Stand by for action – more theft of our money being planned in Washington

Even the leftish-economist — and born-again attack dog for the Democratic Party — Paul Krugman is disappointed with the Obama Administation’s hints that it will continue the Bush team’s strategy of feeding our money to Wall Street until it is again fat and happy.

He becomes suspicious in “More on the bad bank idea“, New York Times, 18 January 2009:

OK, I’ve been doing more homework on the “bad” or “aggregator” bank idea that seems to be gaining ground. And here’s what I think: it’s mainly based on a false analogy.

What people are thinking about, it’s pretty clear, is the Resolution Trust Corporation, which cleaned up the savings and loan mess. That’s a good role model, as far as it goes. But the creation of the RTC did not rescue the S&Ls. The S&Ls were rescued by (1) having FSLIC seize them, cleaning out the stockholders (2) having FSLIC pay down enough debt to make them viable (3) reselling them to new investors. The RTC’s takeover of the bad assets was just a way for taxpayers to reclaim some of the cost of recapitalizing the banks.

What’s being contemplated now, if Sheila Bair’s interviewis any indication, is the creation of an RTC-like entity without the rest of the process. The “bad bank” will pay “fair value”, whatever that is, for the assets. But how does that help the situation?

It looks as if we’re back to the idea that toxic waste is really, truly worth much more than anyone is willing to pay for it — and that if only we get the price “right”, the banks will turn out to be solvent after all. In other words, we’re still in Super-SIV territory, the belief that fancy financial engineering can create value out of nothing.

Color me skeptical. I hope the buzz is wrong, and that something more substantive is being planned. Otherwise, we’re looking at Hankie Pankie II: Paulson may be gone, but officials are still determined to believe in financial magic.

He takes this analysis one step farther in his column “Wall Street Voodoo“, New York Times, 21 January 2009:

But recent news reports suggest that many influential people, including Federal Reserve officials, bank regulators, and, possibly, members of the incoming Obama administration, have become devotees of a new kind of voodoo: the belief that by performing elaborate financial rituals we can keep dead banks walking.

… A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s: it seized the defunct banks, cleaning out the shareholders. Then it transferred their bad assets to a special institution, the Resolution Trust Corporation; paid off enough of the banks’ debts to make them solvent; and sold the fixed-up banks to new owners.

The current buzz suggests, however, that policy makers aren’t willing to take either of these approaches. Instead, they’re reportedly gravitating toward a compromise approach: moving toxic waste from private banks’ balance sheets to a publicly owned “bad bank” or “aggregator bank” that would resemble the Resolution Trust Corporation, but without seizing the banks first.

… What I suspect is that policy makers – possibly without realizing it – are gearing up to attempt a bait-and-switch: a policy that looks like the cleanup of the savings and loans, but in practice amounts to making huge gifts to bank shareholders at taxpayer expense, disguised as “fair value” purchases of toxic assets.

… Unfortunately, the price of this retreat into superstition may be high. I hope I’m wrong, but I suspect that taxpayers are about to get another raw deal – and that we’re about to get another financial rescue plan that fails to do the job.

He provides the final links in the analytical chain in his 29 January blognote.

“As the Obama administration apparently prepares to launch Hankie Pankie II — buying troubled assets from banks at prices higher than they will fetch on the open market — it occurred to me that an updated version of an old Communist-era joke may be appropriate: under Bush, financial policy consisted of Wall Street types cutting sweet deals, at taxpayer expense, for Wall Street types. Under Obama, it’s precisely the reverse.

The original version of this joke: “Capitalism is the exploitation of man by man. Socialism is the reverse.”

A warning from someone who knows about these things

From “Big Risks for U.S. in Trying to Value Bad Bank Assets“, New York Times, 1 February 2009 — A cautionary article about the potential for theft in government purchases of assets from banks. Money quote:

Some critics of the plan warn that the government should not buy the assets, because banks will try to get too high a price and leave taxpayers holding the bag.

“To date, the banks have stuck their heads in the sand,” said Lynn E. Turner, a former chief accountant for the Securities and Exchange Commission, “and demanded that they be paid the price of good apples for bad apples.”

Afterword

Please share your comments by posting below.  Per the FM site’s Comment Policy, 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).

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For more information from the FM site

To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp interest these days:

Other posts about bailout of our financial system:

  1. Slow steps to nationalizing the US financial sector, 7 April 2008 — How this will change our society.
  2. Treasury Secretary Paulson leads us across the Rubicon, 9 September 2008
  3. Another voice warning about the nationalization of AIG, 18 September 2008
  4. Slowly a few voices are raised about the pending theft of taxpayer money, 21 September 2008
  5. The Paulson Plan will buy assets cheap, just as all good cons offer easy money to the marks, 30 September 2008
  6. The last opportunity for effective action before disaster strikes, 3 October 2008
  7. A brief note about our financial system: Intermediation, disintermediation, and soon re-intermediation, 16 October 2008
  8. A reminder – the TARP program is just theft, 24 November 2008

35 thoughts on “Stand by for action – more theft of our money being planned in Washington

  1. Why slur this sensible, understated article by calling its author a “leftish. . democratic attack-dog”?

    I would have thought, from most of your recent posts, that you would agree with his observations here. Are you actually in favor of the “bad bank” idea? Can you explain why?
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    Fabius Maximus replies: Krugman is a brilliant economist. So it is sad that much of his criticism of President Bush resembled speeches of Spiro Agnew rather than an A-team economist. For those to young to remember, VP Agnew was Nixon’s attack dog. Good public speaker, highly partisan, content not bounded by logic, data, or fairness.

  2. Krugman is several decades late and tens of trillions short in his analysis. Those banks are already as good as taken over, essentially no more than branch offices of the same international Banking Behemoth now loosely referred to as ‘the global financial system’ which increasingly seems like a semi-secret cartel controlling both the so-called ‘private’ and so-called ‘public’ sectors.

    He seems to be implying that we have a functioning democratic Republic in the United States. Whilst applauding his good-hearted naivete, I do wish more people of his stature would start calling it like it really is: a good old-fashioned kleptocracy.
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    Fabius Maximus replies: Do you have any evidence of “banks are already as good as taken over” by “a semi-secret cartel controlling both the so-called ‘private’ and so-called ‘public’ sectors”. Sounds nuts to me. I am not even sure what it means. SPECTRE? Thrush? COBRA? The commie conspiracy?

  3. VIKAS BAJAJ and STEPHEN LABATON:”They say the Obama administration may need upwards of $1 trillion in additional aid for banks — on top of the more than $800 billion the administration is seeking in an economic stimulus measure moving through Congress.”

    That’s real money there. $1.8T to foolish bankers, and do we even really know that if this is the last of it? I calculate this as 13% of an entire year US GDP. (A mere $13.8T) A few lucky executives had a nice run there for a few years, and now the rest of us are going to pay, pay, pay for it.

    Article:”Some critics of the plan warn that the government should not buy the assets, because banks will try to get too high a price and leave taxpayers holding the bag.”

    Like, duh. Would you buy a car from this man? I read how this might work is the USA sells bonds and then the ‘bad bank’ leverages this money to buy up the bad assets. We pay full-price for this stuff and expect to make payments on the bad bank’s debt with the income. Except, and here’s the bad news, if these assets turn out to be less valuable than what they are worth, what happens is the bad bank becomes insolvent and needs more money. We could be bailing out the banks, and then again bailing out the bad bank over and over again — now this is a government institution, which we will not allow to default.

    What level of payments to banks will destroy the nation? That’s when this party ends, I fear. At least GM can make a crappy car. The US military can blow something up. What are we getting for all this money? It doesn’t seem like such a good deal to me.
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    Fabius Maximus replies: Let’s not go crazy over this. A few trillion here or there will not destroy America, with its $14 T annual GDP. Also, the government is getting assets in return. Not worth what we’re paying for them, but not worth zero (in aggregate). This is theft, not murder (or, since we’re doing it to ourselves, suicide)

  4. Fabius Maximus replies: “Do you have any evidence of “banks are already as good as taken over” by “a semi-secret cartel controlling both the so-called ‘private’ and so-called ‘public’ sectors”. Sounds nuts to me. I am not even sure what it means. SPECTRE? Thrush? COBRA? The commie conspiracy?”

    I don’t know about Spectre, but there is some rational for saying the banks are as good as already nationalized. And that’s because their Market Cap is relatively small compared to the scale of the disaster. I looked up BAC and all their stock is valued at $30.10B. Citigroup is worth another $20B. That’s $50B, a teensy fraction of the money we’re potentially flushing into this project. Nationalized or not nationalized is a tiny issue in terms of the dollar volume.

    I vote no nationalization. Nationalization doesn’t make all the bank obligations go away, it just means that taxpayers will be on the hook for all of their excessive borrowing and bad contracts. In hindsight, Iceland would have been better off not nationalizing their banks, I think.

    I’m not sure if default is the right option or not, but after we nationalize we lose the default option, because a default on the nationalized bank becomes a US Government default. Bad, bad, bad.
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    Fabius Maximus replies: You are missing the point of Krugman critque. We have NOT nationalized the banks. The guarantees, loans, and asset purchases are strickly “privitized gains, socialized losses. The government has not gained control — no control of voting common, no seats on the board, no control of lending standards or credit allocations by industry.

    Illustrating the lack of control, the bill has to specify bonuses — to keep the managers from stripping money from the banks’ zombie corpses. That micro level of control should be automatic after the government has invested so much money in these institutions.

  5. Oops, that’s only $1.7T to idiot bankers, not $1.8T. TARP=$700B + the $1T+ they’re are talking about here.
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    Fabius Maximus replies: Those “idiot” bankers — the guys who ran the banks into the ground — are rich. They need never work again. Nor need the next 10 generations of their children. We are left to clear up the mess, at incredible expense.

    So who are the idiots?

  6. RE: “The original version of this joke: “Capitalism is the exploitation of man by man. Socialism is the reverse.”

    I prefer the Churchill myself, “Capitalism is the unequal sharing of blessings, socialism is the equal sharing of miseries.” (paraphrase)

  7. What is really happening is this, as Chalmers Johnson states in an excellent TomDispatch article today:

    “Recently, reviewing lobbying disclosure reports, the Washington Times discovered “that 18 of the top 20 recipients of federal bailout money spent a combined $12.2 million lobbying the White House, the Treasury Department, Congress, and federal agencies during the last quarter of 2008.” Citibank alone, according to the New York Times, fielded “an army of Washington lobbyists,” plunking down $1.77 million in lobbying fees just in the fourth quarter of last year.

    “And it isn’t only sinking financial institutions begging for federal dollars that have bolstered their Washington lobbying corps. So have the biggest U.S. armaments companies — “drastically,” according to reporter August Cole of the Wall Street Journal. In 2008, he found, Northrop Grumman almost doubled its lobbying budget to $20.6 million (from $10.9 million the previous year); Boeing upped its budget from $10.6 million to $16.6 million in the same period; and Lockheed-Martin, the company that received the most contracts from the Pentagon last year, hiked its lobbying efforts by a whopping 54% in 2008.”

    Beginning back in our British days with the East India Company, continuing with granting individual rights to corporations in the mid 19th century, through the events described above by Johnson, the balance of power has shifted, due to corruption, from the citizenry and the government to corporations. The result is our current kleptocracy in which the citizenry has been bilked of approximately $2 trillion just in the past year by the ‘defense’ and finance industries.

    It will take many things to change this, but one essential is the restoration of some sort of balance of power. This certainly means taking all the corporate money out of politics and ending the revolving doors. Money is not speech, and boundaries need to be restored, or we are doomed. We need to pay government employees more, expand financial regulation, and place limits on corporations, both in terms of overall size and scale and executive compensation, among other things. What we have is not only not working, it is anti-working.

  8. ” Do you have any evidence of “banks are already as good as taken over” by “a semi-secret cartel controlling both the so-called ‘private’ and so-called ‘public’ sectors”

    It’s so obvious, Watson. The evidence abounds, so obvious that we stumble about it in as in a fog. The majors have been technically broke for some time now and since mid-2008 (at the latest) have lost any semblance of actual private sector autonomy being beholden to hand-outs and obfuscated balance sheets to survive. BAC’s stock is technically worth $0.00 according to many analysts who I think are probably correct.

    As to nationalisation: the USG itself is essentially run by the same financial elites who have been running countries for centuries in one form or another, the government being simply the ‘front office’ of the corporatocracy/kleptocracy. What we have unfolding right now before our eyes is Mussoloni’s definition of fascism:’the union of State and Corporate power’. Who is ‘owning’ whom or what has largely become irrelevant.

    Whether the ‘government’ ‘nationalises’ the ‘private sector’ banks or ‘saves’ them somehow, the same forces will still be in charge, only in more direct fashion. The ‘private sector’ already runs the money via the Fed-Treasury axis, and they who control the money control the country in today’s systems.

    Elementary, dear Watson, elementary.

    Of course the only really important issue in all this is: can they manage things well enough that most of the citizenry can maintain a relatively ‘normal’ lifestyle through all this and not end up in tent cities and/or riots in the Capital?

  9. FM says: “Do you have any evidence of “banks are already as good as taken over”?”

    A good question. In response, let’s see how Senator Claire McCaskill’s proposal that Congress set the pay of banking executives that except TARP for their firms flies in the coming weeks? I see this as a canary in the coal mine, so to speak, for just the very question you just raised.
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    Fabius Maximus replies: Did you read my comment, citing this as evidence otherwise? If the government had taken over the banks, there would be no need for Congress to pass legislation about such a tiny point.

  10. Krugman yesterday: “We can’t afford to squander money giving huge windfalls to banks and their executives, merely to preserve the illusion of private ownership.”

    That last phrase answers the question. Technically they are still ‘private’; the illusion holds. Functionally they are no longer autonomous entities. Who ‘governs’ their fate? (I doubt it is Congress.)

  11. Evidence Exhibit #1: The three-page coup-d’etat ultimatum delivered by SecTreas Paulson to Congress last year in which it was demanded that no oversight or legal repercussions be permitted.

    In what political / governance / constitutional universe did that proposal get drafted? It certainly was not in the ‘America’ most of its citizens believe they live in. And yet it was a succinct, well crafted, public expression of actual Res Publica.
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    Fabius Maximus replies: There are 3 aspects to this, IMO.

    The 1st is the expansion of government authority. For more on this see “Treasury Secretary Paulson leads us across the Rubicon“.

    The 2nd is the model for this expansion: privatized profits, socialized losses. A highly organized form of theft. See “Say good-bye to the old America. Welcome to our new socialist paradise!

    The last is the manner in which this is being done, very autocratic. See “America appoints a Magister Populi to deal with the financial crisis“.

  12. Re 9: It’s a test case, Fabius. They are seeing what they in fact can get away with. You start small, nibble a little bit at a time, then, once people haven’t objected to the initial forays, you go whole hog.
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    Fabius Maximus replies: This is absurd. These large banks are zombies. The US citizens will spend trillions to recapitalize them, and should receive the gains that result. This is the policy followed by everybody else, plus the US (in S&L crisis). Take them over, replace management, repair, sell them off. A post going up later shows that even Russia is following this model.

    Allowing US citizens’ money to benefit managers and shareholders is IMO cracked. Evenentually even the sheep-like citizens might realize they’ve been robbed. What happens then will be interesting to watch.

  13. The government hasn’t taken over the banks. Its been taking over the LOSSES. How many billions has the US government guarenteed as “Insurance” at this point, between Citibank and BofA alone?

    How many billions as “preferred stock” (which doesn’t really solve solvency problems, as “preferred stock” is really “unsecured loan”, and loans don’t improve your capital position, they make it worse)?

    This is the problem: Its been “nationalize the LOSS”, not “nationalize the Banks”. And that Obama is looking to keep up the trend is a really REALLY bad sign, as it shows incompetence or corruption. Worse, it is the already discredited initial TARP proposal of Paulson et al.

    Also, I don’t think Krugman has ever been a Democratic attack dog. Rather, he is liberal and has a great intolerance for ignorance, stupidity, deception, and outright lies, and also a seething resentment for his editors who were rather reluctant to allow him to go after Bush’s social security stupidity before the 2000 election where all four were plainly clear. Thus after the election, he went after Bush greatly, in ways which, in retrospect, were largely correct.

    As such, I’d expect Krugman to continue to be vicious whenever the Obama administration is also grossly ignorant, stupid, deceptive, and lying, such as what they are doing on the bank bailout.

    And call your representative office today! Its about the only way you can make your voice heard in any way.
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    Fabius Maximus replies: What you are describing is “privatized gains, socialized losses” — and has been a major theme of this site for the past year. And I agree, mass protest is the only thing that will stop this looting of our nation.

  14. FM:”Fabius Maximus replies: This is absurd. These large banks are zombies. The US citizens will spend trillions to recapitalize them, and should receive the gains that result. This is the policy followed by everybody else, plus the US (in S&L crisis). Take them over, replace management, repair, sell them off. A post going up later shows that even Russia is following this model.”

    Except, it’s not nationalization, it’s just bankruptcy. These banks are insolvent, that’s not an exaggeration. With bankruptcy, we could dump the management and shareholders, put the whole mess into a court and work it out there. Speaking of Russia, really, it’s like we still have the guys responsible for the Chernobyl meltdown running the reactor. We’re experiencing America’s financial Chernobyl.

    Naturally, bankruptcy would give us the option to stiff some of the bank’s debt holders. Though, I’m starting to wonder about this. Nobody really talks about who the bondholders are that the big banks owe money to. Here’s a little conspiracy theorizing by me. I can imagine that China’s Sovereign wealth fund, and maybe Saudis and Japanese own a lot of this, and that Obama, well, first day in office he ‘got the call,’ you know — and that’s what’s going on here, and that this is why we’re flushing the country down the toilet to make sure these bondholders don’t get the shaft. Who does own all this debt? Could we be right now finally paying the price for endless trade deficits?
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    Fabius Maximus replies: Banks are the nation’s financial circulatory system. Letting the banks go bankrupt in large numbers risks an instant Great Depression. It’s not going to happen, as the government will prevent it at any cost.

  15. FM:”Fabius Maximus replies: Banks are the nation’s financial circulatory system. Letting the banks go bankrupt in large numbers risks an instant Great Depression. It’s not going to happen, as the government will prevent it at any cost.”

    Krugman:”A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s: it seized the defunct banks, cleaning out the shareholders. Then it transferred their bad assets to a special institution, the Resolution Trust Corporation; paid off enough of the banks’ debts to make them solvent; and sold the fixed-up banks to new owners.”

    What about this then? Are we calling this ‘not bankruptcy’ then, even even though it really is. Maybe it’s just the ‘b-word’ that scares people these days. Could be we just need a kinder, less menacing sounding end to these banks. It’s a ‘shareholder cleanout’ and ‘asset transfer’.
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    Fabius Maximus replies: In the US bankruptcy is a highly specific term, operating under The Consitution (Article 1, Section 8, Clause 4). See Wikipedia for details.

  16. Fabius: did you ever imagine your caustic, contrarian analystical essays would attract such a horde of leftie liberals? I love it!!!

  17. Cathryn: What the FSLIC/RTC did in the 80s is exactly nationalization: The insolvent institutions were taken over by the federal government, recapitalized, the bad crap sorted out, and then sold off again a few years later.

    It isn’t bankrupcy: bankrupcy has the bank fail. Nationalization has the bank NOT fail, but still wipes out the shareholders completely.

  18. The S&L solution is exactly the way to proceed, but the S&Ls had no clout in America, a bit above credit unions. Paulson started by propping up AIG when it threatened Goldman. Friends helping friends of course. Not policy, not even conspiracy. He was over his head of course and to continue the same course is deadly for Obama. McCain would have lost in any event, but those who opposed TARP were correct but none of them would have supported seizing the banks. Barny Frank and Chris Dodd are midgets and should not be held up as being responsible for anything but they are emblematic of an entire political establishment that is bought and paid for. Can Obama break from this? So far, no.

  19. Nicholas Weaver:”It isn’t bankrupcy: bankrupcy has the bank fail. Nationalization has the bank NOT fail, but still wipes out the shareholders completely.”

    People get their ideas of what bankruptcy is playing Monopoly(TM). In bankruptcy, a company goes to a court, and then a judge hands out the money to creditors based on the laws that rule these things. Often companies continue functioning in the midst of bankruptcy if the business is still viable. Northern California experienced the PGE utility bankruptcy but the company survived.

    Crazy stuff like handing out executive bonuses would be exactly the kind of thing bankruptcy would prevent. The company would still function independently, but a court would clip their wings a bit.

    With nationalization, all the bank employees become government employees. The bank debts become government debts, the bank assets become government assets.
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    Fabius Maximus replies: Contracts with banks as a party are at the center of the financial sytem. Bankruptcy would put all of these up for modification by courts (there are some exceptions, like residential mortgages). The chaos would be terrible. It’s a crazy idea, and will almost certainly not be attempted.

    The government might do “legislated” bankruptcy, mandated reorganizations without court intervention.

  20. I believe part of the problem here is that if MegaBank A goes bust, then MegaBank B’s balance sheet is revealed as being full of ‘toxic zeros’ (another gift from those pesky Arabs?!) which right now are hidden under the wad of bail-out checks in the Inbox.

    But none of this stuff should have anything to do with healthy circulatory system, rather its Ponzi Derivative Pile A being linked to Ponzi Derivative Pile B, C, D and E in over a quadrillion’s gross of interlocked backed and ‘naked’ derivatives who knows God knows where in how many computer terminals and offshore accounts which even Helicopter Ben couldn’t possibly tally up and he ain’t telling even if he could which he can’t so he doesn’t.

    I blame Congress for all this ultimately. When Ben gave them his private performance in classified sessions of his ‘there will be riots (literally)’ act speech early and then again later last year, they bought it. Made them feel like they had an important role. But I think that’s all stinkin’ thinking. If the Powers that Be (who never will) would just put these monsters out of their ( or rather our) misery, not only would the circulation of the economy have a shot at beginning to return, but far from being riots, there would be dancing in the streets!

    So what is everyone so afraid of? Or maybe the question should be: why are people buying into the fear they are being sold, not unlike the lead-in to the Iraq engagement?

  21. FM:”The government might do “legislated” bankruptcy, mandated reorganizations without court intervention.”

    Or maybe an executive ordered, ‘not a bankruptcy’ type intervention. Something is coming down the next week or so. Obama is politicking about executive bonuses and his outrage over this, and I read that as meaning some kind of oversight is coming right now that will do about the same job. I guess there’s going to be some kind of Bank Czar to make sure banks don’t do anything politically awkward like paying dividends or executives big bonuses.

    FM:” It’s a crazy idea, and will almost certainly not be attempted.”

    These days, I’ll never say never. Bankruptcy is kind of the ‘do nothing’ option. We could fall into it even if we don’t choose it. If bank executives sense that they’ll get a better deal in a straight up bankruptcy court than they get with nationalization or whatever the plan is, I don’t see anything that stops them from declaring an involuntary bankruptcy right now. They could walk in, and ask for a restructuring of obligations, and permission to continue to operating, just like any other corporation.

    Also, the political consensus for bank bailouts is zero right now. All it takes is another disaster but of next-level size, and then poof, a big bank can’t make a payment and it’s in bankruptcy. This is a worst case scenario, of course.

    We do have a test case. Right now, the Lehman bankruptcy making its way through the courts. I did scan the news for this to see how it’s going, but I didn’t find that much, other than a few creditors complaining and some scandal with the judge. It doesn’t seem to be generating much print in the papers. I’m not sure what that means.

  22. Why a legislated bankruptcy? If the depositors are already protected by FDIC, why not let a recalcitrant corporation fail? Do you really believe banks have a valid reason to behave in an intelligent manner regarding risk maangement if stupidity is not punished?

    Is there any reason for banks to be careful regarding the potential downside of a high risk transaction? I opine the answer is “no, there isn’t.” The expectation of another TARP being hurridly cobbled together every time they screw up, will prevent them for ever evaluating risk in a responsible manner again.

    If a company is “too big to fail”, we might as well just make a permanent Department of TARP, find a Democrat who actually knows how to fill out a 1040-EZ, and make that individual Secretary of Corporate Irresponsibility.

  23. A huge amount of the fictitious capital is kept in the currently insolvent BigBanks.
    Pre-packaged Chapter 11 bankruptcies, wiping out the shareholders and most of the bondholders, will certainly end the Financial Institution bubble that has already popped anyway.
    What is the fair way to divide contracted payments when the available cash is less than the promised amount? Maybe 20%? 10%? 5%? 1%?

    Companies are mostly frozen or firing people — they don’t need big loans for big new investments. There are plenty of small, well-managed little banks for people to deposit their money. Much of what the BigBanks speculated/ invested in were the CDS toxic assets.

    Let all insolvent banks die. Their ashes, and absence, will allow room for good banks to grow.

    In the meantime, let folk keep more of the money they earn thru tax cuts, rather than sending it to DC and hoping to get some of it back in stimulus. Much of the stimulus will support corruption.

  24. Tom Grey:”What is the fair way to divide contracted payments when the available cash is less than the promised amount? Maybe 20%? 10%? 5%? 1%?”

    We don’t want to fire sale all the bank assets on the market with a bankruptcy. That would cause further bad things to happen.

    If the banks have a positive cash flow they could remain in business. But we can use bankruptcy to temporarily ease the reserve requirement rules. Mark down all the bad assets to what they are really worth given sensibly pessimistic predictions about the economy and then maybe divide by that by two to account for further declines and let them sit at the banks. The bankruptcy can prevent dividends, crazy bonuses, the Mets deal, screwy mergers or other goodies until they slowly dig out of the hole and their reserves rebuild to sensible levels.

    Admit officially what everyone already knows, these institutions are insolvent — end the mystery and facade. That’s what’s killing this economy. Let everyone see the real numbers, however horrific they are, and then let’s just get back to the business of making them better, rather than trying to hide them or move them around.

  25. The difference between socialism and capitalism? Under socialism, banks are first nationalized and then go bankrupt. In the capitalist system it appears to work the other way around. Read more on Crunchreport.com.

  26. Am off-topic a but here, but wondering if FM or others here have info on the best arguments in favor of 1. Keynesianism, and 2. Monetarism – for solving our current crisis. Not an economist, wondering where to find the most cogent arguments in favor of either position, or for that matter, in favor of the Austrian school of economics. Many thanks.
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    Fabius Maximus replies: Monetarism is almost dead as a guide for economic policy, killed by the discovery that monetary velocity changes rapidly and unexpectedly. See any Econ 101 textbook for the story on Keynesian economics. Or try Wikipedia for a simple intro, which I find is usually reliable on non-contraversal subjects.

  27. Update: two more voices warming about a new round of theft

    (1) “Why Davos Man is waiting for Obama to save him“, Martin Wolf, op-ed in the Financial Times, 3 February 2009 — Excerpt:

    Unfortunately, what is coming out of the US is desperately discouraging. Instead of an overwhelming fiscal stimulus, what is emerging is too small, too wasteful and too ill-focused. Instead of decisive action to recapitalise banks, which must mean temporary public control of insolvent banks, the US may be returning to the immoral and ineffective policy of bailing out those who now hold the “toxic assets”. Instead of acting as a global leader, there is resort to protectionism and a “blame game”.

    This way lies a catastrophe. I expect little enlightenment from the rest of the globe: the European Central Bank is allowing the eurozone to collapse into deep recession; Japan is in meltdown; China has at least announced a big stimulus package, but it lacks a credible plan for needed structural reforms; and most other emerging countries can only try to stay afloat in these storm-tossed seas. Their accumulated foreign currency reserves of the 2000s will help. But the resources available to the IMF, even with their hoped-for doubling, are too small to give most emerging economies the confidence they need to risk keeping their spending up.

    Decisions taken in the next few months will shape the world for a generation. If we get through this crisis without collapse, we will have the time and the chance to construct a better and more stable global order. If we do not, that opportunity may not recur for decades.

    We are living on the cusp of history. The priority is to reverse the downward spiral of despair through overwhelming and concerted action. That will only occur if the US now gives the leadership we need. Mr Obama may even find, as many presidents have found before him, that leading the world is easier and more rewarding than cajoling a recalcitrant Congress. This may not be the challenge he expected. But it is the challenge he confronts. History will judge his presidency on whether he dares to succeed.

    (2) “The Bad Bank Assets Proposal: Even Worse Than You Imagined“, Yves Smith, posted at Naked Capitalism, 4 February 2009 — Excerpt:

    The Obama Administration, if the Washington Post’s latest report is accurate, is about to embark on a hugely expensive “save the banking industry at all costs” experiment that:

    1. Has nothing substantive in common with any of the “deemed as successful” financial crisis programs
    2. Has key elements that studies of financial crises have recommended against
    3. Consumes considerable resources, thus competing with other, in many cases better, uses of fiscal firepower.

    The Obama Administration is as obviously and fully hostage to the interests of the financial services industry as the Bush crowd was. We have no new thinking, no willingness to take measures that are completely defensible (in fact not doing them takes some creative positioning) like wiping out shareholders at obviously dud banks (Citi is top of the list), forcing bondholder haircuts and/or equity swaps, replacing management, writing off and/or restructuring bad loans, and deciding whether and how to reorganize and restructure the company. Instead, the banks are now getting the AIG treatment: every demand is being met, no tough questions asked, no probing of the accounts (or more important, the accounting).

    What we have from Team Obama is a bigger abortion of a :”throw money at bad bank assets” plan that I feared in my worst nightmare. And (when we get to the Post preview), they have the temerity to invoke triage to make what they are doing sound surgical and limited.

    Those who remember the origin know that triage means focusing on the middle third of the wounded on the battlefield : leaving the goners to die, leaving those wounded but stable to fend for themselves for the moment (they were in good enough shape to wait to be transported or hold on to be treated later). The middle third, those in immediate danger but who might nevertheless be salvaged, got top priority.

    The concept of “triage” recognizes that resources are limited, tough decision need to be made, and some are beyond any hope. But in Team Obama Newspeak, triage means everyone can be saved because resources are presumed to be unlimited…

  28. a) right now those buying into CDS and other high-falutin’ mortgage instruments will double their money providing the default rate is less than 50%. (Goldman blog at ATOL)

    b) Cathryn says ‘something is coming down’. Here it is already (today): “Volcker Suggests Ways to Refine Bank Regulations“, NYT, 4 February 2009 — Excerpt:

    “The idea of a systemic-risk regulator, proposed by the Bush administration last year, is gaining adherents in the Obama administration and in Congress. Mr. Dodd has mentioned the possibility of giving that role to the Federal Reserve.”

    c) we now have a private sector cartel already in charge of national monetary policy (since 1913), echoed in similar ‘central banks’ throughout the developed world. In a few weeks we might see them becoming also the regulatory body for the banking sector acting in concert with equivalents world-wide. Note in this context an organisation like the DTCC.

    Try to find on their site where they get the authority (for that is what it is) to hold 99% of all US stock certificates. Hard to do. I knew the answer but Googled for a report. This one is the first I could find (I have not read the whole article) but suffice to say it is ‘authorised’ by the non-government organisation, the Fed.

    “All services provided through the clearing corporations and depository are registered with and regulated by the U.S. Securities and Exchange Commission (SEC). The depository is also a member of the U.S. Federal Reserve System and a limited purpose trust company under New York State banking law.”

    What we now have already in place, as possibly upcoming legislation will publicly seal and operations like the Fed and one of its many mandated offsprings currently manifest in actuality, is the ‘union of State and Corporate’ power.

    FM has promoted activist democracy here. Is America a democracy? Is it even really a Republic?
    .
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    Fabius Maximus replies: Look, black copters in the sky, the UN coming to take over America! What utter nonsense.

    * Volcker’s proposal is one dozens of similar ones; anyone expecting no wave of new regulations after such a crisis is dreaming.

    * DTCC is regulated, just like almost everything else in America — including hair salons. Stock and bond certificates are a service provided by the issuing company (e.g., GM, IBM). They hire a transfer agent and registrar. Paper certificates are expensive to track and move, so for several decades companies have pushed to “immobilize them” at a central clearinghouse — so that future movement can be electronic.

    DTCC is only one such clearinghouse for security products (e.g., Options Clearing Corp). Modern products were paperless from inception, so no imobilization was necessary. There are competitors to DTCC abroad.

    Before writing such stuff, please read Wikipedia (or some other reference work). Their entry about DTC is quite clear.

  29. I can only comment: Steve Keen and ….Steve Keen, definitely Australia’s greatest economist, arguably a Nobel prize candidate. He has just recently made a major breakthrough. He has 2 sites:

    (1) http://www.debtdeflation.com/blogs/ a blog site, that he has just put some of his latest research onto. Plus buy his book ‘Debunking Economics, only $10 as an e-book (no I dont get commission, but he is really that good, I bought his book years ago).

    (2) http://www.debunking-economics.com/. Discover why Marx (ignore the propganda you have always heard) was such an important contributor to economic thought. Plus what Keynes was really on about (and how really smart he was). And of course, arguably the US’s greatest economists, Fisher and Minsky. What they contributed (and was sadly forgotten and/or ignored).

    And of course the ‘snake oil salesman’ of all time, Milton Friedman, why he was not only just wrong .. but how wrong he really was.

    And you can easily derive for yourself from this data and models, why the current ‘solutions’ wont work. But you can also work out for yourself some things that will work .. but that is for another post ….. grasshopper.
    .
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    Fabius Maximus replies: I agree on all points (esp Marx’s often underrated contributions), except about Friedman. His insights about the importance of the money supply still stand today. Monetarism as an policy doctrine is in eclipse (i.e., almost dead) due to operational factors (which might be what Keen refers to), but he made important contributions to economics. His insights about the factors creating the Great Depression remain a key part of the story today.

  30. I didn’t read Wikipedia. I read the CTCC and Fed Reserve sites but then did a Google search to get a quick quote on one aspect. I hardly ever go to Wikipedia except for simple historical facts, certainly not analysis of things like this.

    A company that holds 99% of ALL US paper stock certificates is not just a ‘clearing house’ as you say above.

    Volcker was the one in the NYT article I linked who expressed reservations about making the Fed the chief regulator. It was Dodd who is floating that one.

    The point is that there is a massive – and largely hidden – amount of centralisation, much of it not in government hands, but as good as. In other words, CTCC did not end up holding 99% of all stock certificates simply because it out-competed others in the private sector as your rejoinder naively implies.
    .
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    Fabius Maximus replies: I will explain this once; all future comments on this subject will be deleted.

    The move from paper certificates to electronic-only (aka “book-entry” )is long-standing shift due to cost. Physical movement and transfer of securities is expensive (e.g., often costing hundreds of dollars when involving an estate).

    Bank accounts have been book entry for decades (e.g, no more “passbook” savings accounts, where the record was a physical book). All treasury, municipal and corporate bonds have been electronic-only in the US for many years. Modern securities (e.g., futures and options) were created book-only. Even cash is going book-entry (e.g., debt/credit cards, direct deposit, electronic fund transfers).

    “A company that holds 99% of ALL US paper stock certificates is not just a ‘clearing house’ as you say above.”

    DTCC is exactly a clearinghouse, as the term is used in the securities industry. Immobilization of stock certificates is just an intermediate step towards total book-entry. After which DTCC will be like the other clearinghouses (e.g., Option Clearing Corp), and there will be no certificates.

    Note that clearing corps (like DTCC) do not mainain records of individual ownership, only holdings by member firms. Individual records are maintained by brokerage firms and registrars.

    As for Wikipedia, I am always amazed at some people’s sense of superiority to it (often exulting in their ignorance vs. the information there on non-contraversal material). A quick read there — and use of the links to source material — would have avoided writing this nonsense.

  31. Martin Wolf:”Instead of an overwhelming fiscal stimulus, what is emerging is too small, too wasteful and too ill-focused.”

    What’s sinking in that 00’s America can’t build projects like 50’s America or 40’s America could. We just have this massive legal and bureaucratic system that’s between saying ‘maybe this is a good idea’ and then ‘digging in the first shovel.’ They’ll pass this fiscal stimulus, the first thing it’ll create a lot of jobs in Washington pushing documents through the Washington legal system and that will take years, and maybe the actual construction only begins once the depression is bottoming out, and then it’s inflationary and doesn’t help.

    If we could only short-circuit some of this crap. What we need is a construction project that uses existing construction companies, but where the bulldozers start right now, and if anyone complains we just tell them to shut up.

    The only one who can do this is Obama. He just has to say “I want this, it’s coming through, it’s starting now, and nobody is complaining” and it should be massively expensive, nation-wide, able to use existing construction companies, and be able to start very soon.

  32. It gets better…Here’s what the CBO believes we’re getting in return for the investment.

    The chairwoman of the Congressional Oversight Panel for the bailout funds told the Senate Banking committee Thursday that Treasury in 2008 paid $254 billion and received assets worth about $176 billion.

    That means we get about $0.70 per $1 spent before we start monkeying with the financial cost of creating all this money that doesn’t currently exist. It’s enough to make smart, well-connected people not want to pay their taxes or something.

    The CBO of course posits a very optimistic case that assumes these “assets” deteriorate no further.

  33. From a previous exchange up thread:

    Re 9: It’s a test case, Fabius. They are seeing what they in fact can get away with. You start small, nibble a little bit at a time, then, once people haven’t objected to the initial forays, you go whole hog.

    Fabius Maximus replies: This is absurd. These large banks are zombies. The US citizens will spend trillions to recapitalize them, and should receive the gains that result. This is the policy followed by everybody else, plus the US (in S&L crisis). Take them over, replace management, repair, sell them off. A post going up later shows that even Russia is following this model. Allowing US citizens’ money to benefit managers and shareholders is IMO cracked. Evenentually even the sheep-like citizens might realize they’ve been robbed. What happens then will be interesting to watch.

    Here’s what I read in Financial Week today.

    Congress will consider legislation to extend some of the curbs on executive pay that now apply only to those banks receiving federal assistance, House Financial Services Committee Chairman Barney Frank said. “There’s deeply rooted anger on the part of the average American,” the Massachusetts Democrat said at a Washington news conference today. He said the compensation restrictions would apply to all financial institutions and might be extended to include all U.S. companies.

    Do you still think my initial comment was absurd?
    .
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    Fabius Maximus replies: Yes. Who cares what the hired help are paid? Would the world stop spinning if their compensation vs. average workers returned to 1980 levels (which I very much doubt will happen, as this is probably just smoke for the proles).

    The key fact, which I described clearly IMO, was giving trillions to finanical institutions on absurdly easy terms — benefiting their shareholders (despite the “owners society”, they are overwhelmingly in the top few percent of Americans).

    BTW — despite some politico’s hot air, here’s something you can take to the bank: “Goldman, JPMorgan Won’t Feel Effects of Executive-Salary Caps“, Bloomberg, 5 February 2009.

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