Nouriel Roubini's Global EconoMonitor

Comrades Bush, Paulson and Bernanke Welcome You to the USSRA (United Socialist State Republic of America)

The now inevitable nationalization of Fannie and Freddie is the most radical regime change in global economic and financial affairs in decades. For the last twenty years after the collapse of the USSR, the fall of the Iron Curtain and the economic reforms in China and other emerging market economies the world economy has moved away from state ownership of the economy and towards privatization of previously stated owned enterprises. This trend was aggressively supported the United States that preached right and left the benefits of free markets and free private enterprise.

Today instead the US has performed the greatest nationalization in the history of humanity. By nationalizing Fannie and Freddie the US has increased its public assets by almost $6 trillion and has increased its public debt/liabilities by another $6 trillion. The US has also turned itself into the largest government-owned hedge fund in the world: by injecting a likely $200 billion of capital into Fannie and Freddie and taking on almost $6 trillion of liabilities of such GSEs the US has also undertaken the biggest and most levered LBO (“leveraged buy-out”) in human history that has a debt to equity ratio of 30 ($6,000 billion of debt against $200 billion of equity).

So now Comrades Bush, Paulson and Bernanke (as originally nicknamed by Willem Buiter) have now turned the USA into the USSRA (the United Socialist State Republic of America). Socialism is indeed alive and well in America; but this is socialism for the rich, the well connected and Wall Street. A socialism where profits are privatized and losses are socialized with the US tax-payer being charged the bill of $300 billion.

This biggest bailout and nationalization in human history comes from the most fanatically and ideologically zealot free-market laissez-faire administration in US history. These are the folks who for years spewed the rhetoric of free markets and cutting down government intervention in economic affairs. But they were so fanatically ideological about free markets that they did not realize that financial and other markets without proper rules, supervision and regulation are like a jungle where greed – untempered by fear of loss or of punishment – leads to credit bubbles and asset bubbles and manias and eventual bust and panics.

The ideologue “regulators” who literally held a chain saw at a public event to smash “unnecessary regulations” are now communists nationalizing private firms and socializing their losses: the bailout of the Bear Stearns creditors, the bailout of Fannie and Freddie, the use of the Fed balance sheet (hundreds of billions of safe US Treasuries swapped for junk toxic illiquid private securities), the use of the other GSEs (the Federal Home Loan Bank system) to provide hundreds of billions of dollars of “liquidity” to distressed, illiquid and insolvent mortgage lenders, the use of the SEC to manipulate the stock market (restrictions on short sales), the use of the US Treasury to manipulate the mortgage market (Treasury will now for the first time outright buy agency MBS to manipulate and prop up this market), the creation of a whole host of new bailout facilities (TAF, TSLF, PDCF) to prop and rescue banks and, for the first time since the Great Depression,to bail out non-bank financial institutions, and a whole range of other executive and legislative actions (including the recent bill to provide a public guarantee to mortgage for banks willing to reduce their face value).

This is the biggest and most socialist government intervention in economic affairs since the formation of the Soviet Union and Communist China. So foreign investors are now welcome to the USSRA (the United Socialist State Republic of America) where they can earn fat spreads relative to Treasuries on agency debt and never face any credit risks (not even the subordinated debt holders who made a fortune yesterday as those claims were also made whole).

Like scores of evangelists and hypocrites and moralists who spew and praise family values and pretend to be holier than thou and are then regularly caught cheating or cross dressing or found to be perverts these Bush hypocrites who spewed for years the glory of unfettered wild west laissez faire jungle capitalism (and never believed in any sensible and appropriate regulation and supervision of financial markets) allowed the biggest debt bubble ever to fester without any control, have caused the biggest financial crisis since the Great Depression and are now forced to perform the biggest government intervention and nationalizations in the recent history of humanity, all for the benefit of the rich and the well connected. So Comrades Bush and Paulson and Bernanke will rightly pass to the history books as a troika of Bolsheviks who turned the USA into the USSRA. Fanatic zealots of any religion are always pests that cause havoc and destruction with their inflexible fanaticism; but they usually don’t run the biggest economy in the world. But these laissez faire voodoo-economics zealots in charge of the USA have now caused the biggest financial crisis since the Great Depression and the nastiest economic crisis in decades. So let them be shamed in public for their hypocrisy and zealotry that has caused so much financial and economic damage.

273 Responses to “Comrades Bush, Paulson and Bernanke Welcome You to the USSRA (United Socialist State Republic of America)”

GuestSeptember 9th, 2008 at 11:24 am

Gloomy on 2008-09-09 06:38:56 (earlier thread)

“If the government needs to borrow so much money for the bailout that Treasury yields start to rise, they could begin to compete with mortgages and have the opposite effect,” Shaughnessy said. “There!! Someone finally said it!!!

U.S. government providing house loans?Then you would have the government take-over recommended by Roubini some months back (correct me if I am wrong).The only thing they need to do is to get rid of all of the banks. Wonder how long that might take?

Exercise 13A government has decided to close 400 banks. They will be closing 10 banks each Friday, and no banks on any other day. How many weeks will it take for them to close all 400 banks?

GuestSeptember 9th, 2008 at 11:28 am

If the government takes over the mortgage industry (in a sneaky underhanded ‘de facto’ way), then maybe they should also take over GM and Ford. And the ailing airlines.

aleister perduraboSeptember 9th, 2008 at 11:36 am

Interesting article from economist Michael Hudson. Short excerpt below:When you look at the balance sheet of U.S. assets available for foreign central banks to buy with the $2.5 to $3.5 trillion of surplus dollars they hold, real estate is the only asset category large enough to absorb the balance-of-payments outflows that U.S. military spending, foreign trade and investment-capital flight are throwing off. When the U.S. military spends money abroad to fight the New Cold War, these dollars are recycled increasingly into U.S. mortgage-backed securities, because there is no other market large enough to absorb the sums involved. Remember, we do not permit foreigners – especially Asians – to buy high-tech, “national security” or key infrastructure. The government would prefer to see them buy harmless real estate trophies such as Rockefeller Center, or minority shares in banks with negative equity such as Citibank shares sold to the Saudis and Bahrainis.But there is a limit on how nakedly the U.S. Government can exploit foreign central banks. It does need to keep dollar recycling going, in order to prevent a sharp dollar depreciation. The Treasury therefore has given informal assurances to foreign governments that they will guarantee at least the dollar value of the money their central banks are recycling. (These governments still will lose as the dollar plunges against hard currencies – just about every currency except the dollar these days.) A failure to provide investment guarantees to foreigners would thwart the continuation of U.S. overseas military spending! And once foreigners are bailed out, the Treasury has to bail out domestic American investors as well, simply for political reasons.

GuestSeptember 9th, 2008 at 11:37 am

Novice here – and first time on the blog. Will someone lay out the alternative for me, or point me to a place that does? What happens if the gov’t just lets the GSEs go bankrupt?Thanks

AnonymousSeptember 9th, 2008 at 11:39 am

I’m watching my home value plummet, my salary ina holding-pattern, and the cost of everything rise… thanks Administration! Do I at least get a USSRA t-shirt?

John MaynesSeptember 9th, 2008 at 11:50 am

Well spoken!!! I hope you will say the same on your appearance on CNBC. Or will you tell only the truth on your own blog but not in public? Go for it. Tell the Americans the truth!!!

AfASeptember 9th, 2008 at 11:50 am

I was reading this post with a half smile. I am not sure why, though.Anyway, thank you professor for spelling it, I mean the USSRA.@MAYou are making me worry. Could you be a little bit clearer?

GuestSeptember 9th, 2008 at 11:55 am

So the REAl values to housing and property are near worthless, the intrinsic value of govt intervention.. Its a terrible asset to own now, falling values, rising costs, insurance, heating, and Taxes ! I’ll pass.

GuestSeptember 9th, 2008 at 12:05 pm

Bravo.But don’t forget the chief money printer of all times … Alan Greenspan (who courageously steped down at the right time to let his comrades pick up the pieces).Remember he got the highest distinction in the UK as Knight of the Britsh Empire (K.B.E) for his unique contribution to the “world financial stability” (no kidding). K.B.E can also be read as King Bubble Expander.

GuestSeptember 9th, 2008 at 12:18 pm

Thank you Professor for your emotional but well written column.So what’s the next step? And what happens to a socialist country that runs a structural current account deficit that continuously pump worldwide savings?

bythewaySeptember 9th, 2008 at 12:21 pm

In former times we speak about the “free World” and meant America and western Europe.Now we must define this as all except the US.Mccarthy must rotate in his grave.

PhilTSeptember 9th, 2008 at 12:23 pm

Taxpayers and not-for-profit institutions across the U.S. are on the hook for the same kinds of fees and added interest as New York. The bill for replacing the $166 billion in auction- rate debt may top $7 billion, not counting extra interest, based on New York’s expenses. Most of that money is going to the same banks that created and controlled the auction market.

Click 4 Entire Article : Auction-Rate Cleanup Bill for New York State Tops $340 Million:OR =>

dSeptember 9th, 2008 at 12:30 pm

Why do you call this bailout “socialism”? Socialism is the use of the power of the government to restrain the inevitable tendency of market contracting to benefit the best off: free contract necessarily allows those with more to demand more.This gift to the investing classes (and specifically to the former executives and investors who will not be required to return their ill-gotten gains) is almost precisely the opposite of the Western European socialist institutions of free higher education, socialized medicine, public child support, and economic management aiming at producing good jobs for middle class people.Instead, this is simply standard Bush Administration crony capitalism — along the lines of the K Street Project, hiring government officials from Brownie to US Attorneys based on party loyalty rather than competence, and outsourcing a war-for-private-profit in Iraq to Halliburton.That’s not socialism. It’s corruption: the use of public office for private enrichment.

GloomySeptember 9th, 2008 at 12:34 pm

Mike Morgan:”Stinky Stuff – Everything about Paulson’s scheme is stinky. And the gloating of guys like Bill Gross, combined with the cheery chirps of the bubbleheads on CNBC makes for one really scary nightmare. I’m still wondering whether I’m dreaming all of this or whether we really just witnessed the end of the United States as we have known it. There are a few Congressman and Senators making noise about what just happened, but they will be silenced with some form of payola. “

AnonymousSeptember 9th, 2008 at 12:48 pm

What I don’t understand is why everybody assumes agency debt is now as safe as UST were last Friday. I would have thought agency debt is safer, but UST are riskier this week, because of the expansion of the balance sheet. Any other conclusion would have to assume the USA has far more resources available to it to “guarantee” both UST and agency debt than actually seems to be the case. In the end therefore, the USA will have to pay higher rates to borrow after this than before. Am I missing something here?

GuestSeptember 9th, 2008 at 12:55 pm

Professor,May be this is not socialism ideology. It may be more cinical. A consequence of an “Eltsine policy” where all the country’s wealth is handed over to the oligarch at the expense of the ordinary citizens.Don’t we have similiraties between the after Eltsine Russian economy with the after Bush, Paulson, Greenspan and Bernankee economy?

AnonymousSeptember 9th, 2008 at 1:19 pm

Actually, it’s a form of “National Socialism,” which we’ve seen before. The Nazi absolutely socialized the risks and privatised the profits. Hence Krupps, etc., embraced the new way…..There are endless and endlessly uncomfortable parrallels starting with “Homeland Security?” Fatherland anyone?

AnonymousSeptember 9th, 2008 at 1:24 pm

Professor: Thank you for teaching me and so many others about the truth of the U.S. economic situation. I can feel your anger and even rage coming through in this post at those who have master-minded this financial crisis on the unsuspecting citizens of the U.S. I appreciate that you are one who sees truth and justice as important values–those are important values to me as well. My question is this: what can one do to protect ourselves as individuals as well as our fellow citizens now that we have been placed in a frightening situation of jeopardy? Is it too late? Do we have to just adapt to our fate as it rolls out in front of us? I have the very good fortune to have Sen. Russ Feingold as one of my two Senators and I feel that he truly cares about his constituents and that he listens to us very carefully. However, that is only ONE member of the Senate. This crisis feels so immense and I want to be able to fight back–but I do not know how to do so. I am retired (as is my spouse). For the first time in our lives, we are looking at whether or not we are trapped in this country and dreading what the future portends. I am, however, unwilling to let these thieves, thugs, and liars currently in power get away unscathed with their greed and arrogance and insanity. Where does on go–how does one fight back against this gross abuse of power and trust?

AnonymousSeptember 9th, 2008 at 1:26 pm

Professor-Wow! I’ve never heard/seen you write something with such contempt.As I admire your macro visions, what updates do you have for your predictions?My thoughts are Feb 2009 is the time for a rude awakening.Rich

AnonymousSeptember 9th, 2008 at 1:32 pm

Weak and demagogue post. Nationalization, LBO, hedge fund? These are all half truths or even less. In fact, the government may not have to put up any money depending on the performance of the mortgages. Who are the people posting here? The comments suggest a weird leftist / anti-USA fringe.

AfASeptember 9th, 2008 at 1:37 pm

I remember I heard once how that Chechen fighters planted mines in a site were Russian parachutists were supposed to land.That’s where the Treasury got itself into. I guess they are now in panic mode with the Lehman news after KDB told them “Screw you!”. With all hands tightened now, nobody would dare a move.Poor Paulson, I wonder how many hours he slept during the last week.

mammonSeptember 9th, 2008 at 1:45 pm

The professor is totally and irevocably right and you can call it what you will. Welfare for Financial Corrupt Elite,etc. However, I see a deeper problem in the big picture. Unless information comes from the television media, it does not exist. The american people are so distracted in economic survival, that they don’t see where their interests are, nor do they see who can protect their interests. The Conversational Hypnotherapy that we call network news is so simplistic, that it lends itself to minimalist messages. The messages must be digested in a maximum of two words. This does not bode well for true participatory democracy. The psychologists who bring you subliminal advertising, are experts at accessing the subconscious. They have empirical experience in product advertising, and politics is the same as product advertising. Do some research in Ericksonian Hypnotherapy and you will see the techniques being used in your television commercials. The Socialist Welfare Financial Queens have harvested the fruit of many years in Psychological Explorations of Cognitive Neurology. George Orwell must have had exposure to extensive studies in psychology to come up with “1984”. We are living 1984, but it is extremely subtle and far more effective because of its stealth.Deception is the greatest tool of a Machiavellian.We have reached a point where deception is alpha and the omega of politics. This is not good for Democracy. We must do better to become engines of participatory democracy. We must demand that issues are logically discussed in the “Media”. We can complain in our blogs, but we better engage in the honored pursuit of discussion with our peers face to face. We have a responsibility to the Marketplace of Ideas. I have no agenda! I just think that the spectrum of diverse views will allow us to test them and come up with the most efficient ideas for the future. No democracy, no freedom!

GuestSeptember 9th, 2008 at 1:57 pm

These bailouts are closer to crony capitalism or interwar fascism than socialism; even popular sources like Investopedia and Wikipedia agree on this point. d is right about the analogy to western Europe. They differ from other forms of crony capitalism in degree, not kind.However, the rhetorical value of “free-market capitalists” becoming “socialists for the rich” is potent for many in the US and Roubini certainly understands this. Even Hudson makes this statement.The problem with such an attack is that it closes the door to better regulation, which Roubini himself states is necessary. So the “socialist” charge is good tactical rhetoric but it also limits some long term strategic goals for improvement.But how does this grotesque bailout affect the erosion of BW2 and the expected US “recovery”?Darkie

GuestSeptember 9th, 2008 at 1:58 pm

These bailouts are closer to crony capitalism or interwar fascism than socialism; even popular sources like Investopedia and Wikipedia agree on this point. d is right about the analogy to western Europe. They differ from other forms of crony capitalism in degree, not kind.However, the rhetorical value of “free-market capitalists” becoming “socialists for the rich” is potent for many in the US and Roubini certainly understands this. Even Hudson makes this statement.The problem with such an attack is that it closes the door to better regulation, which Roubini himself states is necessary. So the “socialist” charge is good tactical rhetoric but it also limits some long term strategic goals for improvement.But how does this grotesque bailout affect the erosion of BW2 and the expected US “recovery”?Darkie

Average JaneSeptember 9th, 2008 at 2:01 pm

Oh, this is just too hilarious. My mortgage broker sent me an e-mail this morning to the effect: time to get off the fence, rates are down to almost 6%. Woo-hoo! Think I should jump on that?

GuestSeptember 9th, 2008 at 2:23 pm

Thanks professor, I am sooo looking forward to you discussing this tomorrow Morning on TV. I for one am very frustrated with friends and family who drink the fox cable news cool aid when it comes to politics and current events. The lack of outrage these cult like followers of fox cable news have with current events is shameful. Here is a clip of Rubpert Murdoch talking about the McCain and Obama. If only he would revamp his right wing agenda on fox and provide real insight and facts. Unfortunately (IMO) the media can influence elections in a way that the owners of said media benefit to the demise of their followers whom they influence.Video of Rupert Murdoch:

maoSeptember 9th, 2008 at 2:28 pm

i’d call this state-capitalism because socialist countries are usually dictatorships and the US are still a democracy

kenubieSeptember 9th, 2008 at 2:34 pm

Hi Professor, I like your posts, but you’re giving socialism a bump rap. This is not socialism; at least socialists try to take money from the rich to give to the poor and end up making everyone poor. In this instance is much worse, it’s taking money from the poor to give to the filthy rich. I’m no fan of socialism, but I don’t think even socialism deserve this bump rap !!!Keep up the great posts!

ptmSeptember 9th, 2008 at 2:44 pm

Nouriel Roubini

This biggest bailout and nationalization in human history comes from the most fanatically and ideologically zealot free-market laissez-faire administration in US history. These are the folks who for years spewed the rhetoric of free markets and cutting down government intervention in economic affairs. But they were so fanatically ideological about free markets that they did not realize that financial and other markets without proper rules, supervision and regulation are like a jungle where greed – untempered by fear of loss or of punishment – leads to credit bubbles and asset bubbles and manias and eventual bust and panics.

I’m framing this quote; this it in a nutshell. But wait, did I not just hear you say in the Charlie Rose interview that taking over F & F “was the right thing to do”? Your two statements seem to conflict. Unless you mean that we needed regulation, but since there was none, we now need government intervention and all the inflation that will go along with it!

Miss AmericaSeptember 9th, 2008 at 2:49 pm

@AfAThe move will be twofold. The first half being an anti-proliferation move. (which draws massive support, regardless of who instigates it, or where it is launched from.) The second half of the deal, sends a message to the north about how important an ally Georgia is considered (for it’s strategic location).Miss America

GuestSeptember 9th, 2008 at 2:50 pm

Professor, you are unfairly blaming free markets for sins it has never committed. Your pointing the blame on “unfettered free markets” are highly unwarranted to the degree that we don’t have an “unfettered free market” in the U.S., and never have. We practice regulated capitalism with a large dose of socialism for the poor and trickle down economics for the rich. The socialists (Dems) advocate wealth redistribution to the masses via taxation and handouts; the corporatists (GOP) advocate wealth distribution to the rich via easy money/inflation (via the central bank fiat money system) and various kinds of regulations that benefits large companies. To say that Bush and company are “free marketeers” is truly an insult to those who really are “free marketeers”. The source of our current financial turmoil should not be blamed on free markets; the blame goes to government/central banks that have created bad policy or have failed to enforce existing policy. You say that the free market has run amuck; but the marketplace will exploit whatever regime is in place for their personal gain, as they should. But if they are able to exploit existing regulations then the fault goes to the regulators for either failing to create proper regulations or for bad ones. Your argument that the current cause of our problems lie at the feet of free markets only give ammunition to statists, socialists and central planners that are only too willing to exercise more power over our society with more/bad regulations that will only result in more problems in future.

GLOOMYSeptember 9th, 2008 at 2:51 pm

JIM BUNNING ALERTSept. 9 (Bloomberg) — Senator Jim Bunning said Treasury Secretary Henry Paulson, by rescuing Fannie Mae and Freddie Mac, is acting like China’s finance minister and both Paulson and Federal Reserve Chairman Ben S. Bernanke should step down.“I sincerely believe that Henry Paulson and Ben Bernanke should resign,” said Bunning, a Republican from Kentucky on the Senate Banking Committee. “They have taken the free market out of the free market.”

GuestSeptember 9th, 2008 at 2:52 pm

@Miss Americaright again you were about the huge liquid pools of dark capital.And now about this. I would wager oil and gold would take an up bump as the area is all about oil (stability) and gold reacts well to political and war instability.

QuintumSeptember 9th, 2008 at 2:56 pm

to paraphrase a classic, at last they revealed themselves to the Jedi… Long live the Republic (USSRA)!It’s the attack of the cloned dollars and soon there’s gonna be lots of ’em in the markets…

AlessandroSeptember 9th, 2008 at 3:08 pm

LOL! Volatility hedge funds beat anything financial… you betcha!!Hope anybody so crazy to still play this market to have survived. Many hedge funds will not.

Volatility Hedge Funds Top Rivals in First Since 2003 (Update1)Sept. 9 (Bloomberg) — Hedge funds that profit from turbulence in the financial markets are beating stock, bond and commodity investments for the first time in five years.

RedCreekSeptember 9th, 2008 at 3:13 pm

Dear Comrads:A bit off topic but still a very interesting quote I wanted to share with you:Boon Pickens earlier today on CNBC:USA imports 12 million barrels of oil per day.Saudi Arabia, who is the largest oil producing country in the world, produces 9 million barrels of oil per day.

AnonymousSeptember 9th, 2008 at 3:15 pm

HelloOn the health of the soul1. in the hands of the ruling class, free-market-ideologies –as any other form of religion- are just a tool, a vehicle for their big goal (besides their private moneybag)2. through the eyes of the ruling class, only the tittytainment-humans take an economical theory –as any other religion- for serious3. if the big goal is not achievable in the way of a certain religion, then they change the religion3. this change brings the souls of the tittytainment-humans in big confusion and they loos the head and the orientation; a tittytainment-human is a consumer only: he has not an active understanding by himself of anything; he only can understand that, what others tell him; he only can understand in that way, that others tell him; and so on … ; short: he is just an affect4. after some time, the elites produce a new religion; and then the confused souls will calm down and they fully understand the new religion and are totally convinced, that this time, all things will come in the real order; and everybody is happy as before5. therefore: stay cool; big movement and traffic in the soul is just bad for your health.(6. Fritz Kreamer: ;Kraemer on Elitism: and so on ..)globumedes

AfASeptember 9th, 2008 at 3:25 pm

@ ptmThere is no contradiction in what the Professor is advocating, at least as I understood. He is saying that the bailout is necessarily at this point. But the devil is both in the headlines and in the details. He long advocated that both commons and preferreds should be wiped out and that the agency bondholders take a “haircut”. That was supposed to punish reckless investment (there were no explicit government backstop) and minimize the cost to taxpayers. The real ones that should have been bailed out are the new and future mortgages, who are getting unfairly punished. Obviously, Paulson’s plan does none of these.Written by Guest on 2008-09-09 14:50:38 and other guestsI do not think Professor is blaming “free markets”, as he does not qualify what has just happened as socialism. You know, adjectives, adverbs … matter. “Socialism for the rich” is different from “Socialism” as “unfettered free markets” are different from “free markets”. Obviously, and I stated many times ago, this is neither free markets nor socialism, both being a compliment to this Administration. Apparently, the got the meanings of “regulations” and “free markets” backwards.In their dictionary, regulation stands for ensuring that stocks continue to be up no matter what. And free markets stand for never paying for one’s mistakes.Here is a snapshot:”Washington Wants Oil Down, Stocks Up Before Election, Harrison Says”,FRE,^GSPC,^DJI,XLF,USO,XLEAfalou

tutterfrutSeptember 9th, 2008 at 3:32 pm

“Washington Wants Oil Down, Stocks Up Before Election, Harrison Says”…AND a white Christmas with lots of presents!

GuestSeptember 9th, 2008 at 3:34 pm

NOTE: I ran across this very informative and valuable post in the late letter box of NR’s “Fannie and Freddie’s Bust” epistle that encircled the globe early Monday morn, so I’m re-posting it as it is still very pertinent to discussion here. (I believe the writer inadvertently wrote “Pearson” for Paulson.) sue :)Bernanke and Pearson–“Los Dos Cuates”It is difficult to translate into English the Mexican phrase “los dos cuates”. Literally (the dictionary definition), “cuates” means “twins”, but probably the closest you could come to “los dos cuetes” in English is “the two kindred spirits”.So what is it that joins them together? It is their passionate desires to make, within the economic sphere, the worst seem like the better, or perferably, like the best. Of course, the immediate question that arises is “seem like the best to whom?”. Certainly not to the American taxpayer; to the taxpayer, these two jokers are walking disasters.There are three aspects of their activity. The first aspect is retorical–always walk on the sunny side of the street, and admit to the negative only when it becomes painfully obvious to everyone. They have, in effect, created a virtual or mythical economy based on lies, munipulation of data, and special pleadings. Of course, there is some synchronization between the virtual economy and the real economy. Now that the virtual economy is in deep trouble, how bad a shape is the real economy in? You don’t really want to know!The second aspect is proceedural. For example, the Fed, which is responsible for regulation of financial institutions, aids and abets some of their clients in preparing their financial statements to hide the fact that they are insolvent (they start with the profit and loss statement, and then work backwards). The Treasury Department has a group of shills whose only function is to manipulate the US stock markets. And I wonder how much of the F & F deal is in effect “TOP SECRET”.The third aspect is charitable. When it hits the fan, they both give money to those unfortunate wealthy executives who, for no fault of their own, were responsible for the catastrophic situation in which the financial institution that they manage now finds itself. (Bernanke makes “loans” based on worthless colateral, and Pearson, much more honorably, with outright gifts). And we’re talking big money here–very likely, if the cuates have their way, as much as one trillion dollars!So what will be the inevitable consequences of the actions of these cuates. The inexorable crash will be somewhat delayed, but it will be deeper, of longer duration, and much more pervasive.And then, of course, there is the $64 question (or is it the 64 trillion dollar question?). How much longer will the suckers of the world continue to pay good money for US bonds when there is little or no hope that these bonds will ever be paid off (except possibly with worthless paper dollars)? Perhaps soon the US government will have a big bond sale, and nobody will come to the party!Written by Anonymous on 2008-09-08 22:04:58

AfASeptember 9th, 2008 at 3:35 pm

@ MADo you mean I should be ready to liquidate some of my financial stock positions and load up on gold? I mean the black one.Afalou

GuestSeptember 9th, 2008 at 3:43 pm

Or as Bill Fleckenstein says this week: “Be on red alert for US market chaos” — The nation’s economy is getting worse, not better, and the ‘denialists’ are about to get a big, fat wake-up call:…“As for those folks who are continually making the case that stocks are no longer expensive, it’s worth noting that because of pressures on profit margins, earnings losses, etc., the S&P 500 is now trading at more than 25 times earnings, a multiple previously exceeded only in 2000. That’s another point that gets overlooked by bulls: Earnings estimates can be too high, and stocks can be more expensive than first appears.“And in the ‘be careful trying this at home’ department, Dwight Anderson just announced the closure of his Ospraie Fund, which is down about 40% for the year. For those of you who don’t know, Anderson had a great track record (and reputation). The fact that a wipeout of this size could happen to him — he is calling it quits — should be a warning to folks about how difficult it is to trade commodities (and commodity-oriented equities). Though I suspect his problems were complicated by the size of Anderson’s fund…”

RonSeptember 9th, 2008 at 3:45 pm

Self made men? Individualism? If some Republican annoucnes to me capitalism is the name of their game, I’ll laugh at them. You have to be incredibly weak to need this type of gov’t intervention.

GuestSeptember 9th, 2008 at 3:51 pm

“If the government takes over the mortgage industry (in a sneaky underhanded ‘de facto’ way), then maybe they should also take over GM and Ford. And the ailing airlines.”Don’t worry – they WILL!

GuestSeptember 9th, 2008 at 3:56 pm

More quotes from Bunning:[Senator Jim] Bunning accused Paulson of deception when he told Congress in July that the Treasury’s plan would instill such confidence among investors that it would never have to be used.Paulson “saw and knew what was happening, and didn’t tell the truth to the banking committee,” Bunning said yesterday…Bunning, a critic of former Fed Chairman Alan Greenspan, faults Bernanke for lax supervision of the mortgage market.The Fed chief waited too long to require lenders to change how they write mortgages, Bunning said. “I mean he just did it two months ago. Come on.”

Hilary BarnesSeptember 9th, 2008 at 3:57 pm

A little overboard today! Norway nationalized its two biggest banks in 1992 (or was in 1991?) in the midst of a solvency crisis. It did not mean that Norway suddenly turned Communist. The banks were reprivatised later. The Swedish and Finnish governments bailed out their biggest banks in this same period, though avoiding direct nationalization, and neither of these countries became members of the Federation of Soviet States either. The Nordic governments handled the 1990s crisis sensibly and the banking industries, as well as the economies, retured to good health again within quite a short period. There is however a lesson here for the US: subsequent Nordic economic and financial stability and strong growth had its roots in determined policies to eliminate huge budget deficits. This is also a must for the US in coming years if it is to sustain its position as the dominant global power.

HeedSeptember 9th, 2008 at 3:58 pm

כִּי־מִגֶּפֶן סְדֹם גַּפְנָם וּמִשַּׁדְמֹת עֲמֹרָה עֲנָבֵמֹו עִנְּבֵי־רֹושׁ אַשְׁכְּלֹת מְרֹרֹת לָמֹו׃וּדְנָה כְתָבָא דִּי רְשִׁים מְנֵא מְנֵא תְּקֵל וּפַרְסִין׃

GuestSeptember 9th, 2008 at 3:59 pm

Isn’t this the US / White House definition of “Terrorists”?:”Fanatic zealots of any religion are always pests that cause havoc and destruction with their inflexible fanaticism; … “@ RoubiniI do believe Professor, that you finally see the big picture; congratulations ;-)>Ho humPeterJB

GloomySeptember 9th, 2008 at 4:09 pm

I’ll bet Paulson and Bernanke have a little headache tonight. The market is starting to get the picture that Government is impotent to stop this crisis.

ArmchairSeptember 9th, 2008 at 4:18 pm

Just thought of the Masque of the Red Death. as Prince Prospero? Home-owners afflicted by the red plague (overpriced mortgages)? The nobles at the masquerade as TPTB? The uninvited guest as the doom not only of the masses, but also coming for the nobility too?Also, thinking of Bruce Banner becoming the Incredible Hulk. Roubini going from Bill Bixby to Lou Ferrigno in this post. Sorry I haven’t seen the modern versions. Roubini’a righteous anger is music to the ears.It appears that the Bolshevik fix is to make sure that the whole MBS system continues to roll along, but nothing is done to make mortgage rates cheaper, or to face reality that there is less money rolling in from mortgage payments. The plague continues to ravage the masses as much as ever, but the Prince Paulson and his nobles are well stocked to keep on partying until the next rollover or reset.

SoftwarengineerSeptember 9th, 2008 at 4:24 pm

GLENN BECK FROM CNN IS CALLING IT FASCISMHere’s an email news story that I sent a friend, that mysteriously disappeared from the internet an hour later:”…Washington Wants Oil Down, Stocks Up Before Election, Harrison SaysPosted Sep 09, 2008 01:03pm EDT by Aaron Task in Investing, Commodities, Banking Related: FNM, FRE, ^GSPC, ^DJI, XLF, USO, XLEWith the nationalization of Fannie Mae and Freddie Mac, it’s impossible to argue the Federal government isn’t playing a crucial and growing role in the financial markets.”Call it socialism, manipulation, intervention, [or] desperation. Call it what you will but don’t underestimate the mandate,” says Todd Harrison, CEO of”The agenda [of policymakers] is very clear,” he continues. “They need to stabilize the system [to] avoid the unthinkable — a crash that’s going to suck global capital markets in the abyss.”Certainly there’s an economic benefit to avoiding a global financial market collapse. But Harrison has long argued policymakers had two major goals ahead of the election they are still pursuing: lower oil prices to $100 or below, and get equity prices higher.Given all that’s transpired in the past year, from the bailout of Bear Stearns to the Fed’s special financial vehicles for Wall Street to this weekend’s intervention, one thing is clear: The “invisible hand” in the markets these days belongs to Uncle Sam….”

GuestSeptember 9th, 2008 at 4:30 pm

Bond market, right as usual, is screaming at the top of it’s massive lungs…DEFLATIONARY BUST, DEAD AHEAD.signed,UST @ 3.57%

GuestSeptember 9th, 2008 at 4:47 pm

“… Harrison has long argued policymakers had two major goals ahead of the election they are still pursuing: lower oil prices to $100 or below, and get equity prices higher. Given all that’s transpired in the past year, from the bailout of Bear Stearns to the Fed’s special financial vehicles for Wall Street to this weekend’s intervention, one thing is clear: The “invisible hand” in the markets these days belongs to Uncle Sam….”@ Softwarengineer on 2008-09-09 16:24:47And, it should be noted that the hand is no longer “invisible”.Indeed, in fact since Mr. Greenspan started actively promoting the invasion of Iraq and regularly being in attendance at the White House (during the Clinton Admin. initially)in the wee early hours of the DC mornings, this has been the case. Which brings the continuity of consensual US “economic fall-back” position, which, where these tactics don’t work; the US will invade and create ‘war’, a priori. I believe that all is now ready to now lock in the low oil prices: (IMMHO).Ho humPeterJB

Michael KhorSeptember 9th, 2008 at 4:48 pm

Prof NR, I salute your bravery and direct confrontation of the policymakers, which reflects your confident assessment of the economic situation in the US. During the Asian Financial Crisis government bailouts were branded as nepotism and crony capitalism. Look forward to more of your excellent and insightful analyses pertaining the Credit Crises in which the mainstream media fail to do possibly because of contradicting agenda.

GloomySeptember 9th, 2008 at 5:02 pm

“But the next devaluation (after the deflation cycle which is just now going from the denial phase to the “get me out” phase) will be a doozy. This is when the Fed plays its last card (probably not for a year or two) when the deflation cycle reaches bottom and they must monetize all debt.”

GloomySeptember 9th, 2008 at 5:06 pm

“The strength in the dollar I think is for all bad reasons, caused by deflationary pressures: the part of the money supply due to derivatives and asset backed paper (a lot of off-balance sheet stuff) is shrinking. This destroys dollars and makes them dear. Oil going down is also relatively strengthening the dollar as oil is still priced in dollars. Oil is going down due to lower demand.This is all temporary. How long it lasts I don’t know… could be a year, could be days. It depends on government intervention.The next and only tools left to government is direct intervention like fiscal policy and nationalization of certain parts of the financial system. That is hyper-inflative: that will crush the dollar relatively. We don’t know where, when, or how that will begin. As I said it could be years or days. “

GLOOMYSeptember 9th, 2008 at 5:10 pm

DON’T GET TO DISTRACTED BY LEHMAN-WATCH THIS ELEPHANTAmerican International Group Inc., the largest U.S. insurer by assets, tumbled 19 percent

AlessandroSeptember 9th, 2008 at 5:18 pm

I didn’t have the time to read the post, yet. WOW!@Nourielthanks for calling a spade “a spade”… and for the courage to shout it out loud.Just one nitpick. The Bushes have been no heroes of lazier fare, ever. Just as an example, the 1% monetary policy that set up the debt bomb has been a huge government intervention in free market.

AnonymousSeptember 9th, 2008 at 5:39 pm

I am going to pay my quarterly taxes by scapping guard rails and cutting up some seldom used bridges around here.

Little SaverSeptember 9th, 2008 at 5:48 pm

Written by Guest on 2008-09-09 11:37:29Novice here – and first time on the blog. Will someone lay out the alternative for me, or point me to a place that does? What happens if the gov’t just lets the GSEs go bankrupt?You don’t get it, novice. It’s the greed, corruption, stupidity and willful neglect that preceded the takeover of the GSE’s that are condemned here. Not the takeover itself, which was an inevitable effect of those factors.

GuestSeptember 9th, 2008 at 5:49 pm

from’s Quick Draw

… …Every mortgage now insured by Fannie and Freddie is the equivalent of a U.S. Treasury bond. This allows anyone to borrow on the full faith and credit of the U.S. government so long has the money is used to buy a house. In addition, mortgage lending will now be a government function, run with Post Office-like efficiency.

AnonymousSeptember 9th, 2008 at 6:21 pm

@Guest: “This allows anyone to borrow on the full faith and credit of the U.S. government so long has the money is used to buy a house. In addition, mortgage lending will now be a government function, run with Post Office-like efficiency…”Decisions to nationalize the GSEs had zero to do with the economy and everything to do with the investment banks and the corporations. Nationalization of Freddie and Fannie is a big Section 18 socialized housing welfare transfer to the multi-national corporations to house their low-wage immigrant work force. The reason the investment banks are interested in Fannie and Freddie is that they have to have a place to deposit their unwanted, worthless, poisonous investment waste and sell risky debt without the risk. Of course, they would prefer it to be a private deposal site so they can control what Freddie and Fannie are doing, under the table.Now it’s in Congresses’ lap. Now Congress can have hearings and subpoena these people. Yes, the Democrats want open borders but they also want big programs to pay back their voting constituencies: they don’t want to give all the money to the investment bankers. On the other hand, if Wall Street’s candidate McCain should be elected, it would be wise to remember that the man is a prostitute and that no one can trust a prostitute. He is not dependable to do what they want.And so, the rulers have a problem. When the problem gets worse, with no redress, the public will get violent. It’s already very unhappy — with government, bankers, gas prices, inflation and taxes.

GloomySeptember 9th, 2008 at 6:26 pm

I wonder how much trash Lehman has stashed at the Fed through its new credit facilities. The Fed better aim its shotgun at someone and start counting to three quick before Lehman goes belly up and the Fed is stuck with the junk.

David PtSeptember 9th, 2008 at 6:32 pm

Gee, how did Nouriel miss the 8 years of Clinton degreg, Glass-Stegall, for instance?Poor George, everything now gets heaped on him. Ah, well, its always convenient to have a popular whipping boy, this hides the culpability of the many by sacrificing one man.

GuestSeptember 9th, 2008 at 6:36 pm

NEW YORK (Reuters) – Lehman Brothers Holdings Inc said it will announce third-quarter results on Wednesday at 7:30 a.m..The company said it will announce “key strategic initiatives” and hold a conference call at 8 a.m. to “discuss the firm’s expected financial results, outlook and strategy.”

AfASeptember 9th, 2008 at 7:49 pm

Sooo folks,How many of you think that Lehman’s Q3 results will be similar to BSC’s Q1 results, i.e. never get reported?The question is how strategic the initiatives will be.

CanadianSeptember 9th, 2008 at 8:07 pm

Interesting discussion: is Wall Street the Government or is the Government Wall Street? Several things are clear.80% of the world’s savings is floating this mess but for how long we don’t know, and it looks as if your grand children and ours will struggle because of the crushing debt. About 200 years ago your President Thomas Jefferson, key author of your Consitution, noted that, “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” Maybe it’s time to corral the vulture capitalism run by a bunch of cowboys and take heed of Jefferson’s wisdom.

AnonymousSeptember 9th, 2008 at 9:36 pm

I commend you Dr.Roubini for being such outspoken and taking a courageous stand against the Bolshevik troika.

Wolf in the WildsSeptember 9th, 2008 at 9:51 pm

@gloomyActually AIG may represent the next segment of the financial markets to get stressed. In their case, it will be a liquidity crisis not a solvency crisis (at least not yet). However, the next big thing will still be LEH. Will we see another Bear-styled bailout? I think not. I do not think the Feds have any more political or financial ammunition left to do that. However, that does not mean that there will be a armageddon like meltdown. The main risk of a collapse in LEH is a meltdown in the credit derivative market, from a counterparty risk perspective. Ironically, most of the positions in LEH will be netting positions. One way to avert a choke in the market will be for a large bank (Prob JPM again) to take over the management of the position and wind down (ie novate the trades away ala clearing house style) for a fee. ie, JPM steps in as a temporary clearing house. The losses/gains will be set off against the unwinding of LEH as a whole. Of course, equity and subs will be wiped out but at least the cost will not be on the tax payers. An orderly unwind of the cdses will not be an impossible task as most of these trade net off. It will take time, but it should be executable.It will also set the framework for future financial bankruptcies. The other risk, to me, of a LEH collapse would be a true deleveraging. We should expect prices of assets in Level 3 categories to be properly priced. The contagion effects of this would be reveal the true insolvent state of the US financial system. Would this be allowed? Can it be stopped??

GuestSeptember 9th, 2008 at 10:05 pm

i think you deserve a Nobel Prize in economics (if there’s one)your warning sir have saved a lot of people’s wealth (including me)thank you again

wawawaSeptember 9th, 2008 at 10:16 pm

It is time for people with integrity (e.g. Roubini) to get outraged of this non-sense. This ponzi pyramid is collapsing on the tax payers and MSM is shutup.

GuestSeptember 9th, 2008 at 10:28 pm

Now, I get the indignation at hypocrites (evangelicals, zealots, fanatics), but rarely are they the religious practitioners of any duration. They practice unsustainable and collapsing faith that burns out under public scrutiny. No, I know of a more durable sort, the kind one can admire and maybe envy. Theirs is a most private and concealed worship. These persons guide their every step with a times-tested moral code, practice their generosities in secret, spend their time in prayer and seeking wise direction spurning audience. Theirs is a very deprecating and inconspicuous seeking of internal virtues.Like one wishes in an indulgent grandmother. This is the real gold, the real jewel of a person and exceedingly rare. Their works are slow and abiding and in a lifetime make grandious a common life.There are so few left. And none in public office or directing great firms in commerce.We would not be here, were THEY the captains of industry or commanders of policy.Heap scorn on the hypocrite, call hogwash on religiousity in general, if you wish. But I have had the pleasure of some few such TRUE individuals. Their company makes endurable the panics and duresses abounding today because the more “level-headed” and “professional” men of the world held the helm and steered our uncompassed course. And ever and eventually we find ourselves in the ditch. Again. Who will get us out? Well, you know.

miss americaSeptember 10th, 2008 at 12:08 am

@ hlowe,They don’t run for cover in what you may think is important… They run for cover in what they think will become important… …and then they horde it.I think they want US dollars. …but that’s strictly a guess that I wouldn’t wager a dollar on. I’d sit out for now.Miss America

MASeptember 10th, 2008 at 12:24 am

@AfaPowerful hands are being dealt. I think oil can be well controlled with the right coordination… And winks… And nods…MA

JLCSeptember 10th, 2008 at 2:02 am

Bravo professor.I want to extend my personal thanks for your insights and for the forum you have provided here. Based on what I have learned from you and your readers, I was able to drastically alter my lifestyle to prepare for what seems to be unraveling all around us.In the past year, I have ditched my index funds and gone to cash (spread among various institutions), sold my house, got a government job, moved to a place a couple of miles from work, bought and sold gold and then bought it again, made and lost some money in foreign currencies, bought a chest freezer and a couple months worth of frozen and canned food and water, started a garden, stocked up on essentials. I have shared the insights I learned here with friends and family and given them very good advice (much of which has been ignored). Above all, I have opened my eyes and can clearly see that things are not what they seem.I have shared the above with you because without this forum I would not have made these moves in a timely fashion. For example, the government agency I work for announced a hiring freeze the day after I was hired. Sure, there will probably be budget cuts forthcoming and I may be laid off in the future, but for now I am secure. The next couple of years are going to require flexibility and the ability to adapt to constant change, but will also creat golden opportunities for those who are patient and bide their time.We are very fortunate to have you out there telling it like it is, instead of the usual BS the MSM puts out. Most people don’t have a clue, and don’t care to hear about the truth.My family and I express our sincere gratitude and appreciation.I weep for the Republic, which is being dismantled before our very eyes.

Little SaverSeptember 10th, 2008 at 3:11 am

Nouriel’s pledge for regulation under attack by Mish, who calls for further deregulation and free markets. comment there:Free markets are like free streets. Wonderful if robbers, killers, rapers, lunatics wouldn’t exist. Unfortunately, they do, so cops are necessary.In markets, it’s similar. Fraudsters exist. If let alone, they will build a powerful empire based on fraud and manipulation. It’s sad, but any free system belongs in Utopia, I’m afraid.

TaxpayerSeptember 10th, 2008 at 3:33 am

Prof. Roubini, I share your understandable disappointment, but you and I know that this train with a bad case of brake failure has been barreling down the track towards the inevitable derailment, ignoring the signals it encountered along the way, for some time now.The signal operator hasn’t helped, flashing fake signals to give passengers and observers the impression that everything was OK.It is remarkable that we have got so far, a tribute to the engineer’s ingenuity in the face of overwhelming odds.We have been engaged in a capital base building binge for some time now.This includes asset revaluing (e.g. real estate) and asset creation (e.g. commercializing military support services, prisons etc.).Well not really creation, as we already had the assets, we have “privatized” services and in the process made what was previously commons (state/community owned and operated), into private capital.This capital can then be “securitized” and so increase the amount of credit available in the economy, and providing a home for, and generating a return on, our increasingly concentrated savings.This is all fine and dandy until overloaded debt servicers fall by the wayside and the market loses its nerve, overshoots, and asset prices start to plummet causing credit contraction.The availability of credit depends on how we value the collateral that backs it, and now that is somewhat less than it used to be.We have market overshoot on the way up and market overshoot on the way down.The ability of the market to reliably price assets is suspect.Marking to market becomes a game of russian roulette that, like luck, lets us down when we need it most.We have valuations for property tax and insurance purposes as well as market value.Perhaps we should look at something like these to obtain valuations for credit transactions.A complicating factor of this asset valuation fiasco is the fact that real estate mortgages are highly leveraged margin loans.They allow us to multiply the return on our own capital but are susceptible to margin calls when the market tanks, just like any other margin loan.And the non-recourse character of real estate loans allows the borrower to pass the lot back to the creditor when the margin call cannot be met.This is probably not a good idea for such a highly leveraged business, encouraging a greater degree of risk taking than might otherwise occur.Adjustable rate mortgages add another level of instability to the process.If I had my way, there would be a moratorium on rate resets until things calmed down and incomes had a chance of matching the resets.The hypersensitivity and mobility of the “smart money” always makes the situation worse, it seems.If it behaves like an unruly child, it should be pulled into line like one.The so called “smart money” might sneer at buy and hold stalwarts, but at least they provide a measure of stability that you will never get from it.

MartinSeptember 10th, 2008 at 4:28 am

Alright folks, Listen up.Yes, we have been burning the midnight oil on LEH. This time though, its not a single entity that we have to look at. As we look at LEH, there are two other firms starting with “W” that is puking badly.I am afraid, today is LEHs last chance. In another couple of hours, Fuld will say some good news but not sure if that news is enough for the markets.If I can speak for myself here, I dont see LEH existing beyond OCT.

MartinSeptember 10th, 2008 at 5:30 am

Dial IN : 800-369-1721 Pass code : 7561430See you there at LEH CALL at 8:00 AM. Hopefully we have done enough to save this cretin. Lets see

Wild BillSeptember 10th, 2008 at 6:01 am

Dear Professor,Your courage is inspiring. I believe the current powers that be will stop at nothing to further their aims. They are quite capable of inflicting severe “collateral damage” in order to rid themselves of critics who might oppose them or expose them for what they are. I am fearful for your safety. Please take precautions. Remember, they are capable of anything, including the events of 9/11.

GloomySeptember 10th, 2008 at 6:33 am

@WolfI am not so sure AIG is solvent. Some authors have doubted it, we’ll see. You raise some good questions-maybe we’ll see the answers soon.

FomraSeptember 10th, 2008 at 6:57 am

Points to note in LEH results :For the nine months ended August 31, 2008, approximately $200 million of severance is included in Compensation and benefits.

Franciscdo AlmeidaSeptember 10th, 2008 at 7:58 am

One has to bow to Roubini, or continue to be an idiot to oneself, or, continue to be a sily clown in front of the others. A nobrainer it is now, thanks to Roubini’s crystalball.

VinilSeptember 10th, 2008 at 9:26 am

We are in new territory with respect to public spending and bailouts, as Adam Smith said…[edit] Of War and Public Debts”…when war comes [politicians] are both unwilling and unable to increase their [tax] revenue in proportion to the increase of their expense. They are unwilling for fear of offending the people, who, by so great and so sudden an increase of taxes, would soon be disgusted with the war… The facility of borrowing delivers them from the embarrassment… By means of borrowing they are enabled, with a very moderate increase of taxes, to raise, from year to year, money sufficient for carrying on the war, and by the practice of perpetually funding they are enabled, with the smallest possible increase of taxes [to pay the interest on the debt], to raise annually the largest possible sum of money [to fund the war]….The return of peace, indeed, seldom relieves them from the greater part of the taxes imposed during the war. There are mortgaged for the interest of the debt contracted in order to carry it on.[15]”Smith then goes on to say that even if money was set aside from future revenues to pay for the debts of war, it seldom actually gets used to pay down the debt. Politicians are inclined to spend the money on some other scheme that will win the favor of their constituents. Hence, interest payments rise and war debts continue to grow larger, well beyond the end of the war.Summing up, if governments can borrow without check, then they are more likely to wage war without check, and the costs of the war spending will burden future generations, since war debts are almost never repaid by the generations that incurred them.

AussieRobSeptember 10th, 2008 at 9:37 am

Way to go ! Lehman is broke and the share market goes up. You are the dumbest people on the planet !Your country is owned by the sheiks, the singaporean first family and the Chinese Party chiefs and you are still dreaming about democracy. Most of you are so naive that you have never seen or contemplated the slums of places like Mumbai. Guess what, your next home will be a packing case. If you have any smarts book your one way ticket out of there whilst you can

AnonymousSeptember 10th, 2008 at 9:49 am

I agree, but at this point what else can you do? Your proposals and alternative solutions would cause massive panic among regional banks, among foreign central banks and create absolute havoc for many many reasons. All the government is trying to do now is buy as much time as possible and hope things pass over and let everything bleed slowly. Even this plan could cause serious problems. If preferreds continue to deteriorate, regional banks will face a serious run on capital and banks will fail regardless. The inevitable is not pretty, but slowing the pace of it is the best option you can ask for.

Miss AmericaSeptember 10th, 2008 at 10:27 am

Late last night, Richard Fuld went upstairs to tuck little Lehman into bed. He sat down on the edge of the bed, pushing aside little Lehman’s Teddy Bull, and replaced it with a Teddy Bear. He proceeded to read him his favorite nighttime Wall St story by Dr Se-ussraBank I thankBank I thankThank the BankThank the bank!Thank the bank!I do not likeTo thank the bank!Do you likeGreenspan and Hank?I do not like to,Thank the bank.I do not likeGreenspan and Hank.Would you like themhere or there?I would not like themhere or there.I would not like themanywhere.I do not likeGreenspan and Hank.I do not like to,Thank the bank.Would you like themto save the upper class?Would you like themto save your ass?I do not like themsaving the upper class.I do not like themto save our ass.I do not like themhere or there.I do not like themanywhere.I do not like Greenspan and Hank.I do not like to, thank the bank.Would you borrow from themin a bind?Would you borrow from themwith the government behind?Not in a bind.Not with the government behind.Not to save the upper class.Not to save our ass.I would not borrow from them here or there.I would not borrow from them anywhere.I would not borrow from Greenspan and Hank.I do not like to, thank the bank.Would you? Could you?Borrow some Cash?Borrow from them! Borrow from them!We have a secret stash.I would not,could not,borrow some cash.You may like to.You will see.You may like toSince it’s free!I would not, could not even if free.Not borrow cash! You let me be!I do not like them in a bind.I do not like them with the government behind.I do not like them to save the upper class.I do not like them to save our ass.I do not like them here or there.I do not like them anywhere.I do not like Greenspan and Hank.I do not like to, thank the bank.President McCain! President McCain!President McCain! President McCain!Could you, would you,if President McCain?Not if President McCain! Not even if free!Not borrowing cash! Bank! Let me be!I would not, could not, in a bind.I could not, would not, with the government behind.I will not borrow from them to save our ass.I will not borrow from them to save the upper class.i will not borrow from them here or there.I will not borrow from them anywhere.I do not like Greenspan and Hank.I do not like to, thank the bank.Say!What if President Barrack?Here what if President Barrack!Would you, could you, if President Barrack?I would not, could not,if President Barrack.Would you, could you,No need to explain?I would not, could not, even with no need to explain.Not if President Barrack. Not if President McCain.Not borrowing cash. Not even if free.I do not like to use the TAF facility.Not to save the upper class. Not in a bind.Not to save your ass. Not with the government behind.I will not borrow from them here or there.I do not like them anywhere!You do not likeGreenspan and Hank?I do notlike to,Thank the bank.Could you, would youOn the taxpayer’s dime?I would not,could not,on the taxpayer’s dime!Would you, could you,It’s borrowing time?I could not, would not, on the taxpayer’s dime.I will not, will not, revert to borrowing time.I will not borrow from them even if we don’t explain.I will not borrow from them if President McCain.Not if President Barrack! Not even if free!Not borrowing cash! From the TAF Facility!I do not like them in a bind.I do not like them with the government behind.I will not borrow from them to save the upper class.I do not like them to save our ass.I do not like them here or there.I do not like them ANYWHERE!I do not likeGreenspan and HankI do not like to,Thank the bank.You do not like them.So you say.Try them! Try them!And you may.Try them and you may, I say.Bank!If you will let me be,I will try them.You will see.Say!I like Greenspan and Hank!I do! I like them, Thank the bank!And I would borrow from them on the taxpayer’s dime.And I would borrow from them all the time!And I will borrow from them and not explainAnd if President Barrack or President McCain.And borrowing cash. Especially when free.They are so good, so good, you see!So I will borrow from them in a bind.And I will borrow from them with the government behind.And I will borrow from them to save the upper class.And I will borrow from them to save our ass.And I will borrow from them here and there.Say! I will borrow from them ANYWHERE!I do so likeGreenspan and Hank!Thank you!Thank you,Thank the bank!Sweet dreams LehmanMiss America

GuestSeptember 10th, 2008 at 10:35 am

Don’t worry folks…Caribou Barbie (attended 4 seperate universities to attain her BS degree in Political Science from that venerable thinktank, the Univ. of Idaho)and John McCain will fix everything.Dumb & dumber.(I’m moving to Australia when these Bush 3.0 spinsters are elected in Nov.)

randySeptember 10th, 2008 at 10:50 am

they aren’t going to get elected. Obama and Biden will chew them up in the debates. Mark my words…..the debates will change the direction of the polls. Palin can’t think on her feet about the issues because she doesn’t know what the issues are!

GuestSeptember 10th, 2008 at 10:52 am

Guest on 2008-09-10 10:35:33

Caribou Barbie (attended 4 seperate universities to attain her BS degree in Political Science from that venerable think tank, the Univ. of Idaho)and John McCain will fix everything.

As a college teacher and listening to her talk, my first guess was that she did not attend college. She gives off more of a high-school-grad-real-estate-agent persona, rather than a more introspective, self-aware type college graduate. To my surprise she did attend college. As you say, four of ’em; three for one semester each, but most of the time was spent at the U of Idaho. However, she did not major in poly sci, rather “communications-journalism”!

randySeptember 10th, 2008 at 10:53 am

McCain does not have a clue about the economy he’s even said so. Obama will at least listen to smart people (Volker et al) and maybe just maybe incorporate some of their thinking into actions.

ewulfSeptember 10th, 2008 at 10:59 am

John Kenneth Galbraith ´s book “The affluent society”, made it clear some time ago.Big Corporations, no matter whether they are public or private,rather than demand and supply framework ,shape the important economies .Thus, I guess ,that the discussion is as usual on the territory of the normative and positive analysis.It is understandable Professor Roubini´s critics because he has been severily critized for his “pessimism”, which turned out to be “realism”. However,the fact of the matter,is that usually Governments give an implicit guaranteee to financial sector everywhere,otherwise there is no way they take the necessary risk to support what suppodsely would end up with more wealth .It was the case in Chile (1983), Mexico (1991),(in this case was a foreign Government ,Bill Clinton Presidency),Argentina (2001), and it will be the case in the future ,as long as what it is at stake ,is the financial stability of the whole system.What about the Moral hazards risk ?.The only answer is to improve intitutions and the regulatory framework.

FRIEND OF WASHINGTON MUTUALSeptember 10th, 2008 at 11:04 am

The preparation is on the way for Washington mutual funeral.WaMu’s CDS spreads surge to record high-PhoenixWed Sep 10, 2008 11:22am EDTNEW YORK, Sept 10 (Reuters) – The cost of protecting Washington Mutual’s (WM.N: Quote, Profile, Research, Stock Buzz) debt with credit default swaps surged to a record high on Wednesday as the lender’s shares plunged more than 25 percent.Five-year credit default swaps on Washington Mutual traded at 40 percent upfront, plus 500 basis points annually, up from 32 percent upfront plus 500 basis points a year on Tuesday, according to data from Phoenix Partners Group. That means it now costs $4 million on an upfront basis plus $500,000 a year to protect $10 million of debt for five years. (Reporting by Dena Aubin; Editing by Tom Hals)

GuestSeptember 10th, 2008 at 11:06 am

Berkshire, in Blow to Banks,Reins In Its Deposit InsurerBy DAMIAN PALETTASeptember 10, 2008Warren Buffett’s Berkshire Hathaway Inc. has told one of its subsidiaries to stop insuring bank deposits above the amount guaranteed by the federal government, dealing a fresh blow to the financial-services industry as it tries to assuage anxious customers.The subsidiary, Kansas Bankers Surety Co., is notifying about 1,500 banks in more than 30 states that it will no longer offer a program called “bank deposit guaranty bonds.” KBS is an 18-employee subsidiary of Berkshire Hathaway, according to the parent firm’s 2007 annual report. It is one of a handful of firms that offer such insurance, a big selling point for banks trying to attract wealthy customers.Two people briefed on the matter said the order was made Monday by Mr. Buffett, Berkshire Hathaway’s chief executive. Chuck Towle, a senior vice president at KBS, declined to comment on why his firm was leaving the business. “We have decided to do so,” he said. “We’ll work with each individual bank and work it out with them.”Mr. Towle wouldn’t confirm or deny Mr. Buffett’s involvement, calling it “strictly rumor.” Mr. Buffett declined to comment.Eleven banks have failed this year. Seven have fallen since July 11, a concentration not seen since the savings-and-loan crisis of the late 1980s and early 1990s. The Federal Deposit Insurance Corp. backs deposits of as much as $100,000 on most accounts or $250,000 on some retirement accounts.That Mr. Buffett is withdrawing from this insurance market is an indicator of how many in the industry

GuestSeptember 10th, 2008 at 11:15 am

Interesting tidbit from Bespoke:As expected, Standard and Poor’s announced today that Fannie Mae (FNM) and Freddie Mac (FRE) would be removed from the S&P 500 effective September 10th after the close. In their place, (CRM) and Fastenal (FAST) will be added after the close on September 12th. Besides the fact that the additions will not take place until two days after the two stocks being removed will be taken out (Will it be the S&P 498 for two days?), there are other inconsistencies with the reasoning surrounding the removals.In its press release, Standard and Poor’s said that both FNM and FRE were being removed because they no longer fulfilled the $5 billion market cap requirement for inclusion in the index. With market caps of $1.04 billion for FNM and $0.57 billion for FRE, that’s all well and good. However, there are currently three other stocks in the S&P 500 that have lower market caps than FNM. They are CIEN ($1.05 bln), DDS ($1.00 bln), and MTG ($0.93 bln). Why are they still in the index? Is S&P expecting them to go up 500% in the coming days? In fact, if S&P were to strictly enforce its $5 billion threshold for inclusion in the S&P 500, there would be 119 companies that are currently in the index that would have to be booted — making it the S&P 381.

GuestSeptember 10th, 2008 at 11:24 am

Gross’s true snake-tounged intentions revealed…NEW YORK (Reuters) – The world’s biggest bond fund, PIMCO’s Total Return Fund, said it had its strongest ever day Monday as prices of mortgage-backed securities rose after the government seized control of mortgage finance agencies Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz).Mortgage-backed securities issued by the agencies had one of their biggest rallies ever on Monday, driving their spreads as much as 40 basis points tighter against comparable Treasuries, as investor demand surged after the government’s bailout and explicit backing.”Our mortgage overweight and the performance of mortgages on Monday gave the Total Return fund its greatest one day relative performance (compared to our index) in its history,” Bill Gross, chief investment officer of Pacific Investment Management Co. told Reuters on Tuesday.

ptmSeptember 10th, 2008 at 11:32 am

JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS, FLASH UPDATE, September 10, 2008, August M3 Estimated up 14% Year-to-Year, Bailouts Should Intensify Inflationary Pressures, Unusual Systemic InstabilitiesDon’t know if you have visited his site recently,, but his M3 acceleration has been falling for the last several months. It was at a peak of 17.4% in March, but now it’s down to an estimated 13.97% for August. Regardless, that is still significant growth in the money supply, presently estimating ~$14 trillion this year, ~$13 trillion in 2007, and ~$11 trillion in 2006.For those of who are wondering if they made the right decision to buy PM, here is a quote that may make you feel better about your decision.

When I offer that my general outlook is unchanged, which it remains, I am not at all insensitive to the massive short-term hit taken by precious metals or the significant strength seen recently in the U.S. dollar. My outlook generally is for the long-term and is based on the underlying fundamentals of an intensifying inflationary recession, intensifying systemic solvency crisis and eventually a hyperinflationary great depression. The underlying fundamentals remain place and, if anything, are getting worse. The markets eventually will catch-up with the fundamentals.

GuestSeptember 10th, 2008 at 11:46 am

Hey! More good news that should give the Dow another 100 points or so…12:45 p.m. [SNV] Synovus cuts quarterly dividend by 65% to 6 cents12:44 p.m. [SNV] Synovus expects about $21 mln in restructuring charges12:43 p.m. [SNV] Synovus to cut 650 positions over next 24 months

AfASeptember 10th, 2008 at 11:58 am

Written by Guest on 2008-09-10 11:24:11″Gross’s true snake-tounged intentions revealed…NEW YORK (Reuters) – The world’s biggest bond fund, PIMCO’s Total Return Fund, said it had its strongest ever day Monday as prices of mortgage-backed securities rose after the government seized control of mortgage finance agencies Fannie Mae and Freddie Mac”Yeah, Efficient Market Hypothesis (EMH) my a$$. How are we supposed to make money if some have pre-knowledge, or should I say influence, on market decisions.

GuestSeptember 10th, 2008 at 12:20 pm

1:18 p.m.[FNM] Fannie Mae prices 2-year notes at 70 bps above U.S. TreasuryLooks like th emarket is having trouble believing the “Government Backing” on this debt!!!!

Free TibetSeptember 10th, 2008 at 12:28 pm

@AfALook at the record:Tues. LEH drops 30%Wed. Shares at $7.90 LEH announces $5.80/share loss.Wed. Stock trades flat.Pre-knowledge? Tell me you want to be in this market.

SeanSeptember 10th, 2008 at 12:47 pm

Professor Roubini, I know you are angry now with this bail out that you have been advocating for months.But I assure you that you have seen nothing yet. Detroit 3 will come to governemtn asking for $50 billion subsizied loan package to “help them create green technology”. But instead I assure you those money will go into their financials and bonuses. After all, there is zero risk playing with tax payer money!Then we will have Student Loan company asking for subsized loan too to “help students and secure USA future”!!After that, we will have Credit Card company coming …. all before Bush comrades term expire by Jan 2009!

MarkSeptember 10th, 2008 at 12:57 pm

@JLCPS – So what light do you see at the end of the tunnel?Train :-()@randythey aren’t going to get elected. Obama and Biden will chew them up in the debates. Mark my words…..the debates will change the direction of the polls. Palin can’t think on her feet about the issues because she doesn’t know what the issues are!When the American voters voted in Bush & Co. TWICE I have to wonder whether this “debate” theory has any real sense of validity. What are they going to debate anyway? Certainly not the REAL issues :-()Mark

MarkSeptember 10th, 2008 at 1:01 pm

Looks like WAMU is finally going to fall to gravity… Anyone know what risks there could be with safe deposit boxes held in their institutions?Mark

MarkSeptember 10th, 2008 at 1:09 pm

I hope that people caught the link to the article that Jason B posted ( Orszag, CBO director, said: “It is the CBO view that Fannie Mae and Freddie Mac should be directly incorporated into the federal budget.”The Bush administration appeared to be caught by surprise. A spokeswoman for the Office of Management and Budget told the Financial Times: “We are working through this issue with Treasury and other stakeholders.”The White House could take a different view on Fannie and Freddie and exclude them from its budgets. But this would be difficult because the CBO is regarded as the leading independent authority on US finances and its assessments guide spending decisions by Congress.The two mortgage companies have between them $5,400bn in liabilities, equal to the entire publicly traded debt of the US, alongside mortgage-related assets of about equal value. These will now all be accounted for by the CBO, although public accounting rules mean that its tally of US government debt may not necessarily increase by $5,400bn.[…]Tim Backshall, chief strategist at Credit Derivatives Research, said the price implied that the US was more likely to default on its obligations than Japan, Germany, France, Quebec, the Netherlands and several Scandinavian countries. Traders said the CDS market for US debt was illiquid and it was hard to see evidence of increased concern over US creditworthiness in broader market prices.Clearly things are going in the wrong direction…Mark

MarkSeptember 10th, 2008 at 1:28 pm

Just when you figured we’d run out of koolaid:Bank of America Says Losses Shift to Commercial Loans

rSeptember 10th, 2008 at 1:52 pm

@ Mark:I agree. Neither party really knows what the real issues are. The sheeple are being kept in the dark by the politicians and the MSM because if they got wind of what was really happening, all hell would break loose. It’s a sad state of affairs my friend. I just want to position myself to make a few $$ on the chaos and not lose my A#S!

GuestSeptember 10th, 2008 at 2:46 pm

Bank, Thrift & Specialty LenderSNL EXTRAWELLS FARGO CEO MET WITH PAULSON BEFORE GSE TAKEOVER Wells Fargo CEO John Stumpf met with Treasury Secretary Henry Paulson Sunday morning before the announcement of the government’s takeover of Fannie Mae and Freddie Mac, Stumpf said Sept. 10.Referenced Tickers: WFC9/10/2008 11:45 AM ET

GuestSeptember 10th, 2008 at 2:47 pm

Specialty Lender, North America Real Estate & BankMBA: COMMERCIAL/MULTIFAMILY MORTGAGE DELINQUENCY RATES TICK UP IN Q2 Between the first and second quarters, the 30-plus-day delinquency rate on loans held in commercial mortgage-backed securities edged up 0.05 percentage point to 0.53%.Referenced Tickers: FRE FNM

ewulfSeptember 10th, 2008 at 3:00 pm

Previously I mentioned that Government intervention into the economies to rescue financial institutions (or Governments!)at risk of failure, are more often than what it should be ,because what it is at stake :The financial stability of the whole system.In fact ,this objective on their own , justified the aid that former President Bill Clinton Government, gave to Mexico in 1995,( I wrote earlier 1991).Therefore , the social benefit of saving and protecting the financial stability,(key variable for growth), higher than the social cost facing tax payers,which is spread out all the way into the future,makes this kind of intervention properly done, a necessity.Sure, the nature of the problem is different ,but the justification is not that much so different.

GuestSeptember 10th, 2008 at 3:04 pm

…”Which means that they also – and this is crucial – bailed out the firms who had guaranteed the $1.4 trillion in credit derivatives. There may very well be losses, perhaps significant losses, but there would be no catastrophic loss there, that would threaten the viability of the financial system. Because what has really happened is that you have replaced a credit default swap on a quasi-governmental agency, that being Fannie Mae or Freddie Mac, with a credit default swap on the full faith and credit of the United States government. If the US guarantee had not been substituted then it would be a catastrophic failure. But because the US guarantee was substituted, it’s seemingly not a big deal, though much remains to be worked out.In other words, the biggest beneficiaries of the $1.4 trillion Fannie and Freddie bailout were not Fannie or Freddie at all, but the Wall Street firms whose senior officers just happen to be major political contributors to both political parties – with some of those senior officers also running the Treasury Department on a revolving door basis.”

GuestSeptember 10th, 2008 at 3:06 pm now and Nov. 4th, the Saudi and Kuwaiti monarchs will attempt to knock US gasoline prices lower, to ease the anxieties of jittery swing voters who are worried about the economy. Soybean and corn prices have also plunged by 30% since early July, in sympathy with lower oil prices, and with a little bit of luck, Americans might also see lower food prices before the November 4th election. Yet only a tiny fraction of Americans will even know why oil and grain prices are tumbling.Its a tragedy that the fortune of the world is dependent to dump,fat, stupid american joe6pack voters.Really sad.

GuestSeptember 10th, 2008 at 3:06 pm

Sep 10, 2008 3:01 pm US/CentralU.S. Officials Linked To Sex For Oil ScandalAllegations Range From Rigging Contracts And Consulting Jobs To Sexual RelationshipsInvestigations Reveal ‘Culture Of Substance Abuse And Promiscuity’WASHINGTON (AP) ― Government officials handling billions of dollars in oil royalties engaged in illicit sex with employees of energy companies they were dealing with and received numerous gifts from them, federal investigators said Wednesday.The alleged transgressions involve 13 Interior Department employees in Denver and Washington. Their alleged improprieties include rigging contracts, working part-time as private oil consultants, and having sexual relationships with — and accepting golf and ski trips and dinners from — oil company employees, according to three reports released Wednesday by the Interior Department’s inspector general.The investigations reveal a “culture of substance abuse and promiscuity” by a small group of individuals “wholly lacking in acceptance of or adherence to government ethical standards,” wrote Inspector General Earl E. Devaney.The reports describe a fraternity house atmosphere inside the Denver Minerals Management Service office responsible for marketing the oil and gas that energy companies barter to the government instead of making cash royalty payments for drilling on federal lands. The government received $4.3 billion in such Royalty-in-Kind payments last year. The oil is then resold to energy companies or put in the nation’s emergency stockpile.Between 2002 and 2006, nearly a third of the 55-person staff in the Denver office received gifts and gratuities from oil and gas companies, the investigators found.Devaney said the former head of the Denver Royalty-in-Kind office, Gregory W. Smith, used illegal drugs and had sex with subordinates. The report said Smith also steered government contracts to a consulting business that was employing him part-time.Smith, contacted by e-mail by The Associated Press, said he had not seen the report and could not respond. He and nine other employees in the Denver office are mentioned in the reports.The findings are the latest sign of trouble at the Minerals Management Service, which has already been accused of mismanaging the collection of fees from oil companies and writing faulty contracts for drilling on government land and offshore. The charges also come as lawmakers and both presidential candidates weigh giving oil companies more access to federal lands, which would bring in more money to the federal government.”This all shows the oil industry holds shocking sway over the administration and even key federal employees,” said Sen. Bill Nelson, D-Fla. “This is why we must not allow big oil’s agenda to be jammed through Congress.”While most government royalties for drilling on federal lands are paid in cash, the government in recent years has been receiving a greater share of its oil and gas royalties in actual product. More of that oil is also being sold on the open market, versus being deposited in the Strategic Petroleum Reserve, the nation’s emergency oil stockpile. Congress earlier this year passed a law halting deposits of oil to the reserve to alleviate high gasoline prices.Interior Secretary Dirk Kempthorne, who was asked about the reports earlier in the day before they were given to him and congressional offices, said the investigation was prompted by a 2006 phone call from employee who said there were ethical lapses in the Denver office.”I look forward to having the opportunity to review the inspector general’s findings so we can take the appropriate actions,” Kempthorne said.(© 2008 The Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.)

GuestSeptember 10th, 2008 at 3:29 pm

Standard & Poor’s Ratings Services late Tuesday said it lowered the outlook on WaMu, the nation’s largest thrift, to negative from stable. “The outlook revision reflects the increasingly challenging housing and mortgage markets and their impact on WaMu’s core mortgage franchise,” said Victoria Wagner, an S&P credit analyst, in a statement.

RandySeptember 10th, 2008 at 3:31 pm

anybody know if there “” offer to make wealth out of inflation is bogus???The Hidden Bailout Of $1.4 Trillion In Fannie / Freddie Credit-Default Swapsby Daniel Amerman.Someone posted the link and I read it. It sounds credible. I just don’t know anymore. Please advise.Randy

GuestSeptember 10th, 2008 at 3:43 pm

Sooooo, Miss America, what is it that will take stocks to new lows? When is it to be expected? If you don’t mind that is…

Joe AverageSeptember 10th, 2008 at 3:57 pm

So in affect aren’t the liability for other peoples mortgages being indirectly, unvolunteerly, and unfairly placed on the tax payers.And if so do the tax payers get fairuse of the assets they are paying for?If you don’t have a mortgage, or don’thave a mortgage that is owned by F&Fdo you get a tax credit equal to theindividual’s portion of the entire costof this BS, and for as long as the cost exists?

GloomySeptember 10th, 2008 at 4:25 pm

UBBELIEVABLE”Fannie Mae’s two-year debt was auctioned Wednesday at a yield of nearly 2.9 percent, or almost 0.7 of a percentage point above comparable Treasury notes. That was slightly smaller than the 0.74 percentage-point spread on a smiliar sale in July.”Someone posted this bit of information earlier, but it is really remarkable. The bottom line-buyers do not believe that the US government is guaranteeing GSE debt.

GuestSeptember 10th, 2008 at 6:24 pm

From Guardian article by Kenneth RogoffIf central banks are faced with a massive hit to their balance sheets, it will not necessarily be the end of the world. It has happened before – for example, during the financial crises of the 1990s. But history suggests that fixing a central bank’s balance sheet is never pleasant. Faced with credit losses, a central bank can either dig its way out through inflation or await recapitalisation by taxpayers. Both solutions are extremely traumatic.Raging inflation causes all kinds of distortions and inefficiencies. (And don’t think central banks have ruled out the inflation tax. In fact, inflation has spiked during the past year, conveniently facilitating a necessary correction in the real price of houses.) Taxpayer bailouts, on the other hand, are seldom smooth and inevitably compromise central bank independence.There is also a fairness issue. The financial sector has produced extraordinary profits, particularly in the Anglophone countries. And, while calculating the size of the financial sector is extremely difficult due to its opaqueness and complexity, official US statistics indicate that financial firms accounted for roughly one-third of American corporate profits in 2006. Multi-million dollar bonuses on Wall Street and in the City of London have become routine, and financial firms have dominated donor lists for all the major political candidates in the 2008 US presidential election.Why, then, should ordinary taxpayers foot the bill to bail out the financial industry? Why not the auto and steel industries, or any of the other industries that have suffered downturns in recent years? This argument is all the more forceful if central banks turn to the “inflation tax”, which falls disproportionately on the poor, who have less means to protect themselves from price increases that undermine the value of their savings.British economist Willem Buiter has bluntly accused central banks and treasury officials of “regulatory capture” by the financial sector, particularly in the US. This is a strong charge, especially given the huge uncertainties that central banks and treasury officials have been facing. But if officials fail to adjust as the crisis unfolds, then Buiter’s charge may seem less extreme…

Average JaneSeptember 10th, 2008 at 6:40 pm

@ London Banker — wherefore are thou, sir? Your absence is noticeable. I’d love to have your thoughts on this mess.

GuestSeptember 10th, 2008 at 6:51 pm

On August 11, 1008, Richard Benson asked, “How Much Will Government Bailouts Actually Cost the American Taxpayer?” He estimated the total cost to be $600bn. Excerpts are worth re-reading in retrospect of the magnitude of the economic quake that reshaped America’s financial landscape on September 7:Over the last eight years, we have watched in horror as a two-term Republican Administration furthered programs that have effectively thrown lit sticks of dynamite into our American factories. These programs have dismantled entire industries in the United States and encouraged their growth in China and elsewhere in Asia because of cheap labor. Also, during this time the illusion of prosperity was maintained by a Greenspan Fed as interest rates were cut to record lows, and a disastrous housing bubble was created. Americans were so seduced by home ownership that they bought houses in a frenzy that they couldn’t afford, and then borrowed against them. In addition, under the Administration’s policies, the value of the dollar has been trashed, and commodity inflation has robbed workers lucky enough to still have jobs.As the unprecedented credit crisis continues into its second year, it’s becoming crystal clear that the American economy is slipping into the worst post-WWII recession on record. It’s even beginning to dawn on third and fourth generation Wall Street Republicans that if the average American doesn’t have a good job (much less any job), they won’t be able to pay their mortgage, auto loan or credit card.For now, Fannie Mae and Freddie Mac have been essentially nationalized and the Federal Reserve has been turned into a dumping ground for toxic waste mortgage securities beginning with the Bear Stearns bailout.What is this economic disaster going to cost the taxpayer? (Benson added up costs from The Federal Reserve, Student Loans, Pension Benefit Guarantee Corporation, Federal Housing Administration, Small Business Administration, Federal Home Loan Banks, Federal Deposit Insurance Corporation and lastly, Fannie and Freddie. Here’s Fannie and Freddie):Fannie Mae and Freddie Mac: In 2007, there were over 2 million notices of foreclosure in the United States, and in 2008, foreclosures could reach 3 million. Fannie & Freddie account for 44 percent of the foreclosed loans! So, should it be any surprise that these two giants (that hold or insure over $5 trillion in mortgage loans) just announced they also will not even think of foreclosing on anyone for at least 300 days! Does the federal government really believe that by not foreclosing, the losses will be minimized?Meanwhile, the new law pushed through by the US Treasury guarantees the debt of Fannie & Freddie. Fannie & Freddie each have about $1 trillion on their balance sheets, and they also insure about $3 trillion in GSE agency securities that pass-through mortgage interest and principal on a pool basis to owners of the securities. The new law puts an explicit government guarantee behind the GSE debt, including every pass-through security. This means all mortgage payments must be made on time to investors, even if any mortgages in the past-through security are delinquent.With a record number of homeowners considering whether to live free for 300 days by skipping their mortgage payments, imagine the cash gap that will open up between the cash that comes into Fannie & Freddie from mortgage payments, and the cash that must go out to cover the GSE security payments. For the government, it is more important to spread the losses into the future than to minimize them. Losses on defaulted mortgage loans at the GSEs will be horrible. Put the bailout cost at $300 billion…The financial institution bailouts and the government taxpayer bailouts are looking more like socialism every day. I suspect that when we look back at this time in history four years from now, and marvel at the great increase in government ownership and socialism imbedded in the economy, we will have the Bush Administration to thank for sending us down the road to economic serfdom.

iwwSeptember 10th, 2008 at 6:53 pm

I’d like to join all those who pointed out that what we’re seeing today in the US is not socialism by any stretch of the imagination. It would be over the top to call it fascism, but we’re inching our way in that direction.

GloomySeptember 10th, 2008 at 7:48 pm

EBOLA ON WALL STREETThe pace is quickening with Fan & Fred getting taken down and now, a short few days later, Lehman and WaMu are barely breathing. So many others are lined up in the ICU in very stages of their now rapidly fatal illnesses: big ones, little ones, fat ones, skinny ones. The ICU staff from Treasury and the Fed must be exhausted just trying to keep track of it all. I really do believe this epidemic is about to explode. The crematorium is about to get very busy.

ptmSeptember 10th, 2008 at 8:02 pm

Joe Average on 2008-09-10 15:57:21

So in effect aren’t the liability for other peoples mortgages being indirectly, unvolunteerly, and unfairly placed on the tax payers.

Guest on 2008-09-10 15:04:29

In other words, the biggest beneficiaries of the $1.4 trillion Fannie and Freddie bailout were not Fannie or Freddie at all, but the Wall Street firms whose senior officers just happen to be major political contributors to both political parties – with some of those senior officers also running the Treasury Department on a revolving door basis.”

Joe Average on 2008-09-10 15:57:21

And if so do the tax payers get fair use of the assets they are paying for?

Gloomy on 2008-09-10 16:25:19

The bottom line-buyers do not believe that the US government is guaranteeing GSE debt.

iww on 2008-09-10 18:53:20

It would be over the top to call it fascism, but we’re inching our way in that direction.

Regular readers of this forum know that I am reluctant to engage in self-indulgent opinions, But here comes the exception. In a rage that comes close to a pissed-off Medic or PeterJB, the thing that really gets me is that there was not an amendment to the constitution of the United States of America, or a vote (much less a discussion) in congress, or even a secret presidential signing. Rather, a handful or political appointees unilaterally decided to levy a silent tax upon the American public in the form of inflation to pay for these risky investments. Ladies and gentlemen this IS fascism.As George Carlin said, We have been bought and sold and we do not even understand how it happened! If McCain wins, I predict the participants on this forum will eventually end up in concentration camps like this one in Indiana

Jason BSeptember 10th, 2008 at 8:13 pm

Gloomy-What I learned from my mass casualty planning days – creamatoriums cant go 24 hr/day. They have to be shut down and cleaned. Plus, you cant move all the bodies to the cramatorium, they dont have the capacity, and you cant move contaminated bodies. Just bury them in the hot zone in mass graves.ptm-This is taxation without representation, pure and simple.

AfASeptember 10th, 2008 at 8:29 pm

Epidemic RE, toxic waste, Ebola, contaminated bodies, CDS infection …,zombie banks …No silver bullets, no antibodies, no antidotes, no vaccines.You know what is the ultimate solution, eh?Quarantine camps then … Bomb.Otherwise …… To Be Continued

GuestSeptember 10th, 2008 at 9:53 pm does the sun go on shiningWhy does the sea rush to shoreDon’t they know it’s the end of the world’Cause you don’t love me any moreWhy do the birds go on singingWhy do the stars glow aboveDon’t they know it’s the end of the worldIt ended when I lost your loveI wake up in the morning and I wonderWhy everything’s the same as it wasI can’t understand, no, I can’t understandHow life goes on the way it doesWhy does my heart go on beatingWhy do these eyes of mine cryDon’t they know it’s the end of the worldIt ended when you said goodbyeWhy does my heart go on beatingWhy do these eyes of mine cryDon’t they know it’s the end of the worldIt ended when you said goodbye

AfASeptember 10th, 2008 at 10:26 pm

Is this a fittest-song competition?How about this one (Chicane – Come Tomorrow)Come tomorrow, come tomorrowThere’s never been an answerThere’s always someone else to followAnd you are coming down, and you are coming downGiving me the reasons for your liesAnd when you turn me inside outDon’t know what you feel or dream aboutAnd then you take me upside downRemember my face, my name, my townSigned: TaxPayerTo: F&F, Lehman, Wamu et alcc: Treasury & Fed

little annSeptember 10th, 2008 at 10:35 pm

I’m wondering if anyone here tried to borrow any TLT? Fidelity couldn’t process my order this morning. I’m totally wiped out by all of these outrageous decisions that affect all of us about which we have ZERO control. I feel so much disillusionment, frustration and sadness of so many here. I’m sorry that I have nothing to add that would be of any help. Sincerely-

MarkSeptember 10th, 2008 at 10:38 pm

Oh, how can REM’s It’s The End Of The World not serve as the ultimate anthem?That’s great, it starts with an earthquake, birds and snakes,an aeroplane – Lenny Bruce is not afraid.Eye of a hurricane, listen to yourself churn,world serves its own needs, dummy serve your own needs.Feed it off an aux speak,, grunt, no, strength,The ladder starts to clatter with fear fight down height.Wire in a fire, representing seven games, a government for hire and a combat site.Left of west and coming in a hurry with the furies breathing down your neck.Team by team reporters baffled, trumped, tethered cropped.Look at that low playing!Fine, then.Uh oh, overflow, population, common food, but it’ll do.Save yourself, serve yourself. World serves its own needs, listen to your heart bleed dummy with the rapture and the revered and the right – right.You vitriolic, patriotic, slam, fight, bright light, feeling pretty psyched.It’s the end of the world as we know it.It’s the end of the world as we know it.It’s the end of the world as we know it and I feel fine.Six o’clock – TV hour. Don’t get caught in foreign towers.Slash and burn, return, listen to yourself churn.Locking in, uniforming, book burning, blood letting.Every motive escalate. Automotive incinerate.Light a candle, light a votive. Step down, step down.Watch your heel crush, crushed. Uh-oh, this means no fear cavalier.Renegade steer clear! A tournament, a tournament, a tournament of lies.Offer me solutions, offer me alternatives and I decline.It’s the end of the world as we know it.It’s the end of the world as we know it. (It’s time I had some time alone)It’s the end of the world as we know it (It’s time I had some time alone) and I feel fine.(I feel fine)It’s the end of the world as we know it. (It’s time I had some time alone)It’s the end of the world as we know it. (It’s time I had some time alone)It’s the end of the world as we know it (It’s time I had some time alone) and I feel fine.The other night I dreamt of knives, continental drift divide. Mountains sit in a lineLeonard Bernstein. Leonid Brezhnev. Lenny Bruce and Lester Bangs.Birthday party, cheesecake, jelly bean, boom!You symbiotic, patriotic, slam book neck, right? Right.It’s the end of the world as we know it. (It’s time I had some time alone)It’s the end of the world as we know it. (It’s time I had some time alone)It’s the end of the world as we know it (It’s time I had some time alone) and I feel fine.It’s the end of the world as we know it.It’s the end of the world as we know it.It’s the end of the world as we know it (It’s time I had some time alone) and I feel fine.It’s the end of the world as we know it. (It’s time I had some time alone)It’s the end of the world as we know it. (It’s time I had some time alone)It’s the end of the world as we know it (It’s time I had some time alone) and I feel fine.It’s the end of the world as we know it. (It’s time I had some time alone)It’s the end of the world as we know it. (It’s time I had some time alone)It’s the end of the world as we know it (It’s time I had some time alone) and I feel fine…I now return you to your regular broadcast…Oh, and for movies? Logan’s Run? And there’s Soylent Green…Mark

GuestSeptember 10th, 2008 at 10:55 pm

trivia,did you know, skeeter davis’s its the end of the world is the most played song on Greenspan’s I-Pod.of course Im joking

kilgoresSeptember 10th, 2008 at 11:41 pm

@ JasonB 20:13:18You may not like it, but it’s NOT taxation without representation. Our ELECTED President and our ELECTED representatives in Congress gave Treasury the power to undertake the bailout. Don’t dress up like a native American and start throwing tea overboard. ;-)SWK

MASHIACH BEN CHANASeptember 10th, 2008 at 11:48 pm

THE AMERICANS ARE COMINGHELLO USAGOODBYE IRANIsrael’s senior ministers confer urgently on Iran as US masses air-naval might in Middle East watersDEBKAfile Special ReportSeptember 10, 2008, 10:32 PM (GMT+02:00)USS Theodore Roosevelt carrier joins American Middle East armadaPrime minister Ehud Olmert summoned defense minister Ehud Barak and foreign minister Tzipi Livni for an urgent consultation on Iran Wed. Sept. 10, as the USS Theodore Roosevelt aircraft carrier headed out to the Mediterranean for missions “in support of maritime security.”Its arrival will bring the number of US aircraft carriers in the Mediterranean, Persian Gulf and Arabian Sea to four, compared with two Russian warships. Most of the Russian fleet in the region is concentrated in the Black Sea whence it has easy and rapid access to Middle East waters.The Roosevelt will be followed by its strike force, which includes the guided missile cruiser Monterey , the guided missile destroyers Mason and Nitze , with 7,300 sailors and marines aboard, and the attack submarine Springfield .Our sources report that the USS Ronald Reagan carrier and its strike group began engaging in assault and support missions for US and NATO forces in Afghanistan on Aug. 28.The Iwo Jima carrier group, whose decks carry 6,000 sailors, air crews and marines, supports the US Sixth Fleet in the Mediterranean and Fifth Fleet in the Gulf with a massive amphibious capability.The USS San Antonio amphibious transport dock ship is the first vessel of its class to be deployed in the region as a platform for supporting Marine movements and operations ashore.The USS Peleliu carrier patrols the Red Sea and Indian Ocean. It is escorted by vessels carrying a large Marine contingent.Monday, Iran launched a three-day naval-air-missile exercise to practice defense tactics for its nuclear sites.

MASHIACH BEN CHANASeptember 10th, 2008 at 11:51 pm

THE RUSSIANS ARE COMINGTwo Russian Tu-160 strategic bombers land in Venezuela, nuclear battle cruiser on wayDEBKAfile Special ReportSeptember 10, 2008, 9:57 PM (GMT+02:00)Peter the Great nuclear-powered heavy missile cruiserThe Russian defense ministry said the Tu-160 nuclear-capable, multi-mission bombers (NATO-coded Blackjack) arrived Wednesday Sept. 10 at a Venezuelan air base to take part in joint military exercises along with a Russian flotilla.DEBKAfile’s military sources first disclosed on Sept. 9, that the nuclear maritime reconnaissance/anti-submarine warfare turboprop TU-142 (NATO coded Bear F, or Bear J), which can fly 6,500 km, i.e. from Venezuela to the US coast, will also be based at a Venezuelan military airfield.Caracas announced that four Russian ships with almost 1,000 sailors aboard would join its navy for maneuvers on November 10-14.Like the Russian air contingent, the Russian flotilla is also bigger and more formidable than Russian and Venezuelan spokesmen have indicated.According to DEBKAfile’s military sources, it consists of six to eight vessels, led by the Kirov Class (Type 1144.2) Peter the Great nuclear-powered heavy missile cruiser, one of the largest warships in the world, which is designed to guard the rest of the group against submarine and air attack.It is armed with the Granit (NATO designated SS-N-19 Shipwreck) long range, anti-ship missile system, consisting of 20 missiles. If the lead missile is intercepted, one of the others moves into the lead role.Peter the Great is also equipped with 40 S-300F air defense missiles.Other ships in the Russian flotilla are the Admiral Chabanenko , the Russian navy’s most advanced guided missile anti-submarine battleship, and the guided nuclear missile cruiser Pyotr Velikiy . They are escorted by five smaller warships and a fuel vessel.DEBKAfile’s military experts deduce from the makeup of the Russian group that, while it is being presented as primarily defensive, in fact it is the core infrastructure of an important Russian air and fleet presence for shielding a potential assault deployment in the event of a Kremlin decision to base one in Venezuela.

London BankerSeptember 11th, 2008 at 3:33 am

@ Professor RoubiniLike Cassandra, you are cursed to speak truth and prophesy to those who will ignore you to embrace their destruction.@ Average Jane and othersSadly, the story of Cassandra offers more clues to our fate:Apollo loved Cassandra and when she did not return his love, he cursed her so that her gift of prophesy would become a source of endless pain and frustration as none would believe her.While Cassandra foresaw the destruction of Troy (she warned the Trojans about the Trojan Horse, the death of Agamemnon, and her own demise), she was unable to do anything to forestall these tragedies. Her family believed she was mad and locked her up.After the Trojan War, she sought shelter in the temple of Athena, where she was raped by Ajax the Lesser. Cassandra was then taken as a concubine by King Agamemnon of Mycenae. Unbeknownst to Agamemnon, while he was away at war, his wife, Clytemnestra, had begun an affair with Aegisthus. Clytemnestra and Aegisthus then murdered both Agamemnon and Cassandra. So those of us seeing clearly and speaking truthfully can expect to be ignored, feared, raped, taken into forced servitude, and ultimately killed by traitors.I prefer Miss America’s bedtime story on the whole.Miss America began warning us here that those in power were coordinating with foreknowledge of events and infinite leverage nearly a year ago. Since then we have seen events unfold which can only be explained in that context. The certainties of democracy and free markets are not long assured. The next election may be rigged like the last two in the USA (Florida and Ohio?), with a military October surprise to stir enough uncertainty to defend a suspect outcome. [Am I the only one to note that there is usually a train or apartment building bombing in Russia in the run up to elections to encourage the embrace of unquestioned authority?]In the meanwhile, I have moved a mainland Chinese Mandarin tutor into our home to give intensive isntruction to my children. I want them to be able to communicate and collaborate with our new masters. That may be the wisest investment I will ever make.

GuestSeptember 11th, 2008 at 4:42 am

Any news or opinion on developments of BoA’s acquisition of Countrywide? Has it gone to the taxpayer feed trough yet or about to get in line?

Jason BSeptember 11th, 2008 at 4:45 am

SWK -Of course, you’re correct. Congress voted on the bailout.But I don’t like it. I really don’t like it.

GuestSeptember 11th, 2008 at 4:46 am

“In the meanwhile, I have moved a mainland Chinese Mandarin tutor into our home to give intensive isntruction to my children. I want them to be able to communicate and collaborate with our new masters. That may be the wisest investment I will ever make.”@ London Banker on 2008-09-11 03:33:41Indeed: My daughter is fluent in Mandarin as well as literate; she is 11 years old; we sent her to Chinese schools for 4 years: Her first language is English and she has 4 or 5 other languages that she understands to hear.”Masters”: Sorry, but No. Don’t be so emotional; a new era approaches; just be sentient and carry your integrity like your dignity and respect. Prepare for reality.Ho humPeterJB

London BankerSeptember 11th, 2008 at 5:04 am

@ PeterJB”Masters” was infelicitous. One of the advantages of living in the ex-empire of Britain is that we naturally ally ourselves and adapt to the realities of the day. A hundred years ago we were the Masters with global economic and military hegemony and an empire encircling the globe.As we declined we learned to appease those rising powers to preserve what remained of value. We once appeased the Germans, and currently we appease the Americans, and in future we will appease someone else as circumstances require. The Germans were never our masters. The Americans are not our masters now. Whoever we accommodate in future will not be our masters either. We will indeed carry our integrity (well, most of it anyway), our dignity and respect into the future.

GuestSeptember 11th, 2008 at 5:27 am

;-)>Whoever we accommodate in future will not be our masters either. We will indeed carry our integrity (well, most of it anyway), our dignity and respect into the future.”@ London Banker on 2008-09-11 05:04:43Aye. I remember your carrying community carrying Big Daddy Idi Amin on a bed o’er ‘n ‘cross field and beyond.Pragmatism is a sort of respect with underlaying connotations of empire quieted.Ho humPeterJB

AlessandroSeptember 11th, 2008 at 6:27 am

@London Bankerspending on the education (and general care) of ones kids is the only true investment in the future that I see, at the moment. Happy to see you agree.When people ask me ‘how to invest for the long term’ I answer: ‘Have a few kids, treat them well, let them study and hope they’ll care about you when you’ll be old’. Adoption is obviously an option as well.

mammonSeptember 11th, 2008 at 8:14 am

History repeats itself in predictable cycles based on human nature. The failure of Perfunctory “Democracy” will allow authoritarian control of all but a few governments in the world. Resource shortage will bring us to war. Economics will be a sideshow. Military Strength will determine the outcome of economics. Cassandras and anybody who dares to think will be appropiately filed away. It is our fault, for allowing the concept of democracy to be corrupted to such an extent that it is meaningless. We sat around enjoying the illicit asset appreciation, when we knew it was a mirage. We don’t have democracy! We have deeply entrenched vested interests control every facet of the marketplace of ideas. We don’t have free markets! The markets are elegantly and stealthily manipulated. The processes of control are so complex and their intent is so degenerate that no good can come of this. World population will be diminished by radiation instead of birth control! This shows that human beings have not evolved in tandem with the lethal power of their weapons. If you build weapons of mass destruction, you must have institutions to deter conflict. We have failed to synchronize with nature.Nature is not self destructive, and symbiotic relationships abound. Our cognitive mind is not synchronized with nature. Our subconscious mind, which is where the wisdom of nature is informed has been suppressed. We are all one, but we won’t know it until it is too late. The present geopolitical instability can easily spiral out of control. This is not preordained. We are not living some religious script. We are too selfish and stupid to evolve!!

OuterBeltwaySeptember 11th, 2008 at 8:44 am

PeterJB, LB, Alessandro:Those were great posts, but I think things are tending toward the maudlin on this blog.The leveling of wealth via globalization is a good thing. The hollowing out of the U.S. economy is a natural consequence of globalization. The propping up of the western economies by debt is and was a national, top-to-bottom decision, made in the most part with eyes-open. We made bad decisions, but we made them. Wall Street was happy to profit from our stupidity (that’s what they do), but we made the policy decisions.These economic dislocations are artifacts of the growing-up process for individuals, our nations, and the world. The truly threatening structural risks we face are rooted in the fact that some trends are occurring faster than we can adapt to them, and here I’m talking about dealing with human nature (greed, self-delusion, tribalism, over-population, environmental degradation). These problems have been around forever, but the effect of them is entering the geometric-expansion part of the curve, and our rate-of-adaptation is a some (not that much) behind.The “master” we’ll be serving in the future is the “master” we serve now: Darwin. Darwin says “if you don’t adapt, someone else will be glad to do it for you”.The question that I find most rewarding to ask is “what does it take to accelerate the rate and efficacy of adaptation?”.In the past 50 years, what’s most remarkable about the Chinese is that they went about the process of adaptation with a determination and a degree of focus that eclipsed, by a significant margin, what other societies were able to accomplish.The determinant is adaptation. If your kids don’t know what it takes to adapt, it won’t make any difference what language they speak. Furthermore, if your society can’t adapt, the condition of the natural environmental may make discussion in any language moot.To summarize: econ turbulence is natural given the recalibration of the world economy. U.S. indebtedness is a function of our unwillingness to adapt – to grow up. The winner is the one that adapts.

OuterBeltwaySeptember 11th, 2008 at 8:52 am

Most of the ideas set out above come from other, smarter posters from this and other blogs I frequent.PeterJB comes to mind as one that advocates the notion of societal systems in equilibrium until they hit the edge of the “bottle” they live inside, then they morph. Or they die.Another poster on this blog pointed out the work of a professor, whose name escapes me, who delivers a lecture on the effects of “compounding”, e.g. small incremental change that goes on for a long time, then delivers a huge tsunami of unexpected impact.I hope that both of the above-referenced posters will continue to educate everyone that is willing to listen about their excellent ideas, and the occasional re-post is not a bad idea, given the limitations of blogs.

garyalanSeptember 12th, 2008 at 3:11 pm

This is indeed is sad state of affairs, and I am just as angry about this bail out of the derivative market as you. I believe this will eventually result in continued devaluation of the dollar. Thank you for sharing your views with us.

Peter PrincipleSeptember 12th, 2008 at 11:53 pm

The very worst part is that the SOBs are going to get themselves re-elected and do it some more — because huge numbers of semi-literate, TV-addled white independent voters think Sarah Palin is “spunky”.Hell of a way to run an empire.

The Wall Street ExaminerSeptember 13th, 2008 at 9:20 am

The US government has infected itself with the terminal disease it was seeking to treat.The gross Gross forgot one very important detail, market risk. His fate and the fate of all his holdings are now sealed as Treasury yields begin their inexorable rise to the stratosphere. He better sell quick, or he’ll be sitting on a pile of debt that’s worth a whole lot less than it is today.Let us not forget however that when the debtor is bigger than the creditors, it is the debtor who holds the cards. As the market comes to this realization, and the realization that the debtor cannot pay off the obligations it has assumed, it will revalue those obligations accordingly, thereby cutting their own throats. What will gross Gross say then?The US government can only continue this Ponzi scheme of paying off its existing debts by issuing ever more securities. This game will now come to an end, as Treasuries will now be come to seen for the credits that they are–junk.

AnonymousSeptember 14th, 2008 at 10:11 am

I’m not sure why Roubini is surprised. The business criminals on Wall Street have been playing this game for a long time now. Every few years they come up with new complex financial instruments, they make their money, and blow up the financial system. That’s how the elites make their money. We had the junk bond debacle of the 80s, then we had derivatives (with major banks such as Barings bank as well as governments going under (Orange County), the pushing of internet stocks (which was supposed to be because no one was sure how to value them , only an idiot believes the official story, they can’t use that argument for housing) now we have these asset backed securities. All this is carefully engineered. Roubini calls it the USSRA? The U.S. has been a centrally planned economy for a long time now, so I’m a little surprised at Roubini’s shock, this is nothing new.

gAntonSeptember 18th, 2008 at 8:25 pm

I don’t object to the Bernanke/Paulson gyrations so much on moral grounds as I do the fact that what they’re doing is just going to makea really bad situation very much worse. How much money have they spent so far? Nobody (including these two jokers) has any idea as to how much, but it’s probably somewhere between two and seven trillion dollars. My personal opinion is they’ve just replicated the total debt outstnding on all government bonds. That’s a lot of money to spend for a political expediency, and these two don’t have any money; they’re just debasing the currency. If Dr. Roubini is right that the economy is going th hell in a hand basket (and I’m certain that he is), then these two guys are in a hell of a hurry to get us to the crash point.Let us review how we got here. Housing inflation was completely out of sync with the inflation of the rest of the economy (about 10%/year). Soon the price of houses was well outside the reach of the American consumer, and sales threatened to drop drastically. The industries answer to this was to sell million dollar houses to people with little or no money. Then the housing contracts, which were and still are really worthless in the middle term, were bundled into bond-like packages and sold for astronomical amounts. Oh boy, how much wealth was created!Now, housing prices in many areas (the areas where the money is) have fallen some 20%, but they are more out of reach of the American consumer than ever (due to wage freeze, job loss, inflation, credit problems, etc.). The housing market will only recover when falling housing prices and increasing consumer purchasing power reach and accord, and there is no chance of this happening any time soon, if ever. But Paulson and Bernanke seem to be either in denial, or else they’re living in some some kind of bizarre, make-believe world, because they are trying reajust the value of the these semi-worthless assets to what they were in the dream world of two or three years ago. Boy oh Boy, deja vu all over agein!

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