Fed Watch: Misguided Policies

Tim Duy:

Misguided Policies, by Tim Duy: From the wires:

15:30 *PAULSON SAYS MARKET TURMOIL WON'T ABATE UNTIL HOUSING REBOUNDS

Such comments always leave me with a sick feeling in my stomach – if policymakers are waiting for the housing market to rebound, they had better be prepared for a long wait. Sort of liking waiting for the NASDAQ to revisit the 5,000 mark. I think the biggest potential for policy error lies in maintaining the delusion that preventing housing, and by extension, consumer spending, from adjusting is central to fixing the nation’s economy. Policy would be best focused on supporting the inevitable transition away from debt-supported consumer dependent growth dynamic.

Housing prices are falling because fundamentally the price of housing became unaffordable. The stream of expected household income necessary to repay the loans exceeded the capacity of household budgets. It is that simple – there is no sense in paying $3,000 a month in mortgage payments on property with the rental equivalent of $1,000. To be sure, a homeowner could justify such a purchase as long as they thought they were guaranteed a 15% annual risk free return. But who, other than realtors and mortgage brokers, remain under that delusion?

Similarly, I find programs that purport to “help” homeowners by reducing their mortgage payments of questionable value. Lowering your mortgage payment to 38% of income might sound like a good deal – but if you have no equity, you do not really own anything. You are just a renter by another name. So if your final mortgage payment significantly exceeds the rental equivalent, has the government really made you better off? And if, as I suspect, homeowner bailouts will not stem price declines, the program recipient could soon find themselves with negative equity again in a matter of months. If you really wanted to help underwater homeowners, you would bring their payments in line with the rental equivalent. I suspect this would be extremely costly.

That housing prices will ultimately return to some conventional relationship with incomes does NOT imply that the government has no role in supporting the housing market. The government’s role is simple: to take actions that ensure that persons who can afford a mortgage remain able to do so. The Federal Reserve and Treasury need programs that allow creditworthy borrowers access to credit. This justifies the takeover of the GSEs, and even justifies pouring billions of dollars into them to ensure that the family earning $60k a year is able to get the mortgage for a $200k home.

The problem for housing prices, of course, is that two years ago that same family could purchase a $400k home. Unless policy is expanded to encourage such loans, then the supply of funds is no longer available to support $400k homes. If policy is redirected toward such a goal, then the government, and ultimately the taxpayer, will take on additional credit risk in one form or another. There will be pressure to use the GSEs in this fashion. Consider this proposal, via the WSJ:

As part of an industry proposal called "Fix Housing First," builders are asking Congress for a tax credit of up to $22,000 on houses bought over the next year and an interest rate buy-down that would reduce rates on new, 30-year fixed mortgages to 2.99% for houses bought through June 30, 2009. The proposal could cost up to $268 billion, according to the National Association of Home Builders, though the group may scale it back.

Thirty year money costs the US Treasury 4.2%, so obviously the taxpayers is expected to make up the difference. I suspect this proposal would cost vastly more than $268 billion, as it would ultimately be expanded to refinancing as well. Why shouldn’t those of us who want to stay in our homes be on the same terms? Moreover, can anyone imagine that the government could end such a program? Might as well hope for the mortgage interest tax deduction to be eliminated. I can see that a guarantee of ultra-low interest rates would support the housing market, but I don’t see how the resulting massive unfunded liability could be supported with anything less than outright monetization of deficit spending.

In a similar vein, we are seeing increasing interest in support consumer access to credit. Treasury Secretary Henry Paulson today announced that TARP is no longer about troubled assets:

Second, the important markets for securitizing credit outside of the banking system also need support. Approximately 40 percent of U.S. consumer credit is provided through securitization of credit card receivables, auto loans and student loans and similar products. This market, which is vital for lending and growth, has for all practical purposes ground to a halt. Addressing these two priorities will have powerful impacts on the overall financial system, the strength of our financial institutions and the availability of consumer credit.

Again, policy should rightfully focus on maintaining credit to the creditworthy. But we should draw the line at encouraging lenders to make risky loans. The Federal Reserve has the right idea:

At this critical time, it is imperative that all banking organizations and their regulators work together to ensure that the needs of creditworthy borrowers are met. As discussed below, to support this objective, consistent with safety and soundness principles and existing supervisory standards, each individual banking organization needs to ensure the adequacy of its capital base, engage in appropriate loss mitigation strategies and foreclosure prevention, and reassess the incentive implications of its compensation policies.

Unfortunately, I suspect such jawboning will have little impact. With consumers already overextended, the room for rapid credit growth is simply limited. Moreover, with economic activity deteriorating and unemployment rising, the number of creditworthy borrowers is falling. This comes on top of the deleveraging already underway in the financial sector. The Fed and Treasury are able to do little but prevent the banking system from outright collapse.

Simply put, policies focused on housing and consumer spending are a black hole for spending – this summer’s short-lived stimulus package is a case in point. Policymakers need to come clean with the American public: Future patterns of growth will simply be less dependent on consumer spending. We are entering a period of structural adjustment, and it will be painful. We spent decades pretending that the relentless focus on producing nontradable goods and relying on a ballooning current account deficit to hide our lack of productive capacity was an appropriate policy approach. But ultimately, those policies have failed us, with stagnant income growth for median income families and the deepest recession since the 1980’s (or even worse).

This admission, however, in no way, shape, or form means policy options are limited. The admission simply defines your policy. In the short term, policy can cushion the transition by expanding the social safety net. In the medium term, if consumption is falling, and private investment is unable to compensate, then the federal authority should fill the gap. There is no shortage of sectors of the economy that offer opportunities for investment. In so many ways, we are running on the fumes of the infrastructure investment made by the last generation. Roads, bridges, channels, etc. – you name it, there is an opportunity. Or human capital, via education? Should the federal government finally step up and fund unfunded mandates? And by all means, continue efforts to reform health care, including the development of nationwide, portable medical records tracking. Reasonable policymakers free from ideological constraints can develop a host of potential projects without relying on bridges to nowhere. You can even extend the argument to supporting Detroit – if current management and boards are swept clean.

Can we afford these policies? For the moment, yes. I did not believe this in the first half of the year, as I though the global economy was running too hot to support substantial stimulus without an inflationary offset. That is no longer the case. If we reach a point we can’t finance the spending, financial markets will tell us. All policymakers have to do is listen and adapt. And I think it is much more likely that we can afford investment spending that yields productive assets rather than taking on the risk of refinancing the housing market at less than the cost of funds. Indeed, I think relentless focus on housing prices will lead to rash policies that could only be inflationary in the long run. After all, the key to supporting housing prices is simply to inflate nominal incomes.

In short, policymakers need to envision an economy in the future that is distinctly different from the past. Relying on the housing market to propel growth is a failed policy. Relentless upward leveraging to support consumer spending was not sustainable. Accept the failure, and move on.

Comments

[Patricia Shannon]

In short, policymakers need to envision an economy in the future that is distinctly different from the past.

I agree. And what would that be?

[calmo]

Manufacturing recycled goods to people who need it...peasants in developing countries.
Ok, that was only me "jawboning"...and it's true I turn the sound off on Paulson and marvel at that jaw.
Ok, I can pull out of this jawbone tailspin people and really start talking... straight....dang.
Tim, no ordinary maverick...dang.
No, the time is not ripe for envisioning future economies, landing on Mars, or bidding on Palin's wardrobe, or betting on how many anne/Barkley squabbles I can endure.
No, we better make sure things stay civil...forget about market stability...that was yesterday.

[Rajesh Raut]

There should be support for housing prices simply because the financial system can not sustain the level of losses that an seemingly endless spiral down of home prices implies. The best approach is to have the government buy Real-estate owned from banks and mortgage servicers (at or near current market prices) and hold the homes off the market for three to five years. Already the market is clearing a lot of foreclosed homes, but the price will not stabilize until the inventory of homes for sales begins to moderate. The money will be recycled into new (hopefully more sensible) lending.

This is the original RTC model that the TARP was supposedly modeled after. Now it seems that the $700 billion isn't going to help the housing market, isn't going to help the automakers, might help the insurance companies (why?), might help the credit card companies (that will help us bring our balance sheets in order, more credit card debt.) This administration might have some creditability on the bail out if they didn't change their story every day.

[calmo]

Thanks for enforcing the 'fly straight' rule Rajesh...a model I sorely need.
What is so unpalatable/unconscionable/undoable about your suggestion:The best approach is to have the government buy Real-estate owned from banks and mortgage servicers (at or near current market prices) and hold the homes off the market for three to five years. Izit that there is not enough money to do it without trashing the $?

[ken melvin]

I'm with Tim.

Under the old model, before 1975, people worked in factories making gidgets then used the salaries therefrom to buy houses and the like. There is no known instance of people building houses then using the salaries therefrom to build factories or gidgets.

[Easy Money]

Helicopter Ben hoodwinked us all. While we were on the lookout for the helicopter drops for the public, most of it has been gifted to the banks. Check out the newspeak of helping the public. What a scam!

To see how obvious it's become, check out Naked Capitalism (the best blog on the crisis) on who benefited from the expanded AIG bailout. The economics establishment is a tool of the banks, out to loot the exchequer.

Although I'd caution against reckless fiscal spending, the financial and other industry bailouts are far worse. They distort markets even more. Talk about theft in broad daylight, often cheered on by clueless academics.

[bakho]

Tim Duy is starting to sound like Dean Baker. Scary.

Rajesh may be hitting pretty close to the model Paulson is using.

Paulson and his buddies still don't understand that there was/is a housing bubble.
To them, housing always has value and always increases in value.

Who is Paulson going to believe? His model? or his lying eyes?

Maybe Paulson and friends live in a bubble that makes them unable to see bubbles?
Maybe Paulson could benefit from a long talk with Dean Baker? Does anyone think that Paulson would be taking the current course of actions if he was using a good model?

[Noneed]

Nice blog, but I think people who know whats going on and have the truth need to go out to those who are not informed and spend their time with Football, American Idol, myspace, and facebook too much. Those are the masses. They need to know whats going on
found this good blog online.
www.crashofempire.blogspot.com its actually how I found this blog

[mrrnangun]

Problem with this sensible proposal is that it does not contain subsidies for important political constituencies. It is simply an outline of good public policy. It has no chance in the current political environment.

[Bupa]

George Soros has a view:

http://www.nybooks.com/articles/22113

The salient feature of the current financial crisis is that it was not caused by some external shock like OPEC raising the price of oil or a particular country or financial institution defaulting. The crisis was generated by the financial system itself. This fact—that the defect was inherent in the system —contradicts the prevailing theory, which holds that financial markets tend toward equilibrium and that deviations from the equilibrium either occur in a random manner or are caused by some sudden external event to which markets have difficulty adjusting. The severity and amplitude of the crisis provides convincing evidence that there is something fundamentally wrong with this prevailing theory and with the approach to market regulation that has gone with it. To understand what has happened, and what should be done to avoid such a catastrophic crisis in the future, will require a new way of thinking about how markets work.....

This remarkable sequence of events can be understood only if we abandon the prevailing theory of market behavior. As a way of explaining financial markets, I propose an alternative paradigm that differs from the current one in two respects. First, financial markets do not reflect prevailing conditions accurately; they provide a picture that is always biased or distorted in one way or another. Second, the distorted views held by market participants and expressed in market prices can, under certain circumstances, affect the so-called fundamentals that market prices are supposed to reflect. This two-way circular connection between market prices and the underlying reality I call reflexivity.

While the two-way connection is present at all times, it is only occasionally, and in special circumstances, that it gives rise to financial crises....

Bubbles thus have two components: a trend that prevails in reality and a misconception relating to that trend. The simplest and most common example is to be found in real estate. The trend consists of an increased willingness to lend and a rise in prices. The misconception is that the value of the real estate is independent of the willingness to lend. That misconception encourages bankers to become more lax in their lending practices as prices rise and defaults on mortgage payments diminish....

the explosion of the US housing bubble acted as the detonator for a much larger "super-bubble" that has been developing since the 1980s. The underlying trend in the super-bubble has been the ever-increasing use of credit and leverage. Credit—whether extended to consumers or speculators or banks—has been growing at a much faster rate than the GDP ever since the end of World War II. But the rate of growth accelerated and took on the characteristics of a bubble when it was reinforced by a misconception that became dominant in 1980 when Ronald Reagan became president and Margaret Thatcher was prime minister in the United Kingdom.

The misconception is derived from the prevailing theory of financial markets, which, as mentioned earlier, holds that financial markets tend toward equilibrium and that deviations are random and can be attributed to external causes....

Eventually even the Federal Reserve and other regulators succumbed to the market fundamentalist ideology and abdicated their responsibility to regulate. They ought to have known better since it was their actions that kept the United States economy on an even keel. Alan Greenspan, in particular, believed that giving users of financial innovations such as derivatives free rein brought such great benefits that having to clean up behind the occasional financial mishap was a small price to pay. And his analysis of the costs and benefits of his permissive policies was not totally wrong while the super-bubble lasted. Only now has he been forced to acknowledge that there was a flaw in his argument....

The new paradigm has far-reaching implications for the regulation of financial markets. Since they are prone to create asset bubbles, regulators such as the Fed, the Treasury, and the SEC must accept responsibility for preventing bubbles from growing too big. Until now financial authorities have explicitly rejected that responsibility.
It is impossible to prevent bubbles from forming, but it should be possible to keep them within tolerable bounds. It cannot be done by controlling only the money supply. Regulators must also take into account credit conditions because money and credit do not move in lockstep. Markets have moods and biases and it falls to regulators to counterbalance them. That requires the use of judgment and since regulators are also human, they are bound to make mistakes. They have the advantage, however, of getting feedback from the market and that should enable them to correct their mistakes. If a tightening of margin and minimum capital requirements does not deflate a bubble, they can tighten them some more. But the process is not foolproof because markets can also be wrong. The search for the optimum equilibrium has to be a never-ending process of trial and error.

The cat-and-mouse game between regulators and market participants is already ongoing, but its true nature has not yet been acknowledged. Alan Greenspan was a past master of manipulation with his Delphic utterances, but instead of acknowledging what he was doing he pretended that he was merely a passive observer of the facts. Reflexivity remained a state secret. That is why the super-bubble could develop so far during his tenure.

Since money and credit do not move in lockstep and asset bubbles cannot be controlled purely by monetary means, additional tools must be employed, or more accurately reactivated, since they were in active use in the 1950s and 1960s. I refer to variable margin requirements and minimal capital requirements, which are meant to control the amount of leverage market participants can employ. Central banks even used to issue guidance to banks about how they should allocate loans to specific sectors of the economy. Such directives may be preferable to the blunt instruments of monetary policy in combating "irrational exuberance" in particular sectors, such as information technology or real estate.

Sophisticated financial engineering of the kind I have mentioned can render the calculation of margin and capital requirements extremely difficult if not impossible. In order to activate such requirements, financial engineering must also be regulated and new products must be registered and approved by the appropriate authorities before they can be used. Such regulation should be a high priority of the new Obama administration. It is all the more necessary because financial engineering often aims at circumventing regulations.

Take for example credit default swaps (CDSs), instruments intended to insure against the possibility of bonds and other forms of debt going into default, and whose price captures the perceived risk of such a possibility occurring. These instruments grew like Topsy because they required much less capital than owning or shorting the underlying bonds. Eventually they grew to more than $50 trillion in nominal size, which is a many-fold multiple of the underlying bonds and five times the entire US national debt. Yet the market in credit default swaps has remained entirely unregulated. AIG, the insurance company, lost a fortune selling credit default swaps as a form of insurance and had to be bailed out, costing the Treasury $126 billion so far. Although the CDS market may be eventually saved from the meltdown that has occurred in many other markets, the sheer existence of an unregulated market of this size has been a major factor in increasing risk throughout the entire financial system.
Since the risk management models used until now ignored the uncertainties inherent in reflexivity, limits on credit and leverage will have to be set substantially lower than those that were tolerated in the recent past. This means that financial institutions in the aggregate will be less profitable than they have been during the super-bubble and some business models that depended on excessive leverage will become uneconomical. The financial industry has already dropped from 25 percent of total market capitalization to 16 percent. This ratio is unlikely to recover to anywhere near its previous high; indeed, it is likely to end lower. This may be considered a healthy adjustment, but not by those who are losing their jobs.

In view of the tremendous losses suffered by the general public, there is a real danger that excessive deregulation will be succeeded by punitive reregulation. That would be unfortunate because regulations are liable to be even more deficient than the market mechanism. As I have suggested, regulators are not only human but also bureaucratic and susceptible to lobbying and corruption. It is to be hoped that the reforms outlined here will preempt a regulatory overkill.

—November 6, 2008

[calmo]

thanks bakho, this model outlined by Rajesh hold the homes off the market for three to five years. is not doable, yes? (all references to the financial possibilities of this model are null and void; any concatenation of the letters "m""o""d""e""l" do not signify model...this parrot has snuffed it...)[We need this clause to reaffirm that it is Hank who is lying and that we are not, yes?]
And so we agree, that Hank is desperate, was desperate and will be desperate til Jan 30, yes?

To ricochet off kharris: he has no options. Not really.
There are no models...might as well skip to crowd control.

[calmo]

Thanks Bupa...such a long article and a link that dates it Dec/08...I'll never keep up at this rate.
Were you bulldozed by "paradigm" talk into a non-committal posture or are you busy putting up your dukes for a stunning reply?
Me, I'm busy erasin every occurrence of "paradigm" so that I don't go ballistic early.

[Too Much Fed]

Housing is NOT the problem. It is a symptom. The problems are TOO MUCH DEBT AND NEAGTIVE REAL EARNINGS GROWTH FOR MOST PEOPLE!

The debt to currency ratio is TOO HIGH. It is time to start printing currency (it carries no interest payment with it) to:

1) create a wage bubble

2) start new banks so the bad ones can FAIL

[Bupa]

My Hungarian friends say Soros is showing his age. He's not quite as lucid as he once was.

I think the Nobel committe should take away the Nobel prize from Robert Lucas now that the flaws in his rational expectation theory are so painfully evident and give it to the old Hungarian guy who has made a lot of money betting on the imperfections of the markets. Reflexivity sounds a bit more realistic than Rational Expectations.

Less math involved too.

[Too Much Fed]

EDIT: NEGATIVE

And, "In short, policymakers need to envision an economy in the future that is distinctly different from the past. Relying on the housing market to propel growth is a failed policy. Relentless upward leveraging to support consumer spending was not sustainable. Accept the failure, and move on."

Stop using DEBT (future demand and/or future price gains) to attempt to grow real GDP, housing prices, and stock prices faster than they should be EVEN IF AND ESPECIALLY IF the high-end and central bankers become poorer!!!!

[Bupa]

Calmo, he wrote it on November 6, it was published yesterday for the December 4 issue. No big mystery...though Hungarians are famous for going into revolving doors behind you but coming out ahead of you.

[Inflation is the Enemy]

"...the room for rapid credit growth is simply limited."

The public sector can borrow goods/services from abroad for awhile, and redistribute them to domestic citizens as payment for building infrastructure. However, expansion of public debt cannot indefinitely replace the former constant expansion of private debt. Constant debt expansion is simply not a viable long term strategy.

Its time to let mild deflation put more spending power in the hands of the bottom 90% for them to buy stuff with. Constant inflation has shown itself to be a failed policy.

[lineup32]

Thanks Tim, great idea's too bad the political system is running 180 degree's in the opposite direction.
For the poster who believe's excess inventory can be controlled via some type of warehousing needs to realize that the over building is beyond the numbers that show up as foreclosures and simple RE forsale. Without a long winded post our RE market has been investor driven for 25 years creating a variety of excess inventory such as vacation rentals, 2nd and 3rd and 4th homes for the wealthy and the over leveraged investor flippers and now foreclosure investors, not to mention the number of vacant homes in various parts of the country due to declining economic conditions,subdivisions built hours away from the nearest job the list is long.
Better to adopt Tim's idea and look to new segments of our economy to develop.

[calmo]

thanks 'Too Much' for the humor...do not be offended if it was not intended as such.
I can grow into it: create a wage bubble.
And learn its serious and substantial mysteries.
If not, I'm awarding you the Genius Medal For the Day anyhow.
Learn to like it (to steal from me ol Dad who tired of my response as a toddler to porridge: "I don't like it.").

And thanks for joining us Bupa after quite a recess, I believe, no? Hope all is well with you and glad you can read Soros without the typical preconceptions that attend such figures...I am working up to a serious read...hoping.

[Don the libertarian Democrat]

Compared to TARP,well, I'm with you. But this:

http://www.ft.com/cms/s/0/a21097a0-a5d6-11dd-9d26-000077b07658.html

"Several environmental groups blasted the automakers on Wednesday, accusing them of seeking subsidies to comply with measures they have repeatedly resisted. “It simply beggars belief that the car lobbyists now come cap in hand to the European Union asking for handouts to develop the fuel efficient cars they should have built long ago,” said Jos Dings, directors of Transport & Environment, a pressure group."

And this:

https://www.blogger.com/comment.g?blogID=25510280&postID=3619937715339986563

"Meanwhile, when no one was looking, American automakers are on the way to getting their own sweetheart deal from Congress -- billions, ostensibly to convert to more fuel-efficient cars. On a much smaller scale, this bailout is almost as outrageuos as Wall Street's. Detroit has known for years that it would eventually have to create fuel-efficient cars, but it kept producing SUVs and trucks because that was where the profits were. Japanese automakers in the US did the right thing, took the risk, made the investments in fuel-efficient technologies. But they're not getting bailed out."

It smells too much like blackmail. Couldn't we at least demand a change of management?
By DonthelibertarianDemocrat

So I agree with you.

[lark]

Great article but this bugged me:

"We spent decades pretending that the relentless focus on producing nontradable goods and relying on a ballooning current account deficit to hide our lack of productive capacity was an appropriate policy approach. "

"We"? Who is this "we"?

I wasn't a member. I've looked askance at these absurdities since the tech bubble knocked me for a loop. Since I woke up and started to try to figure out what was going on.

It's a problem that economists have so little credibility. When they didn't lead us down this path, they cheered us on.

Why not just have tariffs and forget all this globalization. Since that is the one thing economists all agree we shouldn't do, perhaps it's the ticket.

Is America the next Iceland?

Last winter, folks on this blog were exclaiming how our credits markets were "deep and liquid". Why manufacture when you can export mortgage backed securities?

[Bruce Wilder]

Tim Duy is terrific. Or, maybe, he just expresses what I have been thinking for months, better than I can express it myself.

I suspect that the country made headed into dead panic. Reading the Calculated Risk blog has become like a prose version of Requiem Mass for the economy. General Electric just got a $139 billion guarantee from Hank Paulson. General Electric!!! General Motors projects its own demise. Best Buy is projecting a year-ending quarter, down 5 to 15%. Intel shaves 10% off its revenue projections. MBS indices reacted to Paulson's plans by diving off the cliff, as CR likes to put it. The Bank of England is warning of the worst downturn in 30 years. A former head of Goldman Sachs uses the phrase, "worse than the Great Depression" in place of the now customary hyperbole, "worse since the Great Depression".

I fear fear, itself.

[cent21]

I think I roughly agree though I wishfully hope that prices have nearly corrected enough to bring costs in line with incomes. But I haven't considered that equation even on the back of an envelope.

I think there is a corrolary that all asset prices, not just housing, have gotten out of line with incomes. Combined with shifting demographics, this would mean the tail-wind of the past 30 years - that resulted in a skewing of the income distribution and wealth, is going in reverse. And the "wealth effect" had a real impact on GDP and employment, though the resulting employment for those tricked down upon was at a lower than sustaining level of income (the rest was borrowed and leveraged into housing).

If this is correct, the issue is bridging the gap between median incomes and asset prices generally. The conventional economics of the past 35 years has targeted wage inflation while considering asset inflation benign or beneficial.

Alas, 30 years ago, the public federal debt was one-third of GDP, and the social security trust fund did not hold significant non-public debt.

Now, the federal debt, including SS trust funds and FED activity, is closing in rapidly on 100% of GDP, not much less than immediately after WWII. So there's another 70% of GDP headwind we've built up over the past 30 years.

I really don't even want the government to be the primary mover in resolving this mess. And don't see much clarity about any other way to do it, save by a slow and painful adjustment to normality, perhaps punctuated with quantum adjustments like we've seen during the waning days of the third Bush administration.

[peterbob]

Excellent post.

[a]

As much as I hate to say that somone from Goldman is right, I think Whitehead is correct:

http://www.reuters.com/article/Finance08/idUSTRE4AB7HT20081112

"I think it would be worse than the depression," Whitehead said. "We're talking about reducing the credit of the United States of America, which is the backbone of the economic system."

Krugman and the Keynesians (a possible name for a band?), following Paulson and Bernanke, just want to spend money in the hopes that this will solve our problems. It won't - it will just create different, and bigger, problems. It prevents banks from defaulting, it prevents Fannie from defaulting, by putting all the default risk in terms of the full faith and credit of the U.S. But now the U.S. can default, and it *will* if the Krugman no-stimulus-is-too-big philosophy takes hold. Economists have to learn *economy* - that you have to live within your means, and you can't just spend because it's a good idea; you have to have the money first.

[hari]

After thirty (30) years of deregulated and prolific extension of *naked* capitalism + globalization to boot under WTO and China's entry into it...we've reached a point in (global) economic history when from all indicators available to us mortals - there is the dawn of a new paradigm!

A more gentler and kindler world of social and economic advancement of the less priveleged and down-trotten - while sucking the rich and well-off. The irony is that this paradigm change is already underway....with election of BO.

Now, the q's is what's that new global economic paradigm? Who will define it? Implement it...ensure its design and imprint...so it is not as fatal - as the last one.

[hari]

14-15 Nov session of extraordinary G-20 gathering for dinner at WH/GWB - surrounded by Hu Juntao + Medvedev + Da Silva + Manmohan Singh - and their subsequent meeting under IMF banner (15th Nov) will tell the toll of final redemtion of *naked* capitalism and its greed and social violence.

[hari]

It's official - OECD is now predicting prolonged stagnation and recession in 30 member countries of the *rich-man's-club*
(my old job). GDP Growth projections 0.3% and going down!

Germany is today officially in recession - two negative gt's. growth.

[Lafayette]

The Feel-Good Factor

Article: Housing prices are falling because fundamentally the price of housing became unaffordable

Thank you, Tim. It is often necessary to state the obvious (the givens) before predicting the future.

But, Tim, wisely, does not go on to predict the future. Meaning, when will prices become more affordable? There is no objective answer to this question. No date, no mean national income figure, no rate of employment -- but perhaps a coalescing of both real disposable income and the rate of employment with one other factor.

That other factor is called the Feel Good Factor. What constitutes the F-G Factor? Confidence in the future and disposable income. When people can renew their confidence in the future, they will start shopping around for housing. I suggest that, though having taken a drubbing, disposable income has not been devastated. I am presuming that most, if not many, had taken their money out of the stock market to place it in bonds or money market investments.

All real estate is sparked by entry-level buyers. When they move into housing purchases, new houses are built, older houses are sold; and those who sold their houses either move up or down in the market. Over the past 8-years, predatory pricing convinced the entry-level group to buy MacMansions. These naive adult-children went for the Golden Ring and now find themselves on the street, with a net loss perhaps of their down-payment.

More than likely, consoled by the recent election, they are now waiting for the good times to roll once again; before entering the Housing Market, this time with eyes not larger than their stomachs. (Which caused the present indigestion. ;^)

[Lafayette]

Economic Guessing Game

Economic recovery is a mysterious thing. It can be historically predictable or not at all. It can come quickly or slowly depending upon a number of factors.

Here are three:
• This coming recovery could be a bit easier than in the past because total Economic Demand is much larger, more global. The rest of the world did not go into such an extensive loss of net worth, since they were not as committed to the stock market for savings or afflicted with subprime credits.
• On the other hand, any significant structural changes in the US will take time to implement. This could slow an inevitable recovery. But, the US has not much choice. The economic paradigm has shifted. Going back to the economy of 1990/2000 is not on, because that was an inflationary bubble built on the myth of Internet technology. Going back to the economy of 1970/1990 is not on either, since that period was the end of the Cold War, when the total supply of labor was considerably reduced (imprisoned so-to-speak behind the Iron Curtain). That situation clearly no longer exists.
• So, the only other way is forward, not backward. That is to build a new Demand Economy based upon the Services Sector and limited Industrial Sectors (mostly orientated toward new infrastructural technologies, particularly in transportation and renewable energy).

Where is the Demand Economy coming from? This breakdown of GDP by Industrial/Commercial Sector is telling:
• More than a third of economic activity is presently provided by Retail/Wholesale Trade as well as a bit less than a fifth of employment.
• A quarter of GDP is provided by Manufacturing/Construction, along with about a fifth of all employment.
• Finance/Insurance provide 13% of GDP value but only 6% of employment
• Health Care/Social Assistance provide 4% of GDP and a large 14% of employment
• Information/Professional/Scientific provide 10% of GDP and 11% of employment
• Accommodations/Restaurants account 2% of GDP and 9% of employment
• Administrative, 2% of GDP and 8% employment
• And all the rest …

So, where will the New Economy take us? My suggestion:
• Retail and Wholesale Trade in the nation that Shops Till It Drops will continue unabated and even expand. (A service sector)
• Manufacturing will contract to less than a fifth of total GDP, whilst employment will reduce as well to between 10 and 15%. Construction will expand since funding will be available for new infrastructure. So, the total should remain constant in the short-term, unless there is a long-term Infrastructural Plan to which resources will be allocated that will maintain renewal -- which is not common to American policy that is short-term orientated.
• Finance/Insurance (service sectors) will remain stable.
• Health Care/Social Assistance will expand employment significantly, but only if adequately funded by the state to 10% of GDP and 20% of employment.
• Information/Professional/Scientific will expand, but only slightly.
• Accommodations/Restaurants will remain stable.
• Administrative will remain stable.

The biggest gains, I suggest, will be in Health and Social Services. I am ever confident that Education will expand, but is presently a very small percentage at the bottom of the chart. It is imperative that the percentage of students who graduate with either only a Secondary School degree or go on to a Postsecondary schooling increase, since the economy will be shifting to a services sector onus – and not everyone can work at McDonalds or Motels.

We must move New Talent beyond menial, unskilled work. We’ve no choice, I submit – except reducing population. Which will not happen because American females are statistically amongst the more fertile in developed nations. (See here.)

[bakho]

The Reagan mantra, "It's your money" has demostrated its inadequacy as public policy. The last wave of tax cuts for the wealthy and low interest rates fuel a financial bubble, not an economic recovery.

We need a new paradigm.
It's your government.
It's your health care system.
It's your public parks.
It's your public school system.
As part owners in joint enterprises, most individuals can have access to far more resources than relying on only their money for private schools, private health insurance, and private swimming pools.

Remember: Your internet was developed by your government using your tax dollars. Wise investment of public moneys is needed now more than ever.

Paulson and the rest of the Bush administration are stuck on the impotent "It's your money" mantra. This is why they cannot get up an adequate bailout or stimulus.

[Farrar]

Thank you, Laf -

It's hard to argue with your forecasts. Your prognosis supports what we've been saying all along: the US must invest heavily in transportation, new energy, and education, not only for our own needs but also in the expectation that this will lead to new tradable manufactures. Since the economic returns seem unpredictable in the short term, such investments must be jump-started by the government - investments which we and future generations will pay for, but which will probably benefit future generations more than ourselves.

The alternative is slow and painful decline for the USA.

[ken melvin]

Lady on the bus, late fifties, on phone with daughter, can't help because she and hubby are tapped out with monthly payments. No, they can't borrow any more, either. The ARM kicks in next year and they have no way of making the $1500/mo extra as is, can't sell their house - underwater - , and with the poor economy, no way fo making additional ...
Why does bailing out GM remind me so of the old adage about pounding sand in a rat hole?

[dirtyal]

"And thanks for joining us Bupa after quite a recess, I believe, no? Hope all is well with you and glad you can read Soros without the typical preconceptions that attend such figures...I am working up to a serious read...hoping"

Note to Calmo: You really don't need to read Soros. He gives great interviews and there are lots of them posted on the internet. Yesterday, I watched a great interview with Soros and the chairman of the MIT Econ Dept. (Caballero) It was very stimulating and I'm sure you can find it without too much trouble.

Soros is a very smart man. In fact, he's very humble considering how much he has done in finance for the past 20 years. He talks about the mistakes he has made about ten times as much as he talks about when he got it right.

And a lot of what he has to say makes a lot of sense. One of the points that he made in the MIT interview was the difficulty of building models that take into account the amount of uncertainty that should be built in. He thinks a lot of the more traditional models don't take uncertainty into account enough. He equates uncertainty with risk and his point is that most investments that appear to be without risk have been shown to be more risky than they first appeared. One of the many problems with the models is that they do not build in a "risk premium" that is sufficient for the actual risk that is being undertaken.

One last thing..watch the whole interview including the Q and A. I was impressed but not surprised at the international demographics of the student body. Most of the graduate students were clearly not brought up in the US and have a much more global understanding than most of our young people. It was a clear case of why there will be other people at the table in the future. And they will be eating the lunches of my kids and others.

[Switch]

"...the relentless focus on producing nontradable goods..."

Public sector borrowing to allow continued production of nontradable goods will not ease the transition, it will slow the transition at great cost. Easing the transition would involve helping people to switch production as painlessly as possible.

[AndrewBW]

"A homeowner could justify such a purchase as long as they thought they were guaranteed a 15% annual risk free return. But who, other than realtors and mortgage brokers, remain under that delusion?"

Uhm, Hank Paulson?

[tompain]

Inflation is the Enemy: deflation will not help the bottom 90%. It will not give them more buying power because they are in debt, via credit cards, auto loans, mortgages, student loans. Their debt is denominated in dollars. If you deflate, the real burden of their debt increase. The way to ease the burden on them is actually to inflate. If the dollar devalues by 50% and their real wage stays flat, you have relieved them of half their debt burden. Depending on what they do for a living, their real wage may decline rather than stay flat, but still for those who have a lot of debt, inflation will not be their enemy, it will be their friend.

[Inflation is the Enemy]

"...because they are in debt..."

Not everyone.

"...their real wage may decline..."

No kidding. Also real pensions, and the real value of their meager savings. You can't make up for lost consumer purchasing power with endless expansion of credit. Some people just borrow at negative real interest rates, leverage bubbles up to the moon, and create credit crises that deprive legitimate borrowers of credit. This tanks the economy.

Lowering the purchasing power of the general consumer with inflation is not a stable long term policy.

[bread and the fish]

you guys

you re married to the chinese guys,
the party of people

how s that for a liberal ?

now this wife of yours
does t wanna spend you let more
does it *?
it happens 2 squanderers,

joe spenders.

stop bea..ing abot that.
Wanna divorce ? go talk to the pope
or to the people, at least.

Confess
and repent.

it s religous
this problem
not economics-related _

and to all of you rest
crowd control
them politicians
and fedsters
that married you all
in the first place.

not public – they/we know.

[Mauler]

http://www.counterpunch.org/
A Credit Crisis or a Collapsing Ponzi Scheme?
The Two Trillion Dollar Black Hole
By PAM MARTENS

Purge your mind for a moment about everything you've heard and read in the last decade about investing on Wall Street and think about the following business model:

You take your hard earned retirement savings to a Wall Street firm and they tell you that as long as you "stay invested for the long haul" you can expect double digit annual returns. You never really know what your money is invested in because it’s pooled with other investors and comes with incomprehensible but legal looking prospectuses. The heads of these Wall Street firms have been taking massive payouts for themselves, ranging from $160 million to $1 billion per CEO over a number of years. As long as new money keeps flooding in from newfangled accounts called 401(k)s, Roth IRAs, 529 plans for education savings, and hedge funds (each carrying ever greater restrictions for withdrawing your money and ever greater opacity) everything appears fine on the surface. And then, suddenly, you learn that many of these Wall Street firms don't have any assets that anybody wants to buy. Because these firms are both managing your money as well as having their own shares constitute a large percentage of your pooled investments, your funds begin to plummet as confidence drains from the scheme.

Now consider how Wikipedia describes a Ponzi scheme:

“A Ponzi scheme is a fraudulent investment operation that involves promising or paying abnormally high returns (‘profits’) to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business. It is named after Charles Ponzi...One reason that the scheme initially works so well is that early investors – those who actually got paid the large returns – quite commonly reinvest (keep) their money in the scheme (it does, after all, pay out much better than any alternative investment). Thus those running the scheme do not actually have to pay out very much (net) – they simply have to send statements to investors that show how much the investors have earned by keeping the money in what looks like a great place to get a high return. They also try to minimize withdrawals by offering new plans to investors, often where money is frozen for a longer period of time...The catch is that at some point one of three things will happen:

(1) the promoters will vanish, taking all the investment money (less payouts) with them;

(2) the scheme will collapse of its own weight, as investment slows and the promoters start having problems paying out the promised returns (and when they start having problems, the word spreads and more people start asking for their money, similar to a bank run);

(3) the scheme is exposed, because when legal authorities begin examining accounting records of the so-called enterprise they find that many of the 'assets' that should exist do not."

Looking at outcomes 1, 2, and 3 above, here’s where we are today. The promoters have clearly not vanished as in outcome 1. In fact, they are behaving as if they know they have nothing to fear. As over $2 trillion of taxpayer money is rapidly infused through Federal Reserve loans and over $125 Billion in U.S. Treasury equity purchases to keep these firms from collapsing, the promoters are standing at the elbow of the President-Elect in press conferences (Citigroup promoter, Robert Rubin); they are served up as business gurus on the business channel CNBC (former AIG CEO and promoter, Maurice “Hank” Greenberg); they are put in charge of nationalized zombie firms like Fannie Mae (Herbert Allison, former President of Merrill Lynch); they are paying $26 million and $42 million, respectively, for new digs at 15 Central Park West in Manhattan, where their chauffeurs have their own waiting room (Lloyd Blankfein, CEO of Goldman Sachs; Sanford “Sandy” Weill, former CEO of Citigroup, who put his penthouse in the name of his wife’s trust, perhaps smelling a few pesky questions ahead over the $1 billion he sucked out of Citigroup before the Fed had to implant a feeding tube).

We are definitely seeing all the signs of outcome 2: the scheme is collapsing under its own weight; there are panic runs around the globe wherever Wall Street has left its footprint.

But outcome 3 is the most fascinating area of departure from the classic Ponzi scheme. Legal authorities have, indeed, examined the books of these firms, except for one area we’ll discuss later. They found worthless assets along with debts hidden off the balance sheet instead of real depositor funds. Instead of arresting the perpetrators and shutting down the schemes, Federal authorities have developed their own new schemes and pumped over $2 trillion of taxpayer money into propping up the firms while leaving the schemers in place. Equally astonishing, Congress has not held any meaningful investigations. This has left many Wall Street veterans wondering if the problem isn’t that the firms are “too big to fail” but rather “too Ponzi-like to prosecute.” Imagine the worldwide reaction to learning that all the claptrap coming from U.S. think-tanks and ivy-league academics over the last decade about efficient market theory and deregulation and trickle down was merely a ruse for a Ponzi scheme now being propped up by a U.S. Treasury Department bailout and loans from our central bank, the Federal Reserve.

Fortunately for American taxpayers, Bloomberg News has some inquiring minds, even if our Congress and prosecutors don’t. On May 20, 2008, Bloomberg News reporter, Mark Pittman, filed a Freedom of Information Act request (FOIA) with the Federal Reserve asking for detailed information relevant to whom the central bank was giving these massive loans and precisely what securities these firms were posting as collateral. Bloomberg also wanted details on “contracts with outside entities that show the employees or entities being used to price the Relevant Securities and to conduct the process of lending.” Heretofore, our opaque central bank had been mum on all points.

By law, the Federal Reserve had until June 18, 2008 to answer the FOIA request. Here’s what happened instead, according to the Bloomberg lawsuit: On June 19, 2008, the Fed invoked its right to extend the response time to July 3, 2008. On July 8, 2008, the Fed called Bloomberg News to say it was processing the request. The Fed rang up Bloomberg again on August 15, 2008, wherein Alison Thro, Senior Counsel and another employee, Pam Wilson, informed the business wire service that their request was going to be denied by the end of September 2008. No further response of any kind was received, including the denial. On November 7, 2008, Bloomberg News slapped a federal lawsuit on the Board of Governors of the Federal Reserve, asserting the following:

“The government documents that Bloomberg seeks are central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression. The effect of that crisis on the American public has been and will continue to be devastating. Hundreds of corporations are announcing layoffs in response to the crisis, and the economy was the top issue for many Americans in the recent elections. In response to the crisis, the Fed has vastly expanded its lending programs to private financial institutions. To obtain access to this public money and to safeguard the taxpayers’ interests, borrowers are required to post collateral. Despite the manifest public interest in such matters, however, none of the programs themselves make reference to any public disclosure of the posted collateral or of the Fed’s methods in valuing it. Thus, while the taxpayers are the ultimate counterparty for the collateral, they have not been given any information regarding the kind of collateral received, how it was valued, or by whom.”

As evidence that Bloomberg News is not engaging in hyperbole when it uses the word “cataclysmic” in a Federal court filing, consider the following price movements of some of these giant financial institutions. (All current prices are intraday on November 12, 2008):

American International Group (AIG): Currently $2.16; in May 2007, $72.00

Bear Stearns: Absorbed into JPMorganChase to avoid bankruptcy filing; share price in April 2007, $159

Fannie Mae: Currently 65 cents; in June 2007 $69.00

Freddie Mac: Currently 79 cents; in May 2007 $67.00

Lehman Brothers: Currently 6 cents; in February 2007, $85.00

What all of the companies in this article have in common is that they were writing secret contracts called Credit Default Swaps (CDS) on each other and/or between each other. These are not the credit default swaps recently disclosed by the Depository Trust and Clearing Corporation (DTCC). These are the contracts that still live in darkness and are at the root of why the Wall Street banks won’t lend to each other and why their share prices are melting faster than a snow cone in July.

A Credit Default Swap can be used by a bank to hedge against default on loans it has made by buying a type of insurance from another party. The buyer pays a premium upfront and annually and the seller pays the face amount of the insurance in the event of default. In the last few years, however, the contracts have been increasingly used to speculate on defaults when the buyer of the CDS has no exposure to the firm or underlying debt instruments. The CDS contracts outstanding now total somewhere between $34 Trillion and $54 Trillion, depending on whose data you want to use, and it remains an unregulated market of darkness. It is also quite likely that none of the firms that agreed to pay the hundreds of billions in insurance, such as AIG, have the money to do so. It is also quite likely that were these hedges shown to be uncollectible hedges, massive amounts of new capital would be needed by the big Wall Street firms and some would be deemed insolvent.

Until Congress holds serious investigations and hearings, the U.S. taxpayer may be funding little more than Ponzi schemes while companies that provide real products and services, legitimate jobs and contributions to the economy are left to fail.

Pam Martens worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article. She writes on public interest issues from New Hampshire. She can be reached at pamk741@aol.com

[econo mister]

...and now those Chinese are refusing to fund this some more.
so you, the people, will have to.

by pensions.

[dirtyal]

In order to begin to fix the housing crisis, why can't the Feds distinguish between the securities that are actually backed by mortgages and the ones that are "synthetic" i.e. only backed by CDS's.

The people holding the "synthetic" instruments would have to pursue remedies through the courts. The people holding the true mortgage backed securities could be bought out. The securities could be unraveled, and the individual mortgages could be reformed to reflect current market conditions in a manner similar to what institutions that already own the mortgages are doing.

It appears to me, the more I learn about it, that it pays the holders of the "synthetic CDO's" to confuse everyone in order to get Federal backing that is really meant to go toward solving the housing crisis.

The Pam Martens article addresses a part of this. There are other good analyses floating around that seem to show that the real "toxic assets" are the ones backed by the naked credit default swaps rather than the more complex mortgage pools. Both are toxic. But one set of instruments has lots to do with the credit freeze and very little to do with the housing crisis.

It appears to me that we should be aiming our limited resources at solving the housing crisis, to the extent possible, and leaving those who bought the toxic assets based solely on the CDS backing to pursue avenues that don't include taxpayer bailouts.

The more we learn about all this, the more it appears that the $700 Billion bailout was meant to protect the banks--not the homeowners and not the taxpayers.

With respect to the so called "sophisticated investors" who were duped into buying the instruments backed only by "insurance", I say, let them fend for themselves.

[im1dc]

Re. "Fed Watch: Misguided Policies"

It might be enlightening to read what Nouriel Roubini wrote today:

But first a PUBLIC HEALTH WARNING.

This truly is the most DEPRESSING article I have ever read. Whoever reads it from this link must promise to read the first 24 comments too (just ignore #25, he's demented) to refloat their sinking souls.

To Patricia Shannon, you won't find any optimism here. Stay away.

Doctor Doom
The Worst Is Not Behind Us
Nouriel Roubini, 11.13.08, 12:01 AM EST

"Beware of those who say we've hit the bottom."

http://www.forbes.com/2008/11/12/recession-global-economy-oped-cx_nr_1113roubini.html?partner=daily_newsletter

[gordon]

Mr Paulson sounds to me like a naughty boy who has broken his mother's vase while playing too boisterously in the living room. He is desperate to put it back together again, and is trying everything but to no avail.

The time has come not only to admit that the broken vase can't be put back together, but also to admit that it was an ugly and cracked old thing which was going to just fall apart soon anyway. Mother might be angry for a while, but Mr Paulson's best strategy now is to contribute his piggy-bank to the purchase of a new and better vase, and offer to accompany Mother to the store and help carry it home.

Persuading Mother that there are better vases out there might be assisted by getting her to read the proposals at the EPI's Agenda for Shared Prosperity site.

[Jim]

"Accept the failure, and move on". If the U.S. were to buy what it needs rather than what it wants (Stones, apologies), the economy would pull back by at least 1/3. We have done just that in our home. The aircraft are used far less.

[dirtyal]

Note to im1dc

Thanks for the referral. Just read the article. I think he is right. Also, the comments range from helpful to totally wacko. And some of the people who disagreed really agree if they read the article carefully.

So, is it deflation or inflation. It's probably both. First deflation followed by inflation.

Deflation in the next two years as the economy shrinks. Inflation following the deflation as the economy strengthens and we begin to have to deal with the deficits and the fact that we now have many infrastructure projects underway that are competing for scarce resources.

But the biggest danger is still the downward spiral to the economy--that everything grinds to a halt and is difficult to get started again. Once the economy is fully employed in a lower consumption world, we can probably deal with the inflation via (ugh) higher taxes and higher interest rates.

The people who have the most trouble accepting the prognosis are in denial!

[calmo]

Right dirtyal.The people who have the most trouble accepting the prognosis are in denial! And for my part I'm going to deny myself the pleasure of chewing gum before I read bakho posts...which have the effect of paralyzing my jaw muscles, you?
Take the gum out and read this bit:The Reagan mantra, "It's your money" has demostrated its inadequacy as public policy. The last wave of tax cuts for the wealthy and low interest rates fuel a financial bubble, not an economic recovery.

We need a new paradigm.
It's your government.
It's your health care system.
It's your public parks.
It's your public school system. Ordinarily the mere sound of "paradigm" makes me spit, but not here.
And there it is: my gum on the floor.
There's no denying it.

[BJ Feng]

Both Tim Duy and George Soros are saying the same thing. We had an unsustainable bubble in housing caused by excessive credit and leverage. This cannot be allowed to happen again in the future. So the solution cannot be to reinflate the housing market back to bubble status. Housing prices need to fall to natural levels, having the government buy homes at inflated prices to prop up the bubble is a very bad idea and won't work because the mania and psychology that fueled the bubble is gone. Sure the government can buy one house on a block with three houses in foreclosure, and it can overpay for that one house, but that won't stop the other two houses from selling at lower prices. All the government did was buy one overpriced house and the market would continue to fall. There simply isn't enough money for the government to buy enough houses to affect the market price, plus homes still need maintenance, is the government going to hire gardeners to maintain the abandoned homes they buy up? Sounds like a very very bad idea.

People need to understand why we have TARP and a bailout plan. The financial system is unique in that its collapse would destroy the economy and subject us to another Great Depression. THAT IS WHY FINANCIAL FIRMS ARE BEING BAILED OUT! Not because we want to, but because we have to. So why aren't other firms being bailed out? Because they don't pose the same dangers to the economy. GM going bankrupt isn't going to cause another Great Depression. This is why only financial firms are receiving aid (yes unfortunately this is slowly changing).

There should be no money given to any other type of firm. We are making money available to financial firms in order to save the economic system, that is the only reason we are doing this. You saw what happened when Lehman failed. Circuit City failed too, but nothing happened to the economy at large. That's why firms like Circuit City receive nothing while the Lehmans get TARP money.

Unless there is systemic risk from a failure, we should allow that firm to fail. We should not lend to firms that pose no systemic risk, and in an ideal dream world, we would let all firms fail. But we don't live in an ideal world.

[Lafayette]

Prudent Man Rule

BJF: There should be no money given to any other type of firm. We are making money available to financial firms in order to save the economic system, that is the only reason we are doing this.

Fine BJ, now with the same enthusiasm, pray tell, explain why executives in companies to whom financial aid for restructuring was given, were allowed to keep their bonuses?

A failed company is a failed company. No bonuses. Period.

This smells to high heaven of the sort of cupidity rot that brought the financial system to its knees in the first place. And, THAT FACT you are not prepared to acknowledge.

So, all your gloss about "having to save the financial system" is just that ... gloss. We have yet to address the key problem: The fact that Risk Managers took leave of their senses in their profit-seeking frenzy. The Prudent Man Rule, a long time the hallmark of Wall Street asset management, was sent off to hide in the closet.

[ken melvin]

I remember feeling sorry for Sunday School teachers trying to explain some of the events told of in the Old Testament and am appreciative of those who dare offer Sunday School lessons here, but, man Sunday School lessons ain't goin get it.

[Precipitous]

"If we reach a point we can’t finance the spending, financial markets will tell us."

Markets don't generally lose confidence in an orderly process, confidence tends to drop precipitously. Lending to private citizens didn't slowly taper off, it went to near zero in a short period. Once the market shows obvious signs of losing confidence, it is too late. Short term debt can't be rolled over, and really bad things can happen.

[Steven Earl Salmony]

Billions of dollars in bailouts and year-end bonuses are being directed to the "wonder boys" on Wall Street. These self-proclaimed Masters of the Universe have turned a great capitalist system into a paltry gambling casino. In the light of all their greedy risk-taking and conspicuously hoarding behavior, they can no longer be called by any name other than "thieves of the highest order".

Steven Earl Salmony
AWAREness Campaign on The Human Population,
established 2001
http://sustainabilityscience.org/content.html?contentid=1176

[gordon]

Ken Melvin, if by "...but, man Sunday School lessons ain't goin [to] get it", you mean that rage against the cupidity of Wall St. tycoons is an inadequate foundation for developing reform proposals for the US financial system, I think you are plausibly wrong.

The law has traditionally regarded thieves as responsible for theft. At various periods, thieves have been tortured, maimed, branded, executed and imprisoned, all in the name of preventing theft by punishing thieves. There are, of course, criminologists who see theives as victims of a social system which leaves them little option but to steal, but such views reflect an environment of social deprivation and lack of opportunity for honest social mobility. That can hardly apply to the millionaire executives of Wall St. firms unless you are going to stretch the idea of relative deprivation to hitherto unheard-of dimensions.

Maybe we can have an argument about "what is theft?", or "what is crime?". In fact, this argument started to happen in the thread under this post in August, but sort of petered out. There, I was trying to suggest that fraud is a crime (an idea that commenter Larry had trouble with) and that to an economist the amount of damage done by crime should be the criterion for ranking (and by implication punishing) criminals, particularly fraudsters. If the activities of some Wall St. executives result in recession, or even in slower growth, that calculus should expose them to pretty extreme penalties.

[Lafayette]

The Rrckless Society

gordon: if ... you mean that rage against the cupidity of Wall St. tycoons is an inadequate foundation for developing reform proposals for the US financial system, I think you are plausibly wrong.

I concur.

I learned about the Prudent Man Rule (inscribed in American common law) a long, long time ago. Long before the stock market was thought, by many Americans, to be their personal device for printing money.

Why does such cupidity happen? Human nature, likely. Because we lose track of such social markers that give us an understanding of the division between right and wrong or, at least, better and worse.

Now, investing in the stock market is not morally wrong. However, taking all one's savings out of a Savings Account or the Money Market to invest it in high-risk / high-return equity values is/was immature, if not reckless.

And, that is what we have become ... a Reckless Society hell bent on personal enrichment of the kind, "I want it ALL and I want it NOW". Or, "If I don't take it, somebody else will".

A mentality that has obtained for us ALL the sh*t imaginable and right NOW.