Summary
- The US government has at most a few weeks to restart the nation’s financial machinery.
- The delay might result from the time required to assembly a sufficiently large policy package.
- Or the US government’s leaders may have become overwhelmed by the rapid evolution of events.
- If the latter (#3), a depression may result (not a Great Depression, more like those in the late 1800’s).
I am confident that the government will act soon. But no matter how we resolve the immediate problem, a global recession is probably coming. Although just a normal cyclical event, it seems likely to reshape the world, marking the end of the post-WWII era. In other words, this is the start of a new world order. Let’s hope that, after the birth trauma passes, it is even better than the one now fading away.
Update: coordinated interest rate cuts made today by 6 nations’ central banks, including the Fed. See the BBC story here; their joint statement is here. A good step, and it might have been decisive if taken 6 months ago. More action will be needed soon.
The situation
The nation’s financial machinery — that complex apparatus that circulates money throughout the economy — suffered a “cardiac arrest” last week. Most short- and long-term credit markets now operate only at a low level of activity. Normal commerce continues but many organizations — even the State of California — are drawing down their cash reserves, and a large liquidity event (e.g., a large bond maturing) can force a serious crisis. As a result…
- unless corrected soon, we risk a cascade of corporate and municipal defaults on their loans, and
- business spending and investment is probably collapsing, although we have no real-time measures of this.
Sunday was the ideal time for the US government’s leaders to announce measures to restart the economy. Nothing was done. On Tuesday one necessary step was taken, direct lending to corporations. Why the delay? Why has the government’s response been so slow, reactive, and incremental since the crisis began in December 2006?
Too slow thinking, too slow action
The late John Boyd (Colonel, USAF) spoke of the OODA loop — observation, orientation, decision, action. A fast OODA loop allows an organization to stay abreast or even ahead of events, acting proactively to shape its environment. If the organization’s OODA loop runs too slowly, it becomes unable to effectively cope with events, falling ever more behind. Disorientation follows, leading to inappropriate — or worse — erroneous responses.
The US government’s OODA loop — that of its leaders, operating as individuals and collectively — might be unable to cope with the rapidly deterioration of the financial system and the economy. We see by their 16 major responses, each too small and too late. Even the Paulson Plan, all $700 billion of it, was ideal … if implemented in June. They are gearing up to implement it in October or November, by which time it is almost irrelevant.
Leaders who see America as a global hegemon, master of the world, might find these events disorienting. Perhaps all they can do is stare at CNN while their staff sings “The World Turned Upside Down.” Also, fatigue may be setting in after countless weekend and night meetings; days of endless stress. There are many historical precedents for this, such as Captain Smith‘s passivity after the Titanic struck the iceberg, and General Gamelin‘s after the German breakthroughs of Allied lines in 1940.
Contrast that with readers of the FM site. Over the last year they have read 62 articles about the End of the post-WWII geopolitical regime. Although thinking that the author is the most pessimistic geopolitical analyst not actually in an asylum, they have in their imaginations an overall framework into which events since 2006 comfortably fit — and from which they can anticipate the future evolution of events.
Update: For a deeper analysis of the OODA loop’s relevance to our financial crisis, see Chet Richard’s article at Defense and the National Interest.
Historical Irony
Chairman Bernanke’s reputation as an academic results in part from his analysis of the Great Depression, and especially his criticism of Andrew Mellon’s response to the early stages of the crash. Now 22 months into a crash, he find himself wearing Mellon’s shoes — looking back at over a dozen responses, each too little and too late. The parallels are astonishingly close, right down to both worrying about inflation and moral hazard as the deflationary fires burned around them. Steering the US economy must have seemed so simple while writing in his office at Princeton University. Historians will write with amusement about this historical irony.
Also odd is that he was feared to be too activist, too likely to over-inflate the economy. “Helicopter Ben” they called him. Who could have guessed that his (and his fellow governors’) error would be excessive caution, excessive worry about inflation? Just like their predecessors in the 1929-32 period.
This is a global problem, we are the epicenter
Space and time constraints prevent analysis of the global dimensions of this problem. Two articles will have to illustrate the scope of this crisis:
- “Pakistan facing bankruptcy“, The Telegraph, 6 October 2008 — “Pakistan’s foreign exchange reserves are so low that the country can only afford one month of imports and faces possible bankruptcy.”
- “Iceland teeters on the brink of bankruptcy“, AP, 7 October 2008 — And a more recent update on rescue operations from Reuters.
What next?
For a summary of my recommendations see A solution to our financial crisis, consisting of three initiatives.
- Stabilize the financial system (first aid)
- Stabilize the economy (emergency medicine)
- Arrange long-term financing for steps #1 and #2 with our foreign creditors (finance the treatment)
I suspect there are few alternatives to these measures, although their timing and sequence remains unpredictable. The primary alternative is collapse, which I consider unlikely. Our major concerns should be, IMO, passivity and/or policy errors by our leaders.
Afterword
If you are new to this site, please glance at the archives below. You may find answers to your questions in these, such as the causes of the present crisis. I have been writing about these events for several years; since November 2007 on this site. As you will see explained in these posts, the magnitude of the events now happening is beyond what most Americans have — or can — imagine.
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).
For more information
To read other articles about these things, see the FM reference page on the right side menu bar. Of esp interest these days:
- about the Financial crisis – what’s happening? how will this end?.
- about The End of the Post-WWII Geopolitical Regime.
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
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Essential steps to surviving the current crisis, 23 September 2008
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How should we respond to the crisis?, 24 September 2008
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A solution to our financial crisis, 25 September 2008
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Is the US economy in good shape, or in terrible shape?, 27 September 2008
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A quick guide to the “Emergency Economic Stabilization Act of 2008″, 29 September 2008
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. To see the all posts on this subject, go to the FM reference page about The End of the Post-WWII Geopolitical Regime. 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, 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
Speedy OODA-loop execution in a democracy requires near-instantaneous buy-in from numerous constituencies, chiefly members of Congress and a handful of Cabinet secretaries whose jurisdictions somewhat overlap (Fed and OCC for bank regulation).
Furthermore, Boyd and others argue that “orientation” is the most important step in the OODA loop. Orient yourself with the wrong frame of reference and you’re toast. The U.S. national leadership may still be oriented to the U.S.’s role as hegemonic actor when in fact we need near-instantaneous buy-in from the financial leadership of the EU, China, Russia, and perhaps the Middle East. Palson and Bernanke did try to frame the orientation correctly with their dramatic closed-door briefing prior to the initial bailout proposal. Perhaps their target audience should have included foreign finance ministers as well. Getting politicians on board is simply not as speedy as a battalion commander giving a statement of intent to his staff to start their MDMP. (Take a guess how I know what MDMP means.)
Concepts like the OODA loop work best when applied against a living, breathing, thinking, human-directed entity such as a wartime enemy or a business competitor. The OODA loop may be less effective when directed at something amorphous like “liquidity” or “capital markets”.
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Fabius Maximus replies: I agree that orientation is the key problem here, and that the transition to a post-WWII geopolitical regime probably has disoriented our leaders (note that was the specific word I used).
“when in fact we need near-instantaneous buy-in from the financial leadership of the EU, China, Russia, and perhaps the Middle East”
Since this crisis has slowly — v er y s l o w l y — developed over 22 month (twenty-two!), why was “near-instantaneous” action required. If I see a claymore mine on the sidewalk ahead of me, instanteous action is needed only if I wait until my foot is right above it before deciding to change course. The very need for instanteous action proves that my OODA loop is defective.
“Concepts like the OODA loop work best when applied against a living, breathing, thinking, human-directed entity”
Why? I think it works just as well when dealing with an individual’s or organization’s relationship to the world, in which other players are a major feature. Our actions are not directed at “liquidity” or “capital markets.” Liquidity is an aspect of the situation, not the enemy. Capital markets are a field of action, a “virtual battlespace.” (to use a military analogy).
FM, it’s true, and I appreciate it, that this is the best written doom & gloom site I’ve found. Strong ideas, and arguments, and brief. My own current disagreements with your solution are based in part on looking at your links, especially total debt.
You’re not convincing about your solution step #1. In fact, direct lending to corporations is an alternative to “stabilizing the financial system”, and is a better and more realistic step.
The #1(tg) step must be to ensure that solvent, non-financial companies can get the business required financial services they need. Gov’t direct lending assists that, but it’s supposed to be a transitory step, it can’t be stabilizing. However, it hugely helps your #2 goal of stabilizing the economy – avoiding a depression. The recession has almost certainly started, with unemployment over 6%, and revised GDP quarter growth estimates going down. But arguments over the definition of recession avoid the huge housing price question. Probably one of the main reasons for such slow reaction to the house price meltdown has been the ‘recession, yes or no’ arguments.
The $6 trillion question: if peak house value mortgages were $12 trillion, but the current market value of those houses is now only $6 trillion, who eats the $6 trillion loss? Even if it’s only a 40% fall in house values, a $4.8 trillion loss — who eats it? The Paulson plan seems to want the taxpayers to eat quite a lot.
The financial system can NOT be stable until the financial losers have been identified.
Interestingly, Becker and Posner disagree about the gov’t taking an equity position in banks, very unusual for those two. I think the gov’t should purchase … assets even more directly, and provide a low but certain floor value so that there is a clear lower bound / worst case value that allows a big reduction in risk uncertainty.
Yet I think the gov’t should avoid banks — there are far too many and they charge too much for services of less certain value. Like house construction, the financial sector needs massive layoffs, consolidation, and firms exiting.
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Fabius Maximus replies: This is not a “doom and gloom site.” Those exist, just like gothic novels and horror films, for entertainment of people whose taste runs to such things. This site attempts to provide an objective look at America’s geopolitical situation. There are dark aspects, which deserve attention. There are bright aspects, which we must remember in order to retain our perspective.
I suggest you read some of the posts listed in the FM reference page about Good news!.
“In fact, direct lending to corporations is an alternative to ‘stabilizing the financial system'”
If you read the actual post, you will learn that direct lending to businesses (Fed buying of commercial paper) is one of the two ways I propose stabilzing the financial system. The Fed announced Tuesday it will do so.
” only $6 trillion, who eats the $6 trillion loss?”
Nobody “eats it.” Asset value changes have little direct economic affect. Unlike, for example, loan defaults — whose losses have economic impacts. BTW — US financial markets (i.e., not including property) are down aprox $7 trillion over the past year; global equity markets have dropped $5 trillion in the past week.
“The financial system can NOT be stable until the financial losers have been identified.”
This misunderstands the situation. This is not a static situation, like totalling the dead after a battle. We have fallen into a classic debt deflation dynamic. Unless arrested, everyone will be losers.
The rest I have commented on many times. Please do not repeat the same things in the comments!
My thought on the reasons for this may be considered to be a shallow take by some, or possibly too obvious by others, but might the reasons for the administration’s slow, reactive, incremental reactions stem from their ideology? They have said that they are against government interference in markets… maybe they were not just blowing smoke, maybe they actually believe it. Also, many of the more secretive actions of the Bush administration, since 2000, have had to do with undermining governmental regulation. Maybe it’s tough to reverse course and undertake large-scale, non-military governmental action in those circumstances.
I see good stuff here in both atheist’s comment and FM’s original post. In the latter, what is clear on a high level is that there is a timing mismatch between the OODA loop in the financial markets and the one in the government. The first happens at electronic speed and has no real relationship with human calendar issues such as weekends, holidays, or distance (space and time being a continuum). The latter stalls for campaigns, celebrations, and all sorts of analog cultural processes. Until this is somehow adjusted responses will always be slow for systemic reasons.
Psychologically it is well proven at this point that while people are generally pretty good at arriving at reasoned opinions based on limited data, they are not so good at adapting those opinions in real time when new facts arrive or old ones change. Ideology is one aspect, simple stubbornness or internal consistency is another, fear of embarrassment and loss of credibility is perhaps another. This permeates everything we do but its dysfunctional impact is heightened when a) the stakes are high and b) there is a tempo clash as described in the previous paragraph.
What about the possibility that there is no “acceptable fix” or endgame to this situation? This Credit Bubble was built over 25 years or so. The mis-allocations of capital are so extensive and the debt burden on the consumer is so great, there are no good choices.
1. Poverty, bank failures and debt slavery to foreign bondholders through asset deflation
2. Poverty, distrust of the banking system and zero foreign direct investment via hyperinflation
Maybe the supergeniuses at the Fed, on Wall Street and inside the Beltway stepped through their version of the OODA loop and came up with no options that are currently politically acceptable? Heck, they’ve made more sweeping political and economic decisions in the past few weeks than could ever have been expected. What if it just doesn’t matter?
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Fabius Maximus replies: The next two posts on this subject discuss this scenario. America will survive, one way or another. The question is the pain suffered along the way, and how this changes (or distorts) us.
We are getting to the stage where we need to think about what we as individuals should do if the government’s actions continue to be too little too late. Obviously a severe recession or even a depression is in the offing if the government cannot get its act together in time.
I cannot sufficiently express my loathing about this thought but it is a logical extension of Fabius’ concern and having some sort of a backup plan (in addition to prayer) might be a good idea.
Here’s a good story about the troubles that Iceland is experiencing. There is no chance that we will encounter identical issues, we’re just too big, but it may be a foretaste of what may be in line for us. “Iceland plunges further into financial turmoil“, AP, 8 October 2008.
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Fabius Maximus replies: This is the best comment to date on the subject. Perhaps the most useful insight on the FM site. Each of us must prepare as best we can for the future, including dark scenarios. That is our responsibility, that is the burden of freedom.
It’s not just ideology that hampered Secretary Paulson and Chairman Bernanke from acting effectively, it was actual ties of interest to the sectors they were supposed to regulate. SEC Chairman Cox just seemed to be not intellectually equipped to understand what was going on in his area, and acted like a stooge.
A slight corrective to FM’s original take is that foreign creditors and investors may have been behind some of these decisions — particularly the $700 bn bank rescue and Fannie Mae/Freddie Mac takeover — since foreign investors had large stakes in those institutions. Except for Lehman Bros and Bear Stearns, most of the federal actions recently have been to save investors.
Moon of Alabama today lists several radical actions that might be able to save the situation — including triage among financial institutions, separating the strong from the weak, nationalizing some, letting others fail. He calls for declaring all credit default swap-type contracts null and void, and destroying excess housing inventory (FM called for this awhile ago.) Whether right or wrong, these recommendations are obviously politically unthinkable — so far.
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Fabius Maximus replies: A few comments in reply.
“A slight corrective to FM’s original take is that foreign creditors and investors may have been behind”
Not a correction at all. I have said as much, as has many others. Is this not obvious? We will need to borrow $500 billion to pay maturing bonds in the next fiscal year, plus at least another trillion of new money. We can hardly stick our creditors with big losses and expect them to lend us more.
“Moon of Alabama today lists several radical actions”
Economic downturns always bring out quack nostrums. Damm the future, just bail us out today! Disregarding the rule of law is always popular, voiding contracts that we find politically inconvenient. The future implications are ignored — such as that America will no longer a safe place to do business, but just another bananna republic — in which contracts are voided according to political whim.
>We are getting to the stage where we need to think about what we as individuals should do if >the government’s actions continue to be too little too late. Obviously a severe recession or >even a depression is in the offing if the government cannot get its act together in time.
>I cannot sufficiently express my loathing about this thought but it is a logical extension of >Fabius’ concern and having some sort of a backup plan (in addition to prayer) might be a good >idea.
Largely too late, I think. If you don’t have substantial financial savings, don’t have cash on hand and/or some other means of currency, don’t have food stored, don’t have water (or a way to purify it), don’t have a way to make heat/power … … well, you’re probably cooked. Even if you have some of these things, if you get evicted from your home, you’re cooked.
Not sure there is much to do at this point except ‘hang on.’ Perhaps get another job and pay down what you can?
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Fabius Maximus replies: Prepare as best you can. That is all any of us can do, at any time. We heat with wood, chopping a few cords every year. Good exercise.
I do not see what storing food and water have to do with this crisis.
“Sunday was the ideal time for the US government’s leaders to announce measures to restart the economy. Nothing was done. On Tuesday one necessary step was taken, direct lending to corporations. Why the delay? Why has the government’s response been so slow, reactive, and incremental since the crisis began in December 2006?”
Bernanke’s announcement was tepid; his inability to project confidence deliberate. The way the ‘bail-out’ bill was pushed onto Congress suddenly with pressure to pass such a directorate in a matter of days to avoid total economic collapse was also deliberate. It is hard not to suspect the motives of the main leadership involved, i.e. that for some reason they wanted to talk down the markets, drive asset prices lower and so forth. After all, many people can now buy things at 50% the price they were only a few weeks ago. Shades of the manipulated UK crash of 1815 during which one bank ended up owning around 80% of UK stocks in a 24 hour period.
I believe it is overly naive to subscribe simple incompetence or fatigue to what has been playing out here. Corruption is rampant in the governance system and to some extent it is little better than a huge criminal enterprise notwithstanding the many sincere, honest participants in the middle levels of various govt agencies.
It will be very interesting to see who is left standing after all this. Indeed, as I said in a post a while back, I am curious to see how Goldman Sachs, for example, comes out of all this.
May have been? I don’t know how close FM is to anyone in market strategy overseas but it’s an open secret in HK that Chinese “consultations” with US Treasury are getting less like friendly advice and more like urgent demands.
But don’t take my word for it. From an interview with Yu Yingdong, former adviser to the Chinese central bank:
“China is very worried about the safety of its assets,” he said. “If you want China to keep calm, you must ensure China that its assets are safe.”
If true, that’s about as close to an official word as you’re going to get.
Re-reading the comment, I realise it singles out equities, not so much debt – although debt is more important IMO. In that case, the actors are sovereign wealth funds, hedge funds, etc; probably more than a few superannuation funds in the US and around the world.
There are a lot of US citizens, citizens of allies, and OPEC shieks with their hands on the spigots in that list. They almost don’t even have to ask; if the US wants to maintain its credibility as a reliable investment destination it must do what it can to prevent catastrophe. Even if they don’t succeed, it must do, and be seen to do, everything it can.
I am consistently bemused by American’s parochial urges when it comes to not “bailing out foreigners”. Foreign investment is almost universally seen as good thing; it is especially important to the US system. For the government to be seen as throwing foreign investors to the dogs at the first sign of trouble would be incredibly harmful to the US economy both short-term and long-term, and so I can only be thankful that the powers that be in the US do not share so many Americans’ xenophobic “them against us” tendencies.
Finally, a speculative comment on why it has taken so long for the Fed to start buying US commercial paper – most commentary here focuses on the decision-making loop, but isn’t it possible that it’s also a structural implementation issue?
Setting up commercial facilities is surely something that can’t be done in a day. Manpower alone would be prohibitive, let alone computing and workflow processes. I consider it possible that the Fed realised it might be necessary in June but has only just finished setting it up. Contrary to the meat of today’s post, I’d say that is light speed by the standards of government.
Just an alternative theory there, worth all of my 2c…
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Fabius Maximus replies: The Fed is staffed to do large scale open market operations in government securities, such as repurchase agreements. Buying commerical paper in large lots would not offer substantial organizational difficulties. The Paulson Plan will take time to set up, however.
Update: For a deeper analysis of the OODA loop’s relevance to our financial crisis, see Chet Richard’s analysis at Defense and the National Interest.
{FM replies: do to the variety of subjects mentioned in this long comment, I have inserted replies into the text.}
Your post’s question is why the treatment is so slow, so small?
While this site has long been arguing about the huge scale of the problem, there has been real GDP growth rather than ‘recession’ in the last year — depending on the definition. Arguments over the definition and our status, recession or not, have crowded out discussion of best plans if we are in a recession.
*** Fabius Maximus replies: I am tempted to stop reading here. Noobdy paying attention can ask “if we are in a recession”, and almost every economic metric in recessionary territory (e.g., 790 thousand jobs lost in the past 9 months). The slowdown has been gentle due to massive government borrowing (for Q2 “rebates”) and consumer borrowing (running at a 10% annual rate, 2x last year’s, until early June).
I’d also argue that huge arguments on the value of Operation Iraqi Freedom, and America’s military adventures in general, have also crowded out discussion of policy options for this economic crisis. Even on this site, tho most especially in the Democratic Majority Congress through all of 2007 and most of 2008. FM, if you’ve previously discussed these crowding out phenomena, I’ve missed those references.
*** The “crowding out” — preoccupation of senior leaders’ with war not domestic policy — is an important aspect of the situation. Like hundreds or thousands of other aspects of the situation, I have not mentioned this.
On huge costs ($6, 4, 1 trillion?) you tell me “nobody eats it”, but you tell MF “The question is the pain suffered along the way”. Seems inconsistent, almost a desire on your part to say I’m wrong when not using your phrases before you use them: eats it = pain.
*** “eats it = pain” is one of the more bizarre metaphors I have seen in a long time. As I said above (and you note below), changes in home prices, like the $6T loss in home values you mention, do not cause significant economic effects. Losses due to mortgage defaults — perhaps as high as $1T before this is over — have serious economic effects. I do not see why this is difficult to understand.
So I say again, a key issue is who suffers how much pain. For instance, I’m enraged that the heads of Fannie Mae & Freddie Mac got $15 mil. severance golden parachutes – when the taxpayers have to (painfully?) pay for those top manager mistakes.
I sincerely appreciate that this site’s warnings are an attempt to support policies to minimize the pain, including long term support for rule of laws and fair contract enforcement.
The gov’t bailing out Bear Stearns but NOT Lehman Brothers seems patently unfair; in retrospect the gov’t should probably have let Bear die and cover the counterparty issues more directly. I’m sure that Buffet is betting on Paulson making sure that Goldman doesn’t die – even if it deserves to.
“Retirement accounts have lost $2 trillion“, AP, 7 October 2008 — Brietbart says that retirement accounts have lost $2 trillion – but I could agree that most of those losses are the usual asset value fluctuations in a downturn.
You are correct that Asset value reduction has no immediate direct effect, while loan defaults do. But why should the responsible homebuyers and mortgage payers continue paying overpriced mortgages for overpriced homes? This is probably all homes bought since 2003 or so up to 2007 foreclosure time.
*** Everyone has different views on these things. The moral aspects of this, which you discuss in the above 5 paragraphs, do not interest me — as we have far more serious problems to worry about.
You’re also correct that simple abrogation of contracts makes the US more like a banana republic, yet the gov’t pushing mortgage holders to renegotiate better terms for homebuyers seems more fair to me than the alternative. If house prices keep falling, more owners will stop paying (walk away) and allow foreclosure with the idea of renting and saving or buying again on a much cheaper recently foreclosed home. All mortgage contracts include the foreclosure threat, but with negative equity it’s now a threat by the home buyer.
McCain has a new housing policy to help homebuyers stay in their homes. He is now claiming that house prices must be stabilized – which I argue is prerequisite to a stable finance system.
*** The McCain plan looks like a massive subsidy to financial institutions more than anything else. See this article at Politico for details.
But the main issue of my disagreement on ‘stabilizing the financial system’ is thinking that there are far too many financial institutions, charging too much in fees, for the amount of real services they provide to production and distribution companies. If it is true that there are too many, the financial system won’t be stable until the banks and companies that are going to die are gone – and the Paulson bailout seems likely to keep too many alive for too long, so the system remains unstable and thus adjusting for a longer time. On the other hand, a rapid crash that is ‘stable’ does seem worse than slow but bumpy landing; I just don’t like calling the latter stable. In my terms, there may be waves of finance companies disappearing, which are necessary bumps. And what’s important is keeping the economy going despite an unstable financial system.
This Time is Up post is even more dark (gloomy?) than this site, but only slightly exaggerates trends noted here.
Your links to good news are important and a good partial balance.
*** On what basis do you call it a “partial balance”? Today who can say what is more important? From a long-term perspective, it is possible that the good news I describe are the things that will determine our future and be remembered. While the bad news is transitory, to be remembered only by historians.
You boldly claim this site is not a gloom and doom site – then tell me that in “an objective look at America’s geopolitical situation. There are dark aspects,” Yet this site features “The End of the Post-WWII Geopolitical Regime” very prominently, the ‘doom’ of unilateral American hegemony.
*** So what? Why should we care about “unilateral American hegemony” or consider its passing a “doom”?
Hmm. dark = gloom; end = doom.
A rose by any other name would smell as sweet.
*** The dawn is the doom of the night; do you cry every morning? Many things pass away as part of life and are not to be mourned. Some are just cyclical, like summer. Some are inherently temporary, like “unilateral American hegemony”. People who cannot see this are doomed to disappointment.
More about Pakistan — According to an article in the Washington Post:
“This nuclear-armed state of 168 million is no stranger to political upheaval, of course. But this time, things are different. Today’s crisis — marked by a rash of suicide bombings, the assassination of former prime minister Benazir Bhutto last December, inflation as high as 25 percent and a resurgent Taliban movement — could spell doom for the Pakistani state. The global financial crisis has only made matters worse: Pakistan’s foreign-exchange reserves are collapsing, and credit markets are worried that it could soon default on its debt payments. The grim truth is that Pakistan is becoming something alarmingly close to a failed state. And that could have disastrous consequences for the United States, NATO and Afghanistan’s struggle to hold back its own Taliban insurgency.
“…. Simply put, Pakistan is facing an existential crisis — on its streets and in its courts, barracks and parliament. American pundits and politicians might be hoping for the best for the country whose lawless border regions are widely thought to harbor Osama bin Laden and other al-Qaeda leaders. But I don’t see much chance of a happy turnaround. If, as both Sens. Barack Obama and John McCain have claimed, a strong, dependable Pakistan is the key to winning the war in Afghanistan, we are waging an unwinnable war.“
“The Paulson Plan will take time to set up, however.”
Some time, yes, but they can move fast too. Tenders for private contractors are deadlined Oct 10th. Then the thirty-something year old whiz kid (front man?) from G. Sachs will have most of the functions of the plan ‘outsourced’ meaning basically that agents from the private sector with the most to lose will probably end up being the ones distributing the monies raised to prevent their collapse. Lovely system.
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Fabius Maximus replies: Too bad that it is almost irrelevant to our current situation.
“Fabius Maximus replies: Too bad that it is almost irrelevant to our current situation.”
Well, I think I understand the point. But not sure. Since a huge amount of leadership (or so-called) energy went into debating and finally passing this landmark legislation whose purpose is to avoid a major meltdown the inference I draw from this is that no other significant initiative or paradigm is in play.
I am amazed that during this election year, apart from candidates yammering the ‘change’ mantra – because they perceive rightly that change is exactly what is called for , nothing of any substance systemically speaking has been offered at all.
So if the same groups are still in charge and no real change is being offered are we to assume that the underlying system is fine and will sort itself out somehow? If so, then this assumes that current leadership has little influence on such underlying system. Personally, I doubt this is the case. Human dynamic always trumps so called ‘systems’ of any sort. People matter more than ideology. And from what I can tell, just as all the military honchos in charge of the 9/11 fiasco were promoted, so all the financial czars running our shadow ruling oligarchies are still firmly in the saddle.
So I think it is relevant that they have the power to do things still. Even though I basically agree with you that they are going to misdirect it again as they have been doing for decades. Until something else comes along, this will continue as such.
FM reply: “I do not see what storing food and water have to do with this crisis.”
If credit is what is required to move food from supply points to market via truck, then it is reasonable to wonder if there will be a food availability problem when things get bad. The flip side is the notion that “the Government cannot let food distribution fail.” Perhaps this will be a new assignment for the Army unit assigned to NORTHCOM.
As far as water, I got too excited when writing. I guess the question is, how bad will things get?
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Fabius Maximus replies: The breakdowns in the global credit system are a technical problem which can be fixed — faster and more easily than the other problems of the global economy.
I read somewhere a while back that the typical supply in developed-nation supermarkets is about 3 days. They depend on not only on frequent credit etc. like all large companies these days, but also free-flowing, abundant transportation. In the event of serious financial freeze, it is not unlikely that food supplies will be curtailed for a while meaning stocks will fly off the shelves (or seem to even if they are used up at the usual rate). i.e. they will be empty quickly. The panic effect this will have on numerically humongous urban populations who have not experienced such hardship before cannot be gauged.
However, the US has thought ahead on this, activating a combat regiment as of Oct 1, building extra capacity for prisons along with camp systems (already 1 per 100 US citizens incarcerated and counting, the highest by far in the world).
We are primed for classic fascist takeover! Anything to get the food back on those supermarket shelves once it’s gone!
A perfect analysis (to the many people who made it) of a failed OODA. If Boyd (and also Stafford Beer who independently worked out many of the same things plus others) were still alive they would be shaking their heads.
In my experience the 1st “O” is usually the main failure point. I noted earlier in another post the Bernanke was fighting the wrong war and wasted a lot of time and taxpayers money. Other countries, possibly with a bit of schandenfreud ” a US problem” many called it.
I’m an analyst (in many fields) and the hardest job I ever face is getting people to face the facts. Many reasons, over optimism (I really hope we find the genetic basis behind optimism .. and eliminate it from the gene pool), vested interest, cognitive dissonence, etc. Usually once you get them there (often kicking and screaming) they then become pretty good at solutions. Eventually, sometimes too late.
Now Bernanke (etc), apart from whatever intellectual bias, also fought the wrong fight because of vested interest. They have a ‘tribe’ they belong to (in Poulson’s case he has a lot of personal money involved as well). They see the world through a distorted lens. Bright they are, but they are not a Boyd or Beer or a Keynes, able to dispationately view things and think of the bigger picture and the hang with themselves (Boyd freed himself from promotion and money, Beer likewise freed himself from quite reasonable wealth, Keynes gave up his life through overwork). None of them ever gave up.
Now with money frozen, literally thousands of people being thrown out of work every day and/or losing their houses. International trade frozen. International credit frozen (here in Oz it is a countdown until we run out of money).
What happens next? Facsism or Communism?
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Fabius Maximus replies: Lots of powerful points in here. I esp agree with your observation that optimism can be a vice. As I said in A solution to our financial crisis: “Despite years of warnings (see this list) we have not seen the danger ahead. Now that it is upon us, our fixed optimism prevents us from orienting ourselves to changed conditions.”
I believe the steps taken by world governments this week will restart the flow of money. However, a global recession was likely before this financial shock — and now seems probable. But recessions are normal cyclical events — every economy must both inhale and exhale — and need not be feared. Neither facsism or communism need result.
Just adding: you should have “optimism of the spirit, with pessimism of the intellect”. Now I don’t know who came up with that, but it is a perfect statement of a correct balanced appoach to problems. A bridge builder doesn’t ‘hope’ that the bridge will stay up, they calculate what is needed and add in pessimistic assumption of overload, ageing, weather, etc. There is an underlying optimism “a bridge can be built that will do the job and be safe”, but a pessimistic: “it will be overloaded, it will not be maintained properly, there will be extreme weather that I have not thought of, so I need to build in large margins of safety”. Good bridges last centuries (e.g. Brunel’s ones).
How long has our current financial system lasted 25 years? Less if you take into account the Japanese meltdown, Asian crisis, Russian default, Enron, LTCM, etc, etc, etc.
Now quite a few warned that this would collapse, but the good old group think, vested interest, cognitive dissonence, excessive optimism, etc, meant that those who did were ignored and marginalised (or worse). A telling comment: an Aussie politician talking recently about the economist Steve Keen (check his website), “Oh Steve has been talking about this for years (since 1996 actually), but he has always been at the very extreme end of economists opinions, though what is happening internationally is sort of in line with what he was talking about, but we will be ok in Australia.”
What else can you say but: It is insane to expect the same idiots who got us into this mess to get us out of it! We need new blood and new ideas.
Lets start with the solutions being proposed by the people who warned us all about this years ago, they were right then and they have a much better chance of being right now!