordable levels is madness. Where is FDR when you need him?

[anne]

"FDR mandated reasonable cost homes be built and funded by his programs."

Please reference this if possible, I was not aware of a New Deal home building program.

[Bruce Wilder]

I have whined quite a bit in comments about the redistributive impacts of the present crisis, and, maybe, that has obscured my increasing concern that, in panic mode, our leaders are doing exactly the wrong things.

Not wrong in the distributive sense, but wrong in the sense that, by not correctly acknowledging the full scope and scale of the problem, and designing policy accordingly, they have created this sense of falling dominoes.

One of the few policy advantages we've had is that the full scale and scope of the crisis has been obvious for well over a year. Witness: Nouriel Roubini. Housing markets are predictable enough, that a good estimate of how much mortgage values, the biggest chunk, would deflate has been available for a long-time.

But, Paulson and Bernanke have acted as if they faced only a liquidity crisis, not a solvency problem.

For the first time in over 25 years of reading Robert Kuttner in the Boston Globe, I found myself actually fully agreeing with one of the old coot's columns. Bushs disastrous financial rescue strategy - The Boston Globe: In the improbable role of emergency government financial czar, Paulson ran the rescues in the manner of a private investment banker. He viewed each collapse as an occasion for a merger, acquisition, or restructuring. Flying without a regulatory compass, Paulson and Federal Reserve Chairman Ben Bernanke extended taxpayer money and lines of credit from the Fed to get through each crisis of the day.

Their strategy was to find white knights and erect firewalls. If Bear Stearns could be saved from bankruptcy by a shotgun merger with JPMorgan Chase, then all of Bear's creditors on Wall Street would not take a hit. If Fannie Mae and Freddie Mac could be rescued with $200 billion of taxpayer money, maybe the mortgage crisis would not deepen. If the Fed could advance enough credit to brokerages and investment bankers that were not even part of the Fed system, maybe it would buy time to clean up their balance sheets. . . . In the Lehman Brothers case, however, the Treasury and the Fed decided it was time to draw a line. History could well record this decision as a big mistake, the one that toppled other dominoes. But the bigger mistake was the absence of a broader strategy

Ian Walsh at Firedoglake is even more pointed:
Getting rid of short selling entirely doesn't make market meltdowns less likely. It makes them more likely. Just as letting banks use depositor money to shore up investment banking subsidiaries is throwing good money, your money, after bad. Just as allowing banks to book "good will" as regulatory reserves doesn't actually change how likely they are to be insolvent.

Maybe, going to Congress in a panic after a full year of this nonsense and with no more than half of the known losses accounted for, will result in some kind of rational, comprehensive plan. But, just from what is in the papers, I don't think they are ready to admit, even now, that this is a solvency crisis, not a liquidity crisis. They're talking about how the banks will have to take a loss on the bad paper they will be selling to the government, but, of course, that's not a solution, since the banks do not have enough capital to absorb the losses. Which is why it is a crisis. And, allowing fake accounting is not going to solve the problem.

They are going to Congress, because they need Congress to appropriate some serious money. By my reckoning, banking needs a gift, minimally, of about $1 trillion.

(Too bad we spent that trillion in Iraq; the Surge has been such a glorious success.)

What are the chances of getting that through Congress in a week less than 60 days before a Presidential election?

And, how is this gift to be financed? Borrowing from the Arabs and Chinese? Taxes? On whom? Would this be an awkward moment to ask Mr. and Mrs. Republican Reform about their plans to "reform" entitlement spending?

Oh, there I go again whining about redistribution in a crisis.

Does this year of crisis add to anyone's confidence? Do the proposals of the moment make any sense?

[Lafayette]

Yes, we can!

dd: Instead of a liquidation institution why not a sort of Tennessee Valley Authority for finance?

Regardless of the name on the building (i.e., the mechanism), the challenge is "Who pays?".

Where is the funding coming from that is necessary to both repair the damage (get rid of the toxic waste, which, after all, has a residual value) and boost the economy to a point where it is generating savings (both personal and corporate) that can be reinvested to produce growth?

In fact, how do we wean Americans off the ingrained idea that:
* The stock market does NOT print money and the bubble frenzy is far too commonplace,
* The China Price has its consequences in terms of chronic debt owed long-term that must be payment maintained,
* Credit card expenditure results in debt-owed unlike discretionary income earned and saved,
* Investment Banking is NOT a game of craps,
* "No money down" can indicate a sure path to the hell of foreclosure,
* Savings accounts for a rainy day are not just for nerds,
* Etc., etc., etc.

What's the sense of repairing anything if the American people don't change the various nuances of a generalized mindset that led to this fiasco? Have we finally learned the lesson the hard way?

Hey, ObiWan, pass that by us once again. "Change - yes, we can!" How's that done?

[Bubble]

"Housing markets are predictable enough, that a good estimate of how much mortgage values, the biggest chunk, would deflate has been available for a long-time."

Policy seems to be designed to keep bubble prices rising even further. Yet bubble prices are what caused the problem in the first place. People can't afford to borrow enough to pay bubble prices, let alone borrow enough to keep prices rising beyond bubble levels.

[Great Depression Echolalia]

"...boost the economy to a point where it is generating savings (both personal and corporate) that can be reinvested to produce growth?"

Saving money will lead the the Great Depression. Spend every last dime immediately, then borrow more from China to keep on spending on top of it. If China won't lend any more, create money out of thin air, and spend that. Spend no matter what. Never, ever save.

[Bruce Wilder]

I like this reaction to the SEC's ban on short-selling:

The Big Picture | SEC: Ban All Short Selling: "We Are A Nation of Morons, led by complete Idiots, making us complicit in our own self destruction."

Aside from the unpleasant interruption, how did you like the play, Mrs. Lincoln?

[roger]

Bruce, I love the carpentry of your comment - you knocked in every nail, very neatly. A top down solution - aimed at liquidity - ignores the fact that this is a bottom up problem - that is, the vast majority of the people who produce and consume in the U.S. don't have the wealth that, by traditional patterns, they should have. Inequality is not simply a statistical fact, it has a dynamic - a consumer based economy can't starve the consumer of real money and substitute credit, which is the grand principle of the Grand Old Party's Ownership society. Eventually, the spread between one's real assets and one's debts grows too far.

And that is simply what has happened. The fictional financial economy, that multilayered cake of absurd bets (so absurd that, according to a source cited on Angry Bear, there is a total of 600 trillion dollars in derivatives floating out there, which figure will eventually get into a new edition of Extraordinary Delusions and the Madness of Crowds), was a secondary effect of the Reagonomics order, which was founded on the principle of increasing inequality. It isn't that the postwar liberal order required absolute equality - it simply fostered a trend towards equality in the economic and social domains. While on the one hand, this was about justice, on the other hand, it was a vital part of the functioning of a Keynesian economy. Reverse the trend towards equality, while retaining the keynesian mechanisms, and you get what we see, in all its appalling glory, today.

[Winslow R.]

"...there’s only one bright spot...: interest rates on mortgages have come down sharply..."

This is really bad news for buyers, since prices will now go even higher. Prices were already unaffordable, requiring taking on more debt than buyers could afford. Increasing prices even more is a disaster."

It's about time buyers get some bad news. Prices were unaffordable, but no longer are. Buyers would take on debt at lower cost. Wake up, prices have fallen so low it is a disaster for the financial sector and is leaking into the real economy. How much lower do you want prices to go?

[Bruce Wilder]

Price Too High,
No More Private Loans,
Bubble,
Imported Loans,
Hidden Problems
[not an exhaustive list, even for this thread]

Often idiotic pronouncements from behind a one-off identity are not contributing to the discussion.

[dd]

anne,
The bottom line is transaction transparency, the sunlight that illuminates, suffered a total eclipse. Opaque assets, instruments, entities and other "off-book" transactions and "dark pool" trading enabled the few purveyors to hollow out future values for current profit leaving the holders of the regulated products nothing but worthless assets "deposited" in insolvent regulated entities. Gramm-Leach and the Commodity Futures Trading Act merely legalized the illegal activity that began 30 years ago and were designed to confound regulators and create opacity.
Enron was the warning of where things were headed without meaningful change; but instead the scapegoating publicity stunts (Arthur Andersen) and an even more confusing abomination (Sox) created even more opacity and allowed more chances for the free-riding crew to profit.
Of course that doesn't even cover the conduit of "mortgage loan originators" churning out worthless mortgage "assets" to be bundled into mortgage products sliced and diced into CDO's with AAA ratings supported by CDS.
Notice the variation on a theme and how investment banking utilized deregulation to profit mightily from both the dot bomb and the current "credit crisis."

[ampersand]

It's about time buyers get some bad news. Prices were unaffordable, but no longer are. Buyers would take on debt at lower cost. Wake up, prices have fallen so low it is a disaster for the financial sector and is leaking into the real economy. How much lower do you want prices to go?

Till it is comparable to rents.

Housing, as a speculative investment, should end. Houses don't produce anything other than shelter. If there are VC like returns, you should expect VC like risks.

Or better, housing, like food, should not be allowed to become like venture capital investment.

Houses as saving, yes. Houses as speculative investment, NO.

Till people start making purchase decisions based on zero investment gains, and prices come to the level of those decisions, housing should fall.

[Bruce Wilder]

And, if anyone thinks the Right is going to learn from their mistakes, think again. Check out David Brooks in the N.Y. Times: "In the first place, the idea that our problems stem from light regulation and could be solved by more regulation doesn’t fit all the facts. The current financial crisis is centered around highly regulated investment banks . . . "

[Winslow R.]

"Till it is comparable to rents."

We are there! You can buy a house now for cheaper than rents in many areas that now need to be stabilized. Open your eyes and start looking.

Other areas will gradually fall towards these levels depending on the desirability of the neighborhood.

[dd]

Thanks for the heads up Bruce. Brooks is the mouthpiece and so the endgame is set. No doubt a "new unified regulatory authority" that is independent of Congressional oversight but might answer a question now and again.

[dd]

Here is the template and everyone is on board:
http://www.senate.gov/~schumer/SchumerWebsite/pressroom/special_reports/2007/NY_REPORT%20_FINAL.pdf

[ampersand]

if anyone thinks the Right is going to learn from their mistakes, think again.

The right? Give me a break.

Watch the so-called leftist economists ... watch them cheer Bernanke and co as "heroes" for saving us. Watch them use the taxpayer funds for wiping away their past policy mistakes and pretend that they were right all along.

The right is nothing compared to the CYA being carried out by the so-called liberal economists. The right, at least can be rightly called idiots. But the left truly should be called crooks for their unabashed refusal to even admit that they are wrong, on Greenspan, regulation, bubbles, past Fed policy, and their current rush to "save" the system.

Save the system!! It is more about saving their professional reputation from going to tatters. It is about their refusal to admit that they were idiots, and the so-called chicken littles like Roubini were right.

These are egomaniacs of the highest degree. They will sell their mother rather tha admit they were wrong.

[Winslow R.]

From dd's link, thanks!

"In fact, for every 100 Americans, five work in
financial services – and these jobs are not just in New York and Chicago. In states as diverse
as Connecticut, Delaware, South Dakota and North Carolina, the financial services industry
employs major portions of the workforce. "

Needs to be reduced drastically and permanently.

[anne]

There were economists and business leaders who long ago understood and discussed the developing financial-economic problems we have experienced, there was also a predominant economic philosophy that allowed the discussions to go ignored by regulators and policy makers. The regulatory authority to have severely limited the problem we have experienced was already and are now there, but the authority needs to be used and that means a philosophy considerably more friendly to such use.

I am struck that though there was concern among selected Democratic legislators far earlier, the current leadership and assorted economic advisers offered no voice for change. Where has Austan Goolsby been all these months?

[Patricia Shannon]

Isn't it interesting that the only big company that has not been bailed out (Lehman) is the one that donated more to Democrats than Republicans.

[anne]

Austan Goolsbee, that is!

[dd]

Laf,
We know who pays. The same people who paid for RTCI. The worry is whether the "credit crisis" was just a backdoor to SS and Medicare. Expressed the worry long ago and more worried now and even more worried about an "independent and unified regulatory body." Truly hoping for some Congressional oversight and that any such "regulatory" body is subject to Congressional scrutiny and not "self" funding if perhaps only to preserve the illusion of democracy.

[Winslow R.]

Bloomberg and Schumer "Third, and finally, a highly skilled workforce is essential for the U.S. to remain dominant in
financial services. Although New York is superior in terms of availability of talent, we are at
risk of falling behind in attracting qualified American and foreign workers. While we undertake
education reforms to address the fact that fewer American students are graduating with the deep
quantitative skills necessary to drive innovation in financial services, we must also address U.S.
immigration restrictions, which are shutting out highly-skilled workers who are ready to work but
increasingly find other markets more inviting."

My goodness, no remorse at all. Here we've taken very smart people from the real economy, placed them into the financial sector and used them to deliver a severe blow to the real economy. We need to do this even more? What a waste of talent. This thinking makes me sick to my stomach. Where are the cures to cancer, educating our young, discovering new energy sources. The financial sector has failed to provide innovation where we need it and they just want another chance to repeat the same failed policies.

Sounds a lot like the McCain campaign platform.

[dd]

Winslow, that was the original template and here is the plan set to go. Notice the date March 2008. The boys have been preparing for a long time right out in the open:
http://www.ustreas.gov/press/releases/reports/pwgpolicystatemktturmoil_03122008.pdf

[dd]

No doubt there is drafted legislation too and it will be rammed; but money markets are as good as Treasuries and the markets are up. Interesting times.

[hari]

Paul if of course thinking of *Crisis Endgame* - as if this massacre will end soon.

It won't until the fat is burned and eliminated from the system. IMF style structural adjustment policy will be imperative to reform the hifi sector and in the process eliminate some of the last thirty years so-called libertarian economic models of deregulation and hands-off the financial markets - introducing a paradigm shift to financial transparency and accountability.

Recall Paulson/Bernake were actually pushed to rescue AIG from colleagues in ECB and elsewhere in Europe and emerging Asian markets - collaboration can best be implemented when we've established framework of policy across Atlantic, as well as BRICS, to regain the lost global confidence in the financial sector - by infinitely more closer cooperation.

SWF are here to stay - as a reserve in dire circumstances.
But they too will have to be somehow controlled so they don't start manipulating life a *cartel* (cf. Opec).

In other words, this massacre of hi fi sector was planned by its libertarian academic (ghosts!) and other perpetrators of free market.

What follows will surely be a reversal of McBush pilosophy.
So inspite of the anger and lose of confidence...the sun will rise again!

[dd]

hari, your optimism makes me smile :)
Need that.

[hari]

dd- we can cry and shame the bastards. But what will it get us? Look how unbelievable McCain sounds all of a sudden about firing the SEC/CEO....and change!

Americans are not silly and stupid, even if some academics think so (for whatever reason). They will punnish the perpetrators of this *massacre*, you can be sure, on Nov 4th!

[rufus]

ampersand says...
But the left truly should be called crooks for their unabashed refusal to even admit that they are wrong, on Greenspan, regulation, bubbles, past Fed policy, and their current rush to "save" the system.

How? Where? Why? Do you have any evidence to support your argument or just smears?

[Alex Tolley]

BW: "But, Paulson and Bernanke have acted as if they faced only a liquidity crisis, not a solvency problem."

That really is the core of the issue. Once it is recognized that the problem is solvency, not liquidity, the the size of the bailouts escalates extremely sharply. The talk of a new RTC that will manage the loans and "even make a profit" is just blather. If the RTC buys up loans at cents on the dollar then the banks still fail as the loans are written down. If they buy the loans at near par, then they have effectively handed over tax payer funds to the banks to "carry on as before". Either way, the tax payers are stuffed, the banking system stays unchanged and the "culprits" walk away [relatively] unscathed. And by culprits, I include a congress that repealed Glass-Steagall in 1999, a bill proposed by Phil Gramm who might even become the next Treasury Secretary.

One has to wonder whether talk of a new RTC, to which the markets have responded very well, will just peter out, its task being to calm the markets (see, it was just a liquidity crisis after all) having been accomplished.

Apropos a previous thread about "relationship complexity", how hard is it to understand that repeal of Glass-Steagall hugely increased the connections and the problems we are seeing today? (I don't forget other issues in the bill, such as capital ratios and unregulated securities that contributed mightily to the rapid collapse of the system).

[Dickeylee]

California's unemployment rate for August-7.7%. Can't wait for those poor blokes to start asking for handouts and be told about the evils of socialism!
And how will that impact the housing crisis? It just keeps on coming!

[dd]

The issue is whether, as Winslow notes re-directing so much intellectual fire power grounded in theoretical math and physics is positive or have both finance and science suffered significant set backs? Now that the knowledge is inserted into the financial sector should it be abolished or can it be re-designed to fit within regulatory transparency parameters? Initial reaction is to abolish; but Mark's connectivity provides insight that derivatives might serve a useful purpose in the next dimensional phases of monetary development. Gold coins are no longer used in everyday transactions and even now paper money is being replaced by electrons on a screen. The younger generation is very comfortable with this virtual system; just as they are more comfortable with text and instant messaging.
Still, there are many philosophical implications and certainly there are dangers to democracy. No matter, we are moving in that direction and one hopes someone has done some independent thinking untainted by self-interest protectionism....anne I'm looking at you!

[ampersand]

How? Where? Why? Do you have any evidence to support your argument or just smears?

Leave alone the pariahs like Baker, Roubini etc.

Look at the support Ben and Greenspan received form Delong, Krugman, Summers, Rubin, this blog,..

They might have differed with Greenspan and disciples - on trivial points, distinctions without differences.

The liberal establishment economists have long been in support of the core Greenspan ideology. The repeal of Glass-Steagall had full support from them.

To see how bankrupt these egomaniacs are, Delong is now calling for outright inflation, calling it an equitable solution. The same guy who called out that housing was not overpriced, now wants to make that call become true by outright inflation, the costs to be borne by those who got zilch from the financial bubble. Talk about egomaniacs!

Krugman is ecstatic like a mad scientists playing like nukes - "its working as we thought". The costs be damned.

The rest are calling for a bailout, knowing well that this administration will make it as inequitable as possible, and enrich the pigmen on Wallstreet even more. Flash a few scary pictures and blather about Depression on TV, and loot more from the public. They would rather do that, than admit they were wrong.

Let us hope and pray that Wall Street gets bailed out AND the pigmen get bonuses this year end.

Or maybe there wont be outrage even with that.

[Barkley Rosser]

anne,

What does your reference to Austen Goolsbee mean? I notice that you appear to give kudos to a long list of politicians, including Hillary and John McCain, although the latter's recent statement involves a complete reversal of views expressed only a day earlier and in complete contravention with his entire career, and especially in conflict with actions taken by his inner adviser, Phil Gramm, to deregulate the financial industry.

I cannot say much about this, but I happen to know that the adviers of Obama have been looking very closely at a lot of very serious reports and arguments about what is going on over a long period of time. He has not said much, and I would say that there has been good reason not to, for the simple reason that too little was known (and still is), and that it is better to speak and act with judiciousness and wisdom, not shooting off one's mouth only to flip flop idiotically a day later. This situation has been moving too rapidly and changing too much for those not in a policymaking position to have pronounced intelligently on in public.

I understand that you just do not want to give Obama any credit, and wish to say nice things about the economically ignorant McCain, but in fact Obama's caution on this matter has been admirable.

I also note that you have become silent about dear old Sarah Palin as her net popularity ratings have plunged into the negative zone and continue falling. Does this mean, anne, that like many others, you have finally seen the light on how unacceptable she is as a vice president, even if you are still pumping up McCain over Obama?

[Barkley Rosser]

anne,

BTW, Chris Cox may not be the height of competence, but McCain's call for firing him was simply ignorant.

[anne]

"I also note that you have become silent about dear old Sarah Palin as her net popularity ratings have plunged into the negative zone and continue falling."

Notice the intense meanness; what is absolutely essential I understand is to destroy a woman selected to run for Vice President for the only time in the history of the Republican Party. Need we continue counting the times in which Governor Palin has been attacked by the person who continually calls a nominated candidate for President "dishonorable." Me, I like counting.

[anne]

"I also note that you have become silent about dear old Sarah Palin...."

Would that be a reference to the Governor of Alaska, Sarah Palin? Would that be the person referred to? I am so wondering....

http://www.nytimes.com/2008/09/17/opinion/17dowd.html?ref=opinion&pagewanted=print

September 17, 2008

'Barbies for War!'
By MAUREEN DOWD

WASHINGTON

I sautéed myself in Sarahville last week.

I wandered through the Wal-Mart, which seemed almost as large as Wasilla, a town that is a soulless strip mall without sidewalks set beside a soulful mountain and lake.

Wal-Mart has all the doodads that Sarah must need in her career as a sportsman....

[Blissex]

«"But, Paulson and Bernanke have acted as if they faced only a liquidity crisis, not a solvency problem."
That really is the core of the issue. Once it is recognized that the problem is solvency, not liquidity, the the size of the bailouts escalates extremely sharply.»

Paulson and Bernanke are not idiots. They have known very well for a long time that there is a large insolvency problem. Talking about "liquidity" is a pure euphemism to buy time and divert attention from the issue. Just another Republican talking point.

[anne]

http://delong.typepad.com/sdj/2008/09/john-mccain-i-8.html

September 19, 2008

John McCain Is Dishonorable and Dishonest

For picking a vice-presidential candidate when he did not know whether she was qualified for the job, and claiming that he did know.

[BJ Feng]

Bruce, Alex, not all financial institutions are insolvent. Certainly AIG wasn't, but the fear of how bad the bad loans would be made everyone with exposure vulnerable to a liquidity squeeze. As I said before, this is the "bad bank", "good bank" idea put into action. If solvent institutions can separate the bad stuff from the good stuff, then they can continue on as viable entities. The insolvent institutions will go broke, but they are a minority.

And if I remember correctly, FDR's earth shattering policies failed to get us out of the Depression. Unemployment was even worse than when Hoover was in office, there was hope and short rallies, but in the end, it took WWII to get us out of the Depression. By the way, WWII was a completely supply side driven event. Lend-lease and then war mobilization created the jobs that allowed Americans to earn money that they later spent, raising the economy. Trickle down economics is what ended up saving America after more than 7 years of failed policies to buy mortgages, etc.

[BJ Feng]

And this has so far been contained to the financial sector. The "real" economy has been pretty good, certainly nothing approaching the Depression or even the bad recessions we've had in the past like in 1983 and 1992. We're still seeing earnings growth for non-financials. The meltdown threatens other sectors because people and corporations need capital. I know I have a mortgage that needs to be rolled over in 2 years, if banks don't lend me the money, that property is going into foreclosure, I can't come up with $600,000. And if no one can get a mortgage, that property can't be sold.

[anne]

"Unemployment was even worse than when Hoover was in office, there was hope and short rallies...."

There is a complete and utter lie, a calculated lie , a lie for the sake of lying and destroying a sense of history.

[anne]

Franklin Roosevelt came to the Presidency in March 1933, when unemployment was 24.9%. By 1934, unemployment had fallen to 16.2% and fell continually from there through the New Deal with the exception of the recession year of 1937.

[BJ Feng]

I stand corrected Anne, unemployment reached its highest levels in 1933, and while 1938 marked another high point, they never reached the 1933 levels.

[anne]

Unemployment through the Presidency of Herbert Hoover went from 3.2% to 8.7% to 15.9% to 23.6% to 24.8%.

[anne]

http://economistsview.typepad.com/economistsview/2007/01/the_new_deal_an.html

January 10, 2007

The New Deal and the Great Depression

Rates of Unemployment

1929 -- 3.2%
1930 -- 8.7%
1931 -- 15.9%
1932 -- 23.6%
1933 -- 24.9% (20.9%)
1934 -- 21.7% (16.2%)
1935 -- 20.1% (14.4%)
1936 -- 16.9% (10.0%)
1937 -- 14.3% ( 9.2%)
1938 -- 19.0% (12.5%)
1939 -- 17.2% (11.3%)
1940 -- 14.6%
1941 -- 9.9%

Numbers in brackets correct for employment in New Deal programs.

Thomas M. Geraghty
University of North Carolina

[anne]

What has been continually done to mask the effectiveness of New Deal employment programs is to count those employed through these programs as unemployed. Knowing what was accomplished during the New Deal, problems and all, is critically importance. Interestingly, the country that emerged quickest from the Depression was Sweden where the policies of Keynes were applied more fully thanks to the influence of several young Swedish economists including the Myrdals who would later win Nobel Prizes.

The New Deal and New Deal legacy built a middle class America.

[anne]

"I stand corrected...."

Thank you, for the matter is most important.

[steve from virginia]

Paul Krugman sez things are going along as planned.

Fine! Yesterday's immediate crisis has been addressed. Tomorrow will take care of itself. Or will it? The US government will buy all debt, no matter how toxic. The need is to reassure overseas investors who keep us on life support.

How reassuring can all these rescues be, anyway?

What is the REAL meaning of 'too big to fail'? Does it mean 'sufficient resources to weather any crisis'? Or does in mean a financial hostage taking?

The government's actions address the symptoms, not the disease:

" ... interest rates on mortgages have come down sharply since the federal government took over Fannie Mae and Freddie Mac, and guaranteed their debt."

The Fed desperately hopes that the gambling casino will reopen and people will begin speculating on real estate and other assets again ... that another bubble will form ... that there will be a return to more shopping and more guzzling on credit ... that subdivisions and strip malls would be built in the last few places that don't have them. The hope is that the rescues will buy time until the corpse of greed can be revived. Even if Paul Volcker approves, it's lousy policy, a reinforcement of a status quo that has outlived its usefulness.

The disease is the hollowing out of America. The high skill, high wage jobs sent to China, the predatory lending, the breaking of the unions, the millions of unskilled immigrants, the mis- investment in consumption instead of production, the accumulation of vast amounts of debt and obligations. US assets are overvalued, regardless of 'rates' on loans available to buy them. They are overvalued because their earning power basis has shriveled.

Inevitably, the next wave of bankruptcies and defaults is coming. Asset values are declining because the people on the street - not the wizards of the Fed or in Congress - have decided this is to be. Americans are tapped out. Bailing out the bankers ... doesn't affect those who matter most, the earners.

When the next wave arrives, it will clarify that the governments' interventions are useless. Contempt for government will surely follow. It will be clear to all the government does not have the correct resources it needs to weather this crisis ... that it and the institutions that is rescuing ... are irrelevant.

That will be the endgame. Check and mate ...

[Dickeylee]

We've just expierenced the largest two-day gain in the DOW since...wait...wait...October, 1929!
So how'd that last one work out?

[Alex Tolley]

Feng: "If solvent institutions can separate the bad stuff from the good stuff, then they can continue on as viable entities. The insolvent institutions will go broke, but they are a minority."

Wasn't the whole point of putting the toxic waste into SIVs to do just that? And wasn't the purpose of that to ensure that the banks maintained their capital ratios? The moment banks started to try to mark to market their assets, it became clear that they needed refinancing. The banks tried the confidence game by stating they were writing down the bad loans, but each time those write-downs proved underestimates. Sure some of the mark-downs will eventually be seen to be liquidity problems, but an awful lot will be because the loans really are crap. Insolvancy is a real issue - look at WaMu - which has a huge real-estate portfolio.

In 1987 I was revaluing my bank's mutual funds after the crash. Some of the stuff we had was marked down to 0 because there were no bids. But weeks later, much of those speculative assets were still only worth pennies on the $ because they really were just junk that had been pumped up in the boom.

You can look at the decline in real estate values and run your own numbers on how much of the recent loans are likely to be non-performing. The losses will take out a lot of leveraged institutions. These losses are real because the rise in real-estate prices was an unsustainable mechanism, just as Krugman explained years ago.

So the problem is still brinkmanship. Many banks are truly insolvent but are hoping to game the system in order to try to stay afloat. The complexity of some of the instruments they own allows a lot of fudging of the values. But that very complexity and the assumption that everyone is still cheating will make the asset split unworkable.

Let's not forget that the US has been effectively leveraging the economy through foreign debt. Taking on the debts of the banking sector just adds more leverage. Aren't we just making a sovereign default a bit more likely?

[Barkley Rosser]

anne,

It is brad delong who keeps calling McCain "dishonorable," not me. I have met him, and while he has lied, I understand that people do that in poltiical races, although the amount of it that he has done, especially since he selected Palin as his running mate (partly to cover for all sorts of goofs and problems relating to her record) has been pretty extreme, about as bad as seen for a very long time.

Also, Palin is the first VP candidate selected by the Republican Party. Geraldine Ferraro was the first woman selected to be a VP candidate by a major party, by the Dems to run with Walter Mondale. For the record, I supported that ticket and voted for it, even if Ferraro has since made some pretty unpleasant and assinine statement.

[Barkley Rosser]

Also, if you think it is "mean" to point out that her
popularity polls have collapsed, tough. You were the
one crowing about her popularity not too long ago.

[anne]

"I also note that you have become silent about dear old Sarah Palin as her net popularity ratings have plunged into the negative zone and continue falling."

I have scant doubt that the continual belittling barrage will be effective.

http://www.nytimes.com/2008/09/17/opinion/17dowd.html?ref=opinion&pagewanted=print

September 17, 2008

'Barbies for War!'
By MAUREEN DOWD

I talked to a Wal-Mart mom, Betty Necas, 39, wearing sweatpants and tattoos on her wrists.

She said she's never voted, and was a teenage mom "like Bristol." She likes Sarah because she's "down home" ...

I had many "Sarahs," as her favorite skinny white mocha is now called, at the Mocha Moose...

I stopped by Sarah's old Pentecostal church, the Wasilla Assembly of God, and perused some books: "The Bait of Satan," "Deliverance from PMS," and "Kissed the Girls and Made them Cry: Why Women Lose When They Give In." (Author Lisa Bevere advises: "Run to the arms of your prince and enter your dream.") ...

R. D. Levno, a retired school principal, flew in from Fairbanks. "She's a child, inexperienced and simplistic," she said of Sarah. "It's taking us back to junior high school. She's one of the popular girls, but one of the mean girls. She is seductive, but she is invented."

[im1dc]

A word to the wise, this deal is NOT DONE YET.

A truism: The Devil is in the Details.

From talkingpointsmemo DOT com

Details Of Massive Bailout Remain A Mystery

Bush officials have won quick acquiescence for a bail out plan that could cost taxpayers as much as $1 trillion. But neither Congress, nor the press -- let alone the public -- is privy to the details, which are not yet drafted.

AP story link http://talkingpointsmemo.com/news/2008/09/govt_rushing_to_finish_huge_fi.php
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Why any Democrat, or patriot, would trust the Bush Administration and vote to give them unfettered additional authority and power is beyond my comprehension.

Do recall Bush took their trust and authorization to fight terrorism and invaded IRAQ after bungling Afghanistan and never did capture Usama bin Laden or Mullah Omar.

Will the DEMs be so easily duped by Republicans running around like chicken little saying the sky is falling with the election only 50 or so days away?

At the most they should only legislate a series of 30 day authorities that take them through August of '09 and require full briefings to Congress by the Treasury and FedRes every 30 days. No free ride this time.

[dd]

Time for a time machine:
Date: November 5, 1999
"The world changes, and we have to change with it," said Senator Phil Gramm of Texas, who wrote the law that will bear his name along with the two other main Republican sponsors, Representative Jim Leach of Iowa and Representative Thomas J. Bliley Jr. of Virginia. "We have a new century coming, and we have an opportunity to dominate that century the same way we dominated this century. Glass-Steagall, in the midst of the Great Depression, came at a time when the thinking was that the government was the answer. In this era of economic prosperity, we have decided that freedom is the answer."

http://cyber.law.harvard.edu/rfi/press/congpass.htm

[anne]

"I also note that you have become silent about dear old Sarah Palin as her net popularity ratings have plunged into the negative zone and continue falling."

Simply look at the wording and wonder that I would never refer to dear old ----- -----, because that is a needlessly disrespectful way of referring to a Governor who has been nominated to be Vice President in an historically important move in an America that has never had a woman President or Vice President and only a lone preceding candidate from the Democratic Party before.

There is reason for respect, but evidently women have an inordinately difficult time commanding such respect here.

[dd]

More from article of 11/99
"I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010," said Senator Byron L. Dorgan, Democrat of North Dakota. "I wasn't around during the 1930's or the debate over Glass-Steagall. But I was here in the early 1980's when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness."

Senator Paul Wellstone, Democrat of Minnesota, said that Congress had "seemed determined to unlearn the lessons from our past mistakes."

"Scores of banks failed in the Great Depression as a result of unsound banking practices, and their failure only deepened the crisis," Wellstone said. "Glass-Steagall was intended to protect our financial system by insulating commercial banking from other forms of risk. It was one of several stabilizers designed to keep a similar tragedy from recurring. Now Congress is about to repeal that economic stabilizer without putting any comparable safeguard in its place."

[A mother's son and sister's brother]

Anne,

You are so right about the disrespectful language that both Dowd and Rosser are using in regards to first Hillary and now Palin. Language used without any apparent realization of what they are really saying (at least in Barkley's case I hope).

Keep trying to make them understand.

[Blissex]

As to 's quotes about financial deregulation, well, of course they are right, but of course Gingrich, Gramm and accomplices were right too: deregulation MADE A LOT OF MONEY for the right people, their sponsors, and too bad for the losers.

[im1dc]

How to dupe a Democrat:

Congressional Leaders Stunned by Warnings
By DAVID M. HERSZENHORN

skipping...
"As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program “Good Morning America,” the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”

http://www.nytimes.com/2008/09/20/washington/19cnd-cong.html?hp=&pagewanted=print

S. Dodd and S. Schumer are real life lemmings, as long as it gets them in front of a camera or microphone. They cannot be trusted to get any situation correct, much less this hugely complex one.

They were the first two before a TV camera today repeating the Bush-Bernanke-Paulsen breathless scare tactic.

Heaven help us.

[rufus]

ampersand says...
The liberal establishment economists have long been in support of the core Greenspan ideology. The repeal of Glass-Steagall had full support from them.

Incorrect. Well I don't have time to address this in full detail it deserves, so a 'cliff notes' clarification of your erroneous assumptions will have to do.

http://en.wikipedia.org/wiki/Glass-Steagall_Act
"The Glass-Steagall Act of 1933 established the Federal Deposit Insurance Corporation (FDIC) in the United States and included banking reforms, some of which were designed to control speculation.[citation needed] Some provisions such as Regulation Q that allowed the Federal Reserve to regulate interest rates in savings accounts were repealed by the Depository Institutions Deregulation and Monetary Control Act of 1980. Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999 by the Gramm-Leach-Bliley Act signed by President Bill Clinton"

The Gramm-Leach_Bliley Act (aka Financial Services Act) was republican authored and sponsored. Votes occured almost directly along party lines in the senate, not to mention that this legislation has its roots in the Reagan era of deregulation, and was passed during a time when the republican party had control of both houses of congress.

http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act
"The bills were introduced in the Senate by Phil Gramm (R-TX) and in the House of Representatives by James Leach (R-IA). The bills were passed by a 54-44 vote along party lines with Republican support in the Senate[1] and by a 343-86 vote in the House of Representatives[2]. Nov 4, 1999: After passing both the Senate and House the bill was moved to a conference committee to work out the differences between the Senate and House versions. The final bill resolving the differences was passed in the Senate 90-8-1 and in the House: 362-57-15. This veto proof legislation was signed into law by President Bill Clinton on November 12, 1999. [3]

The banking industry had been seeking the repeal of Glass-Steagall since at least the 1980s. In 1987 the Congressional Research Service prepared a report which explored the case for preserving Glass-Steagall and the case against preserving the act."

I'm guessing we can look forward to more "innovative" approaches when Gramm becomes treasurer.

[rufus]

"The Gramm-Leach-Bliley Act (GLBA) allowed commercial and investment banks to consolidate."

While consolidation may have aided in the enormous footprint investment banks hold in the market. It is the highly speculative investment in MBS's that led to the current crisis. These imperfectly priced and 'formerly' highly liquid securities are where the investement banks are suffering asset errosion/deflation.

http://en.wikipedia.org/wiki/Mortgage-backed_security
"The total market value of all outstanding U.S. MBS at the end of the first quarter of 2006 was approximately USD 6.1 trillion, according to The Bond Market Association. This is much larger than the market value of outstanding asset-backed securities. The MBS market overtook the market for US Treasury notes and bonds in 2000.

According to The Bond Market Association, gross U.S. issuance of agency MBS was:

2005: USD 967 billion
2004: USD 1,019 billion
2003: USD 2,131 billion
2002: USD 1,444 billion
2001: USD 1,093 billion
The high liquidity of most mortgage-backed securities means that any investor wishing to take a position need not deal with the difficulties of theoretical pricing described below; the price of any bond is essentially quoted at fair value, with a very narrow bid/offer spread.[citation needed]

Reasons (other than speculation) for entering the market include the desire to hedge against a drop in prepayment rates (a critical business risk for any company specializing in refinancing) and certain predatory lending schemes."

The absence of regulation in speculative trading of these imperfectly priced securities and the absence of regulation of hedge funds is what has led to the current debacle.