We’re going down… down… down…
The Federal Reserve is urgently moving to contain a deepening credit crisis and restore confidence in panicked financial markets by becoming a lender of last resort for Wall Street investment houses, which were able to secure short-term emergency loans beginning Monday.Hey free market folks out there — tell us all how it’s going to work itself out. Are some banking bootstraps going to be pulled up, or are we instead going to see crying corporate babies at the government teat?…President Bush rushed to strike a note of calm to the turbulent situation on Monday morning, hailing the Fed’s action and saying: “We’ve taken strong decisive action.” The president spoke after meeting at the White House with Treasury Secretary Henry Paulson and other members of his economic team. “We’re in challenging times,” Bush said.
The central bank, in an extraordinarily rare weekend move, took the bold action Sunday in an attempt to calm the markets. It also approved a cut in its emergency lending rate to financial institutions to 3.25 percent from 3.50 percent, effective immediately.
…The Fed acted just after JPMorgan Chase & Co. agreed to buy rival Bear Stearns Cos. for $236.2 million in a deal that represents a stunning collapse for one of the world’s largest and most venerable investment houses. Just on Friday the Fed had raced to provide emergency financing to cash-strapped Bear Stearns through JPMorgan. Days earlier the Fed announced a set of other unconventional steps to thaw out a credit market in danger of freezing shut.
The Fed’s actions come as fears have spread that other financial houses could also be on shaky ground.
79 Responses to “It’s the economy, stupid”
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This one is definitely major corruption. Fed Reserve is not suppose to bail out Bear Stern. Bernanke better lawyers up pronto.
Btw, This is another Bush “My Pet Goat”, “Katrina guitar strumming/Eating cake” moment. Be very afraid, this is massive market meltdown. Once every 50 yrs type of event. (watch gas price.)
I rather wish the US government had nationalised Bear Stearns, like the British government did Northern Rock, if only so I could laugh at people’s heads exploding.
Typical Bush. When the little guy is threatened with mortgage problems, he insists it will work itself out. But when one of his buddies needs help, then it’s time to suck the Fed dry. How can ANYONE in the US vote for someone in the GOP? With luck, the GOP will go the way of the Whigs and we can be done with those assholes.
I think there are a LOT of heads in the sand about how bad this is going to get. We probably won’t see a Great Depression quite to the level of 1929, if only because we haven’t created the dust bowl again. Still, this is a debt bubble: lots of bad loans and impossible payments are in that pile, and there’s going to be a massive chunk of the economy scaled back as people retrench and start paying off those problems.
One concern I have is what this will do to politics. I think this sort of economic disaster has the potential to violently radicalize politics. I personally don’t look forward to a bunch of people fed on liberal traitor rhetoric and authoritarian worship ready to implement their philosophy by force. =/
We might not have created the dust bowl again, but we (the planet) are going to be in for similar times with global climate change.
It works itself out in direct proportion to those who actually work. Market corrections always punish overexhuberance anyhow.
granted, that’s a tough call in a clime where half the population works for a living, the other half votes Democrat. But still, like Lord Aragorn says, there is always hope.
I notice we never really get dynamic advice from the Swedes.
When I heard about this, all I could envision was Kevin Bacon’s character in ‘Animal House’, hysterically screeching “ All is WELLLLLL!” as he’s getting trampled.
I wonder how bad the economy HAS to get before the remaining Bushie faithful finally understand what the hell their Dear Leader and cronies have done.
Death of the rethug party? Now that would be fun.
The 800 pound gorilla sitting in the eye of this perfect storm of economic issues is the over 512 Billion spent so far on the war in Iraq. Make no mistake, financing this folly with foreign debt is what has driven the dllar to its current junk status vs the Euro and the Yen.
Our continued military presence in the Middle East in Corps strength is a major factor in the price of oil…as well as gold…both react to uncertainty and turmoil.
Combine these elements with the Bush administration’s almost fawning belief that ‘the market’ can solve all problems - a belief which has created a ‘wild west’ of unregulated unfettered gluttonous business practices which would shock even the Robber Barons of the 19th century, and you get this.
God help our children.
http://zfacts.com/p/447.html
Watching that rolling upward number is terrifying, Snookie.
The Audacity of Dope, the Aspirations of Aspercivity!
Liberation Theology never tasted so good. Ahh, imagine Jesus with a machine gun!
Death of the rethug party? Now that would be fun.
Testify!
Well, actually, the media already picked the candidate with an ‘R’ by his name thinking this was good enough. So you got your wish on that one.
But still–yeah–that would be your Audicity of Hope.
Such as it is.
Which reminds me: Maybe for their next trick, The Dems (who can’t handle their own primary process, but deign to think they can handle nationalized health care fantasies without extensive anti-psychotic therapy) can have John Edwards himself, the polyester glad hander from North Kakkala, will use his dead baby channelling prowess to team up with Chris Moonie and tell us ONE MORE TIME why adult stem cells are doing the heavy lifting in treatments, while the other kind (the embryonic version, which offer nothing) get all the attention.
What the joystick?
Hey, this new troll is fun!
Indeed.
And I bet nobody told poor John that those beloved all-American blue-jeans were actually polyester!!!
Dead baby channeling, isn’t that what Jill Stanek does?
I’m not sure which is more fun. The trolls that are vaguely coherent and which I can spend hours, days, weeks arguing with, or the ones that are just straight up batshit insane.
Still, this is a debt bubble: lots of bad loans and impossible payments are in that pile, and there’s going to be a massive chunk of the economy scaled back as people retrench and start paying off those problems. - Left Wing Fox
Yeah, but when people pay back that money, it’s not going down a black hole, but rather being paid to other people, so why doesn’t their spending/investment help keep the economy moving?
Well, some combination of factors I reckon
(1) the people we’re ultimately paying back are not participants in our economy but rather are in other countries
(2) the creditors are themselves nervous and hence don’t wanna spend/invest any money until they know what they will have
(3) our debts have been sold to investors who simply are not ready to cash out because they are busy saving, e.g., for retirement
(4) spending/investment by the creditor class simply does not grow the economy as well as spending by the rest of us
To the extent that (1) is an issue, we gotta start questioning so-called “free trade”. To the extent that (2) is an issue, some bail-outs of creditors may in fact be good for the economy.
To the extent that (4) is an issue, we need to start saying as a society — well, if spending by the non-rich is better for the economy than spending by the creditor class, maybe we should keep some of the money in the hands of the debtor class and away from the creditor class.
You keep hearing the religious right talk about legislating Biblical morality? Well, maybe it’s time to do so and set up some sort of (modified) Sabbitcal and/or Jubilee system to allow the debtor class to keep the money. After all, whose picture is on the money? Is it God? Is it yours or mine? The money’s value exist because the government backs it up. And the government is of the people. Therefore if it is in the best interest of our economy to just let some debts go, maybe that’s what should happen.
To the extent that (3) is an issue, this is why a robust social security system is necessary for our economy — we simply cannot have so many people so worried about having enough money for retirement that they are effectively hoarding away resources for future spending. And all this scary talk about “social security won’t be enough” doesn’t help. As FDR put it, the only thing we have to fear is fear itself.
Perhaps what can be done is to have some sort of WPA-type program for debtors to benefit retirees as well: you get a certain amount of debt forgiven if you work a certain amount of hours providing services for retirees (poorer folk who have to work more to earn a living will get more debt forgiven for less work). And the mechanism for forgiving the debts will be that these retirees in exchange for services will give up a certain amout of their retirement accounts. Which investments will be sold and used to purchase pieces of what Atrios calls “Big Shitpile” so as to bail out the banks and similar institutions (assuming the retirees themselves are not the ones invested in Big Shitpile).
In this way, us young, healthy debtors can achieve some measure of financial security and hence be back spending and contributing to the economy while providing for our elders so that they aren’t so afraid of their financial futures that they flood the markets with capital, which is part of what leads to all these bubbles we’ve been having.
I wonder if any candidate will actually start making such proposals? I’m not holding my breath, that’s for sure!
This is not a bail-out. It’s a liquidation. The shareholders get basically nothing ($2 on a stock that was $35 on Friday.) Management will mostly be fired. Employees are mostly out of jobs (some will apply/get offers at JPM) Bondholders get about nothing.
BSC was approximately 1/3 owned by its employees. They’ve lost a couple of billion dollars between in the last few days: a lot of people who thought they had a million dollars in savings woke up and found they had $20K. Ouch, bummer of a return for 5 years of 100 hour weeks.
The Fed kicks in $30B in credit promises. That’s $75 or so for every man, woman, and child in the US. Painful, yes, but the upper income crowd gets most of that bill.
Good idea or bad idea? Hard to tell. Better than a bailout, probably yes. Better than a catastrophic derivatives default nowball, hard to say.
http://www.fumento.com/fumento/edwards2007.html
heh heh–well, maybe, but then I’m not sure that Stanek came 9/10s of shutting down the OB/GYN industry in some states with Vaudevill theatre.
Piece of work. You should bring him back.
(I hear he already has a ready-made speech writer available if the Red Button is pushed again).
Let’s see: the inflation rate is somewhere between 3.7 and 4.4 percent over the past year, and the Fed is offering loans at 3.25%. That means, in effect, that they’re paying banks to borrow money.
And still the credit markets are a mess.
The thing left out of the quoted story is that the Fed has effectively guaranteed the Bear Sterns portfolio of Big Sh*tpile securities: before Morgan bought the company, they agreed to take the stuff as collateral st face value and not to complain if it turned out to be worthless. So pretty soon on top of the $12 billion a month in Iraq war costs we’ll be counting up the billions in funny money that the Fed is pumping into the system.
At #4,
Oh yes.
Which one might hope, at this juncture, might actually be a good thing. However…
Alas and dammit, I fear this is dead on too.
Bush’s “Pet Goat” Moments ought after all have torpedoed his whole admin, and yet somehow they have not. Judging by outcomes rather than poll results, they seem to have either left his regime unaffected or perhaps even have somehow advanced their agenda.
Which makes no sense at all if we presume that the USA is in any meaningful sense a democracy, but perfect sense if we suppose that the transition to facism was already accomplished before 9/11.
My first thought was, “how would Bush’s refusal to take a decent minimum of damage control measures help his movement stay in power longer?” Certainly if a Democrat takes the White House in November and is allowed to occupy it, this is one whopping big poison pill to pass on to us.
All GHW Bush had to pass on to Clinton was a wrecked but already slowly recovering economy, and Somalia and the mess in the Balkans (plus other headaches as usual, like the mess we had made of Haiti). His son certainly operates on a grander scale.
I don’t see how it actually might help McCain win in November but knowing our Republican base it probably won’t hurt, no matter how spectacular the disaster has become by November nor how clearly reasonable people can trace specific ills to obvious derelictions of basic duty of various executive offices.
And creating a pretext for martial law and a de facto suspension of the election is such an obvious possibility.
Gorobei: it’s still a bailout. JP Morgan wouldn’t be picking up the fire sale stock if the Fed weren’t backing them.
Pam, silly, you’ve forgotten how to conjugate. I rely on appropriate guarantees to stabilize the financial market. You get government funding in a downturn. S/he is a whiny crybaby sucking off the government teat.
mythago: I agree the Fed is intervening, but why is it a bailout? The bad actors aren’t bailed out here.
JPM essentially becomes the trustee/owner of a big mess. The Fed provides the liquidity.
What would you prefer to happen?
Real good job running that empire, dubya!
There is a house on Wall Street
They call it the Bear Stearns
It’s been the ruin of many a shareholder
And the Fed it never learns
Like you could trust any investment anything with the word BEAR in it’s name?
The new troll is boring.
JPM essentially becomes the trustee/owner of a big mess. The Fed provides the liquidity.
Nope. The Fed provided a loan guarantee so that JPM could acquire the “good” portion of the Bear Stearns portfolio and the taxpaying public would cover the downside - i.e. the “illiquid” portion; the bad debt.
So taxpayers have just collateralized an “assets-only” acquisition by JPM of Bear Stearns; and JPM bought that company for less than they would have paid the Yankees to buy out A-Rod’s contract. Less than the value of the Bear HQ at 383 Madison Ave.
What happens if JPM doesn’t pay back the loan? On whose behalf does Helicopter Ben kite the next check? Goldman Sachs? Merrill Lynch?
JPM wouldn’t have taken that big mess if the Fed were not providing a safety net. Sounds like a bailout to me.
Oh, I see. A first-time home buyer walks into the Akbar-sized trap of adjustable-rate mortgages, and it’s, “greedy bastard! You deserve to lose your house and I hope you learned a lesson.” But be the one to offer first-time home buyers predatory loans that you know they won’t be able to pay in the long run with a smile, and it’s, “poor baby, we’ll bail you out .”
Isn’t this just Socialist banking?
Pam, silly, you’ve forgotten how to conjugate. I rely on appropriate guarantees to stabilize the financial market. You get government funding in a downturn. S/he is a whiny crybaby sucking off the government teat.
You fail Conservative 101.
I rely on appropriate guarantees to stabilize the financial market. You are a whiny crybaby sucking off the government teat. S/he is a parasite who should be shoved into a ditch to die quietly and stop disturbing her/his betters.
Sophisticated conservatives express this in economics, but the essence is the same.
Can you say, holy fuck? We gonna hit $5/gallon gas for real. Euro is going to hit 1.6.
To put it another way, cash isn’t worth anything. I suspect we are already at double digit inflation and at 2% interest rate, one lose 10% value as time goes by.
Oh yeah, people are going to riot soon.
http://afp.google.com/article/ALeqM5iSPCWZYNFMpG78MNjks8ELXJGUYA
Fed set to cut rates again in effort to stem crisis
Joseph LaVorgna, senior economist at Deutsche Bank, said he expects a a cut of a full percentage point in the federal funds rate from 3.0 percent to 2.0 percent.
“A deeper and longer recession seems more likely now than a brief, mild one,” he said, saying this could mean the rate may be slashed to as low as 1.0 percent by the end of June.
Others say the Fed must act to avert a broader economic meltdown.
Andy/mythago - so, Ill ask again: what would you prefer the Fed do?
As I said in my original post: the Fed prints up $75 for every citizen in the country. BSC doesn’t benefit from that. JPM might if things go well for them.
Who is being bailed out here? The USA? The global capitalist conspiracy? Wall St? BSC investors? BSC employees?
Maybe we let the whole thing melt down now. Then hold trials for BSC mgmt, mortgage brokers, etc. We can rely on the invisible hand to minimize pain to all citizens?
So, get past your anger (I knoiw I have mine,) and tell me what you want the Fed to do.
Gorobei,
It’s a bail out. The fed took worthless sub-prime as collateral in exchange of Treasury. Full value!
somebody posted the term of agreement in dkos. It reads like a bailout.
————
on related news, take a look at price of commodity.
Loaf of bread price is going to explode soon.
http://www.dailyfutures.com/grains/
Capitalism is only for the middle class.
Bankruptcy Bill Set for Passage; Victory for Bush
March 9, 2005
The Senate assured final passage of the first major overhaul of the nation’s bankruptcy laws in 27 years on Tuesday, when it took two votes that cleared the remaining political obstacles to a measure that the nation’s credit and retail industries have sought for years.
The bill would disqualify many families from taking advantage of the more generous provisions of the current bankruptcy code that permit them to extinguish their debts for a “fresh start.” It would also impose significant new costs on those seeking bankruptcy protection and give lenders and businesses new legal tools for recovering debts.
But critics said the measure was a thinly disguised gift to banks and credit card companies, which, they contend, are largely responsible for the high rate of bankruptcies because they heavily promote credit cards and loans that often come with large and largely unseen fees for late payments. They said that the measure would impose new obstacles on many middle-income families seeking desperately needed protection from creditors, and that it would take far longer for those families to start over after suffering serious illnesses, unemployment and other calamities.
http://www.nytimes.com/2005/03/09/business/09bankruptcy.html?scp=6&sq=bankruptcy+bill&st=nyt
Bankruptcy Bill Set for Passage; Victory for Bush
March 9, 2005
The Senate assured final passage of the first major overhaul of the nation’s bankruptcy laws in 27 years on Tuesday, when it took two votes that cleared the remaining political obstacles to a measure that the nation’s credit and retail industries have sought for years.
The bill would disqualify many families from taking advantage of the more generous provisions of the current bankruptcy code that permit them to extinguish their debts for a “fresh start.” It would also impose significant new costs on those seeking bankruptcy protection and give lenders and businesses new legal tools for recovering debts.
But critics said the measure was a thinly disguised gift to banks and credit card companies, which, they contend, are largely responsible for the high rate of bankruptcies because they heavily promote credit cards and loans that often come with large and largely unseen fees for late payments. They said that the measure would impose new obstacles on many middle-income families seeking desperately needed protection from creditors, and that it would take far longer for those families to start over after suffering serious illnesses, unemployment and other calamities.
http://www.nytimes.com/2005/03/09/business/09bankruptcy.html?scp=6&sq=bankruptcy+bill&st=nyt
Not for the first time, I’m glad that (a) we have virtually no credit card debt (I think we’re at about $500 total) and (b) I learned to knit last year so, worst case scenario, I can at least keep us clothed next winter.
Mnem, you’re rare in America, and I’m in the same boat. I have no debt at all and my bills are for groceries and utilities—-which are bad enough.
granted, that’s a tough call in a clime where half the population works for a living, the other half votes Democrat.
God, this troll isn’t even trying. Then again, if they were interesting, they wouldn’t be trolls, I guess.
squashed, I ask again: who is being bailed out? Who is saying “thanks Fed?”
Rhetoric is easy. Now say what you would have the Fed do rather than dismissing their action with a label.
We’re liberals, we’re supposed to be able to think about things rather than label them and thus demonize them to the in crowrd.
And with that, I go to sleep (having spent all day researching the agreement rather than reading a post from “someone on dkos”)
If I found the stuff and show you that you are either willfully ignorant or glib will you shut the fuck up?
Backed into a bailout
Ben Bernanke, his successor, and the other Fed governors disagree. Over the weekend they approved a $30 billion line of credit so that JP Morgan Chase could buy Bear Stearns, the nation’s fifth-largest investment bank, which was on the verge of collapse because of its portfolio of bad loans.
http://www.boston.com/bostonglobe/editorial_opinion/editorials/articles/2008/03/18/backed_into_a_bailout/
The terms of the Bear Stearns sale contained some highly unusual features. For one, J.P. Morgan retains the option to purchase Bear’s valuable headquarters building in midtown Manhattan, even if Bear’s board recommends a rival offer. Also, the Fed has taken responsibility for $30 billion in hard-to-trade securities on Bear Stearns’s books, with potential for both profit and loss.
http://online.wsj.com/article/SB120580966534444395.html?mod=googlenews_wsj
The Fed, helping to answer that question, simultaneously announced a new lending facility for “primary dealers”–-non-bank financial firms like Bear, which have hitherto been unable to borrow from the Fed. This constitutes a remarkable expansion of the Fed’s financial safety net. Something else Bear’s shareholders will want to know is why this facility was not created in time for them to take advantage of it. At the end of last week, they were having to borrow from the Fed indirectly, through the good offices of J.P. Morgan. Two days later, J.P. Morgan is getting Bear for nothing, and in addition has been promised as much as $30 billion in Fed loans, secured against Bear’s dodgy assets. If the assets turn out to be worth less than the loans, the Fed–-ie, the taxpayer–-shoulders the risk. (And that, by the way, is why these arrangements are indeed a bail-out, though not one that helps Bear’s original owners.)
http://clivecrook.theatlantic.com/archives/2008/03/the_bear_stearns_bailout.php
FTSE dives on Bear Stearns bail out
http://ukpress.google.com/article/ALeqM5j1ZTB9VqGW_Lbfiob7Ng53zLxAkA
FFS, posting here is like using IM in China.
Paulson Defends Bear Stearns Bailout as ‘The Right Decision’
http://www.abcnews.go.com/ThisWeek/Vote2008/story?id=4460517&page=1
Secretary of the Treasury Henry Paulson Sunday defended the Federal Reserve’s recent bailout of investment bank Bear Stearns.
“The right decision here, I am convinced, was the decision that the Fed made, which was to do things, work with market participants to minimize the disruptions,” Paulson said in a “This Week” interview with George Stephanopoulos.
When asked if the Bear Stearns loan goes against the administration’s consistent refusal to use tax dollars to bail out financial institutions, Paulson said, “We’re very aware of moral hazard. But our primary concern right now — my primary concern — is the stability of our financial system.”
Nouriel Roubini
…The emergency bailout of Bear Stearns Cos. dented confidence in other securities firms ahead of results next week from some of Wall Street’s giants including Goldman Sachs, Morgan Stanley and Lehman Brothers, analysts said on Friday…
http://www.huffingtonpost.com/stan-goff/core-melt-the-bear-stea_b_91669.html
Bear Stearns bailout keeps firm afloat
Move gets backing of Fed
JPMorgan’s move was blessed by the nation’s Federal Reserve Bank, which said in a statement that its board members voted unanimously in favor of the arrangement. The Fed added that it would continue to monitor market developments and provide liquidity as needed. Earlier this week, the Fed pumped $200 billion into the market by allowing big bond dealers to offer as collateral certain hard-to-trade mortgage-backed securities for cash.
Wall Street has had plenty to worry about when it comes to Bear Stearns. Shares of the company plunged Thursday morning on fears about how hard the company could get hit by declining values in the mortgage securities market.
http://money.cnn.com/2008/03/14/news/companies/jpm_bsc/index.htm?section=money_topstories
Pathetic Bear Stearns Bailout: Who to Blame
But the first responsibility of any brokerage firm management team is to ensure that under no circumstances can the firm be put in a position where its short-term financiers might lose confidence. This is why there is ultimately only one person who is responsible for the Bear firesale: Bear’s CEO Alan D. Schwartz.
Meanwhile, who will pay for this bailout? Do you really have to ask?
You.
The Fed has promised Bear Stearns savior JP Morgan (JPM) that it will guarantee the value of whatever crap Bear has piled onto its balance sheet. In other words, the Fed is effectively assuming the liabilities of Bear Stearns. And the Fed’s source of capital, ultimately, is you.
http://finance.yahoo.com/tech-ticker/article/6242/Pathetic-Bear-Stearns-Bailout:-Who-to-Blame?tickers=bsc,jpm
Gorobei March 17, 2008 at 11:51 pm
squashed, I ask again: who is being bailed out? Who is saying “thanks Fed?”
In case you are still thick.
FED assume the risk that BSC accumulate. But it didn’t get all the nice buildings and goodies. JPM got that.
Basically, people pay the loan, get worthless subprime paper, and JPM get the nice building and pay back the loan…whenever. (or never)
THAT’s BAIL out. That’s handing out free money. Big daddy is paying.
DAS: Actually I think the biggest aspect is one you didn’t mention: that much of the value on the books that people are relying on to make the money flow dosen’t actually exist, except as assumptions that they’ll be good someday.
Here’s the cascade: Person buys house for $800,000 with one of these “subprime” loans; like an ARM that they can no longer afford, or a less-than interest rate loan that actually jacks up the amount they owe the bank over time. Or a liar loan where the banks didn’t check to make sure the person can hope to pay the mortgage. That’s the “Subprime” mortgage problem we started noticing months ago.
First effect of this is on that market. As the market slows and stops, the values of houses stop climbing, and start to drop again to a point where people are willing to buy them. In the short term, this affects all the related industries: Construction, banking, real estate, retail, home improvement, etc. As those falling prices cause more people to be underwater on the homes they own, people with GOOD mortgages find the lines of credit on their home drying up, slowing their participation in the market. As the economy goes into a recession in those areas, people may lose the jobs that kept their good mortgages paid. Whoops.
Again, that might not be a huge issue if it were local, or if the rest of the economy was doing great. It’s not: The housing bubble was one of the primary movers of the US economy.
So, that’s part of the problem. It’s a business downturn, recession, bad news, but not a huge deal in the long run.
The bigger problem is that the banks have all this money on the books based on those massively inflated loans and developed properties that no-one wants to buy anymore. As people default on mortages and they take the homes back, the books take a double hit: one for the income they’re no longer receiving, and another for the falling price of a house they can’t sell to recover any of the money.
Unfortunately, these mortgage backed securities have been considered a safe place to invest money. They’ve been used by Municipal bond insurers, trust fund managers and pretty much the entire financial industry to fuel investment. Sometimes it’s a matter of borrowing money to invest for a greater rate of return: a system that means high rares of theoreticallyt low-risk return, provided the whole system dosen’t spontaneously collapse.
Debt Bubble. All it takes is one of those actors to call the bluff. Mortgage firm A sees the rising tide of red and hungry creditors looking for their money, and they say “Shit, we’re in trouble. I need to call in that loan from Bank B.” Bank B then says “Oh… shit, well, let me get the money from Group C”. That’s wen you get the systemic margin call that’s going on, and a run on the banks.
Now, it might be the case that everyone has good assets that are simply tied up at the moment. Bank C turns around and says “Look, we have a lot of solid investments, and a lot of good property that is worth a lot of money. Pulling all that out to pay you guys right now is going to kill us.” The Fed then swoops in, and loans one of the banks along the chain the money it needs to make the margin call, then the bank pays back the fed as it frees up assets without getting killed or destroying the market. That seems to be the assumption that the Fed is laboring under.
The reality is that the banks don’t own a lot of useful stock tied up elsewhere. They have a bunch of shit no-one wants, no-one can afford, and will drop on average about 15-20% in the next year or two (Krugman claims 25% average, with up to 60% in places worst hit by overdevelopment, like Miami, Cali and Nevada). And that useless shit is backing the GOOD investments, making everything less stable, and supporting the markets on a collapsing souflee of mortgage insecurities.
Right now, denial and federal aid is probably the only thing keeping this whole charade afloat right now. It’ll prpobably continue for a while with some good and bad, leading the Republicans to crow that everything is fine. Then a couple more banks will collapse, and take the whole crumbling shitpile down with them. I think the result is going to be a crash, a major recession/depression.
After that, it’s anyone’s guess.
Mark: Call me a centrist/mushy middle kind of guy, but I’m of the mind that violence and politics is inherently a bad combination. It would be nice if democratic socialism finally gained a voice of respectability in the public sphere, but it’s been so marginalized of late, that I think outright fascism has a considerable lead in this race.
Which short of complete collapse of civilization pretty much tops my list of “Yes, it CAN get worse” scenarios.
As Gore Vidal so graciously pointed out:
It’s socialism for the rich and capitalism for the poor.
“Hey free market folks out there — tell us all how it’s going to work itself out. Are some banking bootstraps going to be pulled up, or are we instead going to see crying corporate babies at the government teat?”
As one of those free market types, yes, we’ll see a lot more corporate babies crying for the government teat.
And as one of those free market types the reaction should be pretty much as it was here. The shareholders get wiped out (as it should be, you want the upside of having invested your capital sensibly, you carry the downside of investing it not sensibly) but the rest of us don’t get wiped out as well, as would happen if the credit markets completely seize up.
The government borrows money to lend to the Fed to lend to a bank to buy a firm that got into trouble because of bad lending practices?!?! This is supposed to solve the problem of bad lending practices?
Why didn’t the government just buy Bear Sterns and use its muscle to ensure the safe dispersion of its debt over time? If you are going to borrow money you should really have an asset at the end, even a dubious asset.
“Andy/mythago - so, Ill ask again: what would you prefer the Fed do?”
That’s the equivalent of asking, “Now that we’ve fucked up Iraq beyond all recognition, how do you want to use rifles, bombs, missiles and soldiers to fix it?”.
The Fed no longer has the tools to do anything but make it worse. The best we can hope fore is to batten down the hatches and strap in before the wreck.
At this point, all the Fed is doing is trying to delay the worst of it until after Bush Jr. leaves office - and in the process make the inevitable even worse.
But making sure The CEO President keeps his perfect streak of never having to take responsibility for his own fuckups is well worth it, don’t you think?…
“As one of those free market types, yes, we’ll see a lot more corporate babies crying for the government teat.”
…and if past performance is any indication, they’ll get that teat too.
Keep the profits, share the (huge) costs. That’s America v2.0…
At least we can rest soundly knowing that some set of Wallstreet con-artists have nice limousines to take them from their nice private jets to their nice vacation homes where they will do to their nice trophy wives what they’ve been doing to the rest of us without consequence for the last decade.
Keep up the good work, Corporate America!!!…
http://agonist.org/stirling_newberry/20080317/rattling_apart_captain_carnage_and_the_bear…
Good evening.
This is your Captain.
We are about to attempt a crash landing.
Please extinuish all cigarettes.
Place your tray tables in their upright, locked position.
Your Captain says: Put your head on your knees. Your Captain says: Put your head on your hands. Captain says: Put your hands on your head.
Put your hands on your hips.
Heh heh.
This is your Captain. We are going down.
We are all going down. Together.
And I said: Uh oh.
This is gonna be some day.
Standby.
This is the time.
And this is the record of the time.
This is the time.
And this is the record of the time.
Uh, this is your Captain again.
You know, I’ve got a funny feeling
I’ve seen this all before.
Why?
Cause I’m a caveman.
Why?
Cause I’ve got eyes in the back of my head.
Why?
It’s the heat.
Standby.
This is the time.
And this is the record of the time.
This is the time.
And this is the record of the time.
Put your hands over your eyes.
Jump out of the plane.
There is.
No.
Pilot.
You.
Are not.
Alone.
Standby.
This is the time.
And this is the
record of the time.
This is the time.
And this is the record of the time.
that much of the value on the books that people are relying on to make the money flow dosen’t actually exist, except as assumptions that they’ll be good someday. - Left Wing Fox
But the money lent very much does exist and it very much contributed to the economy (by feeding people who build homes or whatever) when it was spent. But having to pay it back is a drain on the economy: which it wouldn’t be if the money paid back again got spent or invested in an economically beneficial way.
Even if the money lent for housing has been lent for something that has no real value, it doesn’t matter. After all, the housing bubble is just part of the credit crunch — many of us are up to our necks in debt from student loans and occassional bad spending decisions, which have nothing to do with buying housing.
The key thing is that our current situation whereby debtors aren’t contributing to the economy because they are focusing on paying back debts but either there is no money to pay back those debts or the money paid back isn’t being reinvested/spent appropriately, so the owed money isn’t going back into the economy is not viable.
And simply lowering interest rates to allow for more money lending (when we don’t have money to lend in the first place … and without any pull for higher interest loans already in existance to be renegotiated to take advantage of the lower interest rates) ain’t gonna do anything. Nor will bail-outs as we’ve been doing them.
What we need to do is take a page from both Leviticus and the WPA and have some massive debt write-offs. The problem is that ultimately some of these debts are to investors who are investing because they are worried about saving for retirement. Nu? Here’s where the WPA model comes in — couple debt write-offs, where appropriate, to some sort of work-fare program whereby us debtors provide services directly to those who would otherwise be in ill-financial health due to having to write off investments. Even when the connection is indirect: have them exchange good investments for a piece of Big Shitpile (which may in the long run still be something ok when the housing market recovers) and also for not having to worry about only having Big Shitpile in their portfolios because they will get taken care of by work-fare part-time workers.
Oh good, the Fed is going to cut interest rates just as the dollar is collapsing. This weekend I saw my first “Euros accepted” sign in downtown Chicago. Looks like were going to see a lot more of those, followed by “Discount given for Euros” (and probably pounds, yens, wons, loonies, and at this rate pesos).
Thanks free-marketeers. I always wondered what a run on currency would look like. But hey, JP Morgan is doing great…
Now I guess Amurka ain’t just morally bankrupt anymore …
I will TELL you what I want the government to do. I want it to set up a big real estate trusteeship-department. Every fucking investment company that says they are going belly up, we– WE, the people of the US, through the government– buys them up at pennies on the dollar. The new Department of Mortgages then works out payment plans that will end up paying, eventually all the bonds it’s going to take to fund this thing.
People will have roofs over their heads and re-vamped mortgages they can handle. The government will be employing white collar workers who can crunch the numbers to make things work; including people who are otherwise unemployed as these bankers and investment firms go down.
The out-of-control situation is suddenly STABLE. Some investors lose money, sure, because they made loans for too large of amounts. But isn’t that the POINT of investing? Isn’t that how the market is supposed to work? You get a return because you’re taking a *risk*.
Meanwhile, the government collects from people at something like a 4% mortgage rate and maybe reduces the loan amount since they picked it up cheap. Taxpayers are happy, bond holders are happy, home owners are happy. Rich people cry boohoohoo and kiss my progressive ass.
Free market is for little people. socialism all the way for the big boys.
“I will TELL you what I want the government to do. I want it to set up a big real estate trusteeship-department.”
Samantha, that just makes too much sense. America would never go for something that logical and helpful…
Agreed. From what I’ve read, those would work great as a stop-gap measure in a market that was tied up in quality assets, rather than the sort of serial insolvency caused by write-downs like we’re experiencing now.
Not a bad idea, but with a 9 trillion dollar debt, can the US government afford to do so, especially since it seems to be tapped out on debt itself? I did a quick search and came up with this:
http://www.die.net/musings/national_debt/
Which leads to the following thoughts:
1: The federal government appears to be in a worse state debt-wise than it was in 1930, which may limit the amount of possible spending on WPA style programs.
2: On the plus side, debt as a percentage of GDP can still get a hell of a lot worse for the US government without resulting in economic collapse.
3: Most of that spending that helped drag the US out of the depression was WW2: The us industrialized, socialized the workforce to make weapons, and retained it’s infrastucture when most of Europe and Asia’s economy were decimated. Given a choice between socializing the workforce to build infrastucture, maintain housing, or go green, and trying to bill a new war as good for the economy, which would the Republican party choose?
With $230Billion spent to bail out BSC,
That money is enough to give every family who doesn’t have house a house!
1: The federal government appears to be in a worse state debt-wise than it was in 1930, which may limit the amount of possible spending on WPA style programs. - Left Wing Fox
And under which administrations’ proposed budgets did much of this debt accrue? Hmmm …
3: Most of that spending that helped drag the US out of the depression was WW2
And yet the current war we’re in seems to be a drag on our economy … obviously that $3 tril/yr. or however much we’re spending on the war is going somewhere. The question is “into whose pockets?”. WWII essentially, finally allowed for the “reconstruction” (i.e. the first industrialization) of the South and West in this country, long delayed since the Civil War days … and which even the CCC, WPA, etc., couldn’t accomplish. But what are the economic expendatures of the current war purchasing (besides death)?
And what exactly is causing the difference?
Mike, Mike, Mike… somebody should hire you to write bodice-rippers. That’s twice now you’ve gotten me all a-flutter.
:)
…
Take your pick. WW2 was actually a pretty unique situation for the USA as far as the creation of new markets (By literally bombing the old ones out of existance) and new infrastructure to take advantge of those markets in a way no other nation could at the time. In reality, the destruction of infrastructure, , resulting debt obligations and general lack of wealth creation possibilities from military spending are usually economic sinkholes.
More than that, the Iraq clusterfuck features massive corruption and crony capitalism, debt financed by foreign interests rather than the public through war bonds, and massive debt obligations thanks to an irresponsible taxation policy aimed at pushing political and economic consequences off to another administration.
I’m just trying to get an idea of what’s going to happen next. I hope the pessimism is unfounded, but I fear the bottom of this ditch is pretty deep.
“All politics is local”-D
If you transpose the fed into your local government, be it municipal or county, you will find it much easier to understand what needs to be done.
Since you cringe at the thought of used car salesman Bush and used car manager Cheney, isn’t it time to send them away?
If you transpose the fed into your local government, be it municipal or county, you will find it much easier to understand what needs to be done. - Mold
Conversely a key reason why the GOP is able to swim upstream in the national body politic is because people project their issues with local governments onto the federal government. And the GOP is able to win votes as the party of “see how bad gummint is? do you trust gummint to run social program X? the Dems do!”.
In my experience, a large part of “I hate gummint so I hate those gummint loving Dems” comes from sour experiences with local governments: speed traps and other negative encounters with tickets for stupid things (lapsed registration when the state hasn’t informed you of your registration’s experation date), stupid liquor laws, political machine corruption, etc.
In many localities in “Red State America”, people’s only experience with the Dem. party is the corrupt political machine of the nearest decent size city. Is it any wonder the “gummint can’t do any good” message of the GOP resonates with such people?
The Dems. are, since the New Deal, the party of government solutions to collective problems. However, in order to gain votes as such a party, the Dems. need to demonstrate that government, under their steering at least, can actually do good things rather than being incompetent and a waste of money ()you having to pay taxes and tickets, etc).
Pass a law stating that any person directly or indirectly involved in the financial sector who, ever again, whines about “government interference” or objects to the government bailing out consumers because “it interferes with the free market”, will be horsewhipped from one end of Wall Street to the other.
Since I’m not actually Empress, I’d settle for the Fed imposing conditions on this bailout–oh, say, increased regulation with teeth. That’s about as likely as the horsewhipping.
I, for one, am sick of these Cadillac driving welfare queens (and kings).
“I, for one, am sick of these Cadillac driving welfare queens (and kings).”
Most of the people involved in big time American “capitalism” wouldn’t be caught dead in a Cadillac.
Now an Italian exotic, a Maybach, a V12 Mercedes, or more likely a limousine - that’s more like it. If it’s a Cadillac stretch limo, that would be okay…
Mythago,
Pass a law stating that any person directly or indirectly involved in the financial sector who, ever again, whines about “government interference” or objects to the government bailing out consumers because “it interferes with the free market”, will be horsewhipped from one end of Wall Street to the other.
I like this law, and would be in favor of its passage. Unfortunately, the Fed doesn’t make law.
The Fed is stuck doing damage control. They horsewhipped BSC as much as they could, but that only amounted to taking away most of the money of the owners.
squashed,
I doubt we can see eye-to-eye on this issue because I look at it in terms of punishing the individual actors (BSC) while you seem to see it in terms of bailing out the system (Wall St.)
I see the money lost as already put on the taxpayers’ tab, you see it as recoverable.
To take one example, the strange option-to-buy on BSC’s office. I see this as a pretty severe fuck-you from the Fed to BSC: if they fight being put out of business, they get evicted in 30 days and are basically dead. A pretty unsubtle hint to not look at alternative saviors.
If you feel all Wall St is one, I can understand your complaint. If, as I do, it’s an ecosytem, then the Fed did pretty well here.
Gorobei March 18, 2008 at 10:05 pm
If you feel all Wall St is one, I can understand your complaint. If, as I do, it’s an ecosytem, then the Fed did pretty well here. ”
Paulson is ex-Lehman Brother guy, bailing out BSC by giving JPM free money and taking on the bad loan responsibility and move it to government tab.
It’s the transfer of responsibility to tax-payer that is dubious. So what if the entire wallstreet ecosystem go bust? So what if BSC go bankrupt and bunch of super rich guys lost seberal billions bucks and cascade to several banks. BIG friggin deal. Let them all die and buy the pieces on the cheap.
eg. I want to know why the government didn’t seize the midtown office and auction it off?
Or why didn’t we government nationalize citibank instead of bailing them out? Turn it into Credit Union for all I care. Make it go bankrupt and sell the pieces to the highest bidder.
Hey, I bet it creates more job that way.
My question. What is so important about saving BSC/the functioning of market bullshit that is so important?
Not that it has any effect on me or anything. pull all my stash out long time ago.
And please STFU, mister “It’s not a bail out”
@ #53, Godmonkey
March 18, 2008 at 8:35 am
Every man
Every man for himself
Every man, every man
For himself.
All in favor say aye.
Big Science, halleluja!
Big Science.
Yodellehe
Hoo…
::nods:: Yeah, MikeEss, I know it won’t happen, not in America as we know it. But I got kind of sick of hearing about how we never have any plans or constructive suggestions.
Nope. But they can certainly condition a bailout on agreement to increased regulations–those regulations being imposed by regulatory bodies such as the SEC, not by the Fed–effective immediately.
Oh, and I’d like to amend my horsewhipping bill to include anyone who whines about Sarbanes-Oxley.
Many of these bets were not huge, but were so highly leveraged that any losses became magnified. If that $100 million investment I described above were to lose just $1 million of its value, the investor who put up only $1 million would lose everything. That’s why a hedge fund associated with the prestigious Carlyle Group collapsed last week.
“If anything goes awry, these dominos fall very fast,” said Charles R. Morris, a former banker who tells the story of the crisis in a new book, “The Trillion Dollar Meltdown.”
This toxic combination — the ubiquity of bad investments and their potential to mushroom — has shocked Wall Street into a state of deep conservatism. The soundness of any investment firm depends largely on other firms having confidence that it has real assets standing behind its bets. So firms are now hoarding cash instead of lending it, until they understand how bad the housing crash will become and how exposed to it they are. Any institution that seems to have a high-risk portfolio, regardless of whether it has enough assets to support the portfolio, faces the double whammy of investors demanding their money back and lenders shutting the door in their face. Goodbye, Bear Stearns.
The conservatism has gone so far that it’s affecting many solid would-be borrowers, which, in turn, is hurting the broader economy and aggravating Wall Streets fears. A recession could cause credit card loans and other forms of debt, some of which were also based on overexuberance, to start going bad as well.
Many economists, on the right and the left, now argue that the only solution is for the federal government to step in and buy some of the unwanted debt, as the Fed began doing last weekend. This is called a bailout, and there is no doubt that giving a handout to Wall Street lenders or foolish home buyers — as opposed to, say, laid-off factory workers — is deeply distasteful. At this point, though, the alternative may be worse.
http://www.nytimes.com/2008/03/19/business/19leonhardt.html
We know we’re in a sharp (decline), and there’s no doubt that the American people know that the economy has turned down sharply, said Henry Paulson on NBC television on Sunday. There’s turbulence in our capital markets and it’s been going on since August. We’re looking for ways to work our way through it.
But Paulson is clearly out of his depth. He’s just not the man to deal with a crisis of this magnitude. His only interest is bailing out his friends in the banking industry. The interests of workers and consumers are just brushed aside. Has anyone from the Dept of the Treasury (or the Fed) suggested a bailout for the 14,000 Bear Stearns employees who lost not only their jobs but the entire retirement when the company was purchased by JP Morgan?
http://elainemeinelsupkis.typepad.com/money_matters/2008/03/the-fed-is-just.html