Today's Installment, In Which I Wax Economical
I've been itching fiercely to weigh in on the current economic hullabaloo, but it seems that I've been a bit busy in the last week or so.
First, I wanted to start with a very basic description of where we find ourselves. Apologies to economists, as my intention here is to be very basic in the hopes that we can look beyond the $700B figure that has stolen steely gazes away from even the glowing visages of Alaskan beauty queens.
Now, let's talk money!
What is money? Your Econ 101 professor will likely tell you that it's an abstract concept which has evolved throughout history, etc. This is where you may be forced to view many slides, some of which may look like this.
Okay, we've all got some of it (at least hopefully we still do), but what is it? Your Econ 101 professor will likely also tell you that it is a store of value, a medium of exchange and a unit of account.
Your Econ 101 professor is starting to put me to sleep.
Seriously, though, let's not worry about the medium of exchange part right now. Let's think about value and account and the quantity theory of money.
For the purposes of this discussion, the quantity theory can be stated as MV=PQ, where M is the money supply, V is velocity, or how many times money is changing hands, P is the price level and Q is real value, but we can think of this as output. Again, I apologize to the economists in the audience, but I'm shooting for the big picture here.
Employing the magic of ceteris paribus, we're going to say that V and Q stay more or less constant. While this isn't strictly true, it will aid in this illustration. If V and Q don't really move much, hopefully we can see that an increase in M will lead to an increase in P. An increase in P, or the price level, is also commonly known as inflation.
Hopefully we all realize this relationship intuitively, or have at least been told that this is how it works. More money means that each unit of currency is worth less, which in turn means that it takes more of each unit to buy today what could have been purchased with less yesterday. Another way of saying this is that prices have gone up, ie inflation.
Okay, basic stuff. I know.
Where does money come from? Sure, some of it comes from a printing press, but that's not where most of it comes from. Physical currency only accounts for about 10% of the total money supply, which brings me to this totally sweet graph.
So that little green portion is the stuff with dead Presidents on it. As you can see, the percentage of physical currency, or what economists call M0, hasn't really changed much. What we need to look at is M3. This is how the money supply is expanded, not through the printing of money.
Fun fact: The Federal Reserve stopped tracking M3 in March of 2006. Notice how the M3 portion doesn't go all the way to the right? That's because they stopped giving us the data. Here's the money quote, pun intended:
Oh, shit.
People keep invoking the Great Depression. What they mean to say is that they're afraid of a deflationary spiral. So, what's that mean? Well, if inflation is an increase in the price level, then deflation is a decrease in the price level. If we can see that price goes up when the money supply increases, then hopefully we can see that price will go down as the money supply decreases.
The M3 money supply is collapsing.
Is your underwear still clean? Good.
How did this happen? Other people have detailed it, so I'll point you over here for a walk-through that I think is rather good. I can also highly recommend this Bill Moyers interview with John Bogle.
In a nutshell, it was assumed that housing prices would always go up. That being the case, lenders thought they could afford to deviate from best lending practices. In other words, they were willing to accept more risk than they ought to because they were betting that the properties would go up. At the same time, they were able to sell these loans on the financial markets, but packaged in complex securities bundles which were, in theory, designed to mitigate the riskier loans. Of course, this led to even riskier behavior because the lenders no longer had to worry about being exposed to the loan risk. It was all upside. Hell, these securities were even insured.
How reckless did the behavior get? Ever heard of a NINJA loan?
So lenders will lend to anyone, which creates a big housing boom. They basically increased the pool of eligible buyers by lowering the barrier of entry. So demand goes up. So supply races to meet the demand.
All of a sudden loans start going bad. The sub-prime meltdown begins. Here's a no brainer: People with no income, no job or assetts can't pay that adjustable rate mortgage when it kicks up to full speed after the 90 day introductory period.
Then the big shit-storm begins. Home prices drop. Why? Too many houses. Supply caught up and now our artificially expanded pool of buyers starts shrinking rapidly. See, one of the fundamental assumptions that these mortgage-backed tranches, CDOs, CDSs, etc., were based around was that even if home prices dropped in one town, they wouldn't drop everywhere at once. Oops.
Funny thing about mathematical models based on fundamental assumptions. They work only as long as the assumptions hold.
So now M3 is crashing back to Earth. Here comes Hank Paulson. He says, "We need, oh, I don't know... $700B. And we need it now. And don't ask us about why we need it exactly, where we came up with that figure or how we're going to pay it back."
Here's a little flashback for you: Dick Cheney, former CEO of Halliburton, says, "We've got to go to war. We're going to need, oh, I don't know... $100B or $200B. And I'm going to need to give my former company a closed-door, no-bid contract to help us get the job done."
What's that tab up to now? $1T? Maybe as much as $3T if you buy what Joseph Stiglitz says?
Colin Powell goes to the U.N. and says, "Saddam Hussein is a mortal threat. We don't have proof, but we have this artist's rendition of what it would look like if we did."
Paulson and Bernanke are doing the same thing right now, but they're holding up pictures of dustbowls and bread lines.
Don't get me wrong. The danger of a deflationary spiral is real. If you don't believe me, look at the data again. However, the Bernanke-Bush-Paulson plan doesn't even begin to address it. If you watched them in front of Congress this week, they can't even tell you how or why it's supposed to work. We're talking about the same game of, "Be afraid, now sign the check." It should be making everyone's skin crawl.
But we do have a real problem. How do we fix it? I'm glad you asked. Fortunately, history has provided us with an example of how we might solve this problem.
They key factor:
So, what's the take-away here? Two things:
1.) Forget saving the investment banks. Hank Paulson wants to save Goldman Sachs. Surprised? You shouldn't be. We don't need to save investment banks. We need to save the economy. Hopefully you can see that saving investment banks is anti-thetical to saving the economy. SEC exemptions for these five institutions allowed them to leverage up 30 and even 40 to 1. The continued existence of these banks in their recent form cannot be permitted. Besides, even if a capital infusion solves the liquidity problem, they are likely insolvent.
2.) The big picture is that we've allowed the basis of our entire economy to shift in the last half-century. Go back and look at the money supply graph again. The "service" economy has replaced the manufacturing economy while the M3 money supply has ballooned. This is not mere coincidence. I implore you to watch the Bill Moyers interview with John Bogle that I've linked above. I feel that Bogle does an excellent job of explaining the big picture of this shift. Hopefully then you'll understand why the fundamentals of our economy are not strong. Most importantly, a trillion dollars isn't going to fix it.
We don't live in an infinite world. This applies also to growth. This applies especially to exponential growth.
Apologies for being so long-winded here, but, as I said, I've been meaning to sink my teeth into this one for over a week now. Anyhow, good luck out there.
First, I wanted to start with a very basic description of where we find ourselves. Apologies to economists, as my intention here is to be very basic in the hopes that we can look beyond the $700B figure that has stolen steely gazes away from even the glowing visages of Alaskan beauty queens.
Now, let's talk money!
What is money? Your Econ 101 professor will likely tell you that it's an abstract concept which has evolved throughout history, etc. This is where you may be forced to view many slides, some of which may look like this.
Okay, we've all got some of it (at least hopefully we still do), but what is it? Your Econ 101 professor will likely also tell you that it is a store of value, a medium of exchange and a unit of account.
Your Econ 101 professor is starting to put me to sleep.
Seriously, though, let's not worry about the medium of exchange part right now. Let's think about value and account and the quantity theory of money.
For the purposes of this discussion, the quantity theory can be stated as MV=PQ, where M is the money supply, V is velocity, or how many times money is changing hands, P is the price level and Q is real value, but we can think of this as output. Again, I apologize to the economists in the audience, but I'm shooting for the big picture here.
Employing the magic of ceteris paribus, we're going to say that V and Q stay more or less constant. While this isn't strictly true, it will aid in this illustration. If V and Q don't really move much, hopefully we can see that an increase in M will lead to an increase in P. An increase in P, or the price level, is also commonly known as inflation.
Hopefully we all realize this relationship intuitively, or have at least been told that this is how it works. More money means that each unit of currency is worth less, which in turn means that it takes more of each unit to buy today what could have been purchased with less yesterday. Another way of saying this is that prices have gone up, ie inflation.
Okay, basic stuff. I know.
Where does money come from? Sure, some of it comes from a printing press, but that's not where most of it comes from. Physical currency only accounts for about 10% of the total money supply, which brings me to this totally sweet graph.
So that little green portion is the stuff with dead Presidents on it. As you can see, the percentage of physical currency, or what economists call M0, hasn't really changed much. What we need to look at is M3. This is how the money supply is expanded, not through the printing of money.
Fun fact: The Federal Reserve stopped tracking M3 in March of 2006. Notice how the M3 portion doesn't go all the way to the right? That's because they stopped giving us the data. Here's the money quote, pun intended:
M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years.Ben Bernanke assumed his role as Chairman of the Federal Reserve in February of 2006, so this decision came right afterward. How has M3 been growing since then? Here's an estimate.
Oh, shit.
People keep invoking the Great Depression. What they mean to say is that they're afraid of a deflationary spiral. So, what's that mean? Well, if inflation is an increase in the price level, then deflation is a decrease in the price level. If we can see that price goes up when the money supply increases, then hopefully we can see that price will go down as the money supply decreases.
The M3 money supply is collapsing.
Is your underwear still clean? Good.
How did this happen? Other people have detailed it, so I'll point you over here for a walk-through that I think is rather good. I can also highly recommend this Bill Moyers interview with John Bogle.
In a nutshell, it was assumed that housing prices would always go up. That being the case, lenders thought they could afford to deviate from best lending practices. In other words, they were willing to accept more risk than they ought to because they were betting that the properties would go up. At the same time, they were able to sell these loans on the financial markets, but packaged in complex securities bundles which were, in theory, designed to mitigate the riskier loans. Of course, this led to even riskier behavior because the lenders no longer had to worry about being exposed to the loan risk. It was all upside. Hell, these securities were even insured.
How reckless did the behavior get? Ever heard of a NINJA loan?
So lenders will lend to anyone, which creates a big housing boom. They basically increased the pool of eligible buyers by lowering the barrier of entry. So demand goes up. So supply races to meet the demand.
All of a sudden loans start going bad. The sub-prime meltdown begins. Here's a no brainer: People with no income, no job or assetts can't pay that adjustable rate mortgage when it kicks up to full speed after the 90 day introductory period.
Then the big shit-storm begins. Home prices drop. Why? Too many houses. Supply caught up and now our artificially expanded pool of buyers starts shrinking rapidly. See, one of the fundamental assumptions that these mortgage-backed tranches, CDOs, CDSs, etc., were based around was that even if home prices dropped in one town, they wouldn't drop everywhere at once. Oops.
Funny thing about mathematical models based on fundamental assumptions. They work only as long as the assumptions hold.
So now M3 is crashing back to Earth. Here comes Hank Paulson. He says, "We need, oh, I don't know... $700B. And we need it now. And don't ask us about why we need it exactly, where we came up with that figure or how we're going to pay it back."
Here's a little flashback for you: Dick Cheney, former CEO of Halliburton, says, "We've got to go to war. We're going to need, oh, I don't know... $100B or $200B. And I'm going to need to give my former company a closed-door, no-bid contract to help us get the job done."
What's that tab up to now? $1T? Maybe as much as $3T if you buy what Joseph Stiglitz says?
Colin Powell goes to the U.N. and says, "Saddam Hussein is a mortal threat. We don't have proof, but we have this artist's rendition of what it would look like if we did."
Paulson and Bernanke are doing the same thing right now, but they're holding up pictures of dustbowls and bread lines.
Don't get me wrong. The danger of a deflationary spiral is real. If you don't believe me, look at the data again. However, the Bernanke-Bush-Paulson plan doesn't even begin to address it. If you watched them in front of Congress this week, they can't even tell you how or why it's supposed to work. We're talking about the same game of, "Be afraid, now sign the check." It should be making everyone's skin crawl.
But we do have a real problem. How do we fix it? I'm glad you asked. Fortunately, history has provided us with an example of how we might solve this problem.
They key factor:
Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.Fortunately, it seems that Congress is getting this at least partly right, and we didn't need John McCain there to do it.
That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.
So, what's the take-away here? Two things:
1.) Forget saving the investment banks. Hank Paulson wants to save Goldman Sachs. Surprised? You shouldn't be. We don't need to save investment banks. We need to save the economy. Hopefully you can see that saving investment banks is anti-thetical to saving the economy. SEC exemptions for these five institutions allowed them to leverage up 30 and even 40 to 1. The continued existence of these banks in their recent form cannot be permitted. Besides, even if a capital infusion solves the liquidity problem, they are likely insolvent.
2.) The big picture is that we've allowed the basis of our entire economy to shift in the last half-century. Go back and look at the money supply graph again. The "service" economy has replaced the manufacturing economy while the M3 money supply has ballooned. This is not mere coincidence. I implore you to watch the Bill Moyers interview with John Bogle that I've linked above. I feel that Bogle does an excellent job of explaining the big picture of this shift. Hopefully then you'll understand why the fundamentals of our economy are not strong. Most importantly, a trillion dollars isn't going to fix it.
We don't live in an infinite world. This applies also to growth. This applies especially to exponential growth.
Apologies for being so long-winded here, but, as I said, I've been meaning to sink my teeth into this one for over a week now. Anyhow, good luck out there.
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Recommended DF.
You've successfully reminded me why I hated Econ 101. ;)
September 25, 2008 6:41 PM | Reply | Permalink
Hah! Sorry about that.
September 25, 2008 6:46 PM | Reply | Permalink
Seriously though, this is great. I'm still working on the links. Best one yet is the one on the total stupidity of crowds. Made the most sense to me of the things I've read yet.
September 25, 2008 7:23 PM | Reply | Permalink
Bless you, DF. This is what I asked for and more. I don't disagree with you about employing the Swedish model (or at least, I don't know enough to disagree with you), and I think that many agree that bailout needs more strings. Nonetheless, I do have some questions/challenges for you:
1) You say that the i-banks need to be shut down for the good of the economy, but you don't say why except to suggest that they received improper and ill-conceived exemptions. The problem, then, would seem to be the exemptions, not the companies.
2) The failure of the i-banks themselves, isn't the real problem. It's the ripple effects that will occur if they all fail in rapid succession. Won't such massive failures be likely create a stock market collapse and credit crisis?
September 25, 2008 6:55 PM | Reply | Permalink
The old investment banks are gone. The two remaining firms, Goldman Sachs and Morgan Stanley, have agreed to become traditional banks. The distinction between investment banks and traditional banks is precisely the exemptions. So, we're really saying the same thing. What I mean is that the institutions, as they were previously conceived, cannot continue to exist. In point of fact, the market would have seen them all erased already. This is why none of them still exist today as they were previously defined, whether they've folded or were bought up or agreed to change forms. From what I can tell, that the days of the investment bank are over is pretty universally understood at this point, whether or not anyone is saying it so explicitly.
But the problem is not simply the exemptions. The exemptions facilitated the model. The model was bad. It has now collapsed. The model was based on faulty assumptions. These assumptions, when understood even more abstractly, have pervaded out entire economic system.
As for two, the answer is yes. That's what's happening now. The banks already failed. There is already a credit crisis.
The question is what to do about it now, but it must be realized that this problem goes far deeper than propping up a couple of firms of Wall Street.
September 25, 2008 7:15 PM | Reply | Permalink
Better language might have been to say that the existence of these banks cannot be further facilitated.
September 25, 2008 7:33 PM | Reply | Permalink
The question isn't really the future of i-banking though; it's who's getting bailed out and whether/why it's important to do so. Can Goldman and Morgan Stanley survive, even in an altered form, without a bailout? Buffet bet big on a Goldman bailout, a benefit that has already been realized by even the promise of a bailout. What would he do if it started to look like the bailout wouldn't materialize? What other banks is the bailout designed to protect, and why do so many economists feel that they need to be protected?
September 25, 2008 7:46 PM | Reply | Permalink
There are 6,000 or so small banks in America. This is who they're concerned about. That's where they don't want the "ripple" to go.
September 25, 2008 7:59 PM | Reply | Permalink
So which of the following do you believe and why?
1) Those banks don't need a bailout; most of them will be fine.
2) A bailout won't help those banks; they're fucked no matter what.
3) The failure of those banks won't have a big impact on the economy.
4) A bailout will help some of those banks to survive, which is important for the health of the economy, so we need to bail them out (albeit not without strings).
5) Genghis is an ass.
6) TPM will never ever fix its damn bugs
September 25, 2008 8:06 PM | Reply | Permalink
It isn't a question of bailing out or not bailing institutions. The system is full of bad paper which has to clear no matter what. It will clear no matter what the Federal government does at this point.
So I'd say #4 (and #6). I'm not saying no action should be taken, but re-capitalizing investment banks has nothing to do with fixing the problem.
Give the Swedish plan some consideration. It's not a matter of bail-outs. It's a matter of the lender of last resort taking ownership.
September 25, 2008 8:56 PM | Reply | Permalink
Long ago, you cursed me for being too reasonable. Back at you, you bastard. You and your damn Swedes. This is not the argument that I was hoping for.
September 25, 2008 9:05 PM | Reply | Permalink
No one expects the Swedish proposition! Our chief weapon is reasonableness. Reasonableness and sobriety! And a ruthless efficiency. A ruthless efficiency and an almost fanatical devotion to the facts!
Sorry to disappoint! :)
September 25, 2008 9:20 PM | Reply | Permalink
LOL. And I don't use that acronym lightly.
September 25, 2008 9:42 PM | Reply | Permalink
And it seems that plenty of economists agree.
September 25, 2008 9:12 PM | Reply | Permalink
Don't expect a list of signatures to sway much. Here is a list that wasn't even able to move Obama to deal with certain issues in the primary season, or even before he and McCain had their faith debate.
http://www.sciencedebate2008.com/www/index.php?id=7
September 25, 2008 9:29 PM | Reply | Permalink
Look at the very fine print of Buffett's "investment" in Goldman Sachs - it's an option to buy, he doesn't need to actually buy anything that doesn't smell right. He's just morphed into an "endorser" here, to give us all nervous concerned trolls the spine to jump in with our money.
September 26, 2008 1:16 AM | Reply | Permalink
I skimmed this whole article twice looking for the Swedish Model.
Did she have something to do with the waxing?
September 26, 2008 10:47 AM | Reply | Permalink
Great Stuff. Coincidentally, a friend sent me the Sweden pound of flesh article today, as well as one by Ted Rall that I posted and am waiting (patiently, though not hopefully) to see appear.
Maybe I'll just put a link here:
BUSH, CONGRESS PARTY LIKE IT'S 1929
09/25/2008
http://www.uexpress.com/tedrall/
Regarding your comment about Mike Ruppert in another thread, I notice that A - a lot of Peak Oilers tend to embrace other conspiracies, and B - a lot of Peak Oil sites advertise buying gold, hence I am careful in how much I swallow.
September 25, 2008 7:15 PM | Reply | Permalink
Thank you for a serious treatment of the issue. Highly rec'd.
But I clicked on all the links and couldn't see the Swedish models. Damn.
September 25, 2008 7:23 PM | Reply | Permalink
I think he said *financial* models, Articleman...
September 26, 2008 2:11 AM | Reply | Permalink
Thank you for the work you did for us. Is this what economists are supposed to do? The role I see them play, through my limited exposure, is being speculative gamblers rather than "scientists" or reporters. Is this the state of the profession or just a current perversion?
It seems that a lot of people are saying that there needs to be a top-to-bottom overhaul of our economy - a repositioning. In reality, I would never expect this. Starting with some sort of economic bill of rights or financial manifest, is it reasonable to expect to see a substantial change in policy following theories rather than the manipulation of theories. Are there economists and political scientists with the ability to do this?
September 25, 2008 8:14 PM | Reply | Permalink
Re-reading this, I can see that I left out an explanation of M3. It's essentially long-term CDs in excess of $100,000 and money market mutual funds. I hope that this could at least be inferred from what I wrote.
September 25, 2008 9:02 PM | Reply | Permalink
Aha! Thanks for clarifying. All the graphs and stuff made sense, but only in a very abstract way without that info.
Loved reading through this, btw.
September 26, 2008 2:13 AM | Reply | Permalink
A comment that I posted on a thread that fell off the rec'ed list just after I posted. It's relevant, so I will repost/expand here.
Much of the "theory" proposed deals with assumptions that need to be challenged. I don't know how many people who read/post here are actually involved in a small business (and no, freelance writing, boutique software companies, etc. aren't what I mean by small business). But much of what I see here (and in the MSM) don't deal with the realities of those "small businesses" we keep hearing about.
I have started a small business. It actually produces things that are critical for improving life. I don't make iPods or other hand gadgets. I make things that get involved in the "not sexy" stuff. Like food production. Just for an example.
Let me tell you about investments, venture capitalist, etc.
Most VCs are scared to death. They are scared about being found out. Many of even the biggies made a single investment that paid off handsomely -- and then people believe they have the magic touch. Bob Metcalf is one such glowing example. But there are plenty of others on Sand Hill road and elsewhere.
As a friend of mine once said: VCs can sound intelligent on every topic in the world, except the one you have expertise in.
If you approached these people with a new way to save 1 penny on the manufacturing of a fork, they would pass you by. But try to sell them a time-machine: well, if your pitch is good, you can start backing up the Brinks truck. High risk, high gain! Why bother putting together singles when you can hit a home run!
Today, long before the current crisis there was a serious gap in investments: Angel (read private) investors are generally less than $500K. And VCs? Don't bother talking to them unless you are asking for $10M.
That's a pretty big gap. This bailout isn't going to fill it. Most VC's want a 10-15X return on investment in 3 years.
You know what? So do I!
And people in Hell want ice water.
This is the "investor climate" we live in.
Investment bankers make loan sharks look like soft teddy bears. They are piranhas with the implicit notion that if you want access to their money, you will be an indentured servant to them. If you are successful, you might be allowed to join the club.
I know. I've been told. That "food production isn't sexy" comment came from an investment banker.
A big one. One that could probably buy and sell everyone who reads this comment.
All of these VCs and investor bankers are the ones hurting right now. They should be treated in kind. There were a lot of hoops to jump through to get at their money. It requires a careful looking over of your books. It requires having answers to questions that if you really knew the answer, you wouldn't need their money. It requires having the equivalent of Tony Soprano as your silent partner. Your board could be filled by their pals. Sometimes they help, sometimes not. But they have the money, you have to play by their rules.
What's the problem with treating them in kind? I would like to see their books. After all, the government is giving them my money.
As I have been told by countless people in finance
Yes, there are many ways. And now these "cowboys of capitalism" can survive like the rest of us.
For what it's worth, money wasn't flowing around for investments in the past several years. This myth of "investing in America" is just that. The money in many of these houses is being invested in *Chinese* businesses. And in software. Lots and lots of software. Because of low overhead capital costs.
Valuable things. You know, like social networks. Things where there is no real business model on how to make money. It's all based on a kind of circle-jerk trust.
Meanwhile, actual products for non-sexy stuff, being sold, isn't as intriguing.
And, by the way, I've created jobs. And been told by these same VCs to expect to scrap these jobs if they were to invest because they wanted to see them go to India and China.
Now is that investing in your country?
The arguments you are hearing now, about how we just must save our banks by throwing money at them, don't wash with the reality that most any entrepreneur will be able to talk about.
Getting investment money was never easy and VCs and investment bankers weren't part of some grand patriotic scheme.
This is business. Markets correct. To paraphrase a line from THE PLAYER, I say to my financial sector friends:
September 25, 2008 9:19 PM | Reply | Permalink
So do you think a proposal like the Swedish example would address your concerns? If the economic effects of the crisis is the potential loss of credit, than that is what we need to make sure is available. That's what I have come to think is the only responsibility the Fed (us) has in protecting.
The Swedish plan looks like a good model to work from. Only after the banking institutions clean house can they come and ask for help. The Fed acted as an investor instead of just an insurer. Do you think this would help you as someone looking for credit as a business owner?
September 25, 2008 10:56 PM | Reply | Permalink
I wasn't aware of the Swedish plan until DF posted. I like it on general principle -- it's about accountability. However, since I'm addressing the issues of investment and not credit, not sure it's directly applicable here.
September 26, 2008 10:51 AM | Reply | Permalink
Isn't investment the same as credit? I understand the differences in the environment and expectations. I guess I shouldn't interchange them. What would be the complications if these Federal stimuli were, along with promises of accountability, etc., earmarked to certain types of investments with state side economic considerations? The Fed could say, "Look, we'll clean up some of your books only if you put these investment programs on your books." You get a cookie only if you give a cookie to economic beneficial areas.
September 27, 2008 1:15 AM | Reply | Permalink
I have a lot of respect for you CT. Being a small business owner in these times are very very difficult indeed. This line especially:
In a fair and just world...
I have a pretty good joke that exemplifies your "treating them in kind" theme.
There are two statues in a park, a male and female. A fairy appears and states "You have been such good statues that I will give you life for 1/2 hour." *POOF*
The male and female statue rush into each others arms and hurriedly take off into the nearby bushes. Unmistakable giggles and rustling ensue. When finished, they emerge from the bushes prompting the fairy to state "You still have 15 minutes".
The male grins at the female.
She smiles, gestures toward the bushes, giggles and then says
"Ok...but this time you hold down the pigeon and I'll shit on his head."
September 26, 2008 12:23 AM | Reply | Permalink
I have posted more than once today that I advise the appointment of co-signers for the purchases and sales of assets that Paulson would be authorized to make. I heard this proposed yesterday in the house finance committee and it doesn't make it foolproof but it at least gives some immediate oversight of each purchase or sale to attempt to keep things transparent and fair.
As it is clear that congress is going to try to pass some form of bail out... I would encourage everyone to demand co-signers. I suggest that one democratic and one republican senator be appointed as co-signers. The senators should be part of the oversight/review board that has been suggested. That board should also have the authority to suspend the program if they determine it is not working or is being abused in any way to send the issues back to congress to be resolved.
Great post! Thanks!
September 25, 2008 10:32 PM | Reply | Permalink
DF -
Great post. Addresses a lot of the fundamentals.
"We need, oh, I don't know... $700B. And we need it now. And don't ask us about why we need it exactly, where we came up with that figure or how we're going to pay it back."
Someone else here on TPM (Donal?) posted that this is ~2.8 million homes in foreclosure at an average price of $250K each.
You are also correct that the bailout keeps the small banks from collapsing also - they need to have a partner to balance payments with, and if those big banks fail, only the Fed is left.
Speaking as a former small banker, we were the ones saying "no" when everyone else was saying "yes" to every loan. Our management felt we not only had a duty to the community, but we'd already seen the results of the S&L crisis. Not kidding. It was tough to lose customers over a quarter or half point difference in rate, or to lose customers because we would not lend above 90% LTV. Even to "golden" customers. I think my former bank, and banks like it deserve to remain in business.
But there is one more thing this bailout does - it will hopefully help the commercial paper market, because banks are not the only institutions that need to borrow short-term - and the spreads in that market are huge right now:
http://www.federalreserve.gov/releases/cp/
Look at the CP issued by non-financial companies and how it is rising. Microsoft just started a CP program. It's not the end of the world when the investment banks fail - other lenders step in!
September 25, 2008 11:02 PM | Reply | Permalink
This site appears to be eating comments wholesale instead of just giving errors now, so I don't know if you'll see this.
That figure jives if you're just talking about paying those mortgages off 1 to 1, but we're talking about mortgage backed securities that were leveraged as much as 40 to 1.
The other reason I say that the figure appears to be at least somewhat arbitrary is because the Department of the Treasury has apparently said so:
September 26, 2008 12:11 AM | Reply | Permalink
I think the entire United States of America has lost its mind. Seriously. Guys, the crisis is UPON you. Not COMING. It's HERE. And people are still arguing - no, shouting - NO BAILOUT... Arguing about how the bad peoples in the investment banks should get whupped, even if it means taking millions out of their homes. complete absence of trust, in ANYBODY, even in the leading Dems & OBAMA....
Washington Mutual just went under. Biggest bank ever. In the world. Donno if anyone's even gonna notice tomorrow. Lehman who? $700 billion in assets - wasn't that the biggest bankruptcy ever? 10 times bigger than Enron? Fannie & Freddie? $5 trillion in mortgages? AIG? Biggest insurance company ever. All 5 investment banks - gone. All money market funds, had to be backed by the government. T-Bills offered at 0%. ZERO percent. Dow crashing. Housing prices today? Off cliff. Unemployment up. But we're not convinced yet, eh?
You're in nutbar city folks. And yes, I mean the grassroots Dems right alongside the freaks in the House Republicans. The plane is screaming towards the Earth, honest to God, flames coming off both wings, and we see BOTH the Hard Right Morons of the Republicans obstructing things, but also the grassroots Democrats. Collective madness. A nation undergoing a complete mental breakdown. Hey... there's no crisis... we don't need no steenking plan... why not let these "businesses" fail... in fact, let 'em ALL fail, we're pretty much in a Depression already, aren't we?
Try this. The US trade balance is - $700 billion each year. Big number. In fact, it's the same size of that HUUUUUUGE bail-out plan that every American is so whooped up about, right? The one which will get paid off over 10-20 years. The one we're all self-righteous about. How DARE anyone make the TAXPAYER pay for the MISTAKES of those few IRRESPONSIBLE people! And yet.... the same people shouting somehow think (if they think about it at all) that the world owes them free oil, cheap clothes, big screen tv's. Because kids, the WORLD has been paying for the Wars, your health care, the oil, the cars, the food, the electronics, the cellphones, tax breaks, whatever, to the tune of $700 billion a year. So here's your test question - What do they GET for their money? You know, for the trillions of dollars of shit Americans consumed, and "paid for" in pretty colored money. Which these other folks can use to buy WHAT? Come on, there's your question. Maybe they should buy T-Bills, at 0%-3% interest rates in a nation with inflation at 4%-14%, a currency on edge, and the ratings agency ready to write down the US? How about MORTGAGES? Well, them foreigners bought a few million of them houses, provided the debt for those families to build (and bankers to get rich) - but oops, that's gone. Help me people, what're they gonna buy now? Missiles? Cars? Software? Bottled water? Old American Gladiator episodes? Now, think of WHO owns those dollars? China. Russia. The Middle East. Feelin' a lot of love there? Not even a leeeeeetle bit worried?
Is there anyone remaining in the US that gets that if OTHER COUNTRIES do not buy stuff, and have confidence that it will maintain its value - and not meltdown within hours - then the US dollar collapses, Wall St crashes, Banks crash, Businesses crash, Unemployment soars... and the only solution is to jam interest rates through the roof. Remember Sweden? 500%. Please God, tell me SOMEONE noticed that. And how're those higher interest rates gonna do, in terms of helping that mortgage crisis? Does no one see ANY serious threat from THAT? Guess not. Guess it's more fun to chant No way, No How, No Bailout. Argue about the timing of debates. And the politicians posing. You know what? McCain? I don't want to hear that coward's name again. Ever. Hero? O this, something that will cost more real lives than any bullshit he's been through before... he showed himself. And John McCain's a god-damn coward. Country first? This was one of the most egotistical moves I've ever seen. I'm serious. You want hang investment bankers? Sorry. If this thing slips, you'll spit on John McCain's grave.
Nope. This is all about a country losing its grip. It's about anger, rage, at each other. Trust? National good? Yaaaaaa. Pull another. Outside Barack Obama - who has impressed the absolute hell out of me during this - I'd swear there's 300 million people who've lost it. It's reached the point where the hurricane's hitting your shores, there's no bloody levees, and everyone's arguing about the placement of the sandbags. EVEN HERE.
Guess New Orleans was too long ago to remember.
September 25, 2008 11:27 PM | Reply | Permalink
Right quinn, and if we all get SCARED!!! and HYSTERICAL!!! it will help, how exactly?
Look, you're quite right that this has already happened. The west coast of Florida must be a fairly depressed area, as are many others. We're not all going to throw up our hands and say "We're doomed! Oh my!
We're going to make sure the motherfuckers that should have known better don't profit one dime from this, and do it right. That takes level headedness and calm. Not hairshirts and heartfelt mea culpas.
But hey, thanks for your concern. Last I looked, Canada's economy looked to be just fine. As they are OUR largest trading partner, I'd think it behooves you to remain calm, too.
The Republicans are trying to spread fear and unrest in order to win an election. Regardless of their shameless politicking, Americans can and will get through this. We've been through worse and come out fine, you know why? Character. We've got plenty, and even though we've been trashed for the idiot leaders that have manipulated a hardworking population to exhaustion, we STILL have it.
Don't fucking foget it. Asshat Canuck.
September 25, 2008 11:51 PM | Reply | Permalink
Reply: Below at 1:24.
September 26, 2008 1:52 AM | Reply | Permalink
This reminds me of all your salt-of-the-earth, toughest-row-to-hoe bromides. Spare me, chicken.
I'm going to paraphrase Bill Hicks and clue you into something. Americans aren't special. You aren't hard-working just because you're American. You don't have character just because you're American. There are plenty of Americans that are smart, hard-working and full of character. There are plenty that are dumb as dirt, lazy and irresponsible. You can thank them for helping us into this mess.
You have character if you show character, not because you were born over a particular patch of dirt.
Those idiot leaders that we have were elected. Twice. Who did that? Your fellow Americans.
It all reminds me of when people say, "That's un-American." That's one of the stupidest things I've ever heard. You ever heard of someone saying, "That's un-French." No. It doesn't mean anything. It's nonsense.
There are a lot of great things about America, but there's a lot that's pretty damned screwed up, too. Your apple pie story about hard-working characters with true grit just doesn't hold water. It's peeling like cheap paint.
September 26, 2008 2:03 AM | Reply | Permalink
See that's the difference between you an me. I do think America and Americans are special. We're the ones that show up when others are in trouble. Not just with our mouths, but with our money and our very REAL support. We're the ones that have that little thing called the Constitution. We're the ones that everyone hates because we work harder for less and expect less thanks than anyone.
I think my fellow folks in the American great unwashed mob are pretty special and I empathize and feel for their sacrifices. Are some of us assholes, sure. Apparently some Canadians are asshats. Go figure.
You let me know when one of us says the whole of Canada collectively has lost their minds.
I doubt you'd ever hear such ugly hyperbole from an American, and for the record, my family emigrated from Canada. My uncles and aunts and cousins back there would no doubt slap ol quinn upside the head, too. They ain't too fond of American arrogance but they do recognize our generosity, and our boundless capacity to turn sows ears into silk purses.
The last thing this country needs right now is for everyone to rush to the banks and haul out their savings.
Whereas you are helping the situation, by giving everyone a realistic look at the situation, the hysterical doomsayer ain't.
That's about all I got to say.
September 26, 2008 4:15 AM | Reply | Permalink
You've got to be kidding me!
September 26, 2008 9:05 AM | Reply | Permalink
That's right loki. "you've got to be kidding me line" pretty much says it all. Here is another "you've got to be kidding me":
I think there are kids working in offshore sweatshops (think Wal-mart suppliers) that would disagree with you.
And I can also say that those non citizens that cut our lawns, pick our fruit and clean our hotel rooms have us beat out in the "working harder for less department".
September 26, 2008 10:19 AM | Reply | Permalink
Pretty funny, bwakfat. You keep saying anyone who thinks there's a crisis is shouting panic & being hysterical. When I say "mental breakdown," you gloss over the list of responses I'm describing, like "people who say there's no crisis... or we don't need no stinking plan... or let the banks fail because they're just like any business... or so what if we have another Depression." To point out that these are a peculiar & dangerous set of responses is, to you, equal to "panic" and "hysteria." I disagree.
My view? "Yes, there's a crisis. Yes, we need a plan. Speed is of the essence in crises. When banks fall they do not fall like other businesses. And above all, we do not want a Depression." That position puts me firmly in the Obama-Dodd-Krugman camp. After reading many posts here, I found a LOT of people arguing for the list of not-so-helpful positions. I'd say these positions show denial, bitterness, or sometimes just ignorance.
Your further responses are, frankly, a load of old crap. That little riff about what Americans are, for instance. I'm sure it feels good to say it. But it's factually and actually, just crap. Americans are the ones who show up, with money and real support? Ever looked at a table of world aid giving? The US is 22nd or so. Read the history of the World War II? There's a little timing issue there. Americans work harder for less? That one just utterly baffles me. And Americans not prone to use ugly hyperbole? Wow. Here's the thing bwakfat. I love lots and lots of Americans - individually, by face & name. Am really proud of its overall history, its inventiveness, its drive. And I pray like hell that - politically, culturally, as a nation - it comes to its senses and becomes the kind of force in the world that we all want it to be. But there has to be a distinction between what we want it to be, and what it actually is, and then... about what its people can be, what they're capable of, at their best. It's the fact that those 3 are so far apart that has made Obama possible.
You're wrong to mistake what I'm saying. Somebody once said, "Ahhhhmerica... We sent you love letters. But you thought they were bills, and left them, unopened. We sang in the back. While you stood up front and shouted for another drink." Love letters, not bills, bwakfat.
September 26, 2008 12:09 PM | Reply | Permalink
but first
Also, Freedom Fries.
Anyhow, enjoy your jingo.
September 26, 2008 2:36 PM | Reply | Permalink
Bwatfat, It's not just Americans, all over the world, smaller banks, pension funds, even whole towns lost their shirts in this subprime mess.
Here is one such town in Norway, they're bankrupt:
http://www.nytimes.com/2007/12/02/world/europe/02norway.html?pagewanted=print
Norway’s unlucky towns are the latest victims — and perhaps the least likely ones so far — of the credit crisis that began last summer in the American subprime mortgage market and has spread to the farthest reaches of the world, causing untold losses and sowing fears about the global economy.
Where all the bad debt ended up remains something of a mystery, but to those hit by the collateral damage, it hardly matters.
Tiny specks on the map, these Norwegian towns are links in a chain of misery that stretches from insolvent homeowners in California to the state treasury of Maine, and from regional banks in Germany to the mightiest names on Wall Street. Citigroup, among the hardest hit, created the investments bought by the towns through a Norwegian broker.
September 26, 2008 10:11 AM | Reply | Permalink
Whoa, watch where you're pointing that thing!
September 26, 2008 1:55 AM | Reply | Permalink
Yeah, fair enough, DF. Pls see response to Dimitry at 2:25 am. The same problems exist worldwide (just in varying degrees), but I just wanted to word it the way I actually think of it - as "we all" participated in this, and I think we need to grip that. I DO feel like there's a real problem with "denial" though, and shared ownership of this - and sooner or later, we need to not just agree that the monsters at the top, and the conmen, are scum.
September 26, 2008 2:29 AM | Reply | Permalink
Sure. I don't disagree with you. I just couldn't tell whether you were leveling your discourse at me or at the general audience. I didn't think I was saying that we had nothing to worry about. Seriously, though, I appreciate the commentary.
September 26, 2008 2:45 AM | Reply | Permalink
Quit apologizing for your prudent fear-mongering. I think you're doing a good job and I think it's necessary.
You know what I've been thinking, the problem really is Bush and the cry wolf thing. If Bush agrees, it must not be true or a huge exaggeration at the very least.
There's also the problem of Americans wishing seriously to go back to isolationism because of what Bush did.
When you come to the economy, though, we can't wish ourselves into isolationism, i.e., have our own little purgative depression, as we drag the whole world down with us. I think it's actually imperialist selfishness in a way to think that way.
You know what I really don't get along those lines? People who are junkies of the globally interactive internet expressing a strong desire to go back to local economies. It's all so "state's rights," so old school Republican, so parochial, so anti-cosmoplitan.
September 26, 2008 2:16 PM | Reply | Permalink
Krugman would seem to agree with you on his blog today: "So what we now have is non-functional government in the face of a major crisis, because Congress includes a quorum of crazies and nobody trusts the White House an inch. As a friend said last night, we’ve become a banana republic with nukes."
The continuing presence of Bush/Cheney, after all they've done, is just making things remarkably worse. Nobody trusts them - I certainly don't. Imagine if either McCain or Obama were in charge. At least the battle-lines would be much much clearer. Right now, it's "shouting matches" and "chaos" in the White House, as the NYT says.
September 26, 2008 2:25 PM | Reply | Permalink
Congress includes a quorum of crazies and nobody trusts the White House an inch. As a friend said last night, we’ve become a banana republic with nukes."
I'd be willing to bet Oliver Stone has the script for a new movie already started, using the headline story of today's NYT:
September 26, 2008 5:00 PM | Reply | Permalink
You know why we're arguing about where to put the sandbags, right, quinn? It's 'cause we don't actually have any control over whether to throw down sand bags at all. And, in this context, I don't think most of us even know what's in the sandbags, much less where the hell the hurricane's coming from. I sure don't, anyway. So the best I can do is sit tight and feel a little validated when some expert or another confirms that, "no, John McCain, it's not going help at all if we pile sand bags on TOP of the church steeple."
So where was I going with all that? Oh yeah. I have a confession to make. Somewhere in the dark, idyllic, idealistic recesses of brain, there's a part of me -- a part that I don't normally let out in polite company -- that's actually rooting for total economic collapse. Why? Because I'm seriously sick of a great deal of our modern culture. I'm sick of conspicuous consumption and product cycles that rely on planned obsolescence. I'm sick of so strong, forthright, and individual that we don't know how to help each other out anymore, much less how to ask our friends for support. If the shit really hit the fan, and then spattered all over everything, and then kept coming, we'd at least learn what it means to be human again. We'd learn how to understand community. We'd be able to slough off some of the stupider aspects of pop culture and replace 'em with the urgent business of daily survival.
I'm not saying -- well, the part of me that lives in the real world and prefers rational thought to romanticism isn't saying -- that I actually want any of that to happen. What I am saying is that there's very little we, the common folk, can do right now except brace for impact and try to understand what the storm destroyed after it clears. And, if we're smart, lucky, or maybe both, we just might be able to figure out a way to draw some useful from this whole mess of a situation.
September 26, 2008 3:41 AM | Reply | Permalink
Hey CalPaige. What you wrote, especially the part starting from "actually rooting for total economic collapse" should be a post. That thing you 'fessed up to there is very widespread, deep & quite strange cultural/psychological thing. But it's not written about very much. When drinking or camping with friends, this stuff often comes out - whether they're green, left, liberal, apathetic or conservative. And those levels of how we think & feel about this economy - and world - actually help drive what happens in the real world. In situations like this, there are a dozen forces at work within people - panic, denial, selfishness, aggression, reversion, you name it. But that bit that longs for this consumer nightmare we've created to be wiped away, that's a big one, you can see it across the boards here, and it's worth talking about I'd say. Cheers.
September 26, 2008 11:08 AM | Reply | Permalink
Thanks, quinn! But if I turned this into a post I'd feel obligated to... I dunno... proofread it, and stuff. :-)
September 26, 2008 1:04 PM | Reply | Permalink
I have a confession to make. Somewhere in the dark, idyllic, idealistic recesses of brain, there's a part of me -- a part that I don't normally let out in polite company -- that's actually rooting for total economic collapse. Why? Because I'm seriously sick of a great deal of our modern culture.
Nothing wrong with having and expressing the thoughts, but a serious reminder to you that Osama bin Laden feels the same way. Only it's not just a part of him, he's 100% sure, that was part of the plan. And he wasn't just seriously sick of it, but actively hated it.
Extreme change gets you extreme counter-reactions that you can't control. Keep in mind what the 1930's Depression did to Germany. And that the once glorious Russian revolution ended up with Stalin.
Patience, Paige, don't let that part of you hope for a depression, hope for incremental change.
I've seen incredible change in my lifetime as to those things bothering you, and my parents have seen incredibly more. Baby steps, not cataclysms, is what works, evolution, not revolution.
Planned obsolescence, for just one micro-example. When I was young, it seemed cars were being made to last only like 5 years or 100,00 miles. Then Nader started his jihad, Japan started taking the market, people stopped buying American cars, and low and behold, we now have cars that often last 20 years. So recently we have it coming back right now, try to see it as just a cycle that would correct, and correct with a recession or other economic downturns, not a depression.
The culture changes, reactions and counter-reactions, constantly, too slow to see day to day, but it is always happening. From a boomer perspective, you can't imagine how much the "greatest generation" has changed culturally, they made an incredible switch from a generational war. They adjusted, grew, adopted to several new cultures, really changed an incredible amount, a single generation. (Did you notice, a black man now has a strong chance of being the next president? No revolution necessary.)
September 26, 2008 1:59 PM | Reply | Permalink
Somewhat irrelevant tangent: A good friend of mine has a 1961 Chevrolet Impala with the original 289 and 2-speed PowerGlide transmission. And the original paint. The car will be 50 years old soon and it still runs sweet. I'm just sayin'.
September 26, 2008 2:42 PM | Reply | Permalink
A few thoughts.
Washington Mutual was just taken over by FDIC. I have to figure out where to send my mortgage check.
Retail US banks have been sucking an average of $200 billion a day from the FED all last week, in order to cover their depositors' massive and continued withdrawals. This is being repeated accross Asia.
It would seem that whatever "plan" we can devise right now, it would be too little, too late.
I would advise that a little cash on hand would be prudent.
September 26, 2008 12:18 AM | Reply | Permalink
That would apparently be JP Morgan Chase.
September 26, 2008 12:46 AM | Reply | Permalink
Dimitry -
Please read the Fed's release - it's $200B for the whole week, not daily. This is not unprecedented - it happened after 9/11 as well due to disruptions in communications between banks. Banks are not doing this to cover massive cash withdrawals.
Banks do this because it is cheaper for them to balance their payments using the Fed rather than with other correspondent banks. Make no mistake, however, this is not sustainable.
September 26, 2008 12:41 AM | Reply | Permalink
Here is what Reuters reports:
-------------------------------------------------
Fed keeps banks afloat as money market crisis deepens
Thu Sep 25, 2008 6:13pm EDT Email | Print | By John Parry and Jamie McGeeever
NEW YORK/LONDON (Reuters) - U.S. banks and money managers borrowed a record amount from the Federal Reserve in the latest week, nearly $188 billion a day on average, showing the central bank went to extremes to keep the banking system afloat amid the biggest financial crisis since the Great Depression.
The data on borrowing from the Fed closed out another day of high anxiety in global money markets. Key measures of funding stress hit record levels on both sides of the Atlantic as nervous market participants awaited developments from Washington on a $700 billion U.S. financial bailout plan.
Federal Reserve data showed on Thursday the total amount banks borrowed nearly quadrupled the previous record of $47.97 billion per day notched just the week before.
...
--------------------------------------------------
http://www.reuters.com/article/ousiv/idUSTRE48O9B920080925
--------------------------------------------------
September 26, 2008 1:04 AM | Reply | Permalink
Shoot, I wrote you a great response that also proposed a truce with Genghis. The system ate it.
Summary: Df is brilliant. I am right that the debased dollar causes inflation. Genghis is right that something must be done. But it ain't right unless we taxpayers get stock in rescued firms. We don't need the Swedish model. The US did it when it bailed out the S&Ls and the equity we got turned the whole thing profitable.
September 26, 2008 12:45 AM | Reply | Permalink
Yeah, I've had a number of responses that got eaten as well.
September 26, 2008 12:48 AM | Reply | Permalink
Also, there's some indication that the way the S&L crisis was handled may have contributed to the moral hazard that has brought us where we are now. See here.
The potential advantage of the Swedish model is that the individual firms have to take their own bite of the shit sandwich. They were able to bring their economy back without rewarding those who behaved most irresponsibly.
No one can know for sure that this is the right prescription for our economy at the present time, but the model is much closer to our current crisis than the S&L crisis.
September 26, 2008 12:56 AM | Reply | Permalink
Great link, DF. I posted the same one ;-) on Destor's blog early yesterday:
http://tpmcafe.talkingpointsmemo.com/talk/2008/09/wait-why-are-people-in-debt.php#comment-3129941
Great minds and all.
September 26, 2008 10:53 AM | Reply | Permalink
DF -
If I'm understanding you correctly, you're saying those mortgages were leveraged at 40:1 - i.e the lenders who issued them borrowed their money from someone else, who borrowed from someone else, etc. (Flavius described this previously). Or default swaps that were similarly leveraged.
The mortgages are the underlying asset, so if you cauterize that artery, you stop the bleed out, if I'm understanding the basic bailout premise.
But: "we just wanted to choose a really large number."
Do you have a link? That is a staggering quote. I can't believe congress would buy that - wouldn't you want some data to back it up? I sure would.
September 26, 2008 12:55 AM | Reply | Permalink
The link appears to me in the comment that I left above. Is it not showing up for you? Anyhow, I'll put it here.
At any rate, it stands to reason that if the mortgage backs the security and the mortgage is good, then the security is good. The way they appear to be talking about it though makes it sound like they're looking at it from above and can't see where the bad paper is. This is truly the case in that it's a big mess. You have tranches with bad mortgages mixed in with good and there's no confidence. The Paulson plan appears to be to re-capitalize the remaining firms, but it doesn't seem like it's clear to what end. It seems like a no-plan plan. I don't know how you do this if you don't do it from the bottom up, but I'm no financial expert.
September 26, 2008 1:08 AM | Reply | Permalink
Apparently so.
I actually liked WaMu as a lender.
September 26, 2008 1:06 AM | Reply | Permalink
DF
Assuming M3 has meaningful significance, I don't understand what shadowstats' graph is showing us.
From August 2007 to early March 2008 M3's growth Y-O-Y accelerated which can be explained by corporations drawing their LOCs down before the window closed and parking the cash in institutional money market funds.
But growth of M3 is still historically high -- about where it was before last summers' "crisis."
How is it deflationary, currently?
September 26, 2008 1:19 AM | Reply | Permalink
Stupid software keeps eating my comment. I've written it three times now, so this is going to sound terse.
I don't know how he's calculating it exactly. I gather that a number of people are doing this and most seem to be using a memorandum tagged onto the Fed's data as a launching point. I can't see his data without paying for it.
I don't know that it's deflationary currently, but this would be the danger that people are referring to when they raise the specter of the Great Depression. I'm not really comfortable with this comparison, but it seems to be getting thrown around a lot.
It seems to me that stagflation should be a bigger concern than deflation or even a deflationary spiral. I'd be very curious to know your thoughts on the status quo. Is the Fed right in saying that M3 isn't even a useful metric?
September 26, 2008 1:53 AM | Reply | Permalink
I'm just not sophisticated enough to gauge how we could use M3, currently.
It's all tied up in your definition "money," and I'm not sure you've gone as far as you might in defining just what constitutes "money"* (I know; you're not writing a textbook).
Quaere: A house is valued at $200K; I borrow $300K from a hedge fund which borrowed $290K from somewhere else (30-1 gearing). I pay $300K for the house.
Did the money supply just go up $100K?
* Greenspan once admitted he didn't know what it is.
September 26, 2008 2:28 AM | Reply | Permalink
Ellen, your example is actually "credit" or more accurately, "debt". As "credit" money on paper, it goes on to do what money does, pushes up prices, buys stuff, stimulates the economy. However, as a collapsed "debt", it becomes deflationary, sucking up liquidity, deflating prices, etc. Debt is usually bad news, unless it takes on the form of "investment" with healthy returns, it becomes capital. Right now, the economy is riddled with collpasing debt and little investment - the most likely scenario is deflationary but hyper-inflationary for basic necessities for which demand is not elastic.
September 26, 2008 2:49 AM | Reply | Permalink
I don't know. It seems to be generally agreed upon that expanding the money supply is inflationary and that this does not happen via printing money. So, is expansion of M3 inflationary? If it's not, then the Fed would seem to be correct in at least one sense. Then again, what's the difference between the "extra" $100K in your scenario and $100K in a CD? It's not like it's cash in a vault. Maybe it went up $10K when you borrowed the $300K. Is a dollar a dollar? It seems to be generally accepted that the Fed (as well as banks in general) expands the money supply via credit. If that's the case, why is it any different at other levels? I don't claim to know the answer.
September 26, 2008 2:59 AM | Reply | Permalink
No, your example isn't "money" in that it isn't a unit of exchange holding or backed by wealth. It is a derivative. Real money is savings, or currency backed by what most would agree constitute wealth, eg. savings, oil, gold.
"Real" money will not cause rampant inflation or deflation as they are anchored to wealth and function as a medium of exchange. There is always a stable balance and state of equilibrium.
An excess of derivatives contributes to parabolic boom and bust cycles which ultimately damage the foundation of a sound economy. These cycles deplete wealth from the middle and lower classes (first squeezed by runaway inflation then by falling wages and assets) and concentrate them at the top where the wealthiest feed and spend near the spigot upstream during a boom and then buy up depressed assets downstream during a bust.
September 26, 2008 3:17 AM | Reply | Permalink
The obscene story of today is how these derivatives have been exchanged for real wealth, sold to investors who bought them with their "real money" savings, and now when no one wants to touch this junk, with taxpayers' money. Meanwhile, the wealth has been siphoned off as billions in bonuses and commissions by the pushers.
September 26, 2008 3:42 AM | Reply | Permalink
Maybe my house -- or a portion of it -- is money.
I know my local banker and she'd give me cash equal to 40-50% of its value in a day. That's faster than I'd get the cash from my stock broker.
Why stop counting money at institutional money market funds and repos (M3)?
Maybe anything that can be converted into cash relatively quickly is money.
September 26, 2008 3:19 AM | Reply | Permalink
Your house is an asset and technically, money. Its worth in monetary terms should correspond to other factors in the economy, eg. wages, food prices, in a stable economy in equilibrium. However, the flooding of "credit" or "debt" would destabilize the worth of your house, first by driving up its price and then by collapsing it below its median worth when those in debt or facing falling home prices try to sell their homes in a hurry. Real estate prices don't fluctuate wildly over time if historic data is studied. I remember seeing such a study in the NYTimes not too long ago.
September 26, 2008 3:35 AM | Reply | Permalink
Your house is an asset and technically, money. Its worth in monetary terms should correspond to other factors in the economy, eg. wages, food prices, in a stable economy in equilibrium. However, the flooding of "credit" or "debt" would destabilize the worth of your house, first by driving up its price and then by collapsing it below its median worth when those in debt or facing falling home prices try to sell their homes in a hurry. Real estate prices don't fluctuate wildly over time if historic data is studied. I remember seeing such a study in the NYTimes not too long ago.
September 26, 2008 3:36 AM | Reply | Permalink
Sometimes it seems that the store of value and medium of exchange functions of money are at odds. In the right circumstance, you'd give your kingdom for a horse. It would be nice to have some sort of "real unit of value", but value isn't static. Marginal utility and all that.
September 26, 2008 2:47 PM | Reply | Permalink
I think we are getting close to the heart of the matter here in this sub-thread. I'm reminded specifically of Keynes' The Economic Consequences Of The Peace. To grossly oversimplify, he indicted the super-rich for saving money for a rainy day, forever and to no end. This is similar to derivatives by an analogy to their moral good, or to their utility. Idle money, or the unconscionable inequality of money-- this is money only in name. Yes, you can call it M3, or leverage, or inflation, or alpha, or candlestick blah blah-- but the real word for it is theft. Keynes insight is similar to the insight of Buffett and Graham, and, not coincidentally, by Lenin. There is theft and there is value: both are "called" money.
Keynes, The Economic Consequences of the PeaceSeptember 26, 2008 5:34 PM | Reply | Permalink
If a bunch of your neighbors also paid 50% more than the market value of their houses, so that the market value of houses in your neighborhood increased by 50%, then I'd venture that you collectively created $100k of "money" for your particular house.
The natural follow-up question: If people stopped being willing to pay so much for houses so that the value of your $200k house (with your $300k mortgage) decreased to $100k, how much money was destroyed?
September 26, 2008 7:39 PM | Reply | Permalink
Last I checked, I could find zero evidence that statements like "We're going to make sure the motherfuckers that should have known better don't profit one dime from this..." bore any connection to any calm, level-headed, real world decision-making. I just laid out, as best I could, how the problem stretched right THROUGH the economy, and thus, through every Americans' home. But no, much more calm and rational and argue about nailing those fuckers down to the last dime, eh?
How would you have a President run a war, bwakfat? Avenge every lost soldier? Throw 10 dead in because 1 was already lost? Think that doesn't apply in economics? What I've heard too much of here are people trotting out their bitter stories about this banker or that business or some guy with a big house or whatever. Except you can't scale up an economic problem from a business. A bit like talking about what plays in Des Moines, and figuring it MUST play the same nationwide. Let's say I got a hedge fund I'd like to hunt down. Let's say they invest for pensioners. Now, the problem is, I gotta skin the one without touching the others. Easy? Or maybe, for ten years I let banks get away with murder. And now, I want to nail 'em - cause they're lying, thieving pricks. (Which, I'd say they pretty much are.) But what if it takes a huge tranche of businesses, and everyday workers down. Do I still do it?
And that "PANIC" label you're trying to stick on people? Sorry, it's a nice cute little blog-sized comeback. But there's a few other things that can mess people up. Complete denial, for starters. Like, did you respond to any one of that long list I put up there? Nope. How about that $700 billion a year trade deficit? Nope. Gee, sure hope the guys putting together that calm, level-headed plan pay attention. Cause no one here is. But hey! Let's ignore that $700 billion.... so we can go get that last dime. Obama's supporting it, Dodd's leading it, Hillary's trying to kickstart some other New Deal organizations. I'm kinda wondering what they're on about, since half of TPM seems to be all "Don't worry, Be happy." so what is it? Have they lost their minds? Or have we?
I have NO problem with completely restructuring this deal, ok? None. For equity, for oversight, for staging, you name it. but there's just waves of nonsense being written here, and it's NOT helping. Clarity and calm in a crisis don't usually go hand in hand with either denial or justice/vengeance. (And just in case, don't get me wrong about there not being a real NEED for justice to get slapped on those bastards. There is. but one of my first posts here talked about how the anger over all the shit that has gone wrong was gonna stop the US from dealing with what it HAD to deal with if it was gonna improve its own citizens lives.)
One more thing. That "asshat Canuck" comment? And that little schtick on "character"? Have a nice day with that. Stick it in your pipe. Last I checked, my people landed in 1620. I got dead soldiers in the ground in every war since then. I got brothers and sister and nieces and nephews in Massachusetts, Arkansas, Jersey, Indiana.... all citizens. Plus Uncles, Aunts, best friends. Maybe I just shoulda stopped at the soldiers part. First time anyone's tried to slap that card on me here, bwakfat. Didn't feel quite right to me. Think about that. I'm fine on arguing economics or politics, but I didn't know we were gonna swerve that way. I'd prefer not to.
September 26, 2008 1:24 AM | Reply | Permalink
For bwakfat, above.
September 26, 2008 1:55 AM | Reply | Permalink
Quinn, I noticed yesterday that the foreign creditors such as China are assuring that they will continue to provide credit :
http://www.marketwatch.com/news/story/china-bank-regulator-denies-report/story.aspx?guid=%7B1F3681AC%2D2953%2D4963%2D99EC%2D57BECF1E9291%7D
They can't recall these loans without bringing about a M.A.D. situation.
What happens would probably be more constructive talk about addressing the trade deficit. This can happen over time.
Although the manufacturing base has disappeared, it doesn't mean the US doesn't have ways to address the trade imbalance. Services, for example, exporting service models. China's social infrastructure is non-existent, from establishing a proper legal framework to federal services such as the FDA (witness the recent poisoned milk scandal), and yes, ironically, even banking services. Other areas - green technology, healthcare and energy conservation. These are domestic sectors that have been sadly neglected by the Neocon thugs obsessed with foreign conquer and fantasies of empire.
Russia, Europe and Japan have maintained a positive trade balance with China for most of the past decade by pursuing this model, and at the same time, stimulated their own economy. There's room for the US to become an export powerhouse again under Obama which will shrink the debt and gradually correct the imbalance.
September 26, 2008 1:58 AM | Reply | Permalink
Absolutely, there's room. There's enormous problems with lag-times though. A financial crash, or surge in unemployment, can happen in a flash. Gearing up for manufacturing exports - or services - can be damned tough. And one of the problems one services is that the last 8 years have seen the US fall behind - or be blocked - by its own Government. Take hybrid cars. Technology invented, essentially, in the US. Big 3 didn't bother with it. So now... tougher to export. Same with plug-in hybrids. Invented in the US, @UC Davis. Japan bought the prototypes. And China is - without hardly anyone noticing - absolutely ROARING out ahead on this now. They'll hit market with it first, actually. And for a lot of social infrastructure, China is gonna want someone who "gets" their model and how to work with them. Can the US outcompete others here? I donno.
As for not being able to recall those loans without kicking MAD in, yep, that's the strongest card the US has to play right now. But. China just said they're refocussing on domestic growth. That's a bad sign, because they can do it. Next question. What will they do with their NEW money? What will everyone, presently taking in $700 billion MORE this year, do with those bucks? The answer I hear ain't one people are gonna like.
They're gonna buy, as quietly as possible, any functioning or valuable American asset. I watched the social strains in London as the Arabs and Russians came in and went wild buying. This may not be a pretty picture.
September 26, 2008 2:22 AM | Reply | Permalink
You're absolutely right that something must first be done to quell the panic - that's the reason they're asking for the $700b bazooka without really knowing what to do with it exactly, but at least they look like they're ready and prepared for ANYTHING imaginable.
The panic is spreading, banks have stopped lending and there are early signs of a possible pandemic run on the banks in main street, so yes, the bazooka is needed.
Beyond this stage however, they have to offer assurances to the Market that the $700b will be wisely used to shore up the system and fix that whichis broken, not as a bail-out of the worst offenders. There are precedents, and with the right kind of experts, they can pull this off.
To be honest, the estimated derivatives figure for this toxic mess is believed by some to be in the hundreds of trillions. I'm quite scared and eyeing my own savings nervously.
Still, to get through this, we've got to get through this, no other choice is there?
September 26, 2008 2:38 AM | Reply | Permalink
I find Krugman - for all my disagreements with him - to be fairly useful on this stuff. Here's his new one, Where are the grown-ups?
Beneath it all, economics (and investment), is about confidence. Psychology. Like it, loathe it, it's there. "Animal spirits." Which is one reason why the quant-freaks keep falling on their asses with their models & fancy financial instruments. And one reason why NO serious politician or senior decision-maker or even commentator is ever supposed to whisper about crashes, Depressions, all that. But read between their lines, and for many months now, they've been saying precisely that. But, when the US Government is getting people to hand over cash in exchange for their paper, which basically pays 0%.... I think we're pretty much at the point where the shit has hit. i.e. People figure their next best alternative is to LOSE money. Now that's ugly.
September 26, 2008 2:55 AM | Reply | Permalink
I used to work for a US firm providing services to China and Vietnamese clients, but I'm so sickened by their attitude, I packed up and joined some like-minded European partners. The American partners are so corrupt, contemptuous and condescending to the clients, it's simply unconscionable to work for them. Yet the services and products they provided were sub-par, outdated and plain unworkable, they thought they could sell anything to third-world simpletons. They've burnt through a number of clients, there aren't many left to fool.
It takes a sea change in attitude, but this Change is necessary not just for the others we're dealing with but for ourselves. This coming hell is a crucible, could be a good thing for this nation saddled with a hubris of obscene proportion, "creating reality for others to judiciously study" indeed.
September 26, 2008 3:01 AM | Reply | Permalink
A thoughtful blog, DF, high rec'd.
I wonder about M3 too. My own hunch is that Helicopter Ben would be pumping "liquidity" like steroids into the economy, but it doesn't work if there are no takers.
We're experiencing stagflation, i.e. inflationary pressures on basics such as food and energy due to an insane supply of money over the past years but deflationary pressures on assets and wages due to the recession and contraction of the economy.
There are similarities to the stagflationary years in the 70s.
September 26, 2008 1:32 AM | Reply | Permalink
It would seem to be too late for an "intervention". I was very sceptical about any bailout yesterday, but today, it just seems like a waste of money, given the tens of trillions of dollars in credit swaps alone. I am convinced that a lot of that activity was fraudulent, but regardless, it was done on such a massive scale that it would seem highly unlikely that $700b can really do much here. Maybe we are actually better off allowing the system to deleverage by itself (that would be like a semi-collapse, apparently) and beef up the FDIC and FED lending, as well as mortgage restructuring for individuals.
I am sorry about that nasty Canadian jab by my compatriot. It was inappropriate and rude. It's just...sometimes, as Americans... we just get tired of being beaten up... by all the smart foreigners... who know what we should so so much better... no excuse though.
September 26, 2008 1:41 AM | Reply | Permalink
In response to quinn.
September 26, 2008 1:42 AM | Reply | Permalink
$700 billion doesn't sound like much against all those swaps, no. But now that everybody's cottoning on to 20:1 or 30:1 leverage, putting the bail-out cash in isn't just going to steady $700 billion - it's gonna help with a whole mountain built on it.
As for the other thing, it's INCREDIBLY difficult for anyone to separate themselves personally from their political leaders from their nation. If I'd worded all that as "The Bush Admin," then it would probably have gone down like milk & honey. But if you say, "Americans" - then it's taken totally differently. The reason I shifted is that I actually think one of the hardest things a politician - like Obama - has to do is eventually, step-by-step, get people to a place where they own part of the problem. Without that, it's just a blame game. And sure, there's lots of shits who should be flogged. But it's gonna be almost impossible to say things like - "Gas prices have to remain high. Taxes have to go up. Interest rates are gonna rise. etc." until we make that transition in how we see and feel this thing. And if we, the Democratic activists & grassroots, don't move first, then the whole thing is delayed.
And Canadians have no real high moral ground they can stand on. It's the same thing here - maybe just with some lag time, a bit less Empire. Our politics is hellishly corrupt. Our housing over-priced. The short-sightedness & selfishness. The moral superiority. But I just felt it was time to word some of this stuff - i.e. we're ALL responsible - directly, instead of coding it in a partisan manner. Because I can tell you, one of the reasons Obama keeps talking like this - about how it's gonna be a long hard road, we all have to pull together, why he backs off from blame - is precisely that. He sees this. I don't envy the guy.
September 26, 2008 2:25 AM | Reply | Permalink
You've hit on exactly why he's the right guy for the job. He knows it's gonna suck and he's still willing to take it. I don't think McCain has any concept. He's too entrenched in his bullshit paradigms about honor and what have you. He doesn't know the answer because he doesn't even know the question.
September 26, 2008 3:06 AM | Reply | Permalink
Nah, I'd say it was a pretty appropriate response to the above. Quinn owes the board an apology, maybe then I'll apologize for callin' him an "asshat" Next time I'll say an addlepated lout, which seems to go over a tad better among elitist pricks.
Quinn is mighty sensitive,when he's getting it dished up, but totally blind to what he's dishin out. I'm glad I got his attention, but you all kissing his ass won't exactly keep him from vomiting similar unhelpful BS elsewhere. Some might even take him seriously. I wouldn't.
I am not apologizing for calling out his bad tempered, fear inducing, utterly useless rant against my fellow countrymen.
If I didn't know better, I'd think he was inducing panic to draw attention away from the utter travesty that was the Paulson proposal.
Take a look at this:
http://community.nytimes.com/article/comments/2008/09/26/business/26bailout.html?permid=8#comment8
I've never seen a comment with over 1,000 recs on a NYTimes comment before. I ain't never seen the Times close down commenting. You poo poo the anger out there. Last time folks poo poo'd Americans anger, well, a King lost a Kingdom.
That our congress is seeing 10s of thousands of emails ain't been lost on Bush, or congress. The American people haven't lost their wits, they've found them.
And no, no sir, it ain't gonna be pretty, least of all for them that was responsible, and no. It wasn't EVERYONE. Most of us know damn well who it was, and it wasn't the poor, or the middle-class, but I will say one thing.
Maybe it's high time you stop trying to excuse the inexcusable. It ain't helping the situation to be telling folks to run and stuff whatever they can cash out under their mattress, that's a sure way to make a bad situation a heck of a lot worse.
That's some free advice you can take to the bank.
September 26, 2008 4:38 AM | Reply | Permalink
How the hell did a post that includes the sentence, the quantity theory can be stated as MV=PQ, where M is the money supply, V is velocity, or how many times money is changing hands, P is the price level and Q is real value, devolve into a nationalistic shouting match?
September 26, 2008 9:20 AM | Reply | Permalink
This is the TPM, no matter where it starts, it inevitably devolves into a LOUD SHOUTING!! @#$%^!! MATCH!!!
September 26, 2008 10:03 AM | Reply | Permalink
Genghis you fool! What set this off????? Are you mad? DF used the dreaded - and deeply divisive - M3 GRAPH! Any economist will tell you, once you pull out the M3... well, let's just say I've seen entire seminars devolve into mayhem. It should have been obvious to DF, when he noticed that they STOPPED TRACKING the M3. It's that dangerous. It can only be compiled now by teams of people, physically separated, each knowing only their small piece - and then the whole summed up on a computer deep in the mountains of Bavaria.
September 26, 2008 10:58 AM | Reply | Permalink
The Shadow M3 Committee.
September 26, 2008 11:04 AM | Reply | Permalink
Damn it all! How could I have been so naive?
September 26, 2008 2:56 PM | Reply | Permalink
It seems many are unable to make a distinction between the two separate issues at hand (yes, quinn, I am looking at you--as well as the kneejerk crowd):
1. How can the economy be stabilised right now; and
2. How can the economy be made systematically stable.
DF, here, addresses issue 1 very well. I will deal with issue 2 in a similarly simplified manner:
To examine the systemic stability of the economy, we need to challenge the premises of the current system. First, by recognising that the reasons enumerated by DF are not anomalous. This is how the system works.
It is predicated on one fundamental concept: that it is possible to extract profit. Because that profit, then, is spent on other goods or services that likewise extract a profit, an additional premise must be presented: perpetual growth.
(Actually, what is growth? The most basic formulation is that growth is an increase in the total value or worth of the economy.)
Perpetual growth is not possible except in the most abstract sense that the universe is infinite. For a realistic economic model, it should be assumed that growth is finite. Furthermore, it should be assumed that there may be periods during which growth is temporarily stalled.
Growth must be finite because resources are finite. If all of the resources on Earth are in use, how can there be growth? If the available resources are decreasing, how can growth continue at the previous--or higher--rate? You cannot just grow the economy by adding zeroes to the end.
Except that currently you can. Between 55-65% of the total worth or value of the economy is fictional. Imaginary money is inserted into the economy at uncountable places, in amounts small and large.
So. The current system is fundamentally cyclic: periods of growth are followed by a halting crash of the economy (or the other way around if you prefer.) That is how it works. And those with the least are always hurt the most.
What are the alternatives? I have one. Anyone else?
September 26, 2008 6:37 AM | Reply | Permalink
Roo. I've worked on #2 all my life. #1 is troubling, and for a good reason. Theorists love 'comparative statics,' where they argue about the relative merits of alternative future positions. The problem is that the actual dynamics/path of change can push you into a position from which either or both futures become impossible. And a 'crash' could do so, just because it would put so much in play from the Right - all those powers they've aggregated, the cultural bile they've grown - that it's well worth avoiding.
That said, I've heard numerous people put forth the proposition you just outlined. linking economic growth/profit to the physical destruction of resources. The short, sharp response is that it is NOT a law, or a necessity. Yes, growth can use of more physical inputs. But no, it needn't. An individual or a society can choose - and many do - to spend their money on.... violins, photography, other valuable activities that do NOT have a heavy physical footprint. I understand why the theory appeals, and the evidence of physical destruction is all around us. Nonetheless, economic value - and yes, even profit - CAN be generated and "grown" without requiring any massive increase in the use of physical materials. Some would argue that out shift to an electronic culture - such as games - shows that this is a whole massive new avenue of profit/growth.
Your question of profit, however, is more interesting to me right now. When you talk to the moneymen, or read the fabulous business/VC pages, it is completely apparent that money is pouring in huge tide around the world right now, looking for happy high return homes.... but not finding enough. The US hasn't, in living history, been subjected to the force of that wave LEAVING. The destruction it leaves behind when it pulls out can be seen in dozens of nations worldwide. The dynamics of this are ugly, and may not leave us a path to some of our chosen futures.
September 26, 2008 11:28 AM | Reply | Permalink
That's a very interesting theoretical argument, but all empirical data points to tremendous increases of ENERGY use as the driving force behind our civilization.
Unless we have been growing generations of quiet buddhists, content to only contemplate the world, your position appears to be mere whishful thinking.
Unfortunately, the reverse is true.
Sorry.
September 26, 2008 12:22 PM | Reply | Permalink
We should debate this on an energy post, but just to say I don't believe it's correct to say "ALL empirical data points...." There are counter data points for individuals, sectors, technologies, nations etc. i.e. Energy use can sometimes be delinked from economic growth. The key here is whether this is an "iron law" or not. If it's not an iron law, then we have room to maneuver. I'm happy to admit there's enormous evidence that they often ARE linked, but it's not an iron law, and therefore, I'm interested in how much room we have. I'd argue it is substantial. I also don't think it requires us to become "quiet buddhists." Higher prices can move us to use less. An economy growing services, information, edu-tainment, arts, the web - all can do the same, without being driven by any deep moral shift. Maybe we can pursue more fully on another post?
September 26, 2008 1:33 PM | Reply | Permalink
The very definition of a technological society is increasing use of energy. We are physical beings and require energy to organize our environment to our needs and desires - that's what we do. Fighting and winning against entropy. Efficiency only comes up for discussion during the depletion part of the curve - as it does for any species. Given our relative youth on the planet and inexperience with the environmental cycle, this is the first time for us.
All empirical data for the last 1000 years supports this view. However one defines "progress" (in the way the word is commonly used), the growth in that quantity required higher outlays of energy. It is not impossible that this may change in the future, but it is highly unlikely, given the whole thrust of our culture.
Sure, higher prices/resource depletion/environmental degradation will induce changes - but they will be highly problematic for the modern society to digest and adjust to. Breaking 1000 years of modern history (and millenia of related prior historic developments) is hard to do.
September 26, 2008 3:27 PM | Reply | Permalink
DJ - there will be some kind of Congressional bailout - you can count on that.
And no, rates will not go up to 500%. Remember the 80s? Remember the S&L failures? Did rates go up to 500% then? Well they aren't going to now either.
The very last thing anyone needs to do about any of this is panic. That's the very worst thing that could happen.
Please do not panic, people.
September 26, 2008 9:25 AM | Reply | Permalink
This is addressed to Bwakfat, It's not just Americans, all over the world, smaller banks, pension funds, even whole towns lost their shirts in this subprime mess.
Here is one such town in Norway, they're bankrupt:
http://www.nytimes.com/2007/12/02/world/europe/02norway.html?pagewanted=print
Norway’s unlucky towns are the latest victims — and perhaps the least likely ones so far — of the credit crisis that began last summer in the American subprime mortgage market and has spread to the farthest reaches of the world, causing untold losses and sowing fears about the global economy.
Where all the bad debt ended up remains something of a mystery, but to those hit by the collateral damage, it hardly matters.
Tiny specks on the map, these Norwegian towns are links in a chain of misery that stretches from insolvent homeowners in California to the state treasury of Maine, and from regional banks in Germany to the mightiest names on Wall Street. Citigroup, among the hardest hit, created the investments bought by the towns through a Norwegian broker.
September 26, 2008 10:14 AM | Reply | Permalink
At the risk of sounding like a broken record, James Kunstler in his book THE LONG EMERGENCY has a very nice chapter on the (d)evolution of money from the real to the imaginary (e.g. derivatives) and shows how it is tied to the economic growth provided by cheap energy and the Industrial age.
It gets to what wealth and investing is really all about.
September 26, 2008 11:03 AM | Reply | Permalink
A masterful post. I've sent it far and wide.
You've done your part to save the Republic here!
September 26, 2008 12:12 PM | Reply | Permalink
Housing prices are also falling fast in the UK and in Spain.
September 26, 2008 12:40 PM | Reply | Permalink
What? Me worry?
I've eaten out of supermarket dumpsters while living on the road. Very little scares me anymore.
September 26, 2008 12:21 PM | Reply | Permalink
Rec'd with gusto. You did the research that I didn't know enough to do when I posted about this a few days ago.
This quote, in particular, is priceless.
Also, great find on the Moyers/Bogle interview. That's a must-watch.
September 26, 2008 1:28 PM | Reply | Permalink
Amen.
September 26, 2008 1:48 PM | Reply | Permalink
DF - This is a fab post. Specially all the links. I've bookmarked this post since I have no time right now. Will read it tomorrow. I *really* liked the bad math - total stupidity of crowds -link.
September 26, 2008 2:15 PM | Reply | Permalink
Maybe it is time for a focus on the Savings and Loan concept, pre-Keating5? (Credit unions included...)
Move the crdit market to an S&L model.
Keep it local, and require them to loan only what they have on deposit, with no Federal Reserve funds, just guaranteed deposits. Individuals with considerable wealth would be required to have their own money on deposit, if they want ownership of these banks.
No Wall Streeet investments, no multi-national co-owners, just neighbors saving and loaning to each other, like the S&L in "It's a Wonderful Life."
Get the Banking Business out of the stock market and back on Main Street, where is thrived for centuries. But lets reconsider how much vertical access, up OR down, we give to the corporate bankers.
A well-regulated S&L policy could help reopen credit availability, but only if the Keating-5 type of shenanigans can be averted. The taint painted onto the S&L's by the Keating 5 scandal has already inhibited them as an alternative to what we are facing with the current situation, so McCain can claim a very big part in taking this option out of the loop.
In so many ways now, It's his own mess.
And he's going to parachute in and clean up?
September 26, 2008 3:11 PM | Reply | Permalink
PS DF; I'm sending this to all the bright folks I know, you are the only source I've found thus far with a comprehensive understanding of the issue at a nuts and bolts level. Still can't say I grasp all the implications and nuances, but I'll be reading it in depth exhaustively to overcome that problem.
Thanks for the knowledge.
September 26, 2008 3:15 PM | Reply | Permalink
I had to read a lot of different sources to even begin to understand it myself. And I certainly don't claim to understand it all. I tried to include what I felt were the best of those sources here. I highly recommend them.
September 26, 2008 3:32 PM | Reply | Permalink
The blog I'm linking to is useful, I think. A small debate about where and how we get the money to fund what needs to be changed, and in the process, knock down speculation, retrieve some of that lost wealth, rein in the ultra-greedy, etc. i.e. there are lots of ways we can get at this stuff we're all enraged about, even after any bail-out. The blogger provides one link, and I've linked to what I found to be a very useful Alternet article.
September 26, 2008 3:52 PM | Reply | Permalink
Beautiful post DF,
I was thinking of doing something similar myself. I'm still looking for the ugly details of Paulson's plan but from watching Jim Cramer last night, he seemed to describe a plan similar to Sweden's. Even Suze Orman liked it too. It's not pretty and people are going to get hurt. But the taxpayer will earn money back, if that's what's made law.
Before I go digging, anyone got the dirty weeds of Paulson's plan?
September 26, 2008 5:10 PM | Reply | Permalink
DF, I tried to contact you at my.barackobama.com, but I'm not sure if you got the message. If not, please email me at xenghis@gmail.com.
September 26, 2008 5:55 PM | Reply | Permalink
Good post DF. Sorry if my attempt to leap from here onto the international issues led to some flak. Will rein myself in more in the future. Anyway, cheers dude, and thanks.
September 26, 2008 7:11 PM | Reply | Permalink