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Reasons for despair: Zombie Ideas Won

by Migeru Sat Mar 21st, 2009 at 11:39:58 AM EST

On Krugman's blog today: Despair over financial policy

The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.


As he wrote nearly three weeks ago:

And the insistence on offering the same plan over and over again, with only cosmetic changes, is itself deeply disturbing. Does Treasury not realize that all these proposals amount to the same thing? Or does it realize that, but hope that the rest of us won’t notice? That is, are they stupid, or do they think we’re stupid? I don’t know which possibility is worse.
There is a third possibility: they are neoclassical economists, they drank the kool-aid of "a decade of financial innovation", or "finance is the brain of the economy", and want to restore the economy to the way it was in 2006, with subprime lending and securitisation and CDOs and CDSs. On this, see (linked to by Krugman) Tim Duy's When Does Faith in Financial Engineering Wane? (March 3, 2009)
But Bernanke has not given up hope, audacious though it may seem, that the answer is financial engineering. Yves Smith noted last week:
...What is amazing is the degree to which Bernanke has been unable to process what has happened over the last year and a half. It isn't simply that he is trying to restore status quo ante; he seems to see the only possible operative paradigm as the status quo ante. Worse, he has a romanticized view of it too.
Leaving aside those challenges, another problem is the one to which Yves alludes to - the persistent belief that current asset prices are currently "wrong." There appears to be little thought given to the likelihood that past prices were "wrong." Instead, policymakers appear to believe that prices have intrinsic values. The trick is to get market participants to recognize those values. The belief (delusion) that the current price is simply wrong is not limited to Bernanke; it is pervasive among policymakers. James Kwak directs us to an interview with Treasury Secretary Timothy Geithner, commenting:
The idea that houses have a “basic inherent economic value” other than the prices they can fetch in the housing market is, I think, a fallacy. And so the idea that therefore houses will naturally return to some “basic inherent economic value” that is higher than current market prices is, I think, wishful thinking of the kind that has hampered responses to this crisis from the beginning. They could; but they could just as well not.
I have to say I find Geithner rather sensible here when he says asset prices need not be higher than they are now. Back to Tim Duy:
And therein lays the key to predicting when the Fed shifts gears; when Bernanke abandons the notion that proper credit market functioning is alone sufficient to restore housing values (asset values more generally) to their former glory and support acceptable growth. At that point, the Fed will again consider the wisdom of what it has defined as quantitative easing, an expansion of the balance sheet via a deliberate expansion of liabilities. Until then, we can expect the Fed to continue its focus on financial engineering.
Oops, I think we're screwed. And don't think European policymakers sound any better. Here's Joaquín Almunia, European Commissioner for Economic and Moneraty Policy, speaking at the end of February:
A broad consensus is now forming in Europe that we will need to move fast and introduce some form of asset relief to complement the measures already in place. Many countries are now looking seriously at the options on the table. Some are considering the possibility of setting up a 'bad bank' to absorb the impaired assets, others an insurance scheme.
Asset relief? You mean relieving the bad banks of their bad assets, for free?
However, less important than the model that each Member State chooses, is the fact that all programs should abide by a set of common principles. This is crucially important to ensure that we maintain a level playing field among banks.
Almunia, as Economic Policy Commisioner, doesn't much care what the economic policy is, as long as it preserves a "level playing field".
For this reason, today we are publishing guidelines on asset relief produced by the ECB and the Commission. These set a clear framework for assessing which assets are eligible for treatment and for their valuation. The Commission has tried to adopt a flexible approach in order to be able to cope with the different situations across Member States. This means that action should not necessarily be limited to subprime related assets but could also cover more typical affected by the current economic difficulties.

We also advise Member States on how to value impaired assets. This is a difficult task, especially when dealing with complex financial instruments. The general principle is that in the absence of correctly functioning markets, the valuation of the assets should be carried out with reference to their real economic value. The Commission will promote ex ante coordination of valuation methodologies where possible and establish an independent ex-post review in order to help evaluate the techniques applied by Member States.

It is clear that after the huge amounts of public money already poured into the banking sector, it will not be easy explaining to taxpayers why we need to do more. If asset relief for banks is to achieve sufficient public acceptance, it is essential that the banking sector is seen to provide an adequate quid quo pro. This cannot just be limited to restrictions on executive pay. It must also include a commitment to maintaining lending to the real economy and to carry out appropriate restructuring.

We are not rushing into any decisions that have not been carefully thought through and their impact assessed. But we do need to act soon. Measures to cleanse bank balance sheets can have a powerful effect to boost confidence and re-start lending. And they will be crucial if we want to see the full impact of fiscal stimulus measures.

Gah.

Display:
Here on ET we follow the US policy debate too much and the EU one too little. Read the Almunia speech and maybe you'll see why. The European Commission even copies the USian talking points and cliches.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sat Mar 21st, 2009 at 11:41:53 AM EST
A broad consensus is now forming in Europe that we will need to move fast and introduce some form of asset relief to complement the measures already in place. Many countries are now looking seriously at the options on the table. Some are considering the possibility of setting up a 'bad bank' to absorb the impaired assets, others an insurance scheme.

In other words, Yurp is toying with the same stupid ideas -- bad bank, ringfencing, yaddayaddayadda -- that we're toying with.

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

by Drew J Jones (pedobear@pennstatefootball.com) on Sat Mar 21st, 2009 at 12:26:12 PM EST
[ Parent ]
'Rubbish Banks' were used successfully in the Nordic countries in the early 90s. On a smaller scale of course, but as I understand it, a decade and a half later, both Sweden and Finland managed to reprivatize the assets without overall losses.

Finland Offers EU Experiences in Financial Crisis Management

In Vanhanen's view, pumping more money into economic stimulus is not the right way to fight a recession. Instead, he calls for going into the core of the crisis by cleaning away bad credit.

However most of the acquired 'rubbish' was still 'performing', but needed additional capital, reorganization and market consolidation.

You can't be me, I'm taken

by Sven Triloqvist on Sat Mar 21st, 2009 at 12:41:38 PM EST
[ Parent ]
I believe Finland has not much to offer. Finland was saved by Nokia in the 90's and the housing prices never recovered (until last year). If Vanhanen thinks the same system works this time, i believe he is mistaken.
by kjr63 on Sat Mar 21st, 2009 at 05:29:28 PM EST
[ Parent ]
Of course, if Vanhanen means debt relief to home owners, then it is another matter.
by kjr63 on Sat Mar 21st, 2009 at 05:31:21 PM EST
[ Parent ]
I would suggest it was 3.5 % GDP annually invested in R&D (which includes Nokia) that saved Finland.

You can't be me, I'm taken
by Sven Triloqvist on Sat Mar 21st, 2009 at 06:22:28 PM EST
[ Parent ]
That paragraph you quote is positively scary coming from a Spanish Socialist.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sat Mar 21st, 2009 at 01:55:06 PM EST
[ Parent ]
the EU debate is more fragmented than the US one - but it's essentially the same one.

And the only language where "European" debate happens is in English - and that's of course the language of the countries most wedded to finance and "efficient markets" and free trade.

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

by Jerome a Paris (etg@eurotrib.com) on Sat Mar 21st, 2009 at 01:02:32 PM EST
[ Parent ]
I was in the stock market for awhile, privately (outperformed my 401k retirement plan 5X, btw). Shortly after the Dow hit 10,000, I recall one earnings season after another were rather flat. Disappointing. Except for the housing market. I wasn't comfortable with that and I cashed out, the retirement plan as well.

If I could see that. Then everyone else could too, and there's no excuse for letting it get to the point we have now.

Stocks went up on bad news, down on good earnings...these days when I see people with books on day trading, investing, etc. I tell them that they'd be just as well off trying poker instead.

"It Can't Be Just About Us"
--Frank Schnittger, ETian Extraordinaire

by papicek (papi_cek_at_hotmail_dot_com) on Sat Mar 21st, 2009 at 02:36:46 PM EST
[ Parent ]
I wasn't comfortable with that and I cashed out, the retirement plan as well.
If I could see that. Then everyone else could too
And if everyone had cashed out you'd've had a crash then instead of now.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sun Mar 22nd, 2009 at 08:15:16 AM EST
[ Parent ]
I have to say I find Geithner rather sensible here when he says asset prices need not be higher than they are now.

Geithner is right, and I'm glad someone has finally said it, but even leaving the possibility that house prices return to '06 levels is utterly ridiculous.  I've asked this about a million times, and I've yet to get an answer from any of the bulls: What part of "Houses are too expensive to clear the market" do homeowners, banks, talking heads, and the idiots who rule us not get?  It costs far more to pay the mortgage than the house will fetch in rent.  The P/E ratio is out of whack (technical term).  The mortgage requires debt levels far above the historic norm without a change in real variables that would justify the the appreciation.

All together now: Houses are too expensive.

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

by Drew J Jones (pedobear@pennstatefootball.com) on Sat Mar 21st, 2009 at 12:05:53 PM EST
...adding: That's about the only thing Frodo has been right about.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sat Mar 21st, 2009 at 12:19:33 PM EST
[ Parent ]
We all have to admit that our most recent "wealth" was fake, ie that the recession is not taking us down to somewhere worse: it's just showing where we've been all along.

The only real debate should be about sharing - all the inflated gains went to a very small group, and the pain is most widely shared, especially, as always, there is collateral damage: when you fall back to the ground after jumping, you hurt more when you touch the ground than if you had stayed there.

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

by Jerome a Paris (etg@eurotrib.com) on Sat Mar 21st, 2009 at 01:04:54 PM EST
[ Parent ]
Nuh uh.  All my wealth -- all, like, six dollars of it -- is in Treasuries and iTunes giftcards.  I'm going to be in the top 1% pretty soon.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sat Mar 21st, 2009 at 06:10:06 PM EST
[ Parent ]
Really, I am, I am pretty stupid and therefore I have stupid reasoning such as this:

If the strength of any currency is a representation of of any nations wealth, as expressed in GDP.  And if GDP is really the measure of the material things made to satisfy a want or need, why are we fiddle-fucking around by playing grab-ass with financial institutions?

I mean, and I'm pretty stupid, I don't understand why we don't take abandoned factories and mills, put people to work doing so, then let firms make concrete, material "things" like wave turbines or solar devices, you know, what they used to call capital back in the 1800s.

I mean, and I'm pretty stupid, doesn't this actually generate wealth and prosperity rather than generating money like the fed did last week?

Hey, I know that the MIC is pretty evil.  They devise more ways to kill before 9 Am than most people do all day.  But they also make airliners, made the internet, and those cool gadgets that we send into space and to Mars that function like porn to the really smart guys and gals from MIT when they get the results back.

I also get they employ a vast number of people, blue and white collar, to make things and so shutting down the MIC is not feasible politically or economically.

But why can't we make even more things like wind turbines and electric grids rather than new star wars blaster ray guns as they did last week.  Ooooo boy, were the engineers having an orgasm over that one while I thought great, another way to kill people.

So in the meantime, we fiddle around with generating money and not with generating wealth.  So, we aren't worth much but we gots us lots of money!

But what do I know?  I'm pretty stupid.

I am just grateful all the smart guys are in charge!

"Schiller sprach zu Goethe, Steck in dem Arsch die Flöte! Goethe sagte zu Schiller, Mein Arsch ist kein Triller!"

by Jeffersonian Democrat (rzg6f@virginia.edu) on Sat Mar 21st, 2009 at 12:33:27 PM EST
One thing about the US that seems pretty clear to me is that, whatever the fate of the dollar, which seems dubious at the present, the less the USA has to import, especially energy, and the more that it can profitably manufacture for itself, the better off we will be.  

Following that logic, we should build wind power, thermal solar and enhanced transmission facilities as fast as we can.  We should support the development of fuel efficient and primarily electric vehicles, PHEVs, along with charging infrastructure.  We should support conversion of passenger and freight rail lines to all electric.  We should support more efficient buildings. And we should support the transition to a sustainable agriculture not based on petrochemicals and mono-cultures.  All of these steps will help to keep the ambient temperature and ocean level closer to where it is now.  Finally, we should support the development of new industries based around these priorities, including providing the requisite educations.  

With such policies in place we could at least feed and house and educate ourselves and have a chance of employing the vast majority of the labor force.  Such policies would seem to have the effect of insulating the USA to some degree from the worst effects of a significant devaluation of our currency and provide us with the possibility of producing goods other countries value.  It would seem wise to move to a position of a net balance in foreign trade before we find ourselves in the position of needing things from other countries that we have no means of purchasing.

But then I, like JD, claim no particular expertise in these matters.  Most of what I think I know I owe to ET.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Mar 22nd, 2009 at 01:31:38 AM EST
[ Parent ]
People on this forum know how bad things truly are, and how radical the solutions have to be, but the American public is no where near ready to face up to this.

We're caught between two cliches; politics is the art of the possible, and you can't handle the truth.

I think...maybe hope is a better word, that Obama gets it, but has to play out the rituals until it becomes clear enough to take action.

When the time comes, Jerome has written the blueprint.

by greatferm (greatferm-at-email.com) on Sat Mar 21st, 2009 at 01:05:48 PM EST
Oops, I think we're screwed. (mig)

And who is this we you mention?  Not the wealthy elites I'd venture.

I think...maybe hope is a better word, that Obama gets it, but has to play out the rituals until it becomes clear enough to take action.

When the time comes, Jerome has written the blueprint. (greatferm)

If Jerome's blueprint doesn't include the wealthy/elites gaining even more power and China laying claim to the world's assets in exchange for all that worthless debt in the form of paper, we will never see Jerome's blueprint.  This ain't no democracy.  Cattle have no rights.

They tried to assimilate me. They failed.

by THE Twank (yatta blah blah @ blah.com) on Sat Mar 21st, 2009 at 01:26:15 PM EST
Oops, I think we're screwed. (mig)

And who is this we you mention?  Not the wealthy elites I'd venture.

Oh, they are, too.




Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Sun Mar 22nd, 2009 at 04:32:44 AM EST
[ Parent ]
<sigh> This is getting exhausting (and we are only at the beginning, it seems) - it is essentially the definition of a repetition neurosis to continue to do the same thing over and over and not resolve the riddle of the problem. Scary to watch, at this level of craziness...

Thanks Miguel for this diary - very sobering...

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia

by whataboutbob on Sat Mar 21st, 2009 at 01:33:20 PM EST
the problems keep on getting bigger as we dither.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Mar 21st, 2009 at 01:54:42 PM EST
[ Parent ]
so it may be transmogrifying from a neurosis to a full blown psychosis...which is a waking nightmare...

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Sat Mar 21st, 2009 at 01:58:54 PM EST
[ Parent ]
Sadly, there's no dither. This morning Obama made as clear a statement as one could that he buys it.

Wish there was a real dither going on.

Krugman thinks it's probably a one-shot deal, since the combination of lost public confidence and Republican sabotage will make a second program into a very, very hard sell.

The only chance I see is a real popular mobilization behind a workable program- of which there seem to be several. And popular mobilization was supposed to be O's strong suit. I am on his e-mail volunteer list, and his attempts to mobilize the troops are pathetic.

 I

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

by geezer in Paris (risico at wanadoo(flypoop)fr) on Sun Mar 22nd, 2009 at 04:52:46 AM EST
[ Parent ]
As Einstein said, insanity is doing the same thing over again and expecting a different result.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sun Mar 22nd, 2009 at 04:33:35 AM EST
[ Parent ]
Isn't the relevant debate on the level of the nation states?
And there of course I think most of us follow our national gov'ts dealing with the crisis. Or do you think this comment is a realistic description of what most EU nations do?
I don't think so. While I'm not happy with happened so far in Germany, I don't see something that stupid happen as described in the diary, which would give the money to the corporations leaving even the shareholders unimpaired. More over the KfW is now rather active to make new lending on behalf of the federal gov't, which come most closely to 'good bank' proposal to what I have seen so far, and which is my favourite solution.

So overall I would give my national politicians a 'C' for handling the crisis, while Geithner is in for an 'F', as well because of a partially misdirected stimulus.

Another reason why it is reasonable to focus on US policy is, because if they would find a good handle on the crisis, it would very likely be copied here - while a good approach on the national European level won't be copied in the US.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Sat Mar 21st, 2009 at 01:54:35 PM EST
If you want to argue that the European Commissioner for Economic and Monetary Affairs is "irrelevant" and all the action is at the national level, you're free to do so, but what does that tell us about the European Union?

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sat Mar 21st, 2009 at 01:57:44 PM EST
[ Parent ]
It tells us, that in case of crisis, the prime response is still on the national level. In a crisis not only objective rule of law, but as well solidarity is needed. And peoples willingness to be solidaric is still strongly national focused.

And the different content of what comes from Brussels and the national capitals tells us as well, how much the EU buraucracy is detached from the EU population. They don't have to face the voters. Huge handouts to the banks are more and more difficult to get public support.
La France en colere?

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Sat Mar 21st, 2009 at 02:29:44 PM EST
[ Parent ]
I guess the Commission is committed (no pun intended) to providing cover for national government facing voter anger over bank rescue packages.
It is clear that after the huge amounts of public money already poured into the banking sector, it will not be easy explaining to taxpayers why we need to do more. If asset relief for banks is to achieve sufficient public acceptance, it is essential that the banking sector is seen to provide an adequate quid quo pro. This cannot just be limited to restrictions on executive pay. It must also include a commitment to maintaining lending to the real economy and to carry out appropriate restructuring.


Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sat Mar 21st, 2009 at 05:35:21 PM EST
[ Parent ]
Actual action will mostly be taken at the national level, simply because of the scale of the tools available there (as noted, the EU budget is only 1% of GDP), but the EU has a role in shaping debate in each country (I expect that more than a few of our governments get their notions on the economy and finance from what is repeated ad nausema at EU summits) and also has a role in coordinating and leveraging some of the action (investment in infrastructure, for instance, or the focus on renewable energy-friendly regulations).

And the old attitude to Europe remain: lok at how Sarkozy and Merkel, despite their continued antagonism, at least continue to make an effort to make it look like they are coordinating (and do in fact coordinate), whereas some other more euroskeptical countries continue to trash the EU.

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

by Jerome a Paris (etg@eurotrib.com) on Sat Mar 21st, 2009 at 02:04:03 PM EST
[ Parent ]
Isn't the relevant debate on the level of the nation states?

Except that we have a common currency zone, a common market, free movement of capital, free movement of people... without a functional economic policy at the EU level.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Sat Mar 21st, 2009 at 06:12:09 PM EST
[ Parent ]
A very important point, Martin. The world is still willing to learn from the US- perhaps. For good or ill. The US has never been willing to learn from anyone, except in the rare instance of the German intelligence structure after WWII.

Capitalism searches out the darkest corners of human potential, and mainlines them.
by geezer in Paris (risico at wanadoo(flypoop)fr) on Sun Mar 22nd, 2009 at 04:57:21 AM EST
[ Parent ]
Well, you speak from Germany. For the financial sector in Hungary, or Lithuania, the Commission is very much relevant.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Sun Mar 22nd, 2009 at 05:33:05 AM EST
[ Parent ]
Its posted over at Firedoglake

http://firedoglake.com/2009/03/21/james-k-galbraith-reponds-to-geithners-toxic-asset-plan/


"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia

by whataboutbob on Sat Mar 21st, 2009 at 02:00:07 PM EST
Here's the last part of his statement:


If I were a member of Congress, I would offer a resolution blocking Treasury from making the low-cost loans it expects to offer the PPIPs, until GAO or the FDIC has conducted an INDEPENDENT EXAMINATION OF THE LOAN TAPES underlying each class of securitized assets, and reported on the prevalence of missing documentation, misrepresentation, and signs of fraud. In the absence of a credible rating, this is the minimum due diligence that any private investor would require.

I hope what I'm driving at, here, is clear.

Sounds pretty clear, stay tuned...

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia

by whataboutbob on Sat Mar 21st, 2009 at 02:02:21 PM EST
[ Parent ]
He is explicitly blowing the whistle - am I wrong, or could this blow up into something very big?

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Sat Mar 21st, 2009 at 06:14:19 PM EST
[ Parent ]
It depends on whether congresscritters read firedoglake...

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sat Mar 21st, 2009 at 06:23:32 PM EST
[ Parent ]
I have a feeling there are going to be some faxes and emails going out from FDL...

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Sun Mar 22nd, 2009 at 04:51:34 AM EST
[ Parent ]
Looking around for the meaning of "loan tapes" I found the following article at Huffintong Post:
...

The widespread claim that nonprime loan originators that sold their loans caused the crisis because they "had no skin in the game" ignores the fundamental causes. The ultra sophisticated buyers knew the originators had no skin in the game. Neoclassical economics and finance predicts that because they know that the nonprime originators have perverse incentives to sell them toxic loans they will take particular care in their due diligence to detect and block any such sales. They assuredly would never buy assets that the trade openly labeled as fraudulent, after receiving FBI warnings of a fraud epidemic, without the taking exceptional due diligence precautions. The rating agencies' concerns for their reputations would make them even more cautious. Real markets, however, became perverse -- "due diligence" and "private market discipline" became oxymoronic. These two documents are enough to begin to understand:

  • the FBI accurately described mortgage fraud as "epidemic"
  • nonprime lenders are overwhelmingly responsible for the epidemic
  • the fraud was so endemic that it would have been easy to spot if anyone looked
  • the lenders, the banks that created nonprime derivatives, the rating agencies, and the buyers all operated on a "don't ask; don't tell" policy
  • willful blindness was essential to originate, sell, pool and resell the loans
  • willful blindness was the pretext for not posting loss reserves
  • both forms of blindness made high (fictional) profits certain when the bubble was expanding rapidly and massive (real) losses certain when it collapsed
  • the worse the nonprime loan quality the higher the fees and interest rates, and the faster the growth in nonprime lending and pooling the greater the immediate fictional profits and (eventual) real losses
the greater the destruction of wealth, the greater the (fictional) profits, bonuses, and stock appreciation
  • many of the big banks are deeply insolvent due to severe credit losses
  • those big banks and Treasury don't know how insolvent they are because they didn't even have the loan files
  • a "stress test" can't remedy the banks' problem -- they do not have the loan files
More on "accounting/regulatory fraud" here and here.


Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sun Mar 22nd, 2009 at 05:54:31 AM EST
[ Parent ]
That's the dead wildebeest on the table - and the one place Obama isn't going to go.

The financial industry is a criminal enterprise. It's that stark, and that simple.

The more interesting question is why Obama is shilling for the industry.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Mar 22nd, 2009 at 08:14:29 AM EST
[ Parent ]


Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Sun Mar 22nd, 2009 at 08:30:34 AM EST
[ Parent ]
The NYT article points out that pools of RMBS can be sold for about 30 cents on the dollar now. But banks are unwilling to sell for less than 60 cents -- either because they really think the loans will experience only a 40 percent loss rate, or because they fear that  acknowledging market value will put them into insolvency.  Which it might very well.
I remember reading elsewhere that the problem of the toxic assets is not lack of buyers but lack of sellers: the banks can't sell without becoming instantly insolvent.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sat Mar 21st, 2009 at 05:57:48 PM EST
[ Parent ]
If I'm right and the mortgages are largely trash, then the Geithner plan is a Rube Goldberg device for shifting inevitable losses from the banks to the Treasury, preserving the big banks and their incumbent management in all their dysfunctional glory. The cost will be continued vast over-capacity in banking, and a consequent weakening of the remaining, smaller, better- managed banks who didn't participate in the garbage-loan frenzy.
This much is clear, bank bailouts protect first and foremost the management, then the shareholders, then the holders of junior debt, then the holders of senior debt, then finally (and unnecessarily given FDIC insurance) the depositors.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sat Mar 21st, 2009 at 05:59:49 PM EST
[ Parent ]
I posted a brief diary over at Daily Kos, since it seems appropriate and nobody had. Please come over and join in on the conversation

http://www.dailykos.com/story/2009/3/22/711564/-FDL:-Galbraiths-response-to-the-Geithner-Plan


"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia

by whataboutbob on Sun Mar 22nd, 2009 at 05:25:42 AM EST
Was it McKinley who was forced to go, hat in hand, to J.P.Morgan to get money to bail out a near-bankrupt government? Deja Vu.

As part of the program, the government plans to offer subsidies, in the form of low-interest loans, to coax private funds to form partnerships with the government to buy troubled assets from banks.

But some executives at private equity firms and hedge funds, who were briefed on the plan Sunday afternoon, are anxious about the recent uproar over millions of dollars in bonus payments made to executives of the American International Group.

Some of them have told administration officials that they would participate only if the government guaranteed that it would not set compensation limits on the firms, according to people briefed on the conversations. The executives also expressed worries about whether disclosure and governance rules could be added retroactively to the program by Congress, these people said.

A spokeswoman for the Treasury declined to comment on the conversations over the weekend.

NY Times

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

by geezer in Paris (risico at wanadoo(flypoop)fr) on Mon Mar 23rd, 2009 at 02:40:38 AM EST
I should have mentioned that many private equity funds and hedge funds seem to have found a common position to take---no limits on executive compensation, no regulation, or we won't play.
Blackmail, pure and simple.

This can only reinforce the perception that the Obama administration is helpless before the power of the new robber barons- and that Geithner is their tool.

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

by geezer in Paris (risico at wanadoo(flypoop)fr) on Mon Mar 23rd, 2009 at 02:43:51 AM EST
[ Parent ]
geezer in Paris:
I should have mentioned that many private equity funds and hedge funds seem to have found a common position to take---no limits on executive compensation, no regulation, or we won't play.
Blackmail, pure and simple.
Who has the strongest hand here? I don't think it's the speculators.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Mar 23rd, 2009 at 04:27:33 AM EST
[ Parent ]
Isn't there in Dune a saying that goes, he who can destroy a resource, controls it ? Can the hedge funds destroy the economic system ?

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Mon Mar 23rd, 2009 at 11:47:01 AM EST
[ Parent ]
Only if banks provide the leverage...

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Mar 24th, 2009 at 09:03:22 AM EST
[ Parent ]
That position seems completely insane to me.

The hedgies and privae equity locusts are helpless, as long as we have the political will to take them down.

Tell them to play ball, and if they refuse they should all be prosecuted for treason and thrown into jail until the next great depression.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Tue Mar 24th, 2009 at 08:56:06 AM EST
[ Parent ]
Gah.

GOSPLAN strikes again!

It's fantastically ironic to see the neolibs running in circles screaming for price controls, government handputs, subsidies and giant transfers of wealt while our side want nothing more than letting the markets work.

Let the weak banks fail, and then we'll nationalize and turn'em around.

Complex vs. simple, wrong vs, right, them vs. us.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Tue Mar 24th, 2009 at 08:54:16 AM EST
Starvid:
It's fantastically ironic to see the neolibs running in circles screaming for price controls, government handputs, subsidies and giant transfers of wealt while our side want nothing more than letting the markets work.

Not really ironic, no. Tragic.

It would be good if more people realised that neolibs don't do ideology - they only do expediency. If a policy gives them cash, they're all for it.

What they said and believed last week is irrelevant and best forgotten.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Mar 24th, 2009 at 09:49:23 AM EST
[ Parent ]


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