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Paulson and Bernanke ratchet up the blackmail talk

by Jerome a Paris Tue Sep 23rd, 2008 at 09:48:07 AM EST

Paulson, Bernanke Tell Lawmakers Urgent Action Needed on Treasury Plan

WASHINGTON -- U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke urged swift action on a Treasury Department plan to buy illiquid mortgage-linked securities and avoid severe spillover effects on the economy.

Mr. Paulson cautioned lawmakers against letting the plan get bogged down in a debate over unnecessary additions.

"Unnecessary additions" - things like accountability, transparency, making sure that the crisis does not happen again, and making sure that it solves the underlying problem. But nope, no "bogging down"


The message could not be clearer - they are not avoiding the brinkmanship - they are escalating it, in the (not wholly unreasonable, given the recent past) expectation that the Democrats in Congress will fold, out of fear of being blamed for the tumbling stock market prices as the plan is delayed.

So, just for the record, a few arguments:

  • the stock market is going down again NOT because the plan is delayed but because, even if the $700 billion gift to the banks is granted, it will still not solve the underlying situation;
  • as the plan is currently drafted, giving $700 billion to the banks to relieve them of their bad assets protects the very institutions or people that lost money by taking stupid risks (and having seen it from the inside, believe me, it was truly stupid) without proposing any upside for taxpayers, nor any reform that would at least avoid the same mistakes from happening again;
  • in the up leg of the bubble, the problem WAS too much liquidity (which helped take silly risks when these were not properly assessed); today's problem is massive deleveraging - that deleveraging is NOT caused by lack of liquidity, but by risk aversion (investors no longer want to invest in anything that looks even remotely risky). Throwing more money at that problem will do nothing to solve it. It will create simply a circuit whereby the government creates new Treasuries, hands them over to the FED, which uses them to create more cash, which it trades with the banks for dubious assets; the banks will use the cash to buy Treasuries. It's a closed circle which helps no one but the banks (and the Fed, see below).
  • the real worry is on actual economic activity, which is straining under the twin burdens of asset price depreciation (house prices crashing, leading to lower incomes for people, less construction activity and foreclosures) and the credit crunch (business no longer having access to credit to develop their activity). Given that companies and households are also deleveraging (reducing their debts or increasing their savings), or are about to be forced to do so, the real need is to inject actual revenues, ie wages coming from real activity, in the economy, and NOT debt. What government needs to do is to spur real economic activity - as it were, there are whole sectors begging for it, like investment in public transporation or renewable energy infrastructure.
The plan from the Bushies helps stricly no one beyond providing TEMPORARY relief to banks, which might be enough but does not quite explain their willingness to engage in such brinkmanship.

Which makes the following suggestion, emailed to me by a US central banker friend, all the more intriguing:

Jerome,

I've been puzzling why Paulson would propose legislation which is so obviously dictatorial, extra-legal and dangerous, even with the careful orchestration of the Lehman Brothers/Reichstag Fire.

I think I've just figured out why they are doing it.

All the Fed's alphabet soup of emergency liquidity facilities innovated over the past year were structured around repurchase agreements. Toxic waste securities were used as collateral for US Treasuries and dollar credit at 85 percent of face value. But as each facility expires, it has to be rolled over and increased to keep pace with the implosion of credit in the interbank markets. Well over half the balance sheet assets of the Fed have been loaned out in this way, perhaps a critical amount in excess of this estimate. Without recapitalisation, the Fed is at risk of failure in the midst of this crisis. Its Enron-style accounting for the toxic waste makes it very vulnerable to a default by any of the repo counterparties it oversees and limits its ability to enforce any constraints as well.

The Paulson plan will provide a one off opportunity for banks to take their toxic collateral back and sell it at a Paulson-determined price for cash. He issues Treasuries to finance the plan which increases the supply available. He selectively decides winners and losers, of course in making the scheme available and pricing assets, creating arbitrage opportunities and survivor bias in the process.

In the meanwhile, the removal of the toxic waste from the Fed balance sheet and redeposit of Treasuries and cash as the repos unwind gets the Fed off the hook for having hypothecated most of its assets against worthless toxic waste at Enron-styled false valuations.

If I'm right, the Paulson Plan recapitalises the Fed without ever publicly admitting that it was dangerously overextended.

My friend provides this video which says Fed has lent out $600 billion of its $800 billion balance sheet.

http://video.msn.com/video.aspx?mkt=en-US&brand=money&vid=25f132d8-4c5d-4f8d-96ca-2d9f327396e7

and concludes a follows:

Real question in my mind is whether the $1 trillion from the Paulson Plan goes to recapitalise the Fed as I suggest, or whether it goes into offshore flight capital before the criminal mafia in Washington and Wall Street flees the jurisdiction.

The theory here is that the Fed has destroyed its balance sheet by taking on increasingly large chunks of non performing assets (the "toxic waste" made from mortgage-backed securities and the like) in exchange for loans of "real" cash to banks that may still end up not repaying them.

It is effectively "broke." This is not what is supposed to happen to a central bank, which can print money without restriction, so let me explain what this means: it can no longer help the banks in a non-inflationary way. In order to take on more toxic collateral from the banks, it would need to actually print money, which would immediately be visible and would be seen as very inflationary. Instead, by getting government to take on more public debt, the impact is diluted in a much larger pool (public debt, rather than cash).

So this is a desperate gamble by Paulson and Bernanke to avoid the run on the dollar that would be triggered by direct cash creation.

Obviously, as the market shows (with the euro up by 6 cents since the plan was announced Thursday night, and gold and oil similarly massively up), worries about inflation have not quite been killed, but they have been kept to a manageable scale.

At this point, of course, the goal is to avoid a bigger crash before the election.

Display:
Fed, shmed.  GTP's got a plan to find PONIES!

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Tue Sep 23rd, 2008 at 09:59:03 AM EST
At this point, of course, the goal is to avoid a bigger crash before the election.

So is this adding weight to the "McCain, a candidacy designed to loose" theory? and everything is just going to fly apart come January to prove that the dems are worthless financially?

Any idiot can face a crisis - it's day to day living that wears you out.

by ceebs (ceebs (at) eurotrib (dot) com) on Tue Sep 23rd, 2008 at 10:04:33 AM EST
I think they have been overtaken by events - they probably would have preferred the last two weeks to have taken place in February :-)

From what I've seen, Frank and Dodd are on the ball.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Sep 23rd, 2008 at 10:12:36 AM EST
[ Parent ]
maybe a small crisis now, that can be used to make sure they loose in November, so its definitely someone elses problem when all the really big bills come due.

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Tue Sep 23rd, 2008 at 01:10:22 PM EST
[ Parent ]
But by then everyone will know whose fault it is. The last couple of weeks blew their cover.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Sep 23rd, 2008 at 01:11:36 PM EST
[ Parent ]
You don't see them saying "well when we left you in charge it was all stable" ?

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Tue Sep 23rd, 2008 at 01:14:32 PM EST
[ Parent ]
and all the talking heads saying that this was true?

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Tue Sep 23rd, 2008 at 01:14:56 PM EST
[ Parent ]
Obama will have to pre-empt it by pulling a Roosevelt:
On March 5, 1933, the day after Roosevelt's inauguration, he called a special session of Congress which instituted a mandatory four-day bank holiday. This act provided for the reopening of banks after federal inspectors had declared them to be financially secure.


A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Sep 23rd, 2008 at 01:17:55 PM EST
[ Parent ]
I think we're both leaning in the same direction.

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Tue Sep 23rd, 2008 at 01:22:12 PM EST
[ Parent ]
If the Dems can get 60 senators to prevent a filibuster, Obama will have free rein.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Sep 23rd, 2008 at 01:23:08 PM EST
[ Parent ]
If...

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Tue Sep 23rd, 2008 at 01:27:21 PM EST
[ Parent ]
They can make a political move regardless.  If 58 Democrats in the Senate stand up and demand something against 42 Republicans they can make hay of it.  The Republicans will cave in the face of economic catastrophe, no doubt.  Their party is already cracked and the coalition won't survive to 2010.
by paving on Tue Sep 23rd, 2008 at 01:52:38 PM EST
[ Parent ]
They would be almost certain to get three or four Republican Senators for anything sensible.  Once they have those, the rest will fall in line like good Republicans always do.  But I think this could move much quicker than January.  The big problem is preventing Paulson from steering any intervention into the pockets of soon to flee cronies.  To the extent that that happens, I would hope they would find it necessary to seek refuge someplace like the Central African Republic, where the rulers could readily be bribed to deliver their heads on a plate. (Getting their money back could be harder.)

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Sep 23rd, 2008 at 10:17:33 PM EST
[ Parent ]
You're talking as if they know what they're doing. It's just as likely they'd dump it on Obama and the first thing he does is look like he successfully navigated his way out of the storm - no-one really understands how this is all going to play out.
by Colman (colman at eurotrib.com) on Tue Sep 23rd, 2008 at 01:33:46 PM EST
[ Parent ]
well that would be Kama at work.

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Tue Sep 23rd, 2008 at 01:40:37 PM EST
[ Parent ]
Definitely Kama, not Karma!

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Sep 23rd, 2008 at 10:19:10 PM EST
[ Parent ]
http://www.dailykos.com/storyonly/2008/9/23/8405/76980/887/607281

Good diaries on the same topic by billmon:
Things become more serious

and thereisnospoon:
Don't take the bait

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Sep 23rd, 2008 at 10:10:42 AM EST
New ideas are beginning to emerge.
Here's Senator Chris Dodd's plan.
Krugman likes it--who else?

Dodd Plan

Capitalism searches out the darkest corners of human potential, and mainlines them.

by geezer in Paris (risico at wanadoo(flypoop)fr) on Tue Sep 23rd, 2008 at 10:15:11 AM EST
[ Parent ]
I love it - will diary tonight.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Sep 23rd, 2008 at 10:19:47 AM EST
[ Parent ]
Paulson is SOB.. he refuses to answer why it is bad to issue warrants.. he want it wihtout this important strin attached...

So, if this somehow works, taxpayers lose, if it does not work taxpayers lose more.

it is crazy...

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Tue Sep 23rd, 2008 at 12:09:21 PM EST
[ Parent ]
Billmon's column and yours should be enough to keep all of us awake well into our 70s.

The Great Unraveling may finally have come.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Sep 23rd, 2008 at 10:55:36 AM EST
[ Parent ]
Excellent cartoon by Tom Tomorrow (hat tip to JPZenger on DailyKos):



"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Tue Sep 23rd, 2008 at 10:22:17 AM EST
I'm skeptical of the fed-failure analysis.

If a repo-counterparty fails (just like Lehman did), the fed owns the crap for good and can mark it down at whatever pace it chooses to amortize it, in proven mark-to-model fashion. They could even have an operating loss, it's only a technicality (the Bank of Japan did a few years ago during the quantitative easing policy).

I believe more in the explanation that it saves the investment banks because assets will be bought at a higher price than what they have already marked down (so they have a profit in their accounts).

No-oversight provisions also allow Paulson & al. to run away to the bahamas with lots of cash. Paulson probably still owns lots of share from its alma mater Goldman Sachs.

Regarding inflationary measures, we are in it already: the fed was short of 50% of the money it lent to AIG, had to have the treasury issue new debt to put it on the FED asset side of balance sheet. They are now officially printing (in M1 aggregate), since one week.

But that won't stop the deflation in assets: their total value is not commensurable to M1, and won't be before years and years of printing. It is more a function of debt outstanding, which is a multiple of the fed balanche sheet by virtue of fractional reserves at the secondary banks. Now that risk aversion brings the multiplier down (reserve ratio go up de facto because of loss provisions), debt will deflate no matter the printing.

Well, at least in the beginning...
If printing overshoots, it will be Zimbabwe. But I think we are still many years away from that.

In the meantime, consumer products & gas (both mostly imported) will inflate strongly all along because of dollar exchange rate losses.

Pierre

by Pierre on Tue Sep 23rd, 2008 at 10:49:54 AM EST
No-oversight provisions also allow Paulson & al. to run away to the bahamas with lots of cash. Paulson probably still owns lots of share from its alma mater Goldman Sachs.

I don't know where I've seen a figure of $100M...

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Sep 23rd, 2008 at 06:07:41 PM EST
[ Parent ]
Not exactly, he was forced to sell most of it, after his confirmation. But:

In addition to the 3.2 million shares, Paulson also owns restricted stock units representing 494,054 shares of common stock, all of which are vested and deliverable. Based on Goldman Sachs' closing price of $152.50 on Thursday, the restricted units are worth about $75 million.
He also owns options to purchase 680,474 shares of common stock, all of which are exercisable.


The road of excess leads to the palace of wisdom - William Blake
by talos (mihalis at gmail dot com) on Wed Sep 24th, 2008 at 11:10:25 AM EST
[ Parent ]
I can see how the paltry sums left were seen not to create any conflict of interests.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
by Cyrille (cyrillev domain yahoo.fr) on Wed Sep 24th, 2008 at 12:25:24 PM EST
[ Parent ]
Of course fed funds account is busted. That's not the object of my anger. That deficit could be reversed, although it ought to be clear as crystal Congress will not legislate such a requirement, simply by issue of cease and desist of FRB credit facilities guided by the current regime.

First, it was BHO promising to extend and expand Bush's "faith-based" social services funding: That completely, utterly abrogates enforcement of the Establishment Clause.

Second, BHO promises to re-appoint Paulson "bond czar," affirming his fealty to finance lobbyist and donors expressed, repeatedly, much earlier in his campaign. Wait for it: BHO will renew Bernanke's contract, too. 2002.

Third, as suggested by a number of studies, when inflation is already low and the fundamentals of the economy suddenly deteriorate, the central bank should act more preemptively and more aggressively than usual in cutting rates ...

To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. ...

One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities....

A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt. The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. [bond-price pegging]

Now this big finger to US voters for "transformation."

WASHINGTON - Democratic presidential candidate Barack Obama says he probably would have to delay the spending programs he has called for during his campaign in light of the massive government bailout being proposed for the nation's financial industry.
[...]
"Does that mean I can do everything that I've called for in this campaign right away? Probably not," he said. "I think we're going to have to phase it in."
[...]
Obama made no reference to the rescue plan's impact on his call for tax cuts for most taxpayers and tax increases for wealthier Americans. On Friday, he said a bailout would not bar him from pushing for middle-class tax cuts, a central proposal in his campaign.

At this point readers should acquaint themselves with the IRS imputes refundable and non-refundable tax credits to taxpayer's future obligations with respect to taxpayer's gross income. The candidate's "tax cut" scheme is a mix of marginal rate adjustments and credits which appear to forebear present obligations of stated income netted by the bottome two quartiles. Check out a conventional donut hole summary.

In a speech Monday, Obama urged Democrats to be as fiscally tough as conservative Republicans and said that the bailout was forcing a new perspective on the federal budget. [i.e. discretionary spending, distinct from fed funds off-budget investment gain (loss)]

Obama said in the interview aired Tuesday that his running mate, Joe Biden, should have waited before commenting on the idea of bailing out the huge insurer American International Group Inc. Biden initially rejected bailing out AIG, a position taken by Republican presidential candidate John McCain that drew Obama's criticism.

All of the election cycle argument is about how to shift costs of so-called entitlements --state and federal arbitration and adjudication of profit-maximizing activity-- to individual HH consumption and capital risk. Instituionalized "libertarianism" in extremis.

Diversity is the key to economic and political evolution.

by Cat on Tue Sep 23rd, 2008 at 10:51:41 AM EST

What government needs to do is to spur real economic activity - as it were, there are whole sectors begging for it, like investment in public transporation or renewable energy infrastructure.

Why has it taken a crisis of immense proportions to make what was absolutely clear a decade or two ago, the true solution (if there is one.)  Occam's Razor.

"Life shrinks or expands in proportion to one's courage." - Anaïs Nin

by Crazy Horse on Tue Sep 23rd, 2008 at 10:53:38 AM EST
Because the financial crack peddlers wanted profits then, and not now.

Fiat money creates fiat finance where obligations are valuable for exactly as long as people believe they are, and no longer.

Reality-based economics, based on tangibles, is so drama-free and boring in comparison.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Sep 23rd, 2008 at 11:01:07 AM EST
[ Parent ]
Occam's Razor, "political" or mathematic modulus

US congressional reps, House and Senate, require HH indenture in order to (1) secure aristocrats' ownership of production, real property; and (2) guarantee revenue streams to aristocrats from HH debt obligations.

Diversity is the key to economic and political evolution.

by Cat on Tue Sep 23rd, 2008 at 11:06:59 AM EST
[ Parent ]
Occam's razor should be used to cut the throats of those who brought us this mess, starting with Paulson, (before he does any further damage,) and Greenspan, (for the damage he has already wrought.)  Perhaps it should first be used to publicly touch up the circumcisions of all of the occupants of the executive suites of the companies and agencies that brought us to here.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Sep 23rd, 2008 at 10:53:45 PM EST
[ Parent ]
Thre is something that does not makes sense.

And he reason it does not makes sense; I think, it is that economic theory is not right... it is not, it can not be epistimelogichally right.

The basics of the economy , or so called basic of the economy are not clear at all. It is not only about stuff, money around (M1, M2, M3), companies , consumers and money-value or money-debt.

There are tendencies, impulses and simbolic variables not taken into account.

I have not still seen any clear and new perspective, new way to look at the glbal system (and the US in aprticualr) which makes sense.

The "normal" way to look at this stuff is krugman eyes, it makes sense, sort of, but not quite completely. Banks were deregualted, they had a lot of liquidity, made awfull bets to enrich themselves, nobody knew exactly what they were buying, so they bought stuff that nobody knows how much it costs..s now there is no market.. if there is no market,there is no liquidity ina bucn of assets and no credit and economy halts..

But given that debt-money is a 30 trillion market (almost like GDP accordign to soem readings credit swaps are worth one year US GDP) what was really the bas bet? Well, actually the whole market.

Antoher approach is that the financial institutions, all of them except local banking, are useless. this is, this is a failure of Wall Street...We do not need finantial services.. but is it true? We do not need credit? But can capitalism exist without credit?

And what about the way stirling looks at it.. captalism does not exist as such, there are purely periods in history where particualr arrangements are set in place to make feel people happy by creating a particualr production-money structure. Stuff produced is no longer a problem: it is kept constant, the improtant thing is the sense of growth, which sicne the great depression came from land for money, then oil-for money and finally debt-mortgage for money.
Bt if this was the general structre in palce, what about doing stuff, you know making things (computers, planes, cars, medical apparatus). Why peple got moey in the frst palce by making things and selling them? who were the first money-holders who wanted huge profits for their money?

Probably it is because I do nto know enough details about economics, or maybe it is becasue economics never quite makes sense.

Structrually one would think that a major redution of wall Street is necessary, and that energy and public transprot investment shuold be the way to creat money-value for consumers. it really seems the best way to go... but I am nto so sure about if it is the way to go fro china, or India.. or even Japan..
So wat happens when some coutnries like the US would benefit for it, while probably europe would but not that much, and china probaby can get more money-value for tis citizens int he way of producing stuff we have adn 1 billion peple may want?

But we could all be wrong, maybe a small Wlall street does not address the problem, maybe debt is the problem as magnifico says, maybe is the investment nature of capitalism, maybe it is the economy fundation... maybe it is that this econmic system does not makes sense at all...maybe..

maybe Europe will avoid the meltdown... but again how is a balacned economy ,a s the german or french, suppose to grow? what is growth? maybe growth is just accounting.. or not..

only maybes...

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Tue Sep 23rd, 2008 at 11:19:17 AM EST
Here is the essence of colonial politics lead by USD intellectual and martial hegemony.

One percenters closing ranks to preserve their "wealth." Honestly, there's not much more to the strategy except details --such as appointing law enforcers.

Diversity is the key to economic and political evolution.

by Cat on Tue Sep 23rd, 2008 at 12:31:49 PM EST
[ Parent ]
Billmon's piece should absolutely be read entirely, but here are some snippets:

Daily Kos: Things Become More Serious

Up until now, the Fed and the Treasury have been able to use their respective balance sheets to absorb the systemic shock of the crisis. <...> But these rescue operations are only feasible because the Treasury is assumed to have unlimited ability to borrow dollars and lend them on to the banks. <...>

But this assumption, in turn, ultimately rests on the fact that the Treasury is borrowing in a currency that can be created on demand by its bureaucratic doppleganger, the Federal Reserve. <...>

So far, the Fed has tried very hard not to monetize (i.e. print up new money to pay for) its various bailout ventures. Instead, it has been liquidating its existing portfolio of Treasury securities, essentially swapping them for toxic crap. But that string has now run out; the Fed has been stuffed as full of crap as a Christmas goose -- meaning the Treasury is going to have to go to the bond market and borrow the money for the MOAB <...> Since Americans don't save nearly enough to buy all those bonds -- not without sending interest rates into the stratosphere -- the bulk of the financing will have to be provided by our foreign creditors, such as the central banks of Japan, China and the major oil exporting countries.

The problem, of course, is that our creditors are already into us for a cool $13 trillion (about 90% of US GDP) and have shown a growing reluctance to lend us more (by using their export earnings to purchase US Treasury bonds and other dollar-denominated assets) as the crisis has worsened.

<...> If ... the Treasury can't find buyers for its debt at interest rate levels that a rapidly weakening US economy can afford to bear, the Fed is going to face an excruciating dilemma: Fire up the printing presses to make the dollars to buy the bonds the Treasury can't sell in the private market, and watch inflation and confidence in the dollar go tearing off in opposite directions (the wrong ones in either case) or allow rising interest rates to push the economy even deeper into recession -- potentially undoing all the damage control paid for with the MOAB.

<...> The Fed may be able to print dollars on demand, but it can't print oil or wheat or gold or any of the other commodities that can, in a pinch, be used as substitutes for dollars.

<...> This is why I've always believed that the great American debt-and-consumption binge would ultimately end in a whopping big dollar crisis -- and not before. The US economy is by nature bubble prone, but there are many ways for the monetary powers-that-be to cushion the blow when bubbles burst and inflate new ones to take their place (as the Greenspan Fed proved several times over). Too much political capital has been invested in the model (i.e. asset price inflation as the engine of growth in an increasingly distorted economy) for it to be otherwise.

The (once-triumphant) model of asset price inflation as the engine of growth in an increasingly distorted economy: we've been able to read that theme over more than three years here on European Tribune. Anglo Disease, anyone?

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Sep 23rd, 2008 at 11:24:42 AM EST
There are two "crises".
  1. Some fraction of mortgages are not being paid and selling off the property to recoup the loan does not yield the full value. The mortgage originators (or their successors) suffer a financial loss.

  2. Non-bank firms have engaged in trading at increasingly more highly leveraged levels. The number bandied about is 3%. This means for each $1 they invest they borrow $33. I 1% drop in price leads to a 33% drop in the value of the asset. Over the years everything that could be imagined has been turned into something that could be traded. The trend began when they made stock averages tradeable.

If, say, 20% of mortgages fail and the value of the property drop to 70% of the original price then the market suffers a 14% loss. This is serious, but not fatal. Such losses happen every decade or so without serious long-term overhang.

On the other hand there is no solution for highly leveraged investing that goes bad. There are no assets that could be sold off to cover the loss. Allowing too low a margin requirement was what cause the 1929 crash and it was 10%, not 3%.

The only possible explanations for what is being proposed is a) to protect the value of the holdings of the Wall Street fat cats. Paulson holds $100 million in Goldman stock, and he has insured that it is one of the firms left standing.

The other explanation is that, for McCain to have any chance of winning, it is necessary to push the real crash until after November. Since the bulk of the financial community are Republicans they can be expected to go along with this plan as well.

I claim there is no "fix". The hedge funds and other highly leveraged accounts will just evaporate, just like what happened with Tulips and the South Sea Bubble and all the other Ponzi schemes.

The only question is when.

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Tue Sep 23rd, 2008 at 12:20:14 PM EST
There are 40 or so million US domestic mortgages according NPR today. Of these only 3% are considered junk loans with no chance of repayment. 50% are considered 'no problem' loans, and some 20% are struggling loans that might be foreclosed if the economy really goes down the chute. The rest carry the normal risks of failure.

The problem are that the good, bad, and tiny percentage of catastrophes, have been sliced and diced, shuffled and riffled into packages that are hard to unpick. The experts thought that the actual value on the dollar was way more than the 22 cents on the dollar currently being bandied about.

The kernel of the problem is a manageable 3 %+. It is the way the debt has been restructured (and the the little commissions added on as it passes on out to the peripheral investors) that is the problem.

I am repeating what was discussed on NPR ;-)

You can't be me, I'm taken

by Sven Triloqvist on Tue Sep 23rd, 2008 at 12:32:05 PM EST
[ Parent ]
Somewhere between 90% and 97% of the 'value' 'traded' in the 'markets' doesn't exist.

Sanity will only be restored when the thieves and con artists are run out of town on a rail and economies go back to trading real stuff for real money, not bullshit for promises.

There is an up side, which is that if enough of the main players die they'll take their funny money with them. Everyone else will take a big and messy hit, but the flip side of the concentrated leveraging is that if the circular firing squad of obligation can be persuaded to fire, the wackos will suicide and real businesses will be left shaky but standing and able to carry on - in some form or other.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Sep 23rd, 2008 at 01:53:31 PM EST
[ Parent ]
Sven Triloqvist:
The problem are that the good, bad, and tiny percentage of catastrophes, have been sliced and diced, shuffled and riffled into packages that are hard to unpick.

yup, how do you unbake a cake?

find the melamine in the milk?

they did it on purpose that way, to cover their collective ass...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Tue Sep 23rd, 2008 at 02:06:01 PM EST
[ Parent ]
The mortgages are not the issue.  To call it the "subprime mortgage crisis" is a terrible lie.  That language is designed to make the public think the problem is deadbeat poor people defaulting on their house loans.  This is not the issue at all as the vast majority of loans are fine and will be paid off commensurate to past trends.

The problem is the ones that aren't paid off.  Mortgages were given for amounts far exceeding the real appraised value of the homes.  That value has now dropped by as much as 20% in some ares.  The homeowner will make the logical financial choice to walk away from the property asset and the mortgage and the bank will eat the loss. Unfortunately for the bank they have sold the "loss" a dozen times over exponentially magnifying the cost on their balance sheet.

by paving on Tue Sep 23rd, 2008 at 02:11:14 PM EST
[ Parent ]
"There are 40 or so million US domestic mortgages according NPR today."

That number is incorrect. It's at least twice that number. It not even correct for 2005 housing; I've read AHS 2005. Nobody has numbers but AHS and Case-Shiller. And there's been twice as much new construction and mortgage originations since release of that publication.

I will be back with references.

Diversity is the key to economic and political evolution.

by Cat on Tue Sep 23rd, 2008 at 02:51:55 PM EST
[ Parent ]
NPR report I heard

You can't be me, I'm taken
by Sven Triloqvist on Tue Sep 23rd, 2008 at 03:09:28 PM EST
[ Parent ]
mmm hmm, 'K. That "primary mortgage" datapoint is still whack.

See American Housing Survey (AHS) 2005, pdf published Aug 2006, link
Total number of HHs (homes) estimated was 108,872,000, of which 33,940,000 renter occupied and 74,931,000 owner occupied. Any estimate of the number of mortgages requires examination of the total population of HHs -- not merely "owner occupied" housing. An notice of census.gov collection methods follows.

In prior years, the American Housing Survey-National Sample was conducted biennially in housing units selected from the 1980 Census and new construction universe. Data collection for AHS-N was conducted in odd-numbered years. The last AHS-N was conducted in 2005 between May and September with a sample size of approximately 60,000 housing units.

Also in prior years the American Housing Survey-Metropolitan Sample was conducted biennially in even-numbered years in 41 metropolitan areas on a rotating basis. The last AHS-MS was completed in early October 2004. The 2004 AHS-MS included 13 metropolitan sampling areas (MSAs) each with approximately 4,700 housing units [approx. 61K total sample]. The 2004 sample consisted of returning housing units selected from the 1990 Census and new construction universe.

In early 2006, the Department of Housing and Urban Development (HUD), the sponsoring agency, made the decision to conduct the AHS in odd-numbered years only beginning with the 2007 data collection. We will no longer survey the national survey in odd-numbered years an the metro survey in even-numbered; however, we will collect data for bot the national and metropolitan sample at the same time. The 2007 AHS national sample will consist of approximately 55,000 housing units and the metropolitan sample will include seven MSAs each with approximately 3,000 housing units for a total of approximately 76,000 in sample.
(Census.gov Demographic Survey Abstracts, Jan 2007 , pdf)

See also most recent 2007 AHS National Data, dataset list. The downloads are *.exe, MS-DOS executable only. That excludes my machine.

See also AHS Table 8, "Housing Vacancies and Homeownership"

Doubtless periodic reports by independent researchers such as CalculatedRisk and Case-Shiller who maintain series data on inventory (existing, new) provide a valuable public service.

In "Fed: Household Percent Equity Declines" CR cautions, "31% of HHs do not have a mortgage. So the 50+ million households with mortgages have far less equity than 45.2%."

Oddly enough 33.1% was the percentage of 2005 owner occupied HHs not mortgaged:  24.776M HHs. (See Table 2, "The American Housing Survey and Non-Traditional Mortgage Products," HUD, Sep 2007; HUDUser.org/publications). CR implies the number of mortgages has increased 2.1% at least since 2005. "Occupied means", too, primary residence as distinct from "investment property."

Conversely, 66.9% should be the percentage of 2005 owner-occupied HHs mortgaged, or 50.1M HHs. However the detail of mortgage types for this class evaluates to 64.6% or 48.6M "owner-occupied" HHs, "regular mortgage and/or home-equity mortgage." 90% of these were conventional, fixed loans only. Additionally, AHS did not collect data for 4.5M "owner occupied" properties.

Additionally, 33.94M HHs were renter occupied in 2005. How many of these "investment properties" were mortgaged? The data do not say.

Additionally, 3.7M seasonal, or second, homes are excluded from the total of occupied housing in 2005. How many of these were mortgaged? The data do not say.

Is it reasonable to assume that the universe of mortgaged housing was closer to 90M in 2005 and likely peaked Q4 2007 around 100M? Yes, the lower bound of a conservative estimate of RE secured by "primary mortgages" is 85.9M - 87.9M.

The AHS considers a home to be "mortgaged" if it has one or more of the following: a regular mortgage, a lump-sum home equity loan, or a home equity line of credit. ...The AHS considers a home to have a "primary mortgage" if it has one or both of the following: a regular mortgage or a lump-sum home equity loan. ...The AHS considers a home whose only lien is a home equity line of credit to be "mortgaged" but not to have a primary mortgage. ["The American Housing Survey and Non-Traditional Mortgage Products," p9]

The FRB's Q1 2008 report of US Flow of Funds (Z.1 Release, Sep 2008) does not explain the number of residential properties mortgaged. Two Calculated Risk charts describe declines in mortgage holders' aggregated equity since 1952 and HH real estate assets and mortgage debt  and housing value as percentages of GDP. The relevant FRB tables are as follows (download each table category to view).






TitleFlow Table ($ billions, net)PageLevels Table ($ billions)Page
Total MortgagesF.21748L.21793
Home MortgagesF.21849L.21894
Multifamily Residential MortgagesF.21949L.21994
Commercial MortgagesF.22050L.22095
Farm MortgagesF.22150L.22195

Over the period Q4 2005 - Q4 2007 the value of all "home mortgages" increased from $9,383.8T to $11,239.0T, or 19.6%. Although AHS data tell us "occupied" housing increased from about 108M to 110M, or 1.85%, it doesn't tell us how much of the mortgage value appreciation is attributable to "primary mortgage" growth or additional inventory sales such as second homes and vacant "investment" property. Clearly the number of home mortgages retired is insignificant.

OK. That's enough of a critical read to whack NPR "reporting" -- understatement of the ages.


Diversity is the key to economic and political evolution.

by Cat on Wed Sep 24th, 2008 at 01:32:20 PM EST
[ Parent ]
RDF
The only question is when.

There is one other question.  Will said failure be before or after the US taxpayer has been pledged to make whole everyone who gambled and lost?  You are right about the bets evaporating, but the debts may linger.  The only way that we could even start to pay off all of these bets would be to go after the wealth of the wealthiest US citizens.  I think the government would default first.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Sep 23rd, 2008 at 11:01:53 PM EST
[ Parent ]
I love that you mention government investment in sectors like Public Transportation.  

Oh, what the USA could do with $700 billion in public transit infrastructure.

by paving on Tue Sep 23rd, 2008 at 01:44:55 PM EST
The entire Bush debt - including Iraq and bailouts - could have transformed the US into a showpiece 21st century economy.

The good thing about this, is that when the libertarians start howling about how markets should be left unregulated, people are going to laugh in their faces. There may even be an unexpected fad for oversight and regulation.

I think Paulson has spectacularly overplayed his hand. By pushing for everything he let the mask drop, and everyone is suddenly saying 'Now wait a minute...' It's not just going to cost him the deal but the next election, and it has undone 30 years of propaganda effort almost overnight.

It may even make Obama begin to wonder if associating with these pirates is really such a good idea.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Sep 23rd, 2008 at 02:02:22 PM EST
[ Parent ]

The good thing about this, is that when the libertarians start howling about how markets should be left unregulated, people are going to laugh in their faces.

Right on the button tbg: this is one of those rare "reputation meltdown" moments.

Such a moment happened to the Tories when Soros fucked Sterling.

It finished them.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Sep 23rd, 2008 at 03:56:05 PM EST
[ Parent ]
It may even make Obama begin to wonder if associating with these pirates is really such a good idea.
Dare we hope?  We might find out Friday.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Sep 23rd, 2008 at 11:04:37 PM EST
[ Parent ]
The one hopeful sign I see is that there appears to be a bi-paritsan consensus in both the House and Senate that this has to be dealt with on the basis of the facts and has to be done thoughtfully.  There seems to be agreement that further enrichment of Wall Street folks is to be avoided.  Cheney and Bolton can't even round up many Republicans to support their stampede approach to pushing Paulson's plan through.

It is the first time I recall seeing such a degree of agreement in Congress since Watergate.  The reason: the election looms and the voters are furious.  This is no less true in Republican states and districts than in Democratic states and districts.

It may or may not be possible to save the financial system, including the Fed, as currently constituted, and we are likely in the first phases of a financial collapse as bad as 1929-1932, but at least we may be able to preserve and even improve the Constitution and  Government of the USA.

I have been hammering away in faxes to Senators and Representatives from California to New England that, among other things, we need campaign finance reform.  It is not possible to properly regulate those to whom you are beholden, except in times of extreme crisis.  That is what got us into this mess.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Sep 23rd, 2008 at 01:47:40 PM EST
There's no political cost to screwing wall street.  Right now they are even less popular than Congress.  This is good news.
by paving on Tue Sep 23rd, 2008 at 02:12:24 PM EST
[ Parent ]
So, the plan is that the government buys the shitpile from the banks at nominal mark to maturity prices. Does that mean that mortgage holders get to sell their houses to the banks at the price they were appraised at when the loans were given?
by MarekNYC on Tue Sep 23rd, 2008 at 02:01:07 PM EST
Of course not!
Remember personal responsibility!
Helping mortgage holders would be ... un-American, French, European, socialist?

/snark

"Mark to maturity" prices. Unbelievable.
Well, at least they made their priorities clear.
A last $700 billion farewell present from Bush to his base, the "haves and the have-mores".

by Detlef (Detlef1961_at_yahoo_dot_de) on Tue Sep 23rd, 2008 at 02:19:37 PM EST
[ Parent ]
Hmmh. I guess as a frenchified fake American with a strong European identity I would think in that anti-American fashion. And I live in a city, NYC even, everyone knows that only small town and rural Americans are 'real America'. Plus I eat arugula, and drink wine. But I don't do lattes.
by MarekNYC on Tue Sep 23rd, 2008 at 02:23:49 PM EST
[ Parent ]
DEAR AMERICAN:

I NEED TO ASK YOU TO SUPPORT AN URGENT SECRET BUSINESS RELATIONSHIP WITH A TRANSFER OF FUNDS OF GREAT MAGNITUDE.

I AM MINISTRY OF THE TREASURY OF THE REPUBLIC OF AMERICA. MY COUNTRY HAS HAD CRISIS THAT HAS CAUSED THE NEED FOR LARGE TRANSFER OF FUNDS OF 800 BILLION DOLLARS US. IF YOU WOULD ASSIST ME IN THIS TRANSFER, IT WOULD BE MOST PROFITABLE TO YOU.

I AM WORKING WITH MR. PHIL GRAM, LOBBYIST FOR UBS, WHO WILL BE MY REPLACEMENT AS MINISTRY OF THE TREASURY IN JANUARY. AS A SENATOR, YOU MAY KNOW HIM AS THE LEADER OF THE AMERICAN BANKING DEREGULATION MOVEMENT IN THE 1990S. THIS TRANSACTIN IS 100% SAFE.

THIS IS A MATTER OF GREAT URGENCY. WE NEED A BLANK CHECK. WE NEED THE FUNDS AS QUICKLY AS POSSIBLE. WE CANNOT DIRECTLY TRANSFER THESE FUNDS IN THE NAMES OF OUR CLOSE FRIENDS BECAUSE WE ARE CONSTANTLY UNDER SURVEILLANCE. MY FAMILY LAWYER ADVISED ME THAT I SHOULD LOOK FOR A RELIABLE AND TRUSTWORTHY PERSON WHO WILL ACT AS A NEXT OF KIN SO THE FUNDS CAN BE TRANSFERRED.

PLEASE REPLY WITH ALL OF YOUR BANK ACCOUNT, IRA AND COLLEGE FUND ACCOUNT NUMBERS AND THOSE OF YOUR CHILDREN AND GRANDCHILDREN TO WALLSTREETBAILOUT@TREASURY.GOV SO THAT WE MAY TRANSFER YOUR COMMISSION FOR THIS TRANSACTION. AFTER I RECEIVE THAT INFORMATION, I WILL RESPOND WITH DETAILED INFORMATION ABOUT SAFEGUARDS THAT WILL BE USED TO PROTECT THE FUNDS.

YOURS FAITHFULLY MINISTER OF TREASURY PAULSON

Via The Big Picture

A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns

by Alexander on Tue Sep 23rd, 2008 at 02:29:23 PM EST
I got one of those to my private URL, twice. The last was slightly more aggressive. I was thinking of posting the text as an article titled Not Nigerian?. Then it occured to me that US "liberals" might be offended. Worse, ICE might knock on my door. Well, here ya go.

Dear Friend,

I hope my e-mail meets you well. I am in need of your assistance. My name
is xxxxxx of the Contract Unit of US Military here in
Baghdad in Iraq; we have about $10.2 Million US dollars that we want to move out of the country. My partners and I need a good partner out there, someone we can trust to receive the funds on our behalf. It is oil money and legal.

We have made arrangements with a Diplomatic Courier Service that will move the funds out of Iraq as a Family Treasures, also we have made arrangement to transfer the said fund through Bank of Baghdad depending on what you want, The most important thing is; "Can We Trust you"? Once the funds get to you, simply take out 20% as your share and keep the remaining 80% for us. Your own part of this deal is to find a safe place where the funds can be sent to, ours is sending it to you safely.

Also you can view the Link http://news.bbc.co.uk/2/hi/middle_east/2988455.stm
If you are interested I will furnish you with more details upon receipt of your response and contact details. But I can assure you the whole process is simple and we must keep a low profile at all times.

I look forward to your reply and co-operation.

Regards,
xxxxx
Private and secured e-mail: xxxx@us-marinemail.us.tt

second message, subject line: I look forward to your reply and co-operation.

Dear Friend,

I am contacting you for the very last time, please  reply to my e-mail immediately you read this letter.

I hope my e-mail meets you well. I am in need of your assistance. My name is xxxxx of the Contract Unit of US Military here in Baghdad in Iraq; we have about $10.2 Million US dollars that we want to move out of the country. My partners and I need a good partner out there, someone we can trust to receive the funds on our behalf. It is oil money and legal.

etc.

Diversity is the key to economic and political evolution.

by Cat on Tue Sep 23rd, 2008 at 03:08:43 PM EST
[ Parent ]
Ha since I left my last job, I no longer get about 800 of them a week.

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Tue Sep 23rd, 2008 at 03:11:00 PM EST
[ Parent ]
Another sort of email altogether.

85 Broads, in association with Barclays Wealth, is delighted to invite you to Preparing for Recession, a presentation and networking reception examining past deep market corrections and their often extreme consequences.

We hope you will be able to join us for what promises to be a probing and insightful session.

Ahead of the curve, as always, yo.

Diversity is the key to economic and political evolution.

by Cat on Tue Sep 23rd, 2008 at 05:13:44 PM EST
[ Parent ]
was waiting for the first of those to turn up

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Tue Sep 23rd, 2008 at 03:22:27 PM EST
[ Parent ]
by MarekNYC on Tue Sep 23rd, 2008 at 07:29:36 PM EST
It has been clear to me all along that eventually the US will be forced to inflate its currency, regardless of the consequences. I don't see how $700 billion or any other remotely possible bailout can help. The central problem is too much debt, particularly external debt. Our total debt in the trillions. That is why we have to inflate.
by Ralph on Sun Sep 28th, 2008 at 01:31:57 AM EST


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