Summary: In response to the growing financial crisis, the government at last takes large-scale measures to stop the rip. These move us ever farther from a free-market system, towards an increasingly centralized and government-dominated economy. Taken in haste, we will have a long-time to consider the wisdom of these steps. Few things so effectively panic a people into surrendering their sovereignty like a hot crisis. Also, remember that that the winners of the November election will have to guide us through this crisis.
Update: This is history in the making, a decisive change in our political and economic system. This post takes a first cut at placing this event in perspective against the overall economic process affecting the United States. Paulson has become a Marxist, for sure. We do not yet know of which form: Karl or Groucho.
In my report on 15 September I described the three phases of the crisis.
- Collapse of the mortgage brokers, starting in December 2006 — met with laissez faire (indifference).
- Collapse of flawed financial institutions (Countrywide bank, Bear-Stearns, the government-sponsored enterprises) — met with massive intervention and bailouts.
- Contagion and failure of healthy institutions.
As we entered phase 3, I said that treatment of the financial system, not its parts, would be needed. That might include actions such as…
- massive fiscal and monetary stimulus programs,
- large scale and explicit nationalizations,
- coordinated central bank action to adjust relative currency values and control capital flows.
We saw two of these steps initiated on Thursday.
(1) Coordinated central bank action
Hoping to shore up confidence with a show of financial shock and awe, the Federal Reserve stunned investors before dawn on Thursday by announcing a plan to provide $180 billion to financial markets through lending programs operated by the European Central Bank and the central banks of Canada, Japan, Britain and Switzerland.
— Source: NY Times. See Brad Setser’s blog at CFR for analysis of this in a global context.
(2) Massive nationalization of assets — the master bailout, limits as yet unknown and unknowable
The head of the Treasury and the Federal Reserve began discussions on Thursday with Congressional leaders on what could become the biggest bailout in United States history. While details remain to be worked out, the plan is likely to authorize the government to buy distressed mortgages at deep discounts from banks and other institutions. The proposal could result in the most direct commitment of taxpayer funds so far in the financial crisis that Fed and Treasury officials say is the worst they have ever seen.
Senior aides and lawmakers said the goal was to complete the legislation by the end of next week, when Congress is scheduled to adjourn. The legislation would grant new authority to the administration and require what several officials said would be a substantial appropriation of federal dollars, though no figures were disclosed in the meeting.
— Source: NY Times.
For details, the few we know, see the offical statement by Secretary Paulson. In the Q&A session Paulson said “We’re talking hundreds of billions.”
What do we know, as big decisions are taken behind closed doors?
A few things are clear.
(a) The government is acting without plan, in haste or even desparation. This greatly increases the odds of policy error, historically what turns a crisis into a disaster.
(b) This requires skillful execution to avoid generating inflation in the US or a currency crisis in the US dollar. Or both. Avoiding both might not be possible.
(c) The US government does not have the money for large-scale nationalizations. Nor does the savings poor United States. We must borrow it. In today’s environment, the only potential lenders are a small number of foreign central banks.
(d) This bails out the private institutions responsible for this crisis. They keep the profits and stick the taxpayers with the potentially large losses.
(e) Most important, the government is still responding only to the financial crisis. The US recession, part of a accelerating global slowdown, remains outside their planning focus. So they remain in a reactive mode, which seldom works well.
The last 3 are esp problematic.
(c) Have the potential lenders (e.g, China, Japan, Saudi Arabia) been consulted up front, or will they get what is in effect a demand to finance a fait accompli (or else risk trashing the global financial system)? Either way, how will they react? We want our existing loans rolled over at low interest rates, our existing massive current account financed at low rates, and now hundreds of billions of dollars at low rates to finance this plan.
(d) How will we reduce the moral hazard created, as we have shown our large financial institutions that they we will underwrite any losses from their reckless speculation? I doubt that a severe lecture will do the job. Vowing to be stern in the next crisis (2028?) might not have much effect. And let’s hope the American public does not realize that they have been conned — free markets for private profit, socialized losses if the bets do not pay off.
(e) Excerpt from the economist David Rosenberg’s report of 18 September:
We have been in this credit collapse now for roughly a year, and yet it seems as though we have yet to fain the clarity and transparency that is required to transition to the next positive economic cycle. A year into this thing and there is still no light at the end of the tunnel … because people still do not comprehend the severity of the asset liquidation and debt deflation process underway.
A cautionary note — Our creditors grow restless
I recomend close attention to the following. It is is not the first such article, nor will it be the last. China’s rulers warn us that our line of credit has limits, and the warnings grow more frequent and more explicit. I suggest we listen to avoid an unpleasant surprise in the future.
“China paper urges new currency order after ‘financial tsunami’“, Reuters, 17 September 2008 — Excerpt:
Threatened by a “financial tsunami,” the world must consider building a financial order no longer dependent on the United States, a leading Chinese state newspaper said on Wednesday. The commentary in the overseas edition of the People’s Daily said the collapse of Lehman Brothers Holdings Inc (LEH.P: Quote, Profile, Research, Stock Buzz) “may augur an even larger impending global ‘financial tsunami’.”
The People’s Daily is the official newspaper of China’s ruling Communist Party … Its pronouncements do not necessarily directly reflect leadership views, but this commentary by a professor at Shanghai’s Tongji University suggested considerable official alarm at the strains buckling world financial markets.
… “The eruption of the U.S. sub-prime crisis has exposed massive loopholes in the United States’ financial oversight and supervision,” writes the commentator, Shi Jianxun. “The world urgently needs to create a diversified currency and financial system and fair and just financial order that is not dependent on the United States.”
… The commentary suggested China must brace for grave economic fallout and look to alternatives, saying the crisis brings to mind the Great Depression of the 1930s. “Lehman Brothers announced bankruptcy will not only have a domino effect on the global financial world, it will bring a shock to the world economy,” the front-page comment stated.
Please share your comments by posting below. Please make them brief (250 words max), civil, and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
Key Treasury Department documents
We cannot plead the “we didn’t know the details in the fine print” excuse. The important details about this massive nationalization have been clearly spelled out for us. See this page for a current list of Treasury Department documents.
Some FM posts about the current crisis
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Treasury Secretary Paulson leads us across the Rubicon, 9 September 2008
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High priority report: a geopolitical sitrep on the financial crisis, 15 September 2008
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Say good-bye to the old America. Welcome to our new socialist paradise!, 17 September 2008
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Another voice warning about the nationalization of AIG, 18 September 2008
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A vital but widely misunderstood aspect of our financial crisis, 18 September 2008
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A new sitrep, as we move into phase 3 of the financial crisis, 19 September 2008
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Another step away from our Constitutional system, with applause, 19 September 2008
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What do we know about the financial crisis? What are the key questions?, 20 September 2008
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Slowly a few voices are raised about the pending theft of taxpayer money, 21 September 2008
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America appoints a Magister Populi to deal with the financial crisis, 21 September 2008
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Legal experts discuss if the Paulson Plan is legal, 21 September 2008
For a full listing see the FM reference page about the Financial crisis – what’s happening? how will this end?.
A few of the most important posts warning about this crisis
This crisis has long been forecast by many, including in articles on this site. Even now that we are in the whirlwind, these provide valuable background material on its causes — and speculation about the results. Here are some of those posts.
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A brief note on the US Dollar. Is this like August 1914?, 8 November 2007 — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
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The post-WWII geopolitical regime is dying. Chapter One, 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
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We have been warned. Death of the post-WWII geopolitical regime, Chapter II, 28 November 2007 — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
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Death of the post-WWII geopolitical regime, III – death by debt, 8 January 2008 – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
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Geopolitical implications of the current economic downturn, 24 January 2008, – How will this recession end? With re-balancing of the global economy, so that the US goods and services are again competitive. No more trade deficit, and we can pay out debts.
- A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
- What will America look like after this recession?, 18 March 208 — The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
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The most important story in this week’s newspapers , 22 May 2008 — How solvent is the US government? They report the facts to us every year.
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The World’s biggest mess, 22 August 2008 — A brillant ex pat looks at America from across the ocean.
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“The changing balance of global financial power”, by Brad Setser, 22 August 2008
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“The Coming US Consumption Bust”, by Nouriel Roubini, 6 September 2008
To see the all posts on this subject, go to the FM reference page about The End of the Post-WWII Geopolitical Regime.
Drawing on Fabius’s remark, “Taken in haste, we will have a long-time to consider the wisdom of these steps,” does this worry anybody:
“Amid Turmoil, Tireless Team Of Advisers Backed Paulson“, Wall Street Journal, 17 September 2008
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Fabius Maximus replies: Their approach — reactive, incremental, blind to the larger dimensions of the crisis — has the additional difficulty of requiring much time to execute. Some methods achieve failure easily; some produce equally bad outcomes only with great effort.
One more place where a ‘grand strategy’ would be very comforting. The only plan/prayer that seems to be guiding these efforts is that enough patching has to carry thru till the election. Trying to cover everything until this blows over is not a plan.
Just now, over at Naked Capitalism, is word of yet another new program to cover money market mutual funds. There is not enough money in the world to paper over all the cracks, although the fed will take a swing at that shortage too.
Yes, dates like 1914 and 1929 all seem very appropriate, because years of unrestrained excess are coming to conclusion. If we are lucky the endgames will reverse, and the global conflict will be after the financial collapse. Spheres of uranium could be great bludgeons, and would be better for us if used that way that the original intent.
Remember how the bankers/lenders acquired power over kings when the latter came to them asking for loans to finance their glorious kingly wars.
Your quote from the Chinese paper puts us on notice. And the Socialist lenders will demand socialist solutions.
This is history in the making, a decisive change in our political and economic system. This post takes a first cut at placing this event in perspective against the overall economic process affecting the United States.
For details, the few we know, see the offical statement by Secretary Paulson.
Here is a transcript of the Q&A session (scroll down), in which we heard the most important words:
QUESTION: Mr. Secretary, you said this needs to be of significant size. Are we talking hundreds of billions, a trillion dollars?
PAULSON: We’re talking hundreds of billions. This needs to be big enough to make a real difference and get at the heart of the problem.
I think we can take him at his word on this.
“Massive nationalization of assets”
This is rather more massive nationalization of liabilities, don’t you think?
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Fabius Maximus replies: Yes, in the vernacular sense. Not in the technical language of accounting, in which a loan is an asset to the creditor and a liability to the debtor. An asset can have a negative market value, like owning a building that gets declared a superfund site — and becomes a bottomless money pit.
“The ‘New’ New Deal“, Barry Ritholtz, posted at The Big Picture, 19 September 2008 — Excerpt:
“If you are a fan of irony, consider this: The conservative movement has utterly hated FDR, and his New Deal programs like Medicaid, Social Security, FDIC, Fannie Mae (1938), and the SEC for nearly 80 years. And for the past 8 years, a conservative was in the White House, with a very conservative agenda. For something like 16 of the past 18 years, the conservative dominated GOP has controlled Congress. Those are the facts.
“We now see that the grand experiment of deregulation has ended, and ended badly. The deregulation movement is now an historical footnote, just another interest group, and once in power they turned into socialists. Indeed, judging by the actions of the conservatives in power, and not the empty rhetoric that comes out of think tanks, the conservative movement has effectively turned the United States into a massive Socialist state, an appendage of Communist Russia, China and Venezuala.”
As a measure of how the financial crisis has weakened – not strengthened the United States in general and the executive in partiuclar, I cite the muted response to the embassay bombing in Yemen.
The government’s energies – and that of our society’s – have been so absorbed by the financial crisis that we have been unable to focus upon a serious provocation – far more serious than than Russia’s attack an Georgia.
( assuming hypothetically that we do not have some covert interest in Georgia that makes it more important than the distant mountainaous region it would appear on the surface to be. )_
This suggests that we are – frankly – loosing it.
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Fabius Maximus replies: A vital point! Between our Middle East wars and the economic crisis, the government’s attention is totally occupied. And perhaps these two events require more “mental bandwidth” than the Bush Administration has available.
There is, however, a strong argument to be made that what is being proposed WRT a systemic bailout may be necessary.
Brad DeLong, hardly a supporter of the current administration and its policies, makes a compelling argument if you find the economic logic reasonable: “Understanding the Three Ways of Dealing with Financial Crises“, Brad Delong (Prof Economics at U Berkeley), 19 September 2008.
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Fabius Maximus replies: I have a different perspective on this. This is not a partisan debate, as the leaders of both parties are in agreement (althougth “back-benchers” in both parties have objections).
The core difference is between statists and free-marketers. Both parties are dominated by big-government enthusiasts, as is academia (like DeLong). Believers in the free market are small in numbers, but were influential because supporter by powerful business interests. These have defected, rendering the free-marketers irrelevant.
DeLong’s position is a political one, not based on economic theory. This is typical for him, as he (like many of us) believe that political decisions have primacy over economic ones — given that economic laws, like physical ones, must be respected.
What is the likely hood of success of these actions? Pretty close to zero. Basically we are seeing trillions of dollars evaporate and according to the government numbers we have positive GDP growth! Right! The Federal government is already trillions in debt, whats a few more added to the backs of the citizens. The amount of money currently at risk goes from $1 trillion to as high as $12 trillion dollars depending on who you listen too. Lehman Brothers alone had $650 Billion of outstanding debt! It was to big to save.
The citizens just want their butt’s saved again by someone else. That’s why liberalism, socialism, and communism are so attractive. Someone else takes responsability in these cases the State and the citizen can have a carefree life. It was a load of crap before and still is now.
Kiplings “The God’s of the Copybook Headings” keeps ringing in my ears.
“In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: “If you don’t work you die.” ”
Read the whole thing.
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Fabius Maximus replies: My position, exactly, about the dynamics of the situation. As for its odds of success, that depends (1) your definition of success, (2) over what time horizon you evaluate it, (3) how skillfully this plan is executed, and (4) if our foreign creditors support it. The last is absolutely critical!
What is happening is a declaration of war by the political and economic elites of this country on the American taxpayer. Both political parties have now endorsed the principle that free markets are viable only up to a point. And that point is when the stock of Goldman Sachs, Morgan Stanley and J.P. Morgan Chase come under attack. Then the rules are changed because their political and economic power is threatened.
The very institutions which created the financial instruments which led to this debacle and the very institutions which still have the largest volume of these worthless instruments still on their balance sheets are now being bailed out by the U.S. taxpayer under the narrative that this move is of ultimate benefit to us. This narrative is a lie.
If you believe in decentralized power, decentralized markets and democracy–this situation cannot stand.
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Fabius Maximus replise: “Declaration of war” seems a bit excessive. Does the shepherd declare “war” on the sheep? Our ruling elites have hit a rough patch, and must harvest the herd a bit more than usual. Unfortunately, the herd has noticed this and become alarmed. Fortunately they trust the shepherd can sooth them with soft words. Panic among sheep is such a bother.
The U.S. taxpayer won’t be stuck with the bill initially, since Bush and the Fed got the money from the Chinese and other central banks.
However there is a price for this bail out and its our sovereignty. We’d be foolish to think that foreign money interests (some of which are hostile) won’t demand their pound of flesh when the time is right.
To see our future look at Burma or Mexico.
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Fabius Maximus replies: This is a key — and unmentioned — aspect of the bailout. Unlike Japan, we are debtor nation. The money for this must be borrowed, in additon to the routine hundreds of billions funding our current accout deficit. There will be an end game at some point. As I have repeatedly shown on this site, the Chinese are already thinking about how this will go down. We have only our dreams of hegemony as a defense.
FM quoted: “Indeed, judging by the actions of the conservatives in power, and not the empty rhetoric that comes out of think tanks, the conservative movement has effectively turned the United States into a massive Socialist state, an appendage of Communist Russia, China and Venezuala.”
I’m with Jim on this one. What’s going on is further centralisation of a political system increasingly dominated by the banking cartels, not socialism at all, rather corporate fascism.
“Fascism should more properly be called corporatism because it is the merger of state and corporate power.” – Benito Mussolini.
In this respect, I agree with one of FM’s lead arguments in the post:
“This is history in the making, a decisive change in our political and economic system” with the caveat that it is simply the natural unfolding of processes that have been clearly in place for most of this past century. And not only in the US. It reveals a fatal flaw in democracy, but that is another subject.
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Fabius Maximus replies: Technically this is probably correct. However, I consider the differences between socialist and fascist regimes to be quite small in practice. The primo fascist regime was called National Socialism for good reason. The historical differences tend to be in the non-economic aspects of these regimes — in the foundational identity of the state, for example. Fascism relying more on blood or ethnic unity, an often almost mystical “oneness” — rather than the mutual help and material equality of socialist regimes.
This week will be remembered for two reasons: The meltdown of the Wall Street and the American intervention in Pakistan. Now overt rather than covert. Which one is the most important? I guess the meltdown of the Wall Street, but actually they are directly linked. The American government is using a lot of its treasury (borrowed by the way) to fight the wars in Iraq and Afghanistan, fighting covert or proxy wars in for example Somalia and maintain a chain of military bases around the world.
There is actually nothing novel about the theory of Imperial Overstretch and men like Paul Kennedy and Chalmers Johnson have predicted the bankruptcy of the United States before. But unlike before – like when Paul Kennedy wrote his famous book back in 1987 – this is now a distinct possibility. What strikes me as fascinating is that nobody has yet made that connection in the current crisis. Yet at some point the American media and leadership will have to face the fact that it can’t continue spending money it doesn’t have on hot wars in several different countries.
Since the behaviour of the American leadership until now has been characterized by denial (where is the great Decider George W. when we need him?)and belated reactions the collapse of the Pentagon empire seems to be able to happen quite sudden. Perhaps almost from one day to the next. This is certainly worth considering: What will happen if the Pentagon suddenly is without money for fighting its hot wars and if hundreds of thousands of soldiers suddenly are without pay, while tanks and planes are without POL or ammo? Unlike the Soviet Union when it collapsed the United States are fighting several hot wars around the world.
I won’t predict what will happen. But I do predict it will be like an earthquake and especially if it happens quite sudden.
I don’t think DeLong on these economic issues is political, but technocrat. There is a significant difference between the two.
The technocrat, for example, is generally in favor of transparent and regulated free markets. EG, most of the technocrats, including DeLong, are major free trade advocates.
But it is UN-regulated free-market behavior that got us into this situation. If it can get bailed-out like a bank after the manure pile hits the 10KW wind turbine, it damn well better be regulated like a bank BEFORE the manure pile hits the 10KW wind turbine.
How much of the S&L crisis can be traced to a deliberate relaxation of regulation in the late 70s and early 80s, where S&Ls were given bank-like abilities without bank-like regulation? Notice that of the actual FDIC banks this-time around, we’ve had significantly fewer problems, as the post FSLIC reregulation has remained MOSTLY intact. We’ve only had Countrywide’s shotgun marrage, IndyMAC, WaMu, and perhaps one or two more.
The same applies here. If it walks like a bank, and quacks like a bank, it must be regulated like a bank or we will be stuck bailing it out.
Likewise, Robert Reich, who’s also from the same vein (and just down the hall office-wise), was specifically proposing Chapter 11 called something else, like oh, ‘liverwurst’, with the Fed being the source of debtor-in-posession financing. (EG, much of the strategy with AIG, but formalized.)
I’m pretty sure you could get DeLong to agree with Reich’s proposal, especially as just buying the assets doesn’t actually solve the liquidity/solvency problems, which DeLong and many others are pointing out.
But among the technocrats, including Bernanke and Paulson, there is a strong urge to NOT repeat the mistakes of the start of the great depression. They don’t want to repeat Mellon’s mistake of “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”
They firmly believe that something far more orderly than chapter 11 liquidation needs to take place and, if it costs taxpayer money, its probably worth it. And as much as it galls me, I think they are right.
Maybe I think too much in long-term dimensions. That could be the reason why I don’t really understand the fear.
I think it was Mandarin Chinese that does only know one word for both “problem” and “opportunity”. Well, I heard a quote some years ago that meant something like that.
A crisis of these proportions is a good opportunity to consider a very daring approach. The timing is perfect – the president will look terrible in history (e-)books and leave office in some months anyway. The daring idea would be to simply accept the crash and prepare for the recovery instead of attempting to stem the spring tide.
A crash would have many healthful effects on economy and society (and of course the fearsome effects). A crash of the financial institutions (like all four major investment banks blown up) could be powerful enough to even break some terrible habits.
Hmm, I don’t understand the fear because I’m almost risk neutral?
Btw, the demonstrated capabilities (and willingness to use the same) of the Fed in this crisis are huge (not as huge as the crisis – bad luck). That’s a good opportunity to think about its legitimation. Independent central banks have a disproportionally little democratic legitimation. They have usually a dictatorship of experts on time.
Sven: the usual translation is ‘Crisis/Opportunity’ not problem/opportunity. The danger here – apart from people starving and being homeless in the extreme as has happened many times before – is that this crisis will prove an opportunity for the neo-fascist tendencies that have been gaining power steadily and that their solutions to the crisis will, in the long run, make things far, far worse.
Sven Ortmann :
危機 (wei ji) – crisis
危 – danger
機 – opportunity
Hence, crisis = danger + opportunity
Methinks J.F.K. quoted it some decades ago. Some marketing guys just copied it some time after the dot com crashes. Maybe with a little help from some chinese colleagues of theirs.
Sven: The problem is the history books and those in charge of the fed and treasury are convinced that there was too much “not enough” rather than too much “too much” in the Hoover administration’s response between 1929-32.
Bernanke in particular is a student of the Great Depression, and does NOT want to be known as the banker who allowed the great depression Mk 2. Thus dispite the fed’s natural tendency to avoid bailouts and behavior on this scale, he firmly believes that, with regard to the great depression and the federal reserve:
“Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”
( http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm )
And the reason why just letting it all fail scares Bernanke more than you can imagine is that a massive, uncontrolled deleveraging represents a massive contraction in the money supply: a far too tight monetary policy. Likewise, it would also be a massive bank-failure in the quasi-bank institutions, which was also a huge contributing factor, as its doubtful that the pre 1913 mechanisms would work (they were tried already with the Super-SIV attempt).
Bernanke, for all his economic free market nature, will refuse to let the money supply contract uncontrolled and will refuse to allow cascading failures of quasi-bank institutions.
I hate the notion of bailouts. I really REALLY do. Fannie and Freddie are an abomination, and the Bear/Stearns deal is a criminal joke. And I’d bet that Bernanke also hates the notion of bailouts.
But when one of the leading experts of the Great Depression endorses and prepares to conduct massive bailouts to prevent the historical themes from reoccuring, you have to listen.
Further note, I was WRONG: there may be a significant disagreement between DeLong and Reich, it might be fun to try to get them in a room together: The question is SOMETHING.
DeLong’s argument is “something”: he doesn’t specify WHAT something should be, but does specify the effects desired: a simultaneous reduction in the supply of risky assets and an attempt to shift upwards the demand curve by moves designed to restore confidence, under the presuposition that there is a metastabil equilibrium point on demand for risky assets.
This could very easily be the case: bank-like (and insurance-like) institutions are all about trust and, once lost, this drops demand. But it presupposes there is a way to regain trust, rather than just a collapse to a lower curve.
Reich’s argument is that its liquidation: http://robertreich.blogspot.com/2008/09/bailout-of-all-bailouts-is-bad-idea.html
He does want a government program, that appears very similar to AIG: A chapter 11 without being chapter 11: the US Government as debtor-in-posession financer for an orderly unwinding.
This would have the effect of reducing supply of risky assets by the orderly unwinding, but notably is NOT intended to shift the demand curve: it doesn’t presupose the metastable equilibrium, and doesn’t presupose the desire to return equilibrium to a high point should it exist.
Note too, however, that Reich’s proposal of “liverwurst” would probably not satisfy the true “let them fail” crowd: look at the reaction to the AIG proposal and observe that the reaction was the same or even more voiciferous than the Fannie/Freddie and Bear/Stearns bailouts.
“Fabius Maximus replies: My position, exactly, about the dynamics of the situation. As for its odds of success, that depends (1) your definition of success, (2) over what time horizon you evaluate it, (3) how skillfully this plan is executed, and (4) if our foreign creditors support it. The last is absolutely critical!”
Good questions. #1 My definition of success would be to stop any long term damage to the economy. Right now they are in short term disaster mode which does not produce good long term policy. #2 The time frame 10 years plus. If it really only works for 2 years then things go south then it was not the right policy. #3 Skill of execution? 40 years ago maybe. Now not likely. Remember this is the same group, Federal reserve, that really got us into this mess. The odds that they will see the light is nill because they don’t know they are wrong. They really believe they are saving the day. #4 Since many of these creditors depend on us for exports they probably will support whatever policy. But at some point the bill comes due and even now we cannot pay it.
We have to start producing product. but to sell we have to compete against the creditors which it will have a negative impact on them, either in their markets or against imports to us. A nice catch 22. They won’t allow that and the vicious circle would then continue.
We take our medicine now as a pill or later as a shot in the butt. I’m betting on the shot.
“We want our existing loans rolled over at low interest rates, our existing massive current account financed at low rates, and now hundreds of billions of dollars at low rates to finance this plan.”
What we want is not at all what we will get. Any Treasury bonds issued at maturities of 10 years or longer will have to pay much higher interest rates than now to entice foreign buyers. The yield curve must steepen dramatically. The good news is that a steeper yield curve, once it migrates to the banking sector, will reinvigorate banks’ “borrow short, lend long” business model. The bad news is that massive new debts will destroy the U.S. dollar and the U.S. government credit rating, as F-M has noted. Welcome to the Sovereignty Crunch.
And the latest headline is C-Plus Augustus asking for another $700 billion to bail out his hypocritical kleptocracy. Unbelievable. Between this and his foreign adventurism we now have the first human being to be singlehandedly responsibe for wasting trillions of dollars to bankrupt an empire. Having this man taken out and shot would be an insult to, and waste of, a perfectly good piece of lead. Meanwhile the public buys more and more copies of Sarah Palin’s eyeglass frames. If this were not all so tragic, it would be extremely funny… the rot is so deep, the system cannot be saved. Constitutional convention, anyone?
Regarding foreign lender support for this bailout & future US debt, the question isn’t binary, i.e. whether they’ll fund all on favorable terms or none on any terms. The key question is what can they succeed in demanding of the debt-junkie US.
Some options might include:
1.Borrowings denominated in a mix of currencies, or in a new basket currency, either highly
inflatiorary here.
2. “Free market” access to acquiring controlling interests in US companies with technology
leadership in biotech, information technologies, aerospace, etc.
3. US military support for, or just neutrality towards, our ‘loyal financial allies’, a
reasonable concern for Taiwanese & Israelis in particular.
What would be a good acronym for a creditor’s OPEC? Like OPEC they would need far less than 70% membership to have virtual ‘terms setting’ control. Especially since this group would likely include most of OPCEC as well.
In summary, thanks go to the radical financial deregulators and radical deficit-for-tax- reduction voodoo economics zealots and their think tank sycophants for a historic ‘heck of a job, Brownie’.
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Fabius Maximus replies: I think that we all understand that few things are binary in the real world. We discuss things in those terms as a shorthand, to avoid these articles being 10,000 words instead of the already too-long 1000-1500 words.
Your last paragraph is, I suspect, difficult to support. This is not a partisan issue. The trends that got us into this mess go back decades, and have continued under both Democratic and Republican Presidents — Democractic-majority Congresses and Republican Congresses.
Re foreign creditors:
Put these two points side by side and we can see an immediate problem, from “Bush Officials Urge Swift Action on Rescue Powers“, NY Times, 19 September 2008.
“The broader economic questions were even more daunting. What were the dangers in letting the government borrow another $500 billion — which ultimately might have to come from foreign investors …”
“[Paulson] indicated that he wanted to buy securities only from United States financial institutions, a decision that could anger legions of foreign institutions that poured hundreds of billions of dollars into the American mortgage market in the housing boom, and have customers located here.”
Do you possibly have a link for the original article by the chinese scholar who suggests a new currency order independent from the United States?
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Fabius Maximus replies: I could not find it on the English-version of the People’s Daily site. This is a common problem with the “official press” of China and Saudi Arabia, their English-versions being either poorly indexed or (sometime) scrubbed of hot stories.
The New York Times and Calculated Risk today have interesting articles/comments on the short-term questions and implications of the bailout. And someone noted that Goldman Sachs, the most common resume for Treasury appointees in the government, is an immediate beneficiary of the bailout proposal, which boosted its stock 20% in a day, unlike poor Lehman Brothers whose price collapsed when Paulson threw it to the wolves.
This thread is rich with comments on the long-term implications of the financial crisis. One comforting idea is that the interconnectedness of global finance will not allow global asset values to collapse entirely, and the rising creditor nations like China will have an influence on what is considered responsible borrowing in the future.
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Fabius Maximus replies: I do not know what NYT article you mean, but the key one is IMO Krugman’s “No Deal“. This explains why the Calculated Risk article is dumb as rocks, describing how this crisis would be handled in Oz. Sorry girls, we are still in Kansas.
http://fabiusmaximus.wordpress.com/2008/09/19/sitrep-2/
Fabius Maximus 19 September 2008
*phase 3 of financial crisis
Financial:
3.Contagion and failure of healthy institutions.
what is phase 4 and 5?
Illness analogy: Is the diagnosis ‘blood poisoning’?
fevers and chills; gangrene.
artificial blood transfusions.
http://www.truthdig.com/report/item/20080928_the_bailout_vs_the_defense_budget/
Distraction and deception is the ‘art of war.’
On Wednesday, September 24th, right in the middle of the fight over billions of taxpayer dollars slated to bail out Wall Street, the House of Representatives passed a $612 billion defense authorization bill for 2009 without a murmur of public protest or any meaningful press comment at all.
Roman Expansion of empire to the frontiers
Pentagon’s request for a radar site in the Czech Republic.
Alienation of allies
we have carried our Afghan war into Pakistan, a relatively wealthy and sophisticated nuclear power that has long cooperated with us militarily.
Rome: allies with Huns, until Attila the Hun turns on the Romans.
http://members.gcronline.com/attila/history.htm
Winslow Wheeler:
“America’s defense budget is now larger in inflation-adjusted dollars than at any point since the end of World War II, and yet our Army has fewer combat brigades than at any point in that period; our Navy has fewer combat ships; and the Air Force has fewer combat aircraft. Our major equipment inventories for these major forces are older on average than any point since 1946—or in some cases, in our entire history.”
Brittleness versus resiliency:
Navy strategy based on aircraft carrier, but few mineships.
Army strategy based on mercenaries, but little oversight.
Air Force strategy based on fighters, yet aging fuel tankers.
Why did the Germans lose in Africa despite brilliant ‘Desert Fox’ General? German tank superior, but ran out of oil.
Middle companies find it difficult to compete against
‘no bid’ defense contractors and ‘financial service/banks’/oil
conglomerates.
monopoly power: Shell – use the Shell Credit card AND purchase
all of your gas and you get a small discount.
Acceleration of ‘military-industrial complex.’
large defense contractors have less oversight and competition from
commercial markets. This is known as ‘large WalMart factor’ which
drives even ‘small grocery stores’ and ‘barber shops’ out of business.
WalMart Ad – stop at one store to save gas. Get a WalMart/Shell discount
gas card.
Rome: lowering of wage rates with ‘price hyperinflation
*The cost of slaves (illegal aliens) came down heavily to the point where it was cheaper to purchase slaves than to pay free workers a salary.
Only job around after the factory closed was Walmart. With a
health problem, fifty hours a week only get minimal health insurance.
After food and gas, nothing is left.
Sparing the Russian/Georgia hornest nest
http://ccat.sas.upenn.edu/rrice/hornets.html
Rome’s potential difficulty in destroying a fleet of Rhodian raiders.
Middle companies find it difficult to compete against
‘no bid’ defense contractors and ‘financial service/banks’/oil
conglomerates.
monopoly power: Shell – use the Shell Credit card AND purchase
all of your gas and you get a small discount.
Acceleration of ‘military-industrial complex.’
large defense contractors have less oversight and competition from
commercial markets. This is known as ‘large WalMart factor’ which
drives even ‘small grocery stores’ and ‘barber shops’ out of business.
WalMart Ad – stop at one store to save gas. Get a WalMart/Shell discount
gas card.
Rome: lowering of wage rates with ‘price hyperinflation
*The cost of slaves (illegal aliens) came down heavily to the point where it was cheaper to purchase slaves than to pay free workers a salary.
Only job around after the factory closed was Walmart. With a
health problem, fifty hours a week only get minimal health insurance.
After food and gas, nothing is left.