EconoMonitor

Nouriel Roubini's Global EconoMonitor

RGE Content: Weekly Roundup

On Nouriel Roubini’s Global EconoMonitor, Nouriel explains why the Treasury rescue plan is very poorly conceived and does not contain many of the key elements of a sound, efficient and fair rescue plan – like a HOLC-style program and the need to recapitalize the financial institutions that are badly undercapitalized..  Check out: RGE Conference Call on the Economic and Financial Outlook and why the Treasury TARP bailout is flawed.

The claim by the Fed and Treasury that spending $700 billion of public money is the best way to recapitalize banks has absolutely no factual basis or justification.  This way of recapitalizing financial institutions is a total rip-off that will mostly benefit – at the huge expense of the U.S. taxpayer – the common and preferred shareholders and even unsecured creditors of the banks.  Check out Nouriel’s Is Purchasing $700 billion of Toxic Assets the Best Way to Recapitalize the Financial System? No! It is Rather a Disgrace and Rip-Off Benefitting only the Shareholders and Unsecured Creditors of Banks

In: The US and global financial crisis is becoming much more severe in spite of the Treasury rescue plan. The risk of a total systemic meltdown is now as high as ever Nouriel explains why the risk of a total systemic meltdown is now as high as ever as the severe strains in financial markets (money markets, credit markets, stock markets, CDS and derivative markets) are becoming more severe rather than less severe in spite of the nuclear option of a $700 billion package.

The next step of this panic could become the mother of all bank runs: a run on the 1 trillion dollar plus of the cross border short-term interbank liabilities of the U.S. banking and financial system as foreign banks start to worry about the safety of their liquid exposures to U.S. financial institutions.  Such a silent cross border bank run has already started as foreign banks are worried about the solvency of U.S. banks and are starting to reduce their exposure.  Check out: Roubini Sees `Silent’ Run on Banks, Urges `Triage’: Bloomberg Radio Interviewand BBC Hardtalk Interview with Roubini: “US Bail-Out Special”.

On the U.S. EconoMonitor, different authors developed alternatives and enhancements to the US bailout package so that taxpayers would gain equity ownership in the financial institutions they will aid.

In The price of salvation Simon Johnson and James Kwak lay out various pricing mechanisms for the toxic assets that the government will clean out from bank balance sheets. In the end, they favor auctioning off a portion of banks’ debt to determine their fair market value in a free market. The government will then use this price to acquire the rest of the debt. Should a bank remain under-capitalized afterwards, the government can make up the difference by buying preferred shares. 

In The RTC or the RFC: Taxpayers as Involuntary Equity Investors Alex Pollock and John H. Makin argue that the Reconstruction Finance Corporation set up in response to the Great Depression would have been a better model for the bailout than the RTC. In the RFC model, the public would make equity investments rather than just provide subsidies to banks.

 In Credit Crisis Versus Credit Crunch, Christopher Carroll differentiates ‘credit crunch’ from ‘credit crisis’ and outlines the proper policy response to each situation. For example, increasing FDIC provisions would help prevent a credit crisis, while re-capitalizing banks will mitigate the current credit crunch.

In Fed Watch: Regardless of Bailout, US Economy Decelerating, Tim Duy bemoans the public’s delusion that the bailout will avert a recession. ‘Main Street’ is setting itself up for massive disappointment, which may compel politicians to inject another fiscal stimulus. The bailouts and stimulus packages will only cushion – not prevent – transformation to an economy less dependent on debt-financed consumption.

Also on the U.S. EconoMonitor this week:

On the Emerging Markets Monitor, Edward Hugh analyses the impacts of the deteriorating global financial crisis on Russia and the long-term prospects for the economy: Happy Families Russian Style. In Nirvikar Singh’s Emerging Markets – A Different Twist the author discusses the aspects of the ‘emerging markets’ taxonomy and its dynamics. Finally, Syed Zahid Ahmad writes on the particularities of the Islamic banking and financial system: Islamic banking restrains bankruptcy.

On the Global Macro EconoMonitor, Christopher Carroll in Revolting Economists suggests recapitalizing the financial system by investing money in the system as a whole. The taxpayer would lend money to the troubled banks in exchange for banks cutting dividends to zero until capital is restored, and get reimbursed out
of any future profits.

To help determine the fair price of the structured products and restore banks’ balance sheets, Gilad Livne and Alistair Milne in Liquidity measures will help restore bank capital recommend setting up an ‘exchange’ for traders to exchange information on the structured credit products and trade a small fraction of their portfolio.

In The Revised Troubled Asset Relief Plan Should Have Passed Jeffrey Frankel makes a case for the revised TARP and argues that bailing out Wall Street or even homeowners is a better alternative than doing nothing or the options that the House Republicans are offering.

In New IMF Study of Banking Crises Contradicts Bailout Bill Premise and Details,Yves Smith draws on the IMF’s study on the past banking crises that show that providing government assistance to troubled banks can be counterproductive.  Such assistance can lead to greater credit contraction and bank losses in the future as well as higher risk exposure and fiscal costs to the government.

Also on the Global Macro EconoMonitor this week:

 

On the Finance & Markets Monitor, Chris Whalen describes the numerous options that the FDIC has at its disposal to deal with the current banking crisis.  As well, he presents his reasons for why the current Paulson proposal before Congress is flawed, what the Congress should actually be doing, and how the ineptitude of Paulson and Bernanke in the demise of Lehman led to such a mess in the first place.  He thinks that bank losses, as much as possible, should be retained in the private sector. Read: A Workable, Private Bank Assistance Plan or Why President Bush Should Fire Ben Bernanke and Hank Paulson. In another piece (Bailout: It’s About Capital, Not Liquidity; Seeking Beta: Interview with Robert Arvanitis) Chris Whalen further extrapolates the form that the bailout should take mainly the RFC/WaMu model instead of the RTC/Paulson model.

Willem Buiter explains that the core of the problem facing the banking sector stems from a lack of capital—not merely a lack of liquidity in The Paulson Plan: A useful first step but nowhere near enough.  He implores the U.S. Congress and its EU counterparts to pass relevant legislation to deal with the crisis in as expeditious a manner as is possible.

In: Fundamentals and Leverage Joseph Mason reviews how creeping sophistication, complexity and lack of clarity in the mortgage securitization market led to its current stagnation.  His solution is greater transparency, public reporting and a development of better rules of accounting, before new financial products are allowed to trade.

Ricardo Caballero and Pablo Kurlat discuss the issue of moral hazard, and how in times of crisis its application could lead to unintended and maybe even disastrous consequences. Read: Paulson plan: ‘exemplary punishment’ could backfire.

Bankruptcy regulation is considered by Christopher Carroll.  In Let Bankruptcy Judges Make Bankruptcy Judgments  he argues for a more pragmatic approach to bankruptcy adjudication, where judges would have a right to intervene in the most egregious cases of fraud and malfeasance regarding mortgage related origination and financing.  With European banks beginning to be impacted by the credit crisis, Daniel Gros and Stefano Micossi propose what needs to be done for the EU to stem the potential for a full blown banking crisis.  In Crisis Management Tools for the Euro Area, they propose that EU wide banking regulation be implemented as soon as possible as well as the creation of a “contingency fund” to be used if any European bank needs a capital injection, in order to prevent the balkanization of the EU banking system. 

Also on the Finance & Markets Monitor this week:

On the Asia EconoMonitor, Michael Pettis highlights four trends that might reduce China’s need to revalue its currency but notes that they all create problems for the economy. See Bank run in Hong Kong

He also suggests that without better disclosure and a reduction of the government’s tendency to try to micro-manage market movements, the Chinese  equity market will continue to be dominated by speculative investing despite New rules for Chinese stock market investors

Takeo Hoshi argues that the U.S. is not quicker to deal with troubled assets than Japan was, rather it is quicker in asking taxpayers to pay for the mess created by the financial industry. Read TARP (US, 2008) = CCPC (Japan, 1992). He also suggests that any response should include strict bank inspections to monitor loan collateral, restructuring bad loans and the closure of the most afflicted institutions as well as selective aggressive recapitalization for the healthiest ones to remove solvency worries. See Beyond TARP.

Also on the Asia EconoMonitor:

 

On the Latin America EconoMonitor, Javier Guillermo Gomez Pineda points out that the US dollar depreciated 51% after the Plaza agreement. Currently, a run on the dollar could inflict a similar loss for China precisely when those savings would serve a better purpose by tackling China’s own financial sector weaknesses. Read: Should the United States defend the dollar or let it go?

In an interesting piece, Luis Felipe Jiménez, Juan Pablo Jiménez, and Osvaldo Kacef explain that since mid 2007, inflation in Latin America has surged substantially. Initially food and fuel prices accounted for the bulk of the increase in headline inflation, but progressively core inflation rose as well, indicating that the old price propagation mechanisms were still alive in spite of successful stabilization efforts in many countries of the region. Targets set by Central Banks have been surpassed in all countries with inflation targeting based monetary policies. Read: Inflation, commodity prices, terms of trade, and fiscal sustainability in Latin America and the Caribbean

The fact that Colombia has experimented something similar to the Paulson plan is an interesting theme that is explored further by Mauricio Cardenas in: Why debt reduction for households is not a good idea.

On the Europe EconoMonitor, Edward Hugh argues the Eurozone is now collectively in its first recession and examines the particular economic situations of France, Germany, Italy, and Spain. See: The Eurozone Is In Recession, But Where Do We Go From Here? and  Eurozone Flash PMI’s For Manufacturing And Services Indicate Continuing Contraction

In a separate post, Slovenia – Are Things Really As Good As They Look?, Edward Hugh makes the case that Slovenia’s economy is overheating and says action must be taken to guarantee a soft landing.

Also on the Europe EconoMonitor,

281 Responses to “RGE Content: Weekly Roundup”

GuestOctober 4th, 2008 at 7:19 am

I really didn’t want to be the first. It is so silly to promote yourself this way. If I have nothing better to say I should skip the first post.

AfAOctober 4th, 2008 at 12:39 pm

What is the problem with being “kiddish” from time to time?I thought it is good for the installing an appeased atmosphere but that is only my opinion.

mammonOctober 4th, 2008 at 8:52 am

How reassuring! Treasury can’t pay more than the assets were purchased for! Extremely reassuring when the assets are Marked to Myth!http://www.bloomberg.com/apps/news?pid=20601087&sid=aVVOrzOIBedo&refer=homeThis article had the word “Guidelines” deleted from thefirst time I saw it. Under the section “Horizons” therenow appears this:The plan sets up a Troubled Asset Relief Program, or TARP, available to “any financial institution” that meets the Treasury’s conditions. Residential and commercial mortgages and mortgage-backed securities are the primary targets, although the Treasury and the Fed are able to add other asset classes as needed. The Treasury also will set up an insurance fund for mortgage securities that will charge premiums.Banks won’t be allowed to sell assets to the Treasury for more than what they paid, unless they purchased the assets from another bank already in bankruptcy or conservatorship. Congress instructed the Treasury to issue conflict-of-interest guidelines, so banks don’t take unfair advantage of the new program.

MarkOctober 4th, 2008 at 10:29 am

Banks won’t be allowed to sell assets to the Treasury for more than what they paid, unless they purchased the assets from another bank already in bankruptcy or conservatorship.Drive everything down, allow the big boys to buy it up really cheap and then re-sell to the Treasury at marked up prices! Brilliant!

ollerOctober 4th, 2008 at 11:42 am

Lonestar Capital who bought the Merrill toxics at 22 cents financed by Merrill 75% which means theypaid really 7 cents, makes 1200% profit if paid at face value! Then they pay off what they owe Merrill!

GuestOctober 4th, 2008 at 9:57 am

This past week was very important for Americans. We learned two major things:1. We have a financial system that is broken, and it’s possible that even a bailout of $700 billion might not fix it.2. We have a political system that is broken, and apparently we no longer have representational government in our Congress.It will take years to fix these two problems. In the mean time, we’re in for a tough struggle ahead.One thing that i do suggest is that we stop calling the $700 bbillion figure from Congress a bailout or a rescue. Let’s be frank and call it what it really is. A bad check written for $700 billion. After all, realistic estimates for the 2009 budget were already forecasting a deficit if $600 billion. So if we add a further expenditure that’s roughly the size of the defense budget again (+ $700 billion), that now comes to a whopping $1.3 trillion. It pretty much looks like Uncle Sam is writing bad checks to me. I don’t see how we’re gonna’ pay it.And finally, Americans did take notice when Congress decided to tack on a huge number of pork barrel projects … on top of a reckless spending authorization already valued at $700 billion. Honestly, what are these people THINKING????? If that action isn’t a clear signal that we need a whole new Congress, then I don’t know what is.PeteCA

AnonymousOctober 4th, 2008 at 3:54 pm

It will take years to fix these two problems

What could possibly make you think anything will get ‘fixed’?

PhilTOctober 5th, 2008 at 8:49 pm

MEGA-Applause for your suggestion of an extreme House Cleaning in November !Some of the Senate is also available to be Cleaned in November!!

GuestOctober 4th, 2008 at 10:09 am

On a separate note, I want to share this personal story,I got talking to an old friend last week. He lives in the Antelope Valley in California. There’s a lot of desert land out there – some use for farming and lot of it unoccupied. There was a small but growing tent city where displaced families were living. So I asked my friend how things were going … was the tent city getting bigger?To my astonishment, he replied it was gone. The local authorities sent the sherrifs, and they chased everyone away.Unbelievable. We’re not talking about a few bums here. There are American families that have lost their jobs and their homes. And now they’re being chased away because someone doesn’t like what they’re doing to the scenery.I pointed out to my friend that there was plenty of unoccupied land for these people. And if the city was worried about a build-up of trash, all they had to do was to establish a special dumpster service – so the people could put all their old cans and paper in the system. My friend’s response was this … “Yeah, but you know that these towns are run by Republicans, and they don’t even think of things like that. They just decide to get rid of people.”It looks a whole lot like America is headed for a depression to me. Unemployment is skyrocketing and we’re definitely going to double digits. Thast will put a lot of families out on the street. If our only response is that “these people are someone else’s problem”, then we are going to see a level of hopelessness, emotional depression, and violent crime that we have not seen in decades.This is not right AmericaPeteCA

K in TXOctober 4th, 2008 at 10:22 am

That’s just not right. At least they weren’t jailed. Criminalization of poverty isn’t new…laws against vagrancy, loitering, begging. The poor with homes are under fire too, at least here.We have some of the highest car insurance rates in the country and some of the smallest paychecks. We also have a law against having auto insurance. Not carrying insurance used to result in a ticket.Now some cities have started towing the cars of the uninsured and impounding them. We also have very limited public transportation.So if you minimum wage job doesn’t pay enough to fill the tank on your old gaz guzzling car AND buy car insurance (nevermind health insurance) then being stopped by the police puts you at risk of losing your car and possibly your job. Can you say high speed chase?

MarkOctober 4th, 2008 at 10:39 am

Now some cities have started towing the cars of the uninsured and impounding them.As someone who has car insurance I am insured in any vehicle that I drive. If someone has an uninsured car THEY cannot drive it, but _I_ could. I would think that confiscating someone’s property that is still usable in this manner is illegal and I would be surprised if someone doesn’t take this to court.

AnonymousOctober 4th, 2008 at 12:51 pm

PeteCA’s story reminds me of The Grapes of Wrath. Our society would benefit if more people would read this thoughtful book by Steinbeck.

GuestOctober 4th, 2008 at 5:54 pm

Yes. It does sound a bit like Steinbeck. I sure hope our country does not go back to that kind of situation … but I’m afraid that it could. If it does, we will be fighting to resurrect a new term in the American vocabulary – compassion.PeteCA

K in TXOctober 4th, 2008 at 10:11 am

Sad State Of AffairsSo the best number I could find re:size of the American workforce was 150 million. According to this we have 9.5 million + unemployed and 6.1 million under employed. Paired with rising costs and tiny wage increases it seems safe to say that over 10% of Americans – 15.6 million – are unable to sustain their standard of living.The 2004 Pew report estimated that the U.S. had 7 million undocumented (illegal) workers which makes up almost 5% of that 150 million strong workforce. There has been a little coverage of Mexicans going back home. While it’s nearly impossible to know how many illegals have left the country chances are they weren’t counted in our official unemployment statistics.But the bailout was supposed to save us from a recession…yeah, right.From the NYT:”The unemployment rate remained steady at 6.1 percent in September, but economists said that reflected how people who had given up looking for work were not counted. Over the last year, the unemployment rolls have swelled by 2.2 million, to 9.5 million. On Friday, Goldman Sachs forecast that the jobless rate would reach 8 percent by the end of next year, which would be the highest in 25 years.””The number of Americans working part time because their hours were cut or they could not find a full-time job increased by 337,000 in September, to 6.1 million — a jump of 1.6 million over the last year, and the highest number since 1993.Average weekly wages for some 80 percent of the American work force have risen by a meager 2.8 percent over the last year, with the gains more than reversed by increases in the prices of food and fuel.”http://www.nytimes.com/2008/10/04/business/economy/04jobs.html?_r=1&th=&adxnnl=1&emc=th&adxnnlx=1223130151-LHlOuyweCDRDMw+UCxh7LA&oref=slogin

GuestOctober 4th, 2008 at 10:17 am

The third of October, 2008.Corruption is made law, codified. Corruption. Too big to fail. Justice. Too weak to prevail.Corruption rules, to destroy the few who stood.The bell of freedom hangs silent. The chains of bondage rattle. The iron fist tightens.Corruption. The silent scream…of corruption.

AfAOctober 4th, 2008 at 1:02 pm

Wow. I knew Marx was a very bright man, but this sounds very … current:

In a system…where the entire continuity of the…process rests upon credit, a crisis must obviously occur — a tremendous rush for means of payment — when credit suddenly ceases and only cash payments have validity. At first glance, therefore, the whole crisis seems to be merely a credit and money crisis. And in fact it is only a question of the convertibility of bills of exchange into money. But themajority of these bills represent actual sales and purchases, whose extension far beyond the needs of society is, after all, the basis of the whole crisis. At the same time, an enormous quantity of these bills of exchange represents plain swindle, which now reaches the light of day and collapses; furthermore, unsuccessful speculation with the capital of other people; finally, commodity-capital which has depreciated or is completely unsaleable, or returns that can never more be realized again. The entire artificial system of forced expansion of the [ecomony] cannot, of course, be remedied by having some bank, like the [Federal Reserve], give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values. Incidentally, everything here appears distorted, since in this paper world, the real price and its real basis appear nowhere, but only bullion, metal coin, notes, bills of exchange, securities. Particularly in centers where the entire money business of the country is concentrated, like London [or New York]…the entire process becomes incomprehensible.

I would rather agree with most of it. In fact, it just echoes what I partly believe some of the root causes of our mess. I don’t know what more can I say.

GuestOctober 4th, 2008 at 3:11 pm

“You reproach us with planning to do away with your property. Precisely; that it what we propose.” KARL MARX and FREDERICH ENGLES: The Communist Manifesto, 1848″Leninism has added no new principles to Marxism, nor abolished any of its old principles Leninism is only Marxism brought up to date. It is the active Marxism of the era of imperialism and proletarian revolutions.” JOSEPH STALIN: Interview with the first American Labor Delegation in Russia, Sept. 9, 1927.Unless you provide full breadth of the teachings of Marx, IMO, you should not offer positive comments because these can mislead other people who are not familiar with Communism. Here, for example, is the true philosophy of Marx as revealed in these Ten Points from The Communist Manifesto (II) PROLETARIANS AND COMMUNISTS:1. Abolition of property in land and application of all rents of land to public purposes.2. A heavy progressive or graduated income tax.3. Abolition of all right of inheritance.4. Confiscation of the property of all emigrants and rebels.5. Centralisation of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly.6. Centralisation of the means of communication and transport in the hands of the State.7. Extension of factories and instruments of production owned by the State; the bringing into cultivation of waste-lands, and the improvement of the soil generally in accordance with a common plan.8. Equal liability of all to labour. Establishment of industrial armies, especially for agriculture.9. Combination of agriculture with manufacturing industries; gradual abolition of the distinction between town and country, by a more equable distribution of the population over the country.10. Free education for all children in public schools. Abolition of children’s factory labour in its present form. Combination of education with industrial production, etc.

MarkOctober 4th, 2008 at 6:01 pm

The INTENT of the article WASN’T to promote Marxist ideologies but to use what Marx wrote to show the weaknesses in the existing systems.Your logic would have us ignore truthful warnings of impending harm from an “evil doer” because that person was, well, an “evil doer!” It’s precisely the mentality that has allowed us to get to the point we’re at!

GuestOctober 4th, 2008 at 7:17 pm

I am sorry for my poor communications. I was trying to say that it would have been much more informative and scholarly, IMO, for DAVE LINDORFF to have provided a brief disclaimer to the uncanny passage he quoted — that Marx and Lenin and Stalin themselves supported a central State bank monopoly ( i.e. Tenet 5), such as the Fed, except the Fed is private. Then no unsophisticated reader would have been left with the impression that Marx did not.I, too, thank trade union activist and Marx scholar Bert Schultz of Philadelphia who found this passage in Karl Marx’s Capital, Volume 3, Chapter 30, “Money-Capital and Real Capital”. It is valuable: perhaps Paulson and Bernanke used it for the basis of their “swindle.” It points out why the Bank Bailout Plan will fail. There is not enough value in the economy to cover the $40 trillion swindle without going into and beyond hyperinflation and collapsing the economy.The reason Marx has been with us for so long and has not totally been obliterated is that he did say some important things. And the Communists picked up what they liked and left out what they did not. Other things Marx said are simply crazy.The Ten Points I listed above give the summary of Marx’s basic beliefs. Primarily, Marx did not believe in private property. I pointed this out to balance Lindorff’s remarks that Marx “called this crisis [America’s financial disaster].”I totally agree with you: it is wise to know one’s enemy. And how else, but to study him?

MarkOctober 4th, 2008 at 12:45 pm

This just landed in my inbox. Figured that some levity was in order…New Financial TermsCEO – Chief Embezzlement Officer.CFO – Corporate Fraud Officer.BULL MARKET – A random market movement causing an investor to mistake himself for a financial genius.BEAR MARKET — A 6 to 18 month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no sex.VALUE INVESTING — The art of buying low and selling lower.P/E RATIO — The percentage of investors wetting their pants as the market keeps crashing.BROKER — What my broker has made me.STANDARD & POOR — Your life in a nutshell.STOCK ANALYST — Idiot who just downgraded your stock.STOCK SPLIT — When your ex-wife and her lawyer split your assets equally between themselves.FINANCIAL PLANNER — A guy whose phone has been disconnected.MARKET CORRECTION — The day after you buy stocks.CASH FLOW– The movement your money makes as it disappears down the toilet.YAHOO — What you yell after selling it to some poor sucker for $240 per share.WINDOWS — What you jump out of when you’re the sucker who bought Yahoo @ $240 per share.INSTITUTIONAL INVESTOR — Past year investor who’s now locked up in a nuthouse.PROFIT — An archaic word no longer in use.

GuestOctober 4th, 2008 at 1:12 pm

After Monday’s stunning defeat of TARP in the House, Steny Hoyer told the world that $1.4 trill in stock losses occurred when the market tanked, as a result of the defeat.Can’t understand why he isn’t telling everyone what our losses are since it passed.

GuestOctober 4th, 2008 at 1:29 pm

Is there anything akin to the “Witness Protecton Program” for soon-to-retire corrupt Presidents and Treasury Secretaries? Maybe somewhere on a 10,000 acre ranch in Bolivia?

ptmOctober 4th, 2008 at 1:37 pm

What do you want to bet that the Federal Reserve will be using it’s NewBank to clear and settle U.S. government securities?As you may know, there are only two banks that act as a clearing house for US Treasuries, J.P. Morgan Chase and the Bank of New York (BONY).As you may also know, several Bank of New York executives moved $7.5 billion from Russia to accounts at the Bank via unlicensed wire transfers during the 1990s. In late 2005 The Bank of New York agreed to pay $38 million in fines as part of a non-prosecution agreement that the Bank signed with the U.S. Department of Justice. In this agreement BONY acknowledged its criminal conduct. Because BONY admitted its guilt, the Russian Federal Customs Service is suing The Bank of New York over an illegal money laundering scheme, using the US’s RICO act, which allows tripling the $7.5 billion to $22.5 billion.http://www.russianbanksuit.com/And there is significant concern that if this judgment where to be assessed, that BONY would crumble.http://www.russianbanksuit.com/Ken_Thomas_letter_to_Ben_Bernankere_re_BONY.pdfAlthough not explicitly stated, the Fed’s response seems to be set up a new private bank starting back in 2004.Release Date: January 30, 2004The Federal Reserve Board announced Friday that it has established a private-sector Working Group on NewBank Implementation to further develop the concept of a dormant bank that would be available for activation, if necessary, to clear and settle U.S. government securities.In a report released January 7, a previous private-sector panel, the Working Group on Government Securities Clearance and Settlement, recommended nine steps to mitigate risks to the financial system from the interruption or termination of the services of a clearing bank as the result of either operational or non-operational problems.http://www.federalreserve.gov/boarddocs/Press/other/2004/20040130/And again in late 2005:Release Date: December 15, 2005The Federal Reserve Board on Thursday released the report of the private-sector Working Group on NewBank Implementation and endorsed its recommendations for the creation of a dormant bank (NewBank) that would be available for activation to clear and settle U.S. government securities. Such activation would occur if a credit or legal problem caused the market to lose confidence in an existing clearing bank, and no well-qualified bank stepped forward to purchase the exiting bank’s clearing business.The Working Group was established by the Board in January 2004 to further develop the concept of NewBank that a previous panel (the Working Group on Government Securities Clearance and Settlement) had identified as a promising private-sector contingency plan for the sudden involuntary exit of one of the two clearing banks for non-operational reasons.http://www.federalreserve.gov/BoardDocs/Press/other/2005/20051215/So my point is that I think we will be seeing a lot of “NewBank” as the Fed uses it new found wealth to consolidate financial power.

GuestOctober 4th, 2008 at 2:07 pm

@ Pete CA: “I pointed out to my friend that there was plenty of unoccupied land [in Antelope Valley] for these [tent] peoplel… My friend’s response was this … ‘Yeah, but you know that these towns are run by Republicans, and they don’t even think of things like that. They just decide to get rid of people.’”Los Angeles has a Latino mayor. Roughly two dozen Latino California mayors lined up behind Clinton, according to the LA Weekly News. “Latinos now make up one-quarter of the California vote and legislature” – all primarily Democrats. The majority of male students in the California school system are Latinos. The speaker of the California Assembly, Fabian Nunez, is Latino. San Franciso’s government is far left Democrat. Berkeley and Santa Cruz, Republican in the fifties, are rabid left. The Republican base in California that elected Ronald Reagan has been overwhelmed and is a dying voice. Tell your friend, Pete, there soon will be no “Republicans” or conservatives left in California “to get rid of people.”Years ago, the majority of the newspapers, from cities of all sizes, were Republican. Now, the national press, newspapers of most cities and nearly all of television and Hollywood are heavily Democrat. City after city across America puts heavy emphasis on welfare.In Ohio, the vote now is ongoing for the November election. The Northeast Ohio Coalition for the Homeless believes it can round up 2,000 people from homeless shelters in the Cleveland area and get them to polling places. A donated van will shuttle voters from two shelters, including the city’s largest downtown. Seventeen other shelters are providing their own transportation.The AP reports Democrat Barack Obama’s presidential campaign is blitzing bars and that advocates for the homeless have lined up vans to ferry potential voters from shelters. This past Saturday, Obama’s campaign targeted the 100,000-strong college football crowd at Ohio Stadium with a flyover advertising early voting and visits from staffers to surrounding bars.Project Vote will go door to door in minority neighborhoods and use vans to transport people to election sites in Cleveland, Cincinnati, Columbus, Dayton and Toledo. The people can vote themselves the treasury, if they like. Democracy rules.One new voter interviewed by the press was still drunk when they took him to vote.It’s a Democrat year! All will be well, Pete. All will be well.http://www.gopusa.com/news/2008/september/0929_ohio_voters1.shtml

AfAOctober 4th, 2008 at 2:41 pm

What is your point Guest, besides the so much reassuring “All will be well”?Are you referring to that archaic politico-ideological bilateralism? I have news for you, they are not so “bi”, they both only prefer one gender, that is taxpayer/voter. Last week was a proof of that.

GuestOctober 4th, 2008 at 3:28 pm

My Point, AfA: America has had Republican congresses and she’s had Democrat congresses. Yet, the size of centralized government and its costs continue to increase, Federal agencies continue to proliferate, the amount of corruption continues to build, the people grow more disenfranchised. To say otherwise is to be unhelpful in the extreme. That’s why I do not like to engage in partisan blame, as does Pete’s friend. It is useless.I am sorry about the people in tent city. My church has been out on the streets supplying rations to the homeless. I am an advocate for street youth. My friends, mostly conservative and in their thirties, tithe and pay a lot of taxes. Some have lost their jobs this year. Some have left this country to go where producers are more welcomed. None of us feel we are represented in America’s political party system: most of us are disenfranchised conservative Republicans, hardworking, and responsible. We did not destroy tent city.I made an attempt at friendly sarcasm, and, it seems, failed. I do not think all is well: I think all that we value is in serious jeopardy. Sorry for the confusion. 🙂

GuestOctober 4th, 2008 at 5:38 pm

Thanks for the question: one to Scotland and some to England. This may not factor, but two of my friends from India have opted to return home. An acquaintance found work in Canada, but I know little about Canada. I have done some work in Germany.

AfAOctober 4th, 2008 at 7:38 pm

My mistake then, it was not very clear to me where you were heading with your “long” sarcasm, <sarcasm>this blog does not support html sacrasm tags yetI agree with your point.

Michael LittleBigOctober 4th, 2008 at 2:49 pm

The wealthy and powerful supported by the Congress have financially panicked the American public. When it started to unravel they blamed the home owners for taking out loans they could not afford, buying SUVs and living high on the hog.Congress has consistently increased their compensation and benefits to support their royal lifestyle. The wealthy and powerful made billions and billions of dollars on the backs of each and every American.We have a President and his staff that can’t tell the difference between a reality and fantasy.This crisis will continue to get worse. The proof is based on the present rescue plans being discussed in the Congress. These plans are not to help the average American but rather to preserve the monetary treasures of the wealthy and the powerful.Senator Harry Reid, the Senate Majority Leader stated that this rescue bill was to protect the Banks from the Bad Loans. If he was concerned about “Main Street” that’s you and I, he should have said we want to protect federal mortgage borrowers from the BAD Bank’s making Bad Loans. I know my mortgage holder Am Trust Bank located in Cleveland Ohio did not follow the rules which resulted in my foreclosure.We as a people need to change the type of politician that we elect to any office. Most of the US Senators are millionaires. The 435 Representatives with their power and financial benefits are obscene. There is no accountability.These politicians gather to preserve their power and wealth like a group of vultures looking for road kill.Nothing will change until the American anger reaches the boiling point of enough is enough.The present personality contest of McCain and OBama who spent millions and millionsrepresent the same old songs of past presidential elections.The Congress continues to reward those who have created this holocaust through their greed for money and their lust for power.Until we change the peoples representatives who serve their self interest in any form of national, state or local governments, then this brutal financial cancer will continue. We need to change how people are elected since we can only elect those who can attract money from those with financial agendas. We need to limit one term in office.Most of these political charlatans have lifetime employment with benefits that the average American can only dream about. Make no mistake about it, the only surprise about this crisis is that the American people will pay dearly for it and these politicians won’t even get a financial scratch.There are 4 million foreclosures victims that have no voice. Their silence is deafening. I can not speak for all of them because I am one of them.The Candidates now running for office sing the same old song. We need to start changing Congress now. The days of lifetime employment for these wealthy and powerful elected officials must end with your vote.Michael LittleBig POB 16588, Rocky River OH 4116-058810-4-2008

KafkaOctober 4th, 2008 at 3:43 pm

Hank Paulson and the Treasury Department are engaging in the most massive tax fraud in the history of the United States by devising a “sham” acquisition structure for Fannie and Freddie which will arguably allow these failed entities to take approximately $80 Billion in tax deductions per year. This tax fraud dwarfs any scheme in history. Why did the acquisition of Fannie involve warrants for exactly 79.9% of the common stock at a price of .00001 dollars per share (essentially zero though by the time Bernanke and Paulson get done debasing the dollar in a manner which would make Stalin and Mao proud, it may be less than zero)? Well, Section 163(j)(6) provides that if a related exempt organization (the Treasury Department) controls a corporation (in this case Fannie) and the exempt organization guarantees the debt of such corporation, the interest expense on such guaranteed debt is nondeductible (or subject to severe limitations) for tax purposes. Treasury has clearly guaranteed the debt of Fannie as defined under section 163(j)(6)(D)(iii). Related person is defined under section 267(b) which provides the corporation must be controlled by Treasury. Control is generally defined by the IRS as owning 80% of the corporation. Thus, Hank and Treasury hope to evade taxes on $80 Billion of income per year based on acquiring only 79.9% of Fannie and thus, defeat their own tax law notwithstanding Treasury effectively owns 100% of Fannie. Interestingly, the Treasury actively throws commoners in jail for life for interpreting the tax law literally as the Treasury argues the non tax paying miscreants violated the spirit of the law under the so called economic substance doctrine (an undefined vague legal concept universally interpreted differently by most courts). In fact, a literal interpretation of 163(j) via its underlying regulations specifically requires that the transaction be analyzed based on the substance of the acquisition under the 1.957-2 regulations which is a catch all provision for any legal machinations to avoid the tax law. Most of the dudes Treasury puts in jail for life for interpreting the tax law literally are using tax laws which have no literal corollary to 163(j) (i.e., no legal requirement to look at the substance of the transaction). Hank Paulson may be the biggest tax fraudster in history: not only did he avoid taxes on $100 million of his Goldman stock through the use of 100% controlled private foundations; illegally change the law under Section 382 to provide tax benefits in the realm of $750 Billion to his friends on Wall Street (which under Section 7201 is likely tax evasion (the intentional violation of tax law to avoid taxes); but now he is engaging in further tax fraud to the tune of $80 Billion of tax deductions per year (for interpretations of the tax law Treasury sends people to prison for life over) yet again for the benefit of his buddies on Wall Street. If Hank was judged by the same standards he judges others, Hank would have to go to jail for life (notwithstanding all of the securities fraud he has engaged in).

Average JaneOctober 4th, 2008 at 5:51 pm

Kafka, thank you for illuminating the reasons behind the 79.9% F&F takeover. There have been many folks on this blog who wanted the answer to that question.

KafkaOctober 4th, 2008 at 7:14 pm

AIG, I believe was effectively acquired by the Fed under simliar terms and has simialr issues though the structure was a little bit different. The 79.9% of common is the same but there may be a two year waiting period (though I could be wrong).

Octavio RichettaOctober 4th, 2008 at 5:03 pm

Greetings to everyone from Caracas. Fishing season is over. We left Morrocoy national park and will head back to Argentina on Tuesday where “I will be back” as a regular poster soon. If you have not done so, take a walk around Mish and read about what a total piece of garbage TARP is: http://globaleconomicanalysis.blogspot.com/It is a pity the professor’s blog as most(all?) blogs are terrible when it comes to searching old posts. Anyone familiar with discussion boards such as Silicon Investor will recognize the superiority of them when it comes to searching one’s writings.Why do I say this? When I started to post in this blog about one year ago, it was my intention to use the blog for note taking so that I could go back and read my old posts and see how good/faulty my analysis/decisions were. As anyone who has given it a try would attest, searching one’s old posts, even in the age of googling, is virtually impossible.So I have to rely on my no so great recollection to bring back some of the key points I have tried to make. I have said consistently and many times that:1. The FED will bring rates down to 1%.2. That low-inflation/deflation was a more likely outcome from the coming world slowdown than inflation.3. That the USD would eventually recover and have been 100% USD invested since early this year.4. That US treasuries were the place to be in this difficult times.5. That US (and world) equity markets would decline significantly.I placed my money [mainly] where my mouth was. As disclosed in this blog, since the BS fall mid-march I was about 30% short the market via ETFs, 30% long Gross’ PTTRX fund (to great regret, more on this later*), 30% long treasuries/Insured CDs, and 10% cash.My YTD return has been 6.8% despite PTTRX’s pitiful YTD return of 0.68%. I covered 2/3 of my shorts on 9/18 before the short squeeze news leak about the bailout plan less than an hour before market close that TH (brings back memories of a similar October TH in 98 when Greenspan announced a 75 bp? cut right before market close). I remain 10% short via the Russell 2000 a position which has finally started to payoff.In deciding to place my first trade since late March, I had no insider knowledge, I acted on instint. After the significant gain I had had in my short positions, and having suffered significant setbacks during previous faked rallies this year, I stuck to the two golden rules of investing: 1: do not loose money. 2: never forget rule 1.I am really upset on Mr Gross’ performance YTD. I was 10% in his fund early in the year but then liquidated long term US treasury bond funds to increase my exposure to his fund (big mistake!). I Chose him as the guy who could do a better job than me of navigating the credit crunch/declining rate environment; but apparently he tried to be too smart. The bastard had the guts to sell CDSs on AIG! I just could not believe the news!Now I ask, how come the guy who coined the term “shadow banking system”, a guy who should have been well aware of the reckless cowboy investing culture old man Greenberg institutionalized at AIG (if a little guy like me knew about AIG’s ways, he most definitely knew) had the guts to try and gain some alpha by selling CDSs on AIG?I am giving him one more chance. Perhaps he has learnt the lesson and is now ready to do for me what I expected him to do from day 1.The whole episode reminds me of when I dumped the Magellan fund back in Vinik’s days when I found out he was trying to time the market in the middle of the 90s bull run.Bill Gross: I am placing my investment in your fund in my “getting ready to dump” watch list.

AfAOctober 4th, 2008 at 8:00 pm

OR, welcome back! Nice to hear from you.Aren’t you considering exiting this rigged market, or are you confident enough in your “instinct”?

GuestOctober 4th, 2008 at 8:11 pm

Been looking for you a long while now, Octavio. I’m glad to hear you’re coming back as a regular poster soon. Not just because of your YTD return of 6.8%, either, but we sure can use your daily expertise — on all fronts. The Monday crowd would like to see this post. Great investing! Hope to hear more from you on inflation: with Bernanke printing now and lowering rates possibly to 1%, I’m fearing hyperinflation.I am not a sophisticated investor, but I have property and investment money and need your big picture. Needless to say, I’m in negative territory big time with inflation.Cheers. And Happy Sunday!

Mother of GodOctober 4th, 2008 at 5:36 pm

I’ve been babysitting the past several hours and didn’t realize everyone had moved on to this new thread. Earlier today, I put up several posts in yesterday’s thread toward the very end that I would like feedback on, if anyone cares to read them. Thanks very much.

GuestOctober 4th, 2008 at 6:20 pm

Why it will be hyperinflation, not deflation according to Bob Chapman:http://www.theinternationalforecaster.com/International_Forecaster_Weekly/Bailout_Creating_a_Financial_Black_Hole_to_Suck_Us_All_InForeign nations with dollar forex cannot possibly keep buying all the treasuries that will have to be created to fund all these bailouts because they are all experiencing rampant inflation, and printing more of their own domestic currencies to absorb the dollars necessary to purchase treasuries is no longer possible without risking social upheaval and revolution as hyperinflation destroys their economies. This means that some, or even most, of the new treasuries that will be created by the Treasury and the Fed to fund the bailouts and deficits will have to be monetized, which is immediately inflationary. M3 is about to explode as these many monetizations and the Fed’s trillions in liquidity injections continue to flood the fiat money and credit system, which will continue in its cryogenic state despite the Paulson Ponzi-Plan that will now be implemented in an attempt to re-inflate the credit markets, which are the lifeblood of our debt-based, fiat money system, thanks to the cessation of the gold standard. Everyone on Wall Street knows that the subprime paper is not the real problem. The real reason they distrust one another, and will not lend to one another, is the unknown counterparty risk that will go into a plasma state when the Derivative Death-Star detonates. It is the opaque, unregulated OTC derivatives market that they are really afraid of.Due to the fact that you have 70 or more trillion of credit default swaps insuring 5 trillion in bonds, a ten billion dollar loss by a large corporation can on average morph into a 140 billion disaster of epic proportions that could wipe out several other companies, whose own credit-default swap counterparty risk would then ignite, in a chain reaction reminiscent of a thermonuclear explosion. Remember, credit default swaps are not true derivatives with a zero net sum. They are insurance policies. But unlike most insurance, there are no regulators or loss reserves, thanks to Slick Willie Clinton and the Congress, which passed the Commodity Futures Modernization Act in 2000. Worse yet, they can be used to insure property which the insured party does not even own. Hence, you can see why everyone trembles at the thought of this radioactive sector going thermonuclear.

GuestOctober 4th, 2008 at 8:32 pm

Do we have any reputable Economist saying the same? Seems this type of position is most often from gold bugs.

MarkOctober 4th, 2008 at 8:35 pm

Chapman brings up lots of things to be concerned about, but I just don’t see the need to continually spew “illuminati” etc. I’d in no way pass this along to anyone on my e-mail list.

GuestOctober 4th, 2008 at 8:59 pm

Didn’t you just put someone down above for, and I quote, “Your logic would have us ignore truthful warnings of impending harm from an “evil doer” because that person was, well, an “evil doer!” It’s precisely the mentality that has allowed us to get to the point we’re at!” Hmmmmm? Of course, I don’t know the people on your “e-mail list.”

MarkOctober 4th, 2008 at 9:20 pm

Ah, what’s your point? I didn’t state that I didn’t accept what Chapman was saying; rather, I was bothered with HOW he was saying it. One doesn’t need to introduce the Illuminati stuff in order to understand the problems.I’m starting to wonder why I bother engage in discussions with anyone who hides behind “Guest” or “Anonymous.”

MarkOctober 4th, 2008 at 6:33 pm

I posted the following response to one of MOG’s posts (as referenced immediately above) from the previous thread:I have a concern that this will all be co-opted, and that it’s still focused on consumerism. The foundation needs to be closer to naturalism than economy, to “money.” Here are some good articles from, IMHO, one of the best magazines around (Orion):Building an Anti-Economyby Chris CarlssonPublished in the September/October 2008 issue of Orion magazinehttp://www.orionmagazine.org/index.php/articles/article/3223The Idols of EnvironmentalismDo environmentalists conspire against their own interests? First in a two-part series.by Curtis Whitehttp://www.orionmagazine.org/index.php/articles/article/233The Ecology of WorkEnvironmentalism can’t succeed until it confronts the destructive nature of modern work—and supplants itby Curtis Whitehttp://www.orionmagazine.org/index.php/articles/article/267[new note: I do believe that it’s essential that we start looking and operating past the existing system. As Buckminster Fuller stated: “You never change anything by fighting the existing. To change something, build a new model and make the existing obsolete.”

Mother of GodOctober 4th, 2008 at 7:22 pm

You really do think it’s easier to build a whole new model than to just install a couple of corrective measures to stop market forces concentrating wealthpower endlessly?I honestly don’t understand how that could be easier than passing a couple of simple laws.And my plan IS reality and IS nature. Economics is based on the fact we have stomachs to feed and need land to put our feet, meaning work is the first and essential condition of life. It doesn’t get any more real and fundamental and natural than that, does it?OB – did you read what i wrote?

MarkOctober 4th, 2008 at 8:14 pm

I read spots of it. While I appreciate the awareness that you put into this, I cannot support the fundamental notion that the existing system can be overhauled/corrected. The structure itself is horribly flawed in that it doesn’t scale. Well, “representative deomcracy” can, I suppose, scale, but it seems to me that we’re seeing all too well HOW it scales: power corrupts…Think about the historical norm. How has mankind tended to associate? I’d argue that large institutions cannot succeed: with the exception of the earth’s core systems, “large” just doesn’t make it.The law of averages will prevail. Average “wage,” the average number of people that can self-govern, the average number of people the planet will support.

OuterBeltwayOctober 5th, 2008 at 3:46 am

Big systems scale if they are composed of stable small systems with simple (reliable) interfaces between components. Nervous system, canal system (pools and locks) and chemistry (elements with properties) are good examples. I think that’s what PeterJB is referring to when he states that all life is physics.Regarding the assertion that all systems have “average number of” bounds…if the components’ behavior is stable, that’s probably so. If the rules are bounding components that are morphing and adapting…that seem to have “free will”, then it’d be more difficult to express “average size” bounds.That may be why government is so tough to do – the components (people, awareness, etc.) are in flux.

OuterBeltwayOctober 4th, 2008 at 8:53 pm

M.O.G. – I just got done reading them. There were some very valuable ideas in there, and I’d like to ID them, and ask you to narrow, distill, and re-cast them into a form that is easy for others to grab onto them and run with them, like a hand-off.Here’s some high-level feedback:a. Humans are competitive. Unfortunately, there is no way to stamp that out. So, resources are going to be allocated competitively. I have yet to see an egalitarian allocation mechanism in practice. I don’t currently believe it’s possible to do so.b. My approach to solving the problem you’re articulating, and it’s an important one (e.g. flatten out the resource dispersal topology) is to level the playing field.Concentrate on equipping the weaker players to be better competitors. Remember, a fool and his money are soon parted – weaker players are separated from their resources, e.g. the Bailout Plan. And as our friend Nassim Taleb says, winnings are being concentrated at the top. How do you reverse this trend?I recommend that you admit/accept the fundamentals of human nature, and devise your systems to use them, rather than managing them. Sail your ship with the wind, don’t try to change the wind.I hope someone will throw down the gauntlet, and say “how do we level the playing field? How do we re-write the rules of the game so that a new class of players can win, and ideas can trump cronyism?”As soon as that happens, we will try to corner PeterJB, and demand that he cease flummoxing the debate with imponderables (e.g. things we’d have to be as smart as he is to really understand), and help us express Mark’s proposed “new economy” as a small, simple list of tactics that can be implemented by household or business alike.I’m only half joking. You guys are spiraling in on the core questions we need to answer.Why not try to reduce your theories to a set of rules that dummies like me could actually follow. Above all, it must be simple, or it’s just not going to happen.So, how about we throw up a straw-man that we can work on?Would anyone like to take a stab at setting out the 5-10 key requirements that viable business models of the next economy would have to meet?Mark, this one’s got your name all over it. You’ve been working the edges of this for days now, and I keep expecting you to fire the torpedo at the engine room.Here’s a few ideas to seed the debate.Next gen business models must be:* profitable even if energy inputs come from renewables* physical products are designed so that almost all raw material inputs are economically salvageable for re-use. Landfills go away.* Design favors re-use over style* Manufacturing mechanism favors the comparative adv for the country of manufacture. U.S. would use highly automated methods, BRIC somewhat less automated.This are just the inputs rules. What about the participation rules? What about M.O.G.’s ideas that everyone gets to play in the game. Where’s that fit in? How can that happen?Express this, if possible, as a FEW bullet-point one-liners. The more words, the less implementable.I invite all readers to have at it. Wild-ass ideas are welcome. Keep it short.

MarkOctober 5th, 2008 at 2:53 am

OB, I am humbled by the thought that someone finds that I have something meaningful to say/contribute :-)The complexities of creating a new socio-economic paradigm is daunting. Too much so for my small brain. But…There are plenty who have given us key pieces in which to face our future. Two people that have stirred my brain are Peter Kropotkin and Murray Bookchin. Here are two references that contain, what I believe, key pieces to our puzzle:The Suppressed Ideas of Kropotkin on Evolutionhttp://to-the-dome.blogspot.com/2006/09/suppressed-ideas-of-kropotkin-on.htmlTHE MURRAY BOOKCHIN READER: Introhttp://dwardmac.pitzer.edu/ANARCHIST_ARCHIVES/bookchin/reader/intro.htmlWhen reading these I would hope that people have a better understanding of the value of anarchism and how it provides us with the flexibility that will be absolutely essential in dealing with the complexities of life… Also note that the notion that we’re basically competitive is false. Both of these points are strongly refuted by the powers that we find dominating our lives today; this in itself should be a clue to their importance in really setting ourselves free…

OuterBeltwayOctober 5th, 2008 at 4:22 am

Mark: read the citations. Takeaways for me:ecology .vs. environmentalism, peer-to-peer .vs. hierarchical perspective of man’s relationship to environment, and natural limiters (kWH/meter2 from sun) on zoning densities and cooperative .vs. competitive determinant of successful life forms.Agree with above points. Socially, humans are competitive, though (up to a certain level of emotional development, then the drivers dissipate).I’ll come back to this shortly.I re-assert that:a. Good design of component and interface between components reduces system complexity and increases reliabilityb. No reason why you can’t distill the info set out in the two links you provided into some rules, or filters, that would be applied to an econ entity (a component) of the fabric of the ecology (expressed to significant extent via economics and trade) of tomorrow’s economy.What is an “economy” except a bunch of components doing transactions with one another? Bookchin says economy version 1 distorted man’s relation to environment. OK, so express some constraints on either the nature of the component (the econ actors) or the nature of the transaction to reflect this oversight.The hard part is to recognize the need for such ideas (bookchin, kropotkin), and to find the matl, absorb it, make a citation. Distilling it down to rules is trivial by comparison, e.g. * profitable even if energy inputs come from renewables. This captures Bookchin’s assertion that humanity operate on incoming energy budget.You assert replacing hierarchical models with peer-to-peer interaction models. That means you need to invest into the components more intelligence, and you need to re-cast the transaction (interaction between component) rules.Ball’s in your court. Other people, feel free to butt in.

MarkOctober 5th, 2008 at 5:55 am

OB, great summation!My fear is that most of this is just a critique of what has obviously become untenable social organizations.Kropotkin argued that we’re basically cooperative, and that explains why we’ve reached the population levels that we have. Well, if we have exceeded, or will soon exceed the carrying capacity of the planet then this tells us that cooperation in and of itself has (or will) fail. OK, to be fair, I think that there ARE ways in which we can be cooperative without turning humankind into lemmings (over the cliff).I don’t, however, believe that we’re going to map out any solutions until we have had a significant downsizing: either in our standard of living or population numbers. Our collective selves need to be deprogrammed, and that’s no small feat: it’s likely that comments such as made in the PNAC document (Project for a New American Century) were, in a very dark way, right in that only through a large cataclysmic event are we going to be able to collectively change.There are two fundamental observations that I see no way around:1) We’re bound to energy, and in order to be in any way in balance, sustainably speaking, our energy intake/consumption cannot cumulatively exceed on a daily basis that made available from the sun;2) There has been, to date, no enduring stable civilizations (well, there have been several that have lasted for centuries, but they were not able to persist, mostly due environmental changes).While I think that it would be possible to align ourselves such that we come into balance with energy, achieving long-term stability just doesn’t seem in the cards- we’re either too cooperative (with the exception of unleashing our nuclear weapons), or there’s an environmental black swan lurking (events of massive geological disruptions).A problem with our thinking that we can adjust, which we can, is that we tend to only respond when we have to: all of the wisdom handed down, while often times so incredibly obscure as to be nearly worthless to the masses, seems to be ignored: the solution is to be dictated to (controlled), or educated to the point that we’re all “wise,” which, unfortunately, doesn’t appear to have a high enough probability factor to elicit optimism from me. I suppose that only when groups of people live in a perpetual state/sense of adaption would we likely find real sustainability.I guess you could say that I toss my hands up in the air. My best recommendation is to seek anarchism, to seek decentralized power as this represents the greatest ability for achieving diversity. And, as they say, diversity is the spice of life :-)I guess this all makes the discussion of $700 billion of virtual fiat paper money kind of look silly…

confused_punterOctober 4th, 2008 at 6:37 pm

I was just reading through Bloomberg when I came across this pearl:Labor Department figures showed yesterday that payrolls fell by 159,000 in September, the biggest reduction in five years. While the unemployment rate held at 6.1 percent, that’s up from 5 percent as recently as April. Some economists, including Goldman Sachs Group Inc.’s Jan Hatzius, said it may rise to 8 percent as the credit crunch hammers consumers and companies. Could anyone even begin to explain how this constitutes reporting? How the f*** can unemployment increase by 159,000 without altering the unemployment rate?

MarkOctober 4th, 2008 at 6:47 pm

That should read the “reported” unemployment rate. Remember, the government thinks all will be fine as long as we don’t disclose bad news.Reality has been banned because, well, it kills confidence!NOTE: This post should really have come from Kafka! 🙂

AnonymousOctober 4th, 2008 at 7:04 pm

There is too much fear-mongering going around. In response to this:1. This is the most stable country in the world, and will remain so.2. Conditions are going to get far worse in Europe, Russia, Asia.3. There is NOT going to be another 1929-style Depression. Mark my words. The government will do everything to prevent this.4. When everyone in the world panics, they put their money into U.S. Treasuries, still (and always will be) the safest place to park money.5. China, Europe, Russia, Japan et al. will continue to buy U.S. Treasuries/Bonds. The bond market is king.6. We are in a recession, and will be in one until 2010-2011.7. There is tons of liquidity on the sidelines. Once a bottom is reached (I predict a bottom sometime in mid-2009), all this liquidity will need to be re-invested.8. In 6-8 years, this period will register as just another blip.Don’t listen to all these fear-mongerers. This is the greatest country in the world. The most diverse. Most dynamic. The smartest people in the world live here (and also a LOT of idiots sorry to say). We are #1 in research, innovation, higher education, healthcare (yes, we need to insure everyone). Look at all the excellent ideas that are being thrown out on all these blogs. We have so many bright people living here. We will get ourselves out of this mess.

KafkaOctober 4th, 2008 at 7:18 pm

It is not entirely clear that a flight to saftey is exactly what is occurring but rather, the dollar could be the new carry trade being unwound with the dollars going into treasuries.

MarkOctober 4th, 2008 at 7:24 pm

Can we quote you on this? Pretty easy to hide behind an Anonymous tag and snipe…USA #1, USA #1 rah, rah!Out of the CIA Factbook’s listing of nations accounts the USA comes out first in debt! 1st out of 188! And by a HUGE margin!Read the above referenced Chapman article to find out why you’re wrong about “China, Europe, Russia, Japan et al.” continuing to buy U.S. Treasuries/Bonds.#1 in research. What, in spending? Surely not in patents filed/granted.If you care to actually look out from behind your flag waving you’d find that the US’s standard of living pales compared to that found in the Scandinavian countries.If the USA has so many intelligent people then how come it’s in the mess that it’s in?”The problems we face will not be solved by the minds that created them.”- Albert EinsteinPerhaps the most damaging things on this planet: 1) Nationalism; 2) False hope.

Little SaverOctober 5th, 2008 at 2:08 am

Mark, may I propose the concept of self-indulgination? It is a combination of self-indulgence and imagination. A property that allows a person to accept a distorted view on reality, with elements of self-aggrandization, a self-promoting world view (nationalism is part of that), overoptimistic view of own capacity, situation and future. Since he really believes his own view, it allows the person to act highly motivated, adds to his charisma (no inhibiting doubts), and so on. He can be very successful even when neglecting negative elements of reality, at least for a while. Until reality becomes overwhelming, a situation we’re in now for many of those “high fliers”.Needless to say that we all have this property, myself included. Some have it more than others…

KafkaOctober 4th, 2008 at 7:33 pm

Also, please advise how all these issues will be resolved under the current course in the next few years? Tsk Tsk Tsk, admittedly I am a dope and can only do simple math but I know when you borrow today to pay back tomorrow with contingent revenue streams, eventually the shell game ends. Let’s see, the U.S. Government 07 tax revenues were about $2.3 Trillion comprised of about $400 Billion in corporate taxes and $1.9 Billion of income taxes (numbers could be off). Approximately, 50% of the income tax revenues were generated from the top 5% income earners from which a substantial portion of those profits were derivatives of the stock market, don’t look like those dudes will fare very well in 08 and beyond. As for the corporations, many will have losses this year and be requesting tax refunds from loss carry backs (I think financial services represents something like 30% of corporate income). Assume tax revenues remain constant in 08 at $2.3 Trillion, how the U.S. government can continue to be the lender of last resort with its $11.5 Trillion (soon to be) national debt, $7 Trillion GSE debt guarantee obligation, $60 Trillion present value entitlement obligation and rolling presumptive annual deficits of $700 Billion from the budget and $700 Billion from trade deficits is beyond this simpleton. Since tax revenues will likely decline from 08 and forward, should the U.S. government be loaning money to anyone? I would be more concerned about who will continue funding the U.S. voracious deficit spending needs with its massive debts and declining revenue stream. Remember, the U.S. economy is 70% debt finaced consumption based, 30% of GDP is fake, about $16.5 Trillion of financial services debt exists, credit spreads are at unheard of levels (over Sigma 6 deviations), real estate will likely revert to the long term mean best case scenario….it seems more likely to me that the $700 Billion will be blip since the Politico heros have already thrown about $1.5 Trillion at the problem they claim did not exist to begin with.

MarkOctober 5th, 2008 at 2:56 am

Kafka scores a bulls eye! Could it be any more clearer that we’re caught up in our own lies? “The American Dream” humph!

Alessandro - http://castellidicarte.blogspot.com/October 5th, 2008 at 4:31 pm

Kafka: “I think financial services represents something like 30% of corporate income”Where did you get the number? I recall having read the same number somewhere, but can’t find where (could not find it in the FED data).The reason I ask is that finance to be 30% of total corporate income in a country is completely insane! The US is not going to start over with real economy until that number is in the low single digit. It is just not possible that 30% of value add is generated by the intermediary between savers and borrowers. Can people see it?

kilgoresOctober 4th, 2008 at 8:22 pm

Can you tell us something about your background, Anonymous? What, for example, do you do for a living? From what part of the country do you come?SWK

MarkOctober 5th, 2008 at 2:54 pm

Fearmongering is making something up which doesn’t exist.If Sherman was told that the markets would be trashed if he (others) didn’t vote for the bill then this isn’t, in the case of Sherman himself, fearmongering. Those making the threats could very well have the capacity to facilitate the outcome as prescribed by the threats.Fearmongering was Iraq and WMD- “mushroom cloud”… The threat did not, and for all intents and purposes, could not exist.

ptmOctober 4th, 2008 at 8:52 pm

Per Nouriel Roubini’s prognostications…Europe shivers as credit freeze hits IcelandThe Icelandic government is believed to be considering a bailout plan after it was revealed the three largest banks have liabilities eight times greater than the country’s GDP. It has already effectively nationalised Glitnir, investing €600m (£470m) in exchange for a 75 per cent stake in the bank last Mondayhttp://www.independent.co.uk/news/business/news/europe-shivers-as-credit-freeze-hits-iceland-951811.html

GuestOctober 4th, 2008 at 8:52 pm

This article, “Gore Vidal is Right It’s socialism for the rich,” published in “The Irish Times” on September 20 appears in the October 4-5 Weekend Edition of LewRockwell.com. It features the work of NOURIEL ROUBINI:’Free enterprise for the poor, socialism for the rich’: Vidal’s claim gains leverage by PAUL GILLESPIEWORLD VIEW: Growing social inequality in the US puts the economy back at the centre of the presidential campaign, writes Paul GillespieIN THE 1980s Gore Vidal observed of Reagonomics: “The US government prefers that public money go not to the people but to big business. The result is a unique society in which we have free enterprise for the poor and socialism for the rich.”His epigram has been repeatedly recalled this week following the nationalisation of American International Group, the world’s biggest insurer, coming shortly after the similar rescue of the Fannie Mae and Freddie Mac housing companies and of the Bear Stearns bank.”Socialised capitalism” is Robert Reich’s description.”Gains privatised and losses socialised” was the more pointed comment by Nouriel Roubini, professor of economics at the Stern School in New York University. He is known in the economics trade as a “permabear” because of his repeated claims over the last six years that a financial system based on self-regulation, non-deposits, highly leveraged subprime housing debts and globalised derivatives trading was unsustainable and would collapse.Now that he has been proved correct he has suddenly become known to wider circles of people desperate to get some expert perspective on these events. How does this crisis compare to previous ones? Is it a systemic failure or a conjunctural one arising from the Bush administration’s deregulation policies (which continued those of the later Clinton administration)? Could it lead to another depression like the 1930s? What alternatives are there to the policies followed this week?Roubini is unusual among economists in combining comparative, historical and mathematical analysis, giving him a broader appeal to policymakers and the mass public. In an interview with the New York Times magazine on August 18th, he described himself as more a realist than a pessimist. He argues that the AIG should have been bankrupted rather than nationalised, and the $85 billion of taxpayers’ money loaned to the firm could have been used instead for debtor-in-possession financing. This would have allowed for a more fair process for allocating losses between shareholders and short-term and long-term creditors of the firm. Nationalisations like this are prejudiced in favour of those responsible for the trouble in the first place.He is scathing about the Bush administration’s actions. In his column for the online RGE Monitor, he wrote: “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.”As to historical comparisons, he says “calling it socialism (even socialism for the rich, the well- connected and Wall Street) is giving a bad name even to a failed experiment like socialism; this is more akin to the creation of a corporatist state (like the Italian fascism or the German Third Reich) where private sector interests are protected (gains privatised and losses socialised), where the government is taken over by corrupt and reckless private interests.”The notion of class division based on economic interests has of course been out of fashion during these years; but the stubborn facts of growing social inequality in the US accelerated by financial deregulation bear out the differential impact of this crisis and put the economy back at the centre of the presidential campaign.The share of aggregate income going to the highest-earning 1 per cent of Americans doubled from 8 per cent in 1980 to 19 per cent in 2004. In 2005 that figure increased to 21 per cent.The bottom 50 per cent earned 12.8 per cent in 2005, compared to 13 per cent in 2000. In recent years more than half of students graduating from Harvard sought and got high-paid employment in the investment banks that are now collapsing. That era has come to an end.Most lower and middle incomes stagnated during the Bush years. To that uncertainty there is added the much greater systemic one now on view. How it plays into the elections will probably determine the result, allowing an escape to policy debate from the juvenile personality discussion most prominent so far.This presents a real opportunity for Barack Obama if he can rise to it. He has been reaching back to the more radical programme put forward in March criticising tax-cutting, trickle-down policies and deregulation, rather than to the more centrist Clintonite ones adopted more recently.Polls indicate he is now communicating more effectively with the lower- and middle-income workers he needs; and the pacing of this crisis will match his own during the final stages of the campaign.McCain’s U-turns are more pronounced, shifting from the deregulation he advocated and supported in 1999-2001 to a call for stronger government action now and a bizarre defence of American workers’ productivity.He will find it more difficult to dissociate himself from the Bush administration, and the Palin effect may be less appealing in the face of these systemic uncertainties. Whoever wins inherits a debt of $10 trillion, which Roubini believes will now increase by at least another trillion – much of it held by China and Japan.Despite the worldwide effects of the US financial collapse, not all capitalisms have a similar structure to the recent American model. Globalisation spread its toxic debt around the world, but varying regulatory regimes make a real difference. Commentators expect the EU to set new standards which would spread to the US and others.Thus there has been notably less impact on the German than on the British economy. Franz Muntefering’s much maligned description of Anglo-Saxon style derivatives trading as “locust capitalism” in 2005 now resonates more widely.pgillespie@irish-times.ie© 2008 The Irish TimesThis article appears in the print edition of the Irish Timeshttp://www.lewrockwell.com/

AfAOctober 4th, 2008 at 10:28 pm

MoG,I took the pain to go and read what you wrote. Boy how you like writing? :)With all due respect, I think that the solutions you provide, as well as the diagnosis backing them are … simplistic.I do not know where to start, so I will start from the beginning. I believe the main “error” you make (beyond those of your solution) resides in your assumption or attempt to use a fiat currency to value wealth. “Raising the minimum wage to $40/h” is a hollow statement, not because it does not make sense, but because of the $ sign. In a fiat regime, a currency’s most critical function is storage of wealth and value, storage across space and across time. So the question becomes how much value does $40 entail, how much living standard can it secure? You should think about the whole transaction. A transaction starts with a physical good (work included) and ends with a physical good. Money is just like an electron. Of itself, an electron is useless. However, it is the movement of an electron from A to B that defines the law of attraction and creates electric currency. So asking that each individual receives $40/hr is equivalent to saying each individual receiving so much of goods and services. The question then becomes “where do these goods and services come from?”. A government does not produce any good or service; it is simply an energy/work transfer warehouse. The answer to that question is one of the following:1-An immediate transfer: that amount of goods and services you will receive is closely equivalent to either the fair value of your past excess work, that of your current work and/or part of your excess future work.2-A spatial transfer: that amount of goods and services you will receive is equivalent to the past/current/future excess work of other people (foreigners)3-A temporal transfer: that amount of goods and services you will receive is equivalent of total excess work that past or future generations have accumulated/ will accumulate in the future.Your pay justice therefore has to make sure that any payment scheme/policy should take place in the first category only; otherwise it will be unjust/unsound.We can even dig deeper to say that the origin of any goods and services a person feels entitled to must come primarily from his/her own work. To explain my point clearer, I would use some of my terminologies and models, and by sticking to physics comparisons, the smallest conceivable yet elementary socio-economic entity/unit is a family/household (the equivalent of a particle in physics, not an atom). As a matter of fact (no pun intended), each particle (household) should exhibit the same integrity and characteristics as the whole matter/system/society. To maintain a matter’s homogeneity and constitution (pun intended), particles/households cannot undergo fusion or fission in any large scale. The main characteristics of any particle, which ensures its sustainability and insures it against fusion/fission, are its integrations and stability. However, the individual atoms composing a particle are not required to be identical or self-sustaining (take the example of water; H2O is a stable and integrated particle that gives water most of its qualities and characteristics, we can safely say that any H2O particle is water. However Hydrogen and Oxygen are two atoms that are, if extracted from the H2O particle, are neither stable, self-sustaining nor similar – NB: it is possible however, just like in real life, to find a particle-atom (a single person: Helium isotopes) or particle-atoms O2). For a household to be self-sustaining, stable and integrated, its decision making process needs to be so too. And that decision making process includes among many other things the produce/consume/save/invest decisions and capabilities. The produce/consume/save/invest process on a family-macro level should be self-sustaining, stable and integrated, although, on a family-micro level (ie at the individual level) disequilibrium is possible or even unavoidable. For example, a school kid cannot be produce/consume/save/invest self-sustaining, stable and integrated, as s/he weighs more on the consumption and investment sides than the others. It is up to the household as a whole to make the process balanced.From this perspective, it is possible, even necessary for a housekeeping spouse to be paid, but it is certainly not by anyone else outside the household family. More importantly, my lengthy explanation tries to make the point that if a society/economy as a whole is debt-burdened and over-consuming; the same applies to virtually all of its particles (with exceptions I will talk about later). And if every particle is fundamentally unstable and not self-sustaining, and worse most are lacking the exact same thing (savings), would be equivalent to a system/matter composed of particles that suddenly lost many of its electrons (don’t ask yet where all those electrons went – and remember my first analogy concerning electrons). It is therefore physically IMPOSSIBLE to try to remedy the lack of electrons by promising to give electrons. A government has no electrons, if it tries to do so; it will be just rearranging electrons, taking from the many to save a few (although my example here is unrealistic in that particles would quickly reach a state of saturation/stability with enough electrons, whereas people are never really saturated even with all the money in their bank account). Also, remember the fact that most particles losing their electrons make them positively charged (thus the delusional denial). And as they become so, they repel each other and the economy as a whole becomes stressed and unstable. The system can and sadly does (like the way you are proposing to GIVE each one the worth of 1% inflation) borrow some electrons from other systems or steal it from their kids’ reserves, where they would be destroying either their own or foreigners’ future generations of particles. I believe none of these is really part of the pay justice domain.Then there is a different issue I believe you need to look at. At the center of you pay justice “theory”, I want to draw your attention to a specific issue. Work, as a source of production and therefore one of the 3 remaining process steps (consume/save/invest), is not a commodity, and therefore it is valued in a … very circumstance/context-based way. Fixing its pricing/value (just like any other price fixing policy) won’t work; it will just make things worse.The state of affairs of what you call “overpayunderpay” is possible only because it overpays the few and underpays the majority and it is a very sustainable system, sadly, as long as the underpaid allow it to be so. However, I believe that the over/under disequilibria apply to all 4 step-process (produce/ consume/save/invest) not only payment. In fact, you should not think about “monetary payment”. You .. sorry .. WE need to think about it as an integrated decision making process; a household needs to determine the necessary work it has to make to secure and conserve a desired life style (consume and save to invest). Then given an amount of earning it can effectively secure decide which current and future life style is optimal. The issue of underpay, I believe, will be short lived if this decision making process is made properly and if over indebtness does not distort it.Sincerely,

Average JaneOctober 4th, 2008 at 11:24 pm

@ MoG and AfA–what a marvelous discourse. I, too, went back and read your mini-manifesto, MoG.But doesn’t all this come down to the same basic issues: What is “work,” and who assigns the “value” to it? As Ayn Rand might say, “check your premises.”I can remember a time when the people who “played” the stock market did just that–because it was their money, to either gain or lose–just like playing a slot machine. And now, 25 years later, the fraudsters have manipulated We The Middle Class into sinking the funds of our our retirement plans, our pension plans, our IRAs and 401(k)s, all into the stock market casino, all of us bowing down, involuntarily or voluntarily, to the concept of the “ownership society.” But of course, spake the Wall Streeters, we promise on our honor to take care of your money for you. And what has happened? Two major stock market crashes in eight years. Bye-bye to any plans for retirement.It makes my head hurt.

PeterJBOctober 5th, 2008 at 12:15 am

FYINYSE Announces Fourth-Quarter 2008 Circuit-Breaker LevelsNEW YORK , September 30, 2008 — The New York Stock Exchange will implement new circuit-breaker collar trigger levels for fourth-quarter 2008 effective Wednesday, October 1, 2008.Circuit-breaker points represent the thresholds at which trading is halted marketwide for single-day declines in the Dow Jones Industrial Average (DJIA). Circuit-breaker levels are set quarterly as 10, 20 and 30-percent of the DJIA average closing values of the previous month, rounded to the nearest 50 points.In fourth-quarter 2008, the 10, 20 and 30-percent decline levels, respectively, in the DJIA will be as follows:Level 1 HaltA 1,100-point drop in the DJIA before 2 p.m. will halt trading for one hour; for 30 minutes if between 2 p.m. and 2:30 p.m.; and have no effect if at 2:30 p.m. or later unless there is a level 2 halt.Level 2 HaltA 2,200-point drop in the DJIA before 1:00 p.m. will halt trading for two hours; for one hour if between 1:00 p.m. and 2:00 p.m.; and for the remainder of the day if at 2:00 p.m. or later.Level 3 HaltA 3,350-point drop will halt trading for the remainder of the day regardless of when the decline occurs.Background:Circuit-breakers are calculated quarterly. The percentage levels were first implemented in April 1998 and are adjusted on the first trading day of each quarter. In 2008, those dates are Jan. 2, April 1, July 1 and Oct. 1.Contact: Mirtha MedinaPhone: 212.656.6192Email: mmedina@nyx.comhttp://www.nyse.com/press/1222772891771.htmlAnd from Bob Chapman: (this was already and also stated here by another but it was suggested that it may be disinformation: Please take on advisement.”The Fed has informed Bank of America to be ready for a one-week universal shutdown of the banking system, including access to checking accounts, savings accounts and credit cards.”All in all, and take into consideration of the elevated security alert by HS, the signs appear to indicate some experiences of chaotic events may be on the horizon. There can be no doubt that the milieux is becoming highly fertile for full fruition of civil unrest leading to revolution.I stated some time ago that I saw a first stop down – at around 8700 for the DOW before submerging into unknown territories; appears that I am getting official validation now:-)I am now also of the opinion now that this collapse, if it is going to be controlled, desperately needs new “leadership” across the Globe- all economies need to be involved but NOT with the “leadership” as it exists today.I ponder if this is possible but I am not confident as it is the nature of current “leadership” to prefer to preside, a priori, and it is not important – to those in power – that this means a total destruction of the World; they just don’t care; bewildering really. SighHo hum

MarkOctober 5th, 2008 at 4:01 am

OK, here’s THE solution… Don’t allow the market’s numbers to decline. Just keep the high-water mark, bump it up only when it’s really bumped up. This way no one will see when we’re in negative territory and “lose confidence!” I further believe that we should wipe out bounced checks and other things that reflect poorly on our negative savings rates.Negative things, negative numbers, are just toomuch of an inconvenience: besides, you have to write extra stuff, like “-” signs and all that!The sun will always shine brightly, all we have to do is to wear our prescribed rose-colored glasses!On a (slightly) more serious note, WE, each of us, has to become leaders, leaders of our own lives. It’s my belief that much of our problems stem from being made to think that we have to have someone else address our issues (and if they fail we can blame them; if they succeed we can claim credit in that it was “our” idea). The hierarchical model enslaves us, we need to ditch it!

PeterJBOctober 5th, 2008 at 6:25 am

Mark,You are so correct. It is the ‘kill-the father-state within you in order to “know thyself”. The concept is biblical (scientific) and it is psychological. The validations of this need are pre-Jung and pre-Freud and can be shown as the only way forward.In order to be yourself, you must kill your reliance on third parties (Father, etc.) and then, even Edward Bernasian tricks of smoke and mirrors will not work.This, Mark, is the way to end the faith-based economic system which allows gross manipulation and inhumane taxation without representation – which really, only serves to cover up the incompetence and stupidity of those who would be Kings… and then to permit Moral Hazard to become official Policy.I am pleased. And, I am not wrong.Ho hum

Jason BOctober 5th, 2008 at 6:40 am

Peter, this is no time to yell Fire in a crowded theater. The bank shutdown hoax on the internet would have no legs if people stopped perpetuating it. Fear and rumor create bank runs.

JLCOctober 5th, 2008 at 5:56 pm

If they would just recognize the losses, close and/or nationalize the insolvent banks, and be forthcoming and truthful about what is going on the bank runs would cease. The obfuscation of the truth is responsible for the fear and rumor.

MarkOctober 6th, 2008 at 2:18 am

But it’s really, fundamentally, about something much more, much bigger. It is being discovered that the very model of growth, which is what our economics is based on, is no longer possible (due to the declining ability to do work- declining energy sources).It’s still the Titanic, and we’re still in the same ocean, same iceberg, and, the same skipper! No redistribution of these elements can change this fundamental fact: to take liberty with one of Bush’s blunderous quotes, we can NOT “make the pie higher!”

Little SaverOctober 5th, 2008 at 1:08 am

Emergency plan for the rescue of German bank Hypo Real Estate withdrawn. The original plan would provide 35 billion euro. Deutsche Bank calculated that until end 2009, 70 to 100 billion would be necessary (Weld am Sontag).Only one bank…

PeterJBOctober 5th, 2008 at 1:09 am

“I am now also of the opinion now that this collapse, if it is going to be controlled, desperately needs new “leadership” across the Globe- all economies need to be involved but NOT with the “leadership” as it exists today.”@ PeterJB (above)I would like to highlight, indeed, scream from the mountain tops for all to hear, that,the “leadership” issue is the most difficult problem that we have in our socio-economic civilization building; the technical builds of the socio-economic, financial, economic and monetary systems are simplistic and so simple and available, our kids in high school could put it together.What you have to get into your minds IS the electing of “leadership” with experience, intelligence and intellect and enough common sense to understand – nay – comprehend, that a faith-based socio-economic system will just not meet the demands that we will, undoubtedly encounter in coming days, years, decades, generations, centuries, etc.We need people that don’t want the job, have fought all their life to get where they are, even if its nowhere, have values and prioritize values before shiny baubles and coloured beads. Leadership should have some knowledge of all things; a working knowledge of the Universe with which we find ourselves at this moment; leadership should understand the workings or physics of nature and above all, understand. that no man can be trusted.Leadership should understand the capabilities of man and that as such, the spirit of man is fully scalable Universally and this is our greatest strength. Leadership should appreciate that denial is mans’ greatest weakness. Leadership must feel compassion for life as the rarest and most valuable commodity in all that is known and yet to be explored; both within and outside our Universe.Leadership my friends, is where all your energies should be focused at this moments as we test the depths of the abyss, brought to us, by our own lack of faith in ourselves.The rest is easy.Ho hum

PeterJBOctober 5th, 2008 at 1:14 am

I have to add, that Academia does not qualify for the job and we really have had enough of the self-opinionated and hollow.Never, ever elect, even one from the consensual to “leadership”.Ho hum

OuterBeltwayOctober 5th, 2008 at 5:08 am

Leadership is a myth. Leaders can only go where “followers” already are.Followership needs to be elevated in social standing. It used to be called “citizenship”, and de Tocqueville identified it as the secret ingredient of the emergent U.S.I have faith in me. I come here to gather information in order to build me into a good “follower”.

OuterBeltwayOctober 5th, 2008 at 6:47 am

The traditional social contract between leader and follower goes like this:Followers: “Do our thinking for us, take the awful chances we dare not, and we will adore thee”.If the leader takes that contract, he’s a fool. He should say:”Sorry, I cannot be the perfect being you dare not aspire to. I will only lead people that don’t need leading, and if I do that, I need not lead at all”.The only people worth leading are the ones that don’t need to be led.Applies in business as it applies in politics.I assert again: Effective followership is a skill worth cultivating.Stated another way, it’s risky to centralize the intelligence and situational awareness. The organism is vulnerable to attack. This is the principle of asymmetrical warfare – decentralize the command & control, reduce vulnerability.

PhilTOctober 6th, 2008 at 12:09 am

” …Leadership should appreciate that denial is mans’ greatest weakness…”@PeterJB and anyone who cares to comment …IMHO, Sir, not only man’s greatest weakness, but extremely pervasive throughout thepopulation in every segment of life these days, at least in the USA, and without a doubtone of the most difficult aspects of/obstacles to proper communication and intellectual honesty.Any thoughts on how to successfully deal with individuals/groups steeped in the levelof denial you refer to ?Best …

PeterJBOctober 6th, 2008 at 5:16 am

“Any thoughts on how to successfully deal with individuals/groups steeped in the levelof denial you refer to ?”@ By PhilT on 2008-10-06 00:09:44I know the mechanism and I believe it to be a Universal Principle (full dimensional scalability) and I, and others are working (independently) on the “Authorities” (documents and translations and interpretations) that are the original (from what we know) concepts but these works are red hot and highly and potentially emotional fire so we are, I am, being very careful. we have put many, many years into this search.Yes, I know how to do it but it will take the breathe out of most people – it is a mental step but a natural step but one you will find is possibly against everything that you have become.You will see (below) that Mark has made the first step – now, the explanation and validation but these will not find easy acceptance accept by those like Mark, et al.”On a (slightly) more serious note, WE, each of us, has to become leaders, leaders of our own lives. It’s my belief that much of our problems stem from being made to think that we have to have someone else address our issues (and if they fail we can blame them; if they succeed we can claim credit in that it was “our” idea). The hierarchical model enslaves us, we need to ditch it!”@ Mark on 2008-10-05 04:01:21And unfortunately, I am not prepared to put this on public display – it needs a rigorous and sensitive environment with planned slow leaks…I will say this:men are somewhere between Cause and Effect and in that measure, we are closer to the beginning than to the end – but the wisdom / awareness is greatest (much greater) at the beginning because at the end when achievement is reached, it all becomes redundant; Man. The steps in this process are ones of differentiation which is in effect, ‘mass’ – in terms of physics, not the usual term, but the phenomenon anyhow. The process is a Universal Principle. And, the time for the next step has arrived; critical mass has been reached and time has begun its emergence.Ho hum

PeterJBOctober 5th, 2008 at 2:23 am

“In the words of Robert Rubin himself in his book, In An Uncertain World, on page 170 he states,“Without an increase, the federal government would hit the debt ceiling before the end of 1995, possibly as early as October. Default and the President being forced to sign an unacceptable budget were both untenable. We needed to find a way out, rather than simply hoping that at the last minute the opposition would blink and increase the debt limit.”http://www.marketoracle.co.uk/Article6619.htmlInteresting article and as you can see from Rubin’s remarks, the misuse and manipulation of the economy is THE priority to cover for the incompetence and stupidity of “leadership” (moral hazard). And once this is perpetrated, the secondary economy slicks move into the opportunity zone and from that moment on, Moral Hazard becomes National Policy!An interesting history of usury and interest as well.Ho hum

OuterBeltwayOctober 5th, 2008 at 4:36 am

If the real economy can’t finance Empire operations, need to find a new way to raise money. Aha! What about bubbles?Bin Laden had identified a major strategic weakness of the Empire (of any Empire). Empire is expensive, and relies on plunder.In the West, the lesson was not well-learnt. The Empire overplayed its hand. It played the old game until there was no equity pool left to squander, once the industrial base and the West’s credit standing was sold off.Now the Empire is cornered by the physical reality of the actual functioning of an economy, and by the lack of stored sugar to plunder.What to do… what to do…

GuestOctober 5th, 2008 at 4:36 am

Interesting article from Germanys FAZ about the Bush legacy:…And a disturbed world hopes that an Obama is enough to heal the wounds. But if the world doesn’t understand what wounds it has inflicted on itself, it won’t advance any more to the optimistic, happiness seeking and in the end even loving ego that slumbers embryonically in the innermost core of our democratic and social ideals. „In the interminably repetitive speeches, announcements, press conferences and threats, the recurrent terms are Democracy, Justice, Human Rights, Terrorism“, John Berger writes. „Each word in the context signifies the opposite of what it was once meant to mean. Each has been trafficked, each has become a gang’s code-word, stolen from humanity.“But Bush hasn’t just taken, he has given back: a changed reality of the constitution, freedom deformed and happiness destroyed. Shaken by the financial crisis, the entrepreneurs of Silicon Valley announced in The New York Times a few days ago the preliminary „end of ideas“. Maybe this last, quasi materialistic ruin of ideals is the endpoint. Bush multiplies us with zero. The European societies must painstakingly learn again to count together one and one to be able to begin anew.http://www.faz.net/s/RubCF3AEB154CE64960822FA5429A182360/Doc~E315934EF0414487782348A80FA440DE5~ATpl~Ecommon~Scontent.html

Andrew G. Bernhardt, St. LouisOctober 5th, 2008 at 4:54 am

I will keep this short and sweet… I can’t believe that the entire (negligent) congress wants to borrow another 700 billion dollars and pretend that somehow borrowing more money will help the situation that was induced from borrowing too much to begin with! They have increased the total government debt outstanding from roughly 5 trillion to 10 trillion, and now we will have what I describe as the equivalent of Bush’s 9th year, another 700 billion borrowed…. HOW DOES BORROWING MORE MONEY SOMEHOW HELP A SITUATION THAT HAS BEEN INDUCED DIRECTLY FROM BORROWING TOO MUCH IN THE FIRST PLACE!!! The government borrowed foolishly for a war against the mountains against afghanastan and iraq, and doing that crowded out investment, crowded out borrowing, incited a credit crunch, took money and diverted it away from realestate, other existing fixed income, the stock market, CMOs, and it created deficits that wrecked the US Dollar, and all the GSEs also! Now the congress will pretend that borrowing (or printing, or taxing) 700 billion dollars will somehow help the situation! What idiots! I think it’s going to get worse!

MarkOctober 5th, 2008 at 6:17 am

Andrew, good to see you back :-)Yes, it’s all a logical disaster isn’t it?I suspect that much was done to try and please foreign creditors. After all, they’re still allowing the US’s dollar to be recognized as the world’s reserve currency. But I think that somehow only this avenue was permissible as a solution (to the US’s foreign creditors); better, perhaps, than straight out running the printing presses? (which seems inevitable, but maybe this delays it enough such that others can work to get out of US dollars?)If there’s nothing else that I know, I know this: it all smells of an incredible amount of panic. And yes, it’s only going to get worse 🙁

PeterJBOctober 5th, 2008 at 6:31 am

“What idiots! I think it’s going to get worse!”@ Andrew G. Bernhardt, St. Louis on 2008-10-05 04:54:28You can take that to the Bank :-)Ho hum

Andrew G. Bernhardt, St. Louis, MOOctober 5th, 2008 at 11:32 pm

Also, I keep on forgetting to mention… if the (negligent) government tries to take over, bail out, or rescue banking, and if it takes over the entire financial sector, it will be indirectly taking over the following A) banking, B) Insurance, C)Underwriting, and D) Brokerage units, etc… now… if it even just takes over B) Insurance… then it will indirectly be taking over medical care and healthcare… this will produce MASSIVE DEFICITS that idiotic bureaucratic foolish clowns will not be able to handle… I am strongly against bailouts, rescue packages, and take-overs! The government and it’s scroundrels should wisen up and vow to never again write MASSIVE deficits for any reason, and they should balance the budget, or run a surplus! They should actually have fiscal responsibility and monetary responsibility! I currently see no catalyst whatsoever for the stock market to rise any time soon, and the situation will only get worse before it gets better! When will it get better you ask?? HMMMM maybe in like 30 years or more! Oh, but they could sign a declaration of default… they should and could sign a treasury securities default and a default of the dollar too! All bills, notes, bonds, both conventional and inflation linked could very well go bust (becuase I got news for ya, the treasury securities and the US Dollar, they are not AAA rated… they are rather FFF fecal status!), the dollar and the debt will be declared worthless! When will this happen? Not sure! I’m guessing sooner rather than later! If the USA entity itself makes it until election day, I will be surprised. Perhaps, like Russia, the USA will be split up into e.g. 16 pieces and there will have to be a new currency, new constitution (that hopefully will not allow the right to bear arms), and new rules and regulations. Maybe there will be riots in the streets? Maybe there will be an dramatic increase in the violent crime rate, e.g. rape, murder, and armed criminal action? Maybe we, as in the USA, maybe we will be invaded by the UN, Canada, and Mexico to keep the peace, once a total default of Treasury Securities and the US Dollar materializes? Geez everyone, this is what happens when everyone thinks that deficits do not matter! This is what happens when idiots run the country, as in all the totally negligent congressman of the legislative branch, the negligent idiots of the judicial branch, and the negligent idiots of the executive branch too! When all else fails remember, when it’s hennessy vs. vodka, aka Marlboro v. Madison, blame all three branches of the negligent idiotic government!

PeterJBOctober 5th, 2008 at 6:55 am

Talking about incompetence and stupidity:Australia:http://www.bloomberg.com/apps/news?pid=20601087&sid=ads6yy1.XVDk&refer=homeIt's a joke.Oct. 5 (Bloomberg) — Australian Treasurer Wayne Swan said the $700 billion financial-rescue plan signed by President George W. Bush won’t be enough by itself to restore confidence in the world’s financial system.“I don’t think there’s any magic bullet here,” Swan told Channel Ten’s Meet the Press program today. “But this package was absolutely essential, absolutely essential to deal with the problem at the core of the U.S. financial system, which is the bad debts in the banking system.”Swan expects a “rocky road” as the global economy adjusts to the package and lending recovers from the credit crunch.“The bailout is a good first step toward restoring confidence by cleaning up the banks and getting credit markets working,” said Craig James, a senior economist at Commonwealth Bank of Australia in Sydney. “Phase one is out of the road now and phase two is the workout process for this bailout; it will take some time.”Swan declined to comment on what Australia’s central bank may do when it meets next week, with all 18 economists surveyed by Bloomberg News expecting the Reserve Bank will cut borrowing costs for a second straight month.Funding Costs“In the coming months we should see most of the world’s central banks moving to stimulate growth and that is very encouraging,” said Commonwealth’s James.Rising wholesale funding costs in money markets may make it difficult for Australian banks to pass on in full any reduction to customers, Swan said. The London interbank offered rate, or Libor, that banks charge each other for three-month loans in euros increased to an all time high of 5.33 percent last week, the British Bankers Association said.“It is absolutely vital at this time that we have a stable banking sector,” Swan said. “What the government expects from the banks, is a maximum possible flow-on that is economically responsible and consistent with the stability of our banking system.”Swan said it’s “too early” to estimate how a slowdown in the global economy would cut Australian government revenue. “comment: What utter crap – and bulls%$#Q. What would he know? A. Nothing.The Australian Banks have repeatedly told Swan to get lost – Just give us money and then go mind your own business as we are not passing anything on! We are going to foreclose! Get over it!And, that’s what they are doing!”absolutely essential” Hah!In the coming months we will see the World’s leading Banks what they do best – gouging every that moves and doesn’t move! er, still!Please note the comment “no magic bullet”! This guy Swan is so incompetent that he even shocks me and that is saying something! I think he meqns that the gopvernment is going to ream the people a lot more in order to keep their crappy abnks happy for all those reasons that they they don’t want to tell us about.Yes, denial also gets to become official Policy, too!Ho hum

MarkOctober 5th, 2008 at 7:35 am

comment: What utter crap – and bulls%$#Can we demand that this disclaimer be applied to everything that the pols and banksters write/talk about?Why can’t reporters actually ask questions anymore? I mean, this statement BEGS for a question:“In the coming months we should see most of the world’s central banks moving to stimulate growth and that is very encouraging,” said Commonwealth’s James.How are we to interpret “moving to stimulate growth?” “moving” as in “we’re thinking about it” or, “we’d like to be able to, but we know it’s not possible” or, “it’s a ‘feel good’ sound bite, thanks for the money!”?The world’s in recession. Doesn’t matter how much credit the banks have if actual LIVE people cannot draw on it! And then there’s the small detail about the physical world not wanting to cooperate in this growth plan…Ho freak’n hum!

GuestOctober 5th, 2008 at 1:41 pm

If you are following media in the US since the Bill passed on Friday and the market plunged: that plunge is getting little or no attention; and the revisionist spin doctors are working overtime to remind everyone that the $700 Billion panacea promised before the vote was really just a first baby step.

MarkOctober 5th, 2008 at 3:04 pm

…and brought to you by the same people who told us that the Iraq war would only cost us $50 billion and that this amount would likely be paid back through oil revenues.As a friend of mine says, “if their lips are moving they’re lying.”

GuestOctober 5th, 2008 at 4:03 pm

And not to pick away at any partisan political wounds but it’s also the same media that seems intent on getting a particular candidate elected – what is happening to America?

Octavio RichettaOctober 5th, 2008 at 9:05 am

Gee, I am having a hard time getting used to the blog’s new “Reply to this comment” format. I was used to reading 100% of the posts and my brain was quite capable of filtering the junk while remembering the really good ones so that if someone replied to a post by LB 100 posts later I could still keep track of the thread.Any suggestions on how to cope? I am getting dizzy!

Alessandro - http://castellidicarte.blogspot.com/October 5th, 2008 at 4:50 pm

It gets better after a couple of days. But you need to scroll up and down. Also the search key is your friend (I usually search for the people I find interesting, but look out for misspellings).Keep in mind that comment volume is literally through the roof.And welcome back!!

Pecos BankerOctober 5th, 2008 at 9:43 am

Has anyone heard that they might be replacing the dollar with a new currency called the “Amero”? If that happens, would all our assets in dollars suddenly become worthless or greatly reduced in value? Somebody wrote in another blog that the US has already promised to give the Chinese 800 million Ameros when this happens. Who knows whether that is just an idle rumor.Other questions: Even with a new ceiling of $250,000 for deposits in banks, if your bank collapses, how long would it take to get your money back? Isn’t the FDIC vastly undercapitalized? If they did pay the insurance in a complete financial meltdown, wouldn’t that mean that the dollar would be practically at zero?Concerning possible bank runs, I have heard people saying that if everybody withdraws their deposits from their bank, that would force the economy to its knees and give the people leverage over the Wall street gang and congress. Is this foolhardy, or what?

GuestOctober 5th, 2008 at 1:52 pm

There is a school of thought that there is a secret agenda to merge the CDN$, Mexican Peso and USD as part of a North American Union (sort of like the European Union and the EURO). They point to the fact that some north south super highway is being constructed between Mexico and Canada of which there is only circumstantial evidence. I’m not one to dismiss something by simply labeling it the work of conspiracy theorists but I think if there is such a plan it will be many many years from now. But keep in mind that oil and water will be the big issues of the future and it would be more efficient for the US to merge with Canada than to invade it.

GuestOctober 5th, 2008 at 10:11 am

Anecdote from an American BankLast Friday I was standing in line at one of the major US banks. It’s a well-known bank. There was a man in line standing directly behind me. He was one of those people who has the annoying habit of speaking out loud … to no-one in particular. He happened to be expressing his profound frustration that the US Congress had just passed the rescue bill.Meanwhile, other customers in line were mostly keeping quiet, or cringeing. They clearly just wanted a little peace. But this man was not going to keep quiet.The interesting thing to me was that the noisy man had clearly done his homework. He was rattling off all the details of the rescue bill – especially all the pork barrel projects that had been tacked onto the $700 billion. I was amazed that someone had obtained a copy of this bill on the same day it was passed. He had already parsed all of the details.Eventually he got to reciting the news item where Senator Feinstein said that she had received over 90,000 messages from the public on this bill, and that 85,000 votes were against it. At that point I spoke to the man. I pointed out that one of those “Nay” votes came from me. I FAX’ed messages to a lot of Senators last week. This apparently encouraged the outspoken man, who continued his tirade about the infamy of this piece of legislation. I suspect that the other customers were wishing I had just kept my mouth shut.Some people appeared to be doing normal transactions at the bank.But others were clearly withdrawing larger sums of money from their accounts.In my case, I was increasing the safety cushion of cash that our family has available in case there is some type of major financial emergency.But you could see the look in the faces of the bank tellers. “Oh, ***. Not another person withdrawing large amounts of cash.” They were willing to do it, and they tried to keep smiling faces. But they plainly were not happy about the situation.PeteCA

DanOctober 5th, 2008 at 11:12 am

PeteCAWhat would you estimate as an appropriate at home cash reserve for a family of four.I would apprecdiate your adviceThanks

GuestOctober 5th, 2008 at 11:23 am

Dan: I noticed that one of the financial commentators (I think it was Chris Laird, but I could be wrong) was suggesting that people have enough cash to cover one month of living expenses. Quite frankly, I think a lot of Americans might have trouble amassing even that level of emergency cash. My suggestion would be to have enough cash to cover your grocery bills and gasonline bills for a couple of weeks. Plus, if you can, maybe one lump of cash to cover a regular large payment that your family has to make (e.g. a mortgage payment, or rent payment). That way, if there is a disruption in banking services and it comes at a very inconvenient time … you can still find a way to get the money to cover your home or apartment. I’m not encouraging panic in any way. Just suggesting that it’s better to be able to keep your family off the streets, in case there is confusion out there. I’d rather watch the events of an unfolding crisis on TV, safe in the confines of my own home.PeteCA

MNmomOctober 5th, 2008 at 11:28 am

PeteCA,Hi. I’m from MN. First time on this blog. I’m not surprised the gentleman had all the details. My local TV station , WCCO-TV, had a copy of the bill on its website one hour after the bill was passed.For anyone who’s interested, it’s still there:http:llnw.cbslocal.com/station/national/docs/2009/10/HR1424BailOut.pdfIt’s been a sad week for America. I take consolation that my Rep. Collin Peterson, voted it down twice. However both of my senators voted for it. But it’s a very small consolation.

GuestOctober 5th, 2008 at 11:45 am

Pete, this man you speak of is one of ours. And I notice that of all the people in the bank, not one contested what he was saying. And, fortunately for all of us, many of those in the bank heard the details, perhaps for the first time, of the bailout (not a rescue).Toward the end of his life, Thomas Paine was widely ridiculed by the people around him and by his former friends; he was even disowned by his native England. But Tom Paine, like the man behind you, refused at that one point in his life to shut up when the entire world depended on someone to speak out, no matter how injurious it was to the sacred ears of the meek.And I noticed that the people in line with the guy of whom you speak did not say you’re out of line here. And they didn’t because the man had the facts. Anyone knew if he did, he would be nailed – with the facts. Your man was not a blowhard.Our freedom rests in what direction the people want to take it. And there is a growing hate for Wall Street bankers and what they have forced the people to do. America’s power is not in the banks, in paper money, in politicians, in the US Marines. It is in the people. That is the strength that moves America.Kudos to you Pete, for speaking out.

kilgoresOctober 5th, 2008 at 12:04 pm

Several weeks ago, I suggested to my elderly parents, whose finances I have been compelled to begin managing this past year, that they withdraw several thousand dollars to have on hand in their home safe in the event of a temporary disruption in the banking system. They were advised last week when they went in late one afternoon to withdraw some more cash that the bank was out of one hundred dollar bills. Apparently, the “silent run” may not be limited to uninsured deposits — there must be a lot of other individuals withdrawing extra cash “just in case.”SWK

GuestOctober 5th, 2008 at 12:13 pm

How ironic … that apparently several people who read this blog were all withdrawing cash from the same bank at the same time (last Friday). Very interesting!!!PeteCA

kilgoresOctober 5th, 2008 at 12:31 pm

I’m afraid some cash-hoarding is a rational response to the place in which we now find ourselves.SWK

theadrOctober 6th, 2008 at 2:25 am

Don’t take out all your cash. They may turn this into a cash-less society. Only plastic and internet transactions work. That way they can pierce your medical needs and blackmail you like the ‘good’ criminals that they are. Today is always a good day to Die!

GuestOctober 5th, 2008 at 1:09 pm

For two weeks I have been making trips to various banks that I have dealings with with the objective of withdrawing currency just in case the ATMs stop working or if withdrawl limits are imposed. What surprised me was the difficulty in withdrawing larger sums e.g. >$10k. It wasn’t an issue of trust but rather we don’t maintain that large of a float. I suspect that if there were an open run on the banks most branches would be out of currency within the first 20 minutes. Depending on how the markets open tomorrow I will again be topping up my cash position. If I could only figure out why gold is not going higher I would also moving in that direction but from $902 last Monday to $834 Friday doesn’t make sense unless deflation is the greater bogey man.

Average JaneOctober 5th, 2008 at 2:56 pm

The credit union at which I used to bank had a daily (24-hour) limit on cash withdrawals of $3,000. This was about a month ago.

ThetaOctober 6th, 2008 at 4:23 am

<sigh> I would love to have that kind of “difficulty.” Would that I had >$10K in my accounts…

BrianOctober 5th, 2008 at 1:27 pm

I have taken this advice, even though I live in Canada, and put aside a reasonable cash reserve. I have taken to advising my family and friends to do the same.Although I always state that I think and hope it won’t be necessary, and even that the chances that they will actually need to call on this cash is probably less than 10%, I argue that if it did come to that, wouldn’t it be hugely better to have take this precaution.Most people still think I’m crazy when I suggest it, but by saying that I don’t actually believe it will be needed, but that they must agree with me that there is an outside chance, well, that seems to win them over.You know what they say: The thing about being paranoid is that you only have to be right ONCE!

kilgoresOctober 5th, 2008 at 2:06 pm

Like Pascal’s Wager Theory, if you’re wrong, no harm done, but it you’re right, you’ve saved yourself from (in this case, at least a little bit of) hell.SWK

GuestOctober 5th, 2008 at 11:06 am

News item … Sunday morning, Oct 5’th”LONDON (Reuters) – Britain’s commander in Afghanistan has said the war against the Taliban cannot be won, the Sunday Times reported. “I wonder if Mr. McCain and Mr. Obama are aware of this. They seem to spend a lot of time debating spending increases for Afghanistan, troop surges, more aid etc.PeteCA

kilgoresOctober 5th, 2008 at 12:27 pm

What the brigadier reportedly said was, “We’re not going to win this war. It’s about reducing it to a manageable level of insurgency that’s not a strategic threat and can be managed by the Afghan army.” That’s not really news, or shouldn’t be news to anyone that’s kept up with this conflict since the beginning.Decisive victories can be measured in traditional wars between nation states, where one side surrenders to the other in a written instrument. You’re never going to see that sort of thing in a conflict with non-state actors who engage in terrorism. That doesn’t mean you can’t accomplish the primary goal, which in the case of Afghanistan would be the elimination of a state government that sponsored the non-state terrorists (done) and the stabilization of a successor regime to a point at which it can maintain reasonable control over its own territory (ongoing). Anyone who seriously believes that terrorism can be completely eliminated throughout the world probably needs a refresher in world history.SWK

GuestOctober 5th, 2008 at 12:01 pm

This is crazy, but there is a good dialogue going on simultaneously with this one — on Roubini’s previous thread. Here’s the last post, from Ryan Darwish, at 11:25:18 ~~~~Congress has passed the Paulson Mega Bailout Plan. Much of the public dialogue around this issue appears to confuse the two major factors underlying this crisis. These two factors are liquidity and solvency.The credit markets are the lifeblood of a healthy functioning global economy. This financial crisis has resulted in a “freezing up” of the credit markets. Despite Central Banks flooding these markets with access to funds, the credit markets had remained frozen. The ostensible reason is that there is an underlying fear of institutional insolvency arising from exposure to toxic assets on their balance sheets. Because of the complexity of the financial structure of these assets, valuation becomes, more or less, conjecture. At the very least there is an asymmetric knowledge regarding the real quality of these assets. Probably, however, this even overstates the value assessment of these assets because, apparently, even the holders of these assets have exercised poor judgment regarding their value.A more nefarious explanation as the why the credit markets continue to remain frozen after hundreds of billions of dollars have been injected into the system, could be a “money cartel strategy”. In this case, the fear generated by this credit crisis provides great cover for the institutional withholding of credit. The resulting worsening of financial market conditions result in more institutional and corporate failures and an increased availability of distressed asset sales for those who have access to capital.Whichever explanation may be partially, or wholly, representative, the recently passed Paulson Plan is intended, at least at face value, to address the frozen credit market conditions by alleviating the institutional solvency concerns.Unfortunately, as the point has been made by Roubini, and others, this only partially addresses the real problem which is the crushing personal debt burden. This is an underlying weak point which has lead to the deterioration in home values, and the associated mortgage securities. The idea that making more credit available to an economic system whose members are already drowning in debt seems to leave something to be desired as to this strategy’s future efficacy and effectiveness.Because of the immense magnitude and pervasiveness of this financial crisis, it is likely that $700 billion will not be sufficient to successfully address this problem because the dollar value is insufficient, and its focus is incomplete. The other aspect which must be addressed is how to provide relief to an overly indebted population who cannot adequately service its debt, and how to do it equitably so that those who have acted prudently do not feel penalized for their more prudent financial behavior.From my perspective the inevitable public policy which will arise will be monetizing the debt, and creating enough inflation to diminish the real value of the existing debt. This appears the only real option if the global financial system will not collapse in a shambles. This would be the case where the number of losers is maximized, and a result would arise from either an immensely stupid public policy decision, or a monumental geopolitical miscalculation. My inclination is to believe that because the vested interests are at stake of so many who truly are mentally sharp, as well as business and worldly-wise, the inflating option will be the direction we find ourselves going in. Given the monetary and fiscal policy apparatus, mechanisms, and policy maker predispositions, this seems the most probable outcome.The next step in this would be to more directly address the personal solvency issues. This is a bitter pill to swallow, but this would be a natural consequence of the imprudent financial behaviors on the scale we have witnessed over many years. There are many creative ways in which this could be done. I would think, however, that a policy this is bold, and demonstrably decisive would be what is really required to breathe life back into the system. The follow-up, if we were to really correct the error of our ways would be to put in place regulations as well as financial education, training, and counseling programs, and a rethinking of our values, as to not get ourselves, globally, back into these circumstances.Ryan Darwishryandarwish@gmail.com

GuestOctober 5th, 2008 at 12:18 pm

Ryan:Your “nefarious scenario” is certainly plausible. Given the behavior we have seen from the Wall St banks up until now … anything seems possible. But if this is their true motive – then it’s an incredible miscalculation. The next step in the credit crisis is a higher level of anarchy in the financial system … “every man for himself”. That type of move represents a major step downwards in confidence.PeteCA

MalthusOctober 5th, 2008 at 12:57 pm

Inflation does indeed seem a logical outcome, however with most asset classes and even gold in decline the evidence would suggest that deflationary forces are running amok. Moreover, as resilient as the American consumer has been, they are tapped out and thanks to the efforts of Government; they are in a state of panic. Wage driven inflation is not on the horizon such that any attempt to induce inflation through public policy will only serve to weaken an already embattled and fearful consumer. So while inflation may be the answer, beside it lurks its evil sibling deflation.For interest sake only this video link should be quite interesting to any consiracy theorists out there: http://www.youtube.com/watch?v=HaG9d_4zij8

GuestOctober 5th, 2008 at 2:45 pm

Ryan, the German government monetized debt in the twenties and destroyed three generations of its people.Your next step, to address personal solvency issues, would, IMO, wipe out the responsible that worked and saved and paid. To make them pay again for the personal solvency of irresponsible and reckless spenders and bankers is counterproductive and demoralizing.When this great country turned from a republic into a democracy, the majority voted itself a major share of the bread that the little Red Hen had baked “all by herself,” even though they had refused to help her bake it. Now, you say, she must swallow a bitter pill and give up the last bit of bread she managed to save for her old age — to these same lotus-eaters. Not only that, she must re-tie her apron strings and bake them more, because they ate all she gave them and then some.A policy this bold may appear to “breathe new life back into the system,” but to starve and exploit America’s middle class further will destroy the very heart of the system. And all the artificial respiration and threatening and ranting and regulation-writing by the mob won’t bring back the life of that lifeless, beautiful, and industrious little Red Hen…that baked the bread.

Ryan DarwishOctober 5th, 2008 at 3:43 pm

I think that depends upon whetheer or not waage inflation occurs as well. As to the “German government monetized debt in the twenties and destroyed three generations of its people”; it appears to be the damned if you do, damned if you don’t choice set. Which is the lesser of evils collapse of the global financial system, or massive restructoring of the underlying indebtedness?

GuestOctober 5th, 2008 at 5:46 pm

Most of the degeneration that precipitated America’s and the world’s financial crisis can be laid at the door of finance: the same can be said for the destruction of Germany leading up to World War II. (Incidentally, the financiers survived that one, too.) IMO, it will be a “breathe of new life” for all humanity if America’s central cartel of international bankers who run the Fed, after having caused so much suffering for so long by debasement of the currency, is allowed to die a natural death.Increasing unemployment, devalued savings and pensions, relocation of America’s industrial base, outsourcing of her jobs, her faltering economy, the corruption of her political system, all are the desert-making of paper money and tyranny.History shows that when civilizations have sound money, they prosper and freedom thrives. The less free a society becomes, the greater the likelihood its money is being debased and the more the economic well being of its citizens suffers.The essential first step toward the return to human happiness in American and the economic security of her people is for the nation to reassume its prerogative over the issue of money and credit and the stability of the currency. To do that, the Fed must be abolished.Even Alan Greenspan said in his pre-Fed days that the “shabby secret” of the proponents of paper money is that deficit spending is simply nothing more than a “scheme for the hidden confiscation of wealth.”

GuestOctober 5th, 2008 at 7:11 pm

The question is, are these the real choices? It’s difficult to accept the premise that these are the two choices when the description of the approaching ”global financial collapse” is being provided by the parties who brought us where they say we are. In other words, can we trust their appraisal? They also selected the other alternative — the “restructuring” alternative that would make whole those who created the crisis at the expense of honest men, savers, taxpayers and working people.Nor do we know exactly what’s involved within their massive restructuring approach. Much of that also is going to be handled by the people who are providing the two choices. Stop and think a minute. We have been brought to this point with a gun to our heads, telling us if we don’t help these people out, the crisis is going to get worse and we’re going to suffer. I don’t know about you but I’m leery of invitations and propositions offered by people with guns in their hands.The two choices, IMO, are these: Do we follow these people down this same road again? Or, do we find out what’s going on, punish the guilty and begin to return to sound business practices? Last time I heard, monetizing the debt is not a sound business practice. It is surrender to the financiers.It’s time to allow the built-in mechanisms of a market economy based on a stable currency of exchange to function again.MNR

AnonymousOctober 5th, 2008 at 8:30 pm

The description and analysis of the financial meltdown appear to be coming from more than just the parties that “brought us where they say we are”. The analysis from Roubini, the IMF and others, as well as the evidence of mounting numbers failed institutions all suggest this crisis is very real and growing. Finding out what’s going on, and has gone on, will provide fodder for academic careers for years to come.There is a time for philosophizing and a time for action. Despite the stench, sometimes cleanup work needs to be done.

GuestOctober 5th, 2008 at 11:24 pm

IMO,Anon,what Roubini is doing is forecasting what’s going to happen – based on economic analysis and consequence and political probability. He provides specific advice. These people. the bankers for bailout and their financial media, engaged in hyperventilating what’s already happened or might happen if — you can’t buy a house, a car, the banks are in trouble…. We went from one week where they were engaging in trying to calm everybody to the next week where they tried to panic everybody, the least of which caused the Dow to drop 800 points – and then they exploited that. What they’ve done is to frighten the American people into capitulating to the Paulson-Bernanke bank bailout. And the under handed way in which they did it is emphasized by the fact they couldn’t wait even a day or two days for Congress to act. The problem was so big it had to be done right now, this instant, tonight!I don’t think Roubini and other learned people suggested that unless we dealt with it instantly the sky would fall in. And we all know the reason it had to be done so quickly. The problem.was not that big that it couldn’t have been handled over time and the American people knew it and wouldn’t have allowed the bailout as Paulson presented it if Congress had taken its time and had hearings, There is no immediate evidence that credit has dried up and isn’t available. Yes, the big banks are having trouble with credit seizing up because they don’t trust each other. But there is little evidence that credit is frozen in the economy. Where is the evidence you can’t get a car loan? Are the car dealerships closed? Yes, the people believe we are in a recession, even though government officials cover it up with fake figures. But a recession is not the same as the frozen credit.As economist Dr. Michael Hudson pointed out, this is not a bailout, “it’s a giveaway—and a giveaway that will create a new plutocracy of billionaires. It lets billionaires who’ve leveraged their capital cash out, take their cash and move it all into euros and sterling, move it all abroad and collapse the dollar…”Do it over time, he said, don’t rush.When asked, “So, this is weapons-of mass-destruction in Iraq all over again?” Hudson said, “Yes.“Panic the people. Make them think there’s an emergency. There’s no emergency at all. You know, it’s just in the last 5 years that the richest 1% of the American population have increased their wealth from 37% to 57% of all the returns to wealth – dividends, interest and capital gains—in the economy. They’ve vastly increased it. They don’t want it to go back to normal. They’d like to keep on going. This is a once-in-a-century rip-off. You can do this kind of thing under emergency conditions — usually with the kind of bloodshed you saw when Pinochet introduced free markets at gunpoint in Chile.”Hudson wrote on CounterPunch that the bailout “will shape the coming century by giving finance unprecedented power over debtors – homebuyers, industry, state and local government, and the federal government as well.“But what threatens to be even worse,” he said, “is the government’s move to let the financial sector make even higher, unprecedented gains by working its way out of negative equity to ‘make taxpayers whole’ by repaying the government’s bailout by bleeding the economy at large.”MNR

AnonymousOctober 6th, 2008 at 12:20 am

Actually a Google news search “credit drying up” will give you over 3,800 citations indicating evidence of credit drying up.

Ryan DarwishOctober 5th, 2008 at 3:38 pm

From Yves Smith Oct 5, 2008 posting in RGEReader Saboor passed along the day’s updates on the case filed by Lehman creditors last week, alleging that JP Morgan, Lehman’s clearing bank, refused to give Lehman access to $17 billion of excess funds held at the bank, precipitating the firm’s failure.I did not see an link to the case yet in a quick Google search, and I suspect Gretchen Morgenson will have her teeth into this one post haste. But the latest stories did provide more detail on the court filings.One thing we need to stress: Lehman was a goner. Before it went under, many observers labored under the mistaken belief that if the firm, say, managed to sell Neuberger & Berman for $10 billion, or got a nice chunk of change form the Koreans, it could soldier on for a while, and in the unlikely event that the real estate and LBO paper quit deteriorating in value, the firm might pull through. But there was a reason none of the last-minute prospective buyers (Barclays and Bank of America) came forward with a bid. The firm had a gaping hole in its balance sheet, vastly bigger than what the public at large believed.But that said, JP Morgan was not entitled to stick a knife in and twist, if that is what it effectively did.

GuestOctober 5th, 2008 at 5:53 pm

Looks like the thieves are starting to “fight amongst themselves for the treasure that has fallen into their hands.”

Ryan DarwishOctober 5th, 2008 at 3:45 pm

From Yves Smith Oct 5, 2008 posting in RGEReader Saboor passed along the day’s updates on the case filed by Lehman creditors last week, alleging that JP Morgan, Lehman’s clearing bank, refused to give Lehman access to $17 billion of excess funds held at the bank, precipitating the firm’s failure.I did not see an link to the case yet in a quick Google search, and I suspect Gretchen Morgenson will have her teeth into this one post haste. But the latest stories did provide more detail on the court filings.One thing we need to stress: Lehman was a goner. Before it went under, many observers labored under the mistaken belief that if the firm, say, managed to sell Neuberger & Berman for $10 billion, or got a nice chunk of change form the Koreans, it could soldier on for a while, and in the unlikely event that the real estate and LBO paper quit deteriorating in value, the firm might pull through. But there was a reason none of the last-minute prospective buyers (Barclays and Bank of America) came forward with a bid. The firm had a gaping hole in its balance sheet, vastly bigger than what the public at large believed.

KafkaOctober 5th, 2008 at 12:20 pm

At the end of the day, you can apply all the econometric analysis you want, the math is simple, you can’t beat a “liquidity trap”, all the rhetoric and analyses on the planet will not solve one the most massive liquidity traps in history. Perhaps more debt will defer or smooth out the insolvency issues for a time but more debt can not and will not solve the liquidity trap which necessarily requires a reversion to the mean. And all you lovers of Buffet ought to go read his simple article on Squanderville from 2003 (which apparently the bottom feeder is now ignoring for his own financial gain), more production, less consumption and less debt are the only answers; which I do not see ever happening especially if you listen to your Politico heroes.

YankeeOctober 5th, 2008 at 12:36 pm

These past few threads have some really good discussion. When we are done with this phase, we will not recognize society-“in the good old days, I used to be able to…..” But there will be no going back.MOG – $40/hr for all will not work. Why? Simply, I know I am capable of more than the dummy earning $40/hr right next to me and I want more.Afa – good analogies. Remember, ontonogy recapitulates phylogenyMy company is going through some hideous times due to blowback from Wall Street – more so than anything self-imposed. I have resumes into other companies for jobs that I am qualified to do, but I wonder – are there informal hiring freezes? Anything remotely related to financial, not just IBs, and banks but insurance, healthcare (Medic is correct) is dicey. Anyone with a cushy gov’t job-dicey. Retail? Forget it!I have been thinking a lot about what we should do. Oil WILL go to $200-300 a barrel as world demand is outstripping our cutbacks and the big oil field are in decline and we are not replacing the VOLUME. It is all about the flow.What do we do people? We need to produce things again. And locally… I think manufacturing needs to make a big comeback and I think it needs to be local/regional to make economic sense.I fully intend on voting out every idiotic incumbent save a few who are not dolts, i.e., Ron Paul. Everyone else needs to go. We lose with either McCain or Obama. But one will get us out of an expensive war in the ME, at least. Make no mistake, we need to VOTE OUT most of Congress.You all must locally get involved to make this happen.I would have some hope if intelligent people like you on this blog got involved in local politics. Really. We need thinking, reasoning people. Please consider it.Yankee

GuestOctober 5th, 2008 at 2:26 pm

Even Obama won’t be able to exit Iraq the way people are expecting him to and then there’s the issue of protectionism. Leave Iraq too quickly and Iran moves in backed by Russia and presto there’s your $300 oil. Throw up the trade barriers and the global economy spins out of control with political instability right behind. McCain and Obama are a Morton’s Fork much like the options on dealing with this economy; an ugly recesssion or and ugly depression.

TaxpayerOctober 7th, 2008 at 2:37 am

We might have a credit crisis.We might have asset deflation.We might have debt saturation.We might have an income distribution problem.We might have overproduction issues (housing).We might have rising unemployment.We might have a shortage of confidence.We might have scary rate spreads.We might have a banking identity crisis.We might have a leverage problem.We might have counterparty risk up the wazoo.We might have regulatory problems.We might have a lot of dud paper.We might have moral hazard.We might have cronyism.But we don’ have a shortage of oil.We won’t have a shortage of oil for a long time.

kilgoresOctober 5th, 2008 at 1:21 pm

Dr. Roubini:In your recent discussion on the BBC television show, Hard Talk, you were cut off at the end when Oliver Kamm had just suggested that the U.S. would survive this financial and economic crisis despite being hugely in debt as Great Britain was at the end of the Second World War, principally because it provides public goods such as global security to the rest of the world and the world’s reserve currency. What would your response have been to Mr. Kamm’s suggestion that this crisis does not necessarily mark the end of the “American Empire?”Thank you,SWK

RedCreekOctober 5th, 2008 at 1:58 pm

I read on Naked Capitalism that Freddie, Lehman and Fannie CDS are up for expiration(?)this week? Apparently, Freddie alone would trigger US$ 500 Billion of Freddie CDS coming to the market?They also argued that that was the reason why, by the end of last week, banks stopped lending to eachother and the Commercial paper mkt dried up??Any thoughts? If this is correct, then we should see armageddon this coming week???Also – is this why Paulson and co wanted to push the 700bn bill through the house before this weekend???

GuestOctober 5th, 2008 at 4:34 pm

Berlusconi has just promised the moon (creating a superfund so that no one lose’s one single euro), and says Sarkozy and Merkel are on board. He also claimed the banking system is sound.

GuestOctober 5th, 2008 at 5:08 pm

Gold keeps losing ground current spot quote (10pm UTC) $830 down a half percent from Fridayhttp://www.kitco.com/market/

GuestOctober 5th, 2008 at 8:47 pm

No win in shorting gold. It’s takes time (9-18 months) for all that new money that has been create4d and will be created to work it way through the economy. Although it does appear that around $800/oz is a floor for gold.

KafkaOctober 5th, 2008 at 5:50 pm

Could it be the Fed was complicit in massive fraud with JP Morgan which perhaps is or was insolvent prior to Fed intervention? I have heard Dimon is unhappy with the Bear Acquisition and estimates the true cost to be $106 per share as opposed to the $10 per share price paid. Of course, this would be the ultimate payback by the Fed, $138 Billion, notwithstanding that LEH had to be forced into bankruptcy by JP Morgan prior to the Fed giving JP Morgan $138 Billion ostensibly to fund liabilities which were substantively owed by LEH to JP Morgan. It seems the shell game is unending though the results are apparent.……………………………………………………………………………………………………………………………The advance was reportedly “to allow” Lehman to settle securities trades with clients. J.P. Morgan was then immediately reimbursed by the Federal Reserve for the same 138 billion.What was not originally reported, or likely not understood at the time due to the types of securities that Lehman did most of their business in [Credit Derivatives], it is a virtual certainty that J.P. Morgan [the largest derivatives player in the world with 8.1 Trillion in Credit Derivatives alone] was the “client” [the other side of the Lehman trades that needed to be settled].The critical piece of information that completes the daisy-chain: The world only learned about J.P. Morgan’s 138 billion advance from a bankruptcy court document, where Lehman was asking the court for the authority to give the settlement of claims of J.P. Morgan “special status.”It is highly likely [or a certainty on my planet] that J.P. Morgan was INSOLVENT and was “BAILED OUT” last Monday, September 15, to the tune of 138 billion dollars. This would explain why the Fed and Treasury dictated that Lehman fail – to disguise or otherwise obfuscate the recapitalization of or illicit transfer of 138 billion to A MUCH SICKER, TEETERING ENTITY, J.P. Morgan Chase.This makes sense. Investment banks are dropping like flies, owing to their involvement in credit derivatives – this is a fact.J. P. Morgan is – HANDS DOWN – the largest derivatives player in the world with a book of 90 Trillion in notional value on March 31, 2008 – with 9% of the book composed of Credit Derivatives. That amounts to a cool 8.1 Trillion worth of Credit Derivatives. We know this from the Office of the Comptroller of the Currency’s Quarterly Derivatives Report – pg. 24.http://www.financialsense.com/Market/kirby/2008/0922.html

BrianOctober 5th, 2008 at 7:13 pm

Hi Kafka,Can you explain something to me? Did the Fed give JP Morgan $138 Billion? I’m unclear from your post as to whether that actually happened, and if so, by what mechanism did the Fed give that money? Was it a loan? It seems hard to believe that a transaction like this could have occurred under the radar.I guess the upshot of my question is: is the Fed out of pocket $138 billlion?

KafkaOctober 5th, 2008 at 7:35 pm

Possibly, it depends how LEH does in bankruptcy. The circularity of these transactins is difficult to follow but at the end of the day, I believe that JP was owed at least 10s of billions by LEH and the Fed through JP funded these loans to LEH with JP standing first in line to get paid out of bankruptcy, essentially creating a round robin of cash payments to JP of all monies owed by LEH instead of having to stand in line with the other creditors. The first link I provided shows a nice chart of how the circularity of funds may have or be occurring……………………………………………………………………………..JPMorgan Gave Lehman $138 Billion After Bankruptcy (Update3)By Tiffany Kary and Chris ScintaSept. 16 (Bloomberg) — JPMorgan Chase & Co. gave $138 billion this week in Federal Reserve-backed advances to the broker dealer unit of Lehman Brothers Holdings Inc. to settle Lehman trades and keep financial markets stable amid the biggest bankruptcy in history, according to a court filing.One advance of $87 billion was made on Sept. 15 after the pre-dawn bankruptcy filing, and another of $51 billion was made today, Lehman said in court documents. Both advances were made to settle securities transactions with customers of Lehman and its clearance parties, according to the filing.The advances were necessary “to avoid a disruption of the financial markets,” Lehman said in the filing.The first advance was repaid by the Federal Reserve Bank of New York on the night of Sept. 15, Lehman said. JPMorgan said in a statement that the $51 billion advance was also repaid and the process will zero out the advances at the end of each day.U.S. Bankruptcy Judge James Peck in Manhattan approved an order confirming that advances JPMorgan is providing are covered by existing collateral agreements with Lehman and its affiliates. JPMorgan holds about $17 billion in collateral to secure the money it advances to clear the trades, Lehman attorney Richard Krasnow said.`Comfort Order’“I believe the comfort order for the benefit of JPMorgan Chase under these clearance agreements, while unusual in my experience, is entirely appropriate,” Peck said. There were no objections to the request.Requests to obtain a bankruptcy loan and schedule the sale of Lehman assets were postponed until tomorrow.JPMorgan said in a statement before the hearing that it would “be unable to continue” making future advances needed to settle trades unless the court granted its claims special status.Both advances were “guaranteed by Lehman” through collateral of the firm’s holding company under an agreement reached in August, according to the filing. The advances were made at the request of Lehman and the Federal Reserve, according to the filing.Lehman disclosed the advances in a motion seeking court permission to give JPMorgan’s claims special status in its bankruptcy and to certify they are guaranteed by Lehman’s collateral.http://www.bloomberg.com/apps/news?pid=20601087&sid=aX7mhYCHmVf8&refer=home

kilgoresOctober 5th, 2008 at 6:31 pm

New York TimesGermany Moves To Shore Up Confidence In EconomyBy CARTER DOUGHERTYPublished: October 5, 2008 3:08 p.m.FRANKFURT — The German government said on Sunday that it would guarantee all private savings accounts in the country in an effort to reinforce increasingly shaky confidence in the financial system. The announcement came as the leaders of largest European economies met over the weekend searching for a systemwide answer to a credit crisis that has required them to rescue several banks in just the past week….SWK

GuestOctober 5th, 2008 at 6:42 pm

If the US is spending a trillion USD and the Europeans are spending a trillion Euros to save the Western financial system, who then is supposed to buy two trillions in highly leveraged government debt securities? BRIC?Like the financial institutions they are trying to save, governments may be leveraging every 3 cents into a dollar/euro. Do they run the risk of draining themselves, going belly up, canceling the notion of money and henceforward we’ll all run on willpower?

Free TibetOctober 5th, 2008 at 7:24 pm

Alessandro hit on something above. “…that finance to be 30% of total corporate income in a country is completely insane! ….It is just not possible that 30% of value add is generated by the intermediary between savers and borrowers.”That should give us a rough handle on how much contraction we need in the financial sector.

MattOctober 5th, 2008 at 7:35 pm

I’ve posted this on a few other blogs trying to get the supporting information against and I know how active this forum is.I’m going to ask a question that has been on my mind lately and have had no one to ask.What happens to the other economies in the world when the U.S. economy goes into a depression? This may sound a bit conspiratorial but I’ll press on because I’m curious. If all the other economies tank worse than the U.S. because they can’t afford to bailout all of their banks then what position does that put the U.S. in? Here we were seeing our role as the one and only world power being challenged by European and emerging economies, so at the end of all this where will those economies be? Is this the “Mother of all Power Plays”? Is the game being reset back to post WWII when the U.S. was the big man standing and everyone needed assistance? Would like to hear your thoughts on how a global depression would affect U.S. compared to other economies.Thanks,Matt

GuestOctober 5th, 2008 at 8:00 pm

China 70% internal – 30% export – Projections for 8% growth in current environment – Chinese markets down 60% — probably outperforms other markets and helps to buoy commodities. Other considerations are geo-political issues – US cannot afford to stay in Iraq but in leaving will create an Oil Nightmare scenario e.g. Oil way up by end of 2009 regardless of US – Many other EEM are also internal more than export but China is the elephant in the room

GuessOctober 5th, 2008 at 7:37 pm

Banks modifying large numbers of mortgages… Developing…The above is a breaking headline from DRUDGEREPORT.com – one of the most visited news sites on the WEB. Drudge is seldom wrong… And it makes sense – they need to do something to prevent Black Monday October 6, 2008 — what better than something Main Street can relate to.

TulsaTimeOctober 5th, 2008 at 8:20 pm

If a black monday is in the cards, the only thing that might hold it off would be to close the markets. There is no way modifying individual mortgages could stave off a systemic meltdown. Key will be what asia and eu do overnight. I don’t ‘hear’ enough tension slapping around to think it’s probable, but that does not mean squat these days.

GuestOctober 5th, 2008 at 9:05 pm

don’t disagree but more often than not he can move the news cycle in America- half if not all of the talk shows get their talking points from Drudge

GuessOctober 5th, 2008 at 9:02 pm

COUNTRYWIDE TO SET ASIDE $8.4 BILLION IN LOAN AID… Developing…update from Drudge on this mortgage story — looks like an attempt to grab (manipulate) headlines Monday AM – my guess is that this will be just one of a series of announcements to try and prop up the markets –

kilgoresOctober 5th, 2008 at 10:16 pm

Propping up the stock markets with feel-good headlines seems to be easier than re-instilling confidence in the credit markets. The TED spread looks to be about 3.96 (one-month T-bills at 0.15 Friday, and Libor at 4.11).SWK

kilgoresOctober 6th, 2008 at 4:12 am

Correction: TED is based on 3-month treasury yieds, not one month. It’s actualy at 3.87…still really high!SWK

KafkaOctober 5th, 2008 at 8:28 pm

So the dude who helped con people in the IT bubble is going to head the bail out effort. Very nice, this country should be so very proud. Of course Einstein says “The problems we face will not be solved by the minds that created them.”……………………………………………………………………………………………………………………………..Prior to joining the Treasury Department, Mr. Kashkari was a Vice President at Goldman, Sachs & Co. in San Francisco, where he led Goldman’s IT Security Investment Banking practice, advising public and private companies on mergers and acquisitions and financial transactions. Prior to his career in finance, Mr. Kashkari was a R&D Principal Investigator at TRW in Redondo Beach, California where he developed technology for NASA space science missions such as the James Webb Space Telescope.

GuestOctober 5th, 2008 at 8:33 pm

Thought I would pass this along for consideration.Still no deflation: Disinflation then lots of inflationhttp://www.itulip.com/forums/showthread.php?p=52281#post52281hlowe

kilgoresOctober 5th, 2008 at 8:45 pm

http://www.bloomberg.com/apps/news?pid=20601068&sid=aD24rTsF1jwE&refer=economyDeflation May Be Next Threat as Commodities, Asset Markets SinkBy John FraherOct. 6 (Bloomberg) — As Federal Reserve Chairman Ben S. Bernanke and his global colleagues fight the worst financial crisis since the 1930s, one danger is looming larger by the day: deflation.With asset markets tumbling, commodity prices plunging the most in 50 years and banks keeping a tighter grip on credit, the ingredients for a sustained period of falling prices are coalescing. While inflation is still a concern for many policy makers only months after oil and food prices peaked, the risk is their patchwork of rescue and stimulus packages will fail, and prices will start to fall throughout the broader economy.“The ghost of deflation could be dragged out of the closet again in coming months,” says Joerg Kraemer, chief economist at Commerzbank AG in London.A global recession is already looking more likely, with the credit freeze stirring memories of Japan’s decade-long struggle with deflation in the 1990s. So European Central Bank President Jean-Claude Trichet and Bank of England Governor Mervyn King may be forced to follow Bernanke, whose Fed has chopped its benchmark rate by 3.25 percentage points since August 2007 to 2 percent — its most aggressive round of easing in two decades.The deflation scenario might go like this: Banks worldwide, stung by $588 billion in writedowns related to toxic assets — especially mortgage-related securities — will further reduce the flow of credit, strangling growth. That will push house prices lower, forcing additional losses and making banks even more reluctant to lend. As the credit crisis worsens, businesses will find it almost impossible to raise prices.A `Vicious’ Cycle“A vicious deflationary cycle” could then ensue, says Tony Tan, deputy chairman of Government of Singapore Investment Corp., a sovereign-wealth fund that oversees more than $100 billion.Prices are already falling in parts of the world economy. Home values dropped more than 10 percent in the U.K. and in the U.S. in the past year. Oil, copper and corn drove commodities toward their biggest weekly decline since at least 1956 on Oct. 3, with the Reuters/Jefferies CRB Index of 19 raw materials tumbling 10.4 percent. The Baltic Dry Index, a measure of commodity shipping costs, has dropped 75 percent since May.“We are certainly more worried about deflation than inflation,” says David Owen, chief European economist at Dresdner Kleinwort Group Ltd. in London. Central bankers need to “get rates down and keep them there for quite some time,” he says.Aggressive EasingTrichet said Oct. 2 that European policy makers have considered reversing their decision in July to raise their benchmark rate by a quarter point to 4.25 percent. Forty-six of the 61 economists surveyed by Bloomberg News expect the Bank of England to cut its key rate by at least a quarter point Oct. 9 from 5 percent.The Fed has already responded to one deflationary scare this decade. With inflation approaching 1 percent in 2003, then- Chairman Alan Greenspan slashed its rate to a 45-year low of 1 percent and kept it there for a year, which its critics say helped fuel the property and credit boom that is now unraveling.This time, the crisis is an increasingly dysfunctional banking system that may not be able to continue making loans that grease economic activity. Such a pullback, combined with slowing growth and falling asset and commodity prices, makes deflation more of a threat, Owen says.Restricting CreditSpooked by the collapse of Lehman Brothers Holdings Inc. and other institutions, banks are restricting access to credit. The London interbank offered rate, or Libor, they charge each other for three-month loans in dollars rose to 4.33 percent on Oct, 3, the highest since January.Not all economists share Owen’s gloomy outlook. Some say Bernanke and other central bankers have learned the lessons of Japan and the Great Depression so well they will do everything necessary to head off trouble.Former Fed Governor Lyle Gramley says that while deflation is a risk “if we were to go into a very, very prolonged recession and nobody did anything about it,” he is “not worried,” because he’s confident the Fed will act “very, very, very aggressively.”Bernanke, who has studied the Great Depression since he was a graduate student, has said that one key reason the U.S. stock- market crash of 1929 had such severe consequences was that lenders were forced to close and the banking system was deprived of liquidity.`Lost Decade’He has also studied Japan’s “lost decade ” of deflation, which was partly caused by a banking crisis, and has argued that its policy makers waited too long to respond to a stock-and- property price crash at the start of the 1990s. In a 2002 speech that earned him the nickname “Helicopter Ben,” he said governments and central banks must respond immediately to such a deflationary shock by dropping money into the banking system.The caution of Japan’s leaders — who waited until 1999 before using taxpayers’ money to bail out the banks — cost their economy dearly. Lending shrank, unemployment more than doubled to 5.5 percent, and Japan experienced three recessions between 1990 and 2002. From 1997 to 2007, consumer prices dropped 2.2 percent. In the U.S., prices climbed 29 percent in the same period.When credit markets started seizing up in August 2007, Bernanke set up $1.4 trillion in emergency borrowing for financial institutions. The ECB, the Bank of Japan and other central banks have set up similar lifelines. On Oct. 3, President George W. Bush signed into law Treasury Secretary Henry Paulson’s $700 billion bank-rescue plan.`Last Resort’Commerzbank’s Kraemer says the Fed might also consider further easing collateral requirements or purchases of government bonds “as a last resort.”Kraemer says he thinks a slowdown in inflation is more likely than deflation. The surge in commodity prices earlier this year drove inflation in the U.S., Europe and Asia to the strongest pace in at least a decade. Strategists have pointed to Paulson’s rescue plan as an additional risk.Japanese core consumer prices, which exclude fresh food, climbed 2.4 percent in August from August 2007. The U.S. core rate, which strips out food and energy, rose 2.5 percent from a year earlier.Still, deflationary forces are mounting in the U.S. and other parts of the world economy. In Britain, the Nationwide Building Society says house prices have dropped 12.4 percent in the past year as banks restrict the supply of mortgages, putting the economy on course for its first recession since the early 1990s.Deflationary Consequences“The risk we must be careful not to underestimate is the deflationary consequences of the credit crisis,” Bank of England Deputy Governor John Gieve said last month.In the U.S., prices manufacturers paid for materials last month plunged the most since at least 1948, with the Institute for Supply Management’s index dropping 23.5 points to 53.5 points.The breakeven rate on U.S. 10-year Treasuries, a measure of price expectations, dropped to 1.5 percent from 2.6 percent in July. Japan is the only country whose bond market implies a lower inflation rate than the U.S.All this is likely to make the Fed resume rate cuts, says Robert Dye, a senior economist at PNC Financial Services Group in Pittsburgh, Pennsylvania.“If we’re going over a cliff, we’re not going to go over a cliff with a 2 percent federal funds rate,” he says. “What’s the point of holding back?”___SWK

GuessOctober 5th, 2008 at 8:56 pm

thanks for posting this – it helps to explain why gold is where it’s at – another post above suggests disinflation followed by inflation, which I have heard elsewhere too. Gold seems to be a good barometer, however at least for the next while – not many places to hide.

kilgoresOctober 5th, 2008 at 8:39 pm

From Bloomberg:Asian Stocks Fall for Third Day as Global Credit Crisis DeepensBy Chua Kong Ho and Shani RajaOct. 6 (Bloomberg) — Asian stocks fell for a third day, led by financial companies, after the global credit crisis deepened in Europe and the U.S. lost the most jobs in five years….Japan’s Nikkei 225 Stock Average fell 2.8 percent to 10,636.18….SWK

ptmOctober 5th, 2008 at 9:04 pm

Not a bad description of the basics… (Heads up PeterJB, here is some red meat ;-)From tonight’s 60 Minutes broadcast: A Look At Wall Street’s Shadow MarketOne of the country’s foremost experts on credit markets Jim Grant, the editor of “Grant’s Interest Rate Observer,” says this is a “financial storm and one that comes around perhaps once every 50 or 100 years.”Asked how much of this was incompetence on the part of Wall Street and the people who ran it, Jim Grant tells Kroft, “The truth is that on Wall Street, a lot of people just weren’t very good at their jobs. It’s as simple as that.””These people were being paid $50 to $100 million a year. Some of them, the guys that were running the places,” Kroft remarks.”There is no defending,” Grant replies. “A trainee making 45,000 a year would have had the common sense not to bet the firm on mortgage contraptions that no one in the firm actually understood. That is not a deep point to comprehend. Somehow, through, I will call it a criminal neglect and incompetence, the people at the top of these firms chose to look away, to take more risk, to enrich themselves and to put the shareholders and, indeed, the country, itself, ultimately, the country’s economy at risk. And it is truly not only a shame, it’s a crime.”http://www.cbsnews.com/stories/2008/10/05/60minutes/main4502454.shtml

GuestOctober 5th, 2008 at 9:14 pm

next phase: blaming / finger pointing each otherthis is a so typical reaction of a “Game Over” situationno no no no not me it was himnaah i didnt do that it was jimme?? i was just following instructions, john told me to do itblah blah blah

Average JaneOctober 5th, 2008 at 9:29 pm

And again I say: there is no honor among thieves. Not one of these jerks trusts any one of the others. Crisis of confidence, indeed.

ollerOctober 5th, 2008 at 10:02 pm

It is very important the Jim Grant not only said that these executives areresponsible for “criminal negligence”, but he later reaffirmed thattheir actions were criminal. Unfortunately, this report came after the850 billion bailout. It is high time for criminal prosecution of theexecutives who directed Clayton Holdings to do cursory due diligenceon verifying the underwriting on the loans. NY attorney general Cuomoknows this. You may want to read a book called “Chain of Blame”. WhenI read the reports of the employees of the due diligence companies, Iwas blown out. The investment banks wanted them to only go through themotions and approve everything to get product out the door. Somebodyat Lehman, Bear, Merrill, and others will have to go to jail!

ArmchairOctober 5th, 2008 at 9:26 pm

It might be a good idea to keep some cash on hand, but one must admit it will be a tremendous advantage to the teenagers of the world who can now raid their parents’ mattresses anytime they need beer or video game money. At least, that money will get right back into the economy.

GuestOctober 5th, 2008 at 10:24 pm

From the UK Guardian (hat tip Elaine Meinel Supkis). The cat is out of the bag on the survivors package. The truth is out:”Fears are mounting that many Wall Street banks and financial firms will refuse to participate in the US government’s $700bn bail-out package, leaving global markets and world economies in a perilous state for months to come.’There is a growing feeling that banks … might instead decide to tough it out,’ said Thomas Caldwell, chairman and CEO of Caldwell Financial, a $1bn-plus fund manager.*snip*One of the least attractive elements is a section designed to curb executive pay at banks that participate in the bail-out package. These include limiting stock-related pay and banning ‘golden parachutes’ for executives.’I think this hodge-podge of regulations and rules will be enough to put many [chief executives] off participating,’ Caldwell said.Sources close to Goldman Sachs and Merrill Lynch indicated the banks might choose not to participate in the bail-out as there is a growing view on Wall Street that the market may be bottoming out.Analysts also believe that the mere presence of the government as buyer of last resort will be enough to get credit markets moving again, and that a large number of banks would not need to take part for the legislation to succeed.”

GuestOctober 5th, 2008 at 11:12 pm

Previou8s quote: “One of the least attractive elements is a section designed to curb executive pay at banks that participate in the bail-out package. These include limiting stock-related pay and banning ‘golden parachutes’ for executives.”Boy … that just about says it all, doesn’t it?!!! The Wall St execs can’t deal with a regular salary, even though the country’s finances are going down in flames. And Congress can’t help but add hundreds of millions of dollars in pork barrel projects … even though the economy is in critical condition. Howe about if we just take all these leaders, send them to a remote third world country, and start again.PeteCA

ptmOctober 5th, 2008 at 10:56 pm

Just discovered this character: Dr. Jim Willie CB who gave an interview on Korelin’s Economics Report from the Toronto Resource Investment Conference. Here are a few choice quotes:The dollar’s rally is a sign of liquidation and the dollar’s death.Some European counties, Russia, Chinese, and Middle East countries have agreed to a gold-back basket of currencies. Probably a split Euro with the USA, UK, Ireland, Spain, Greece, & other left out in the cold!Interest rates will sky rocket…US Treasury default coming…USA will not be able to pay the new cost of oil…Bailout bill just paying off foreign investors, nothing fixed, leading to a collapse…Goldman Sachs manipulation – Gold is $830/oz here, but $930/oz in the east!http://www.kereport.com/http://www.kereport.com/DailyRadio/Daily100608-2.mp3http://www.goldenjackass.com

GuestOctober 6th, 2008 at 4:33 am

imagine all those senators who voted yeswell if some of you are listening/reading this, let me tell youif you view yourself becoming president one day, succesfully climbing the socio-political ladder, dreaming of giving speeches to a your loving/adoring citizens, becoming the elite of elites….you can kiss your F**king dream goodbyeremember… it was YOU who shot down your political careerit was YOU

PeterJBOctober 6th, 2008 at 5:46 am

Look at the whole thing simply:1. The Banks are the ones empowered and entrusted to keep the liquidity flowing.2. The banks want to and have committed usury and have influenced the political, the bureaucratic the academia (economics) and the body corporate to sit in their corner; the economy (real) is in the other corner.3. The Banks have folded their hands because they don’t want to understand (denial) that usury is dangerous and creates chaos. That is, usury doesn’t work as one would like; it destroys! It has destroyed!4. In hard times, Cash is king and Power is Insurance so, the Banks grab the cash and empower themselves with legal immunity through the offices of those in their corner. The Bankers survive while the people suffer and die!5. The Banks lied: the liquidity will not flow; the Banks have the cash and the Power. We all wait.6. Depression – pain – death and destruction: for what? For the Banks. Why? Because this Banking system is entrenched in usury that has no intention of allowing the flow of liquidity as empowered and entrusted to continue. Meanwhile the Banks hold the cash and impose any conditions that they like! After all, they have been given total control over the World’s Assets by those in their Corner. Is this not true?The Solution:A. Every Bank (HQ) in the World MUST be put into Bankruptcy and its shareholders and executives removed and placed in containment and on criminal charges under advisement (charges are low priority).B. Provisional management must be supervised under new rules – the liquidity must flow.C. The Banks are taken over and operations of liquidity flows guaranteed by their respective States and Nations.D A new plan whereby thousands of new banks (small) are built on strict but free-market guidelines throughout the World.E All Large Banks are broken up eventually and no large Banks are permitted to ever exist again – and usury is totally forbidden (again).F. Of course a Glass Steagull Act or something similar is brought in to regulate the banking system.G. The structure of the new Banking System must be hard-wired into technology.The Theme of this Action must be: THE LIQUIDITY MUST FLOWThe Federal Reserve should be turned into a free-market Bordello and legalized:),

GuestOctober 6th, 2008 at 6:00 am

too late to implement these steps Peterthey have already decided what our future will bedo people think the “Svalbard Seed Vault” was built for incoming comets/meteors or for fun??they think their plan is perfect,but i say God is just.. lets see if their plans succeeds

PeterJBOctober 6th, 2008 at 6:11 am

Yes, I am not that naive but I was just working out the lest amount of steps for the most result. Thought I would share some humor.No, their plan cannot succeed – physics doesn’t work that way:-]>Ho hum

GuestOctober 6th, 2008 at 11:46 am

Ah, Peter. Your happy ending reminds me of the good old days when the movies ended with the hero riding over the hill at the last minute…and all is saved and justice is done. Current “new reality” movies end with everyone getting chain-sawed to death. But look, the bankers own Hollywood. Maybe they are just acclimatizing us to the slaughter, like the carnage in the Gramm-Leach-Bliley Act (S. 900). Get this provision to “Protect Consumer Privacy”:”For the first time, under S. 900 banks and other financial services firms would be required to develop privacy standards regarding sharing a customer’s confidential data with corporate affiliates and other companies. This policy would have to be explained to every new customer and provided annually to existing customers. This section of the bill has several major benefits. It would:Allow customers to know how confidential information will be treated…Allow consumers to control how their personal information is shared…Protect both account numbers and access codes…” (The Heritage Foundation)Notice that we don’t get “privacy”: we just get notification of privacy “sharing.” (I know about efforts to make the banks send out option forms for opting out – and how they “complied” by mailing out a new required form every two days. Bah!) To reread this thing makes your blood run cold.http://www.heritage.org/Research/Regulation/BG1338.cfm

Little SaverOctober 6th, 2008 at 7:11 am

Finally discovering that profits weren’t profits, just numbers on paper. The time has come to show the money.Governments all around are showing the money: that of taxpayers.

ptmOctober 6th, 2008 at 7:27 am

Jim Cramer was on the Today show this morning and Jim “Every Man For Himself” Cramer called a 20% drop in the market.He went as far as to say “If you need your money within five years, take it out of the market NOW!”Jim Cramer is calling a panic! As they say up north, Not too bad doh hey!

GuestOctober 6th, 2008 at 9:12 am

Will someone please just walk in on Cramer’s show and pull the electric plug while they’re on the air. Do us a favor. Nix this guy. Otherwise … the next thing is that he’ll be out with some kind of book claiming he predicted the whole Wall St downfall. We don’t need any more charlatans.PeteCA

GuestOctober 6th, 2008 at 10:29 am

It could be that Cramer, an old Goldman Sacher, is provoking the scenario introduced by Ryan Darwish above: “A more nefarious explanation as to why the credit markets continue to remain frozen after hundreds of billions of dollars have been injected into the system, could be a “money cartel strategy”. In this case, the fear generated by this credit crisis provides great cover for the institutional withholding of credit. The resulting worsening of financial market conditions result in more institutional and corporate failures and an increased availability of distressed asset sales for those who have access to capital.”We all know who has access to the taxpayers’ money, don’t we?

GuestOctober 6th, 2008 at 7:40 am

In “an exclusive conversation with Warren Buffet” on the Charlie Rose show Warren is showing himself to be an idiot!His Perl Harbor metaphor is meant to mean “sneak attack”; says the actions of Wall Street are irrelevant; we needed the bailout to save the real patient with the hart attack and that’s the economy! And it goes on and on… And this character is the best we have in the country!http://www.charlierose.com/shows/2008/10/1/1/an-exclusive-conversation-with-warren-buffett

K in TXOctober 6th, 2008 at 8:26 am

Apologies if this is posted upthread. European situation continues to develop:October 6, 2008Europe Governments Scramble to Protect DepositsBy THE ASSOCIATED PRESSFiled at 8:40 a.m. ETLONDON (AP) — European governments struggled to find a coordinated approach to the crisis sweeping financial markets, as Denmark became the latest country to guarantee bank deposits, putting more pressure on Britain and other countries to follow.Denmark’s move came after a startling announcement by German Chancellor Angela Merkel on Sunday that her government would guarantee all private bank deposits held in the euro zone’s single largest economy. ”We want to tell people that their savings are safe,” she said.A sense of disarray has mounted amid government bailouts of several major banks in the past week and a worsening of the outlook for the wider economy. The Bank of England is expected by many to cut interest rates by at least a quarter point at its Thursday meeting, and European Central Bank President Jean-Claude Trichet gave a decidedly downbeat outlook on the countries using the euro at the bank’s meeting last week.Austrian officials suggested they might join in guaranteeing deposits as well, and analysts said a failure by other authorities to offer a similar guarantee could risk a massive funds outflow from their countries’ coffers, while the guarantees themselves raised questions about their potential impact on government finances.”Although the move to provide such guarantees is undoubtedly better than the highly destabilizing alternative, this will raise questions about how these guarantees would be funded were they to be called upon,” said Simon Derrick, an analyst at Bank of New York Mellon.The markets are keeping a close eye on signs that Europe’s banking system is under pressure and the unraveling of a weekend pledge from the leaders of the four largest EU economies — France, Britain, Germany and Italy — in Paris that they would work in a coordinated manner to ensure the stability of the financial system.European Union finance ministers were set to begin two days of talks on the crisis in Luxembourg.”This is a very serious situation and one that needs to be addressed,” said EU spokesman Johannes Laitenberger.”Obviously there is a great effort under way. Nobody is suggesting that this is business as usual, but it’s true that there is not one single magic bullet that will solve this.”British Prime Minister Gordon Brown planned a call to Merkel to discuss the crisis, and Britain’s Treasury chief Alistair Darling was due to make a statement to Parliament later.The weekend commitment to work together was blown apart Sunday when Germany’s Chancellor Angela Merkel announced that all 568 billion euros ($786 billion) worth of private deposits held in Germany will be guaranteed alongside a new 50 billion euros ($69 billion) bailout package for Hypo Real Estate AG, Germany’s second-biggest mortgage lender.In response, the Danish Economy Ministry said commercial lenders had agreed to contribute up to 35 billion kroner, or about $6.4 billion, over two years to a fund that will help insure account holders from losses.Meanwhile, Iceland halted trading in six bank stocks while the government drafted a crisis plan. Icelandic banks’ assets dwarfs the rest of its economy and its currency has fallen sharply in the past week.Markets responded to the disarray by sinking rapidly, following selloffs in Asia. Russia shut down both its stock markets after they fell more than 15 percent.”The EU is liable to be exposed as a fair weather construction, lacking the means of swift response and the hold over its citizens’ loyalties to survive really adverse conditions,” said Stephen Lewis, an analyst at Monument Securities.Germany’s DAX was down 324.66 points, or 5.6 percent, at 5,472.32, while France’s CAC-40 was 244.69 points, or 6.0 percent, lower at 3,836.06. The FTSE 100 index of leading British shares was faring slightly better, down 165.09 points, or 3.4 percent, at 4,705.25.Meanwhile, the euro slid below the $1.36 mark for the first time in over a year——Associated Press writers Matt Moore in Stockholm, Angela Doland in Paris, Patrick McGroarty in Berlin and Jill Lawless in London contributed to this report.

Free TibetOctober 6th, 2008 at 9:09 am

How bad is it? It’s instructive to see European traders rushing out of Euros for the _safety_ of US$.

Octavio RichettaOctober 6th, 2008 at 10:00 am

I just liquidated my Russell 2000 short position which means I am no longer short the market and that it will probably fall even harder from now on:-) I just could not resist the 10%+ return from Friday’s close on TWM.

Alessandro - http://castellidicarte.blogspot.com/October 6th, 2008 at 10:26 am

Most of the bears I follow on the net are flat, right now. If this market crashes now no blame should go to the bears.

GuestOctober 6th, 2008 at 10:00 am

I just saw a Dow print -503! Looks like some buyers testing the water down here. Already rallied back 60 points while I am typing. Miss America, you think today the Fed eases?

GuestOctober 6th, 2008 at 10:08 am

Last comment: “How bad is it? It’s instructive to see European traders rushing out of Euros for the _safety_ of US$.”Money is pouring into T-Bills and gold today, as investors become more nervous about the spreading G7 banking crisis. Temporarily the US dollar keeps climbing for this reason – foreign investors and funds going into T-Bills. However, as I pointed out a couple of weeks ago (and Mike Shedlock posted again on his blog today) … we are rapidly approaching the point where the world MUST DROP the US dollar as the global reserve currency! In reality, this does not happen as one single move. But rather over a period of time as individual countries sever their formal connections to the dollar.The gold market is beginning to resolve the discrepancy between the “paper price” that has been trading on the futures market and the real price of physical gold (real gold has been trading well above the paper price for some time). Gold prices must move up to become meaningful again. A substantial upwards move is becoming more likely… because large investors are now in panic mode and seeking to obtain physical gold. One way to do this is to take long positions in the futures market using short-dated contracts – and thrn demand actual delivery of gold bars. If this pattern of buying takes hold, prices of precious metals will rocket upwards very quickly.Meanwhile, it appears to me that the new TARP cannot operate quickly enough to resolve the difficulties being experienced this week. This means that some form of new emergency action from Washington cannot be ruled out. No doubt they are trying to co-ordinate with the UK and Europe.Just my personal impressions … and I could be wrong.PeteCA

GuestOctober 6th, 2008 at 10:23 am

By David WilsonOct. 2 (Bloomberg) — U.S. homeowners may end next year withthe least amount of equity in their houses since 1984, accordingto Michael R. Widner, a Stifel Nicolaus & Co. analyst.

GuestOctober 6th, 2008 at 10:26 am

better get long before “they” get ‘er back through 10K and an explosive short cover rally ensues…

Alessandro - http://castellidicarte.blogspot.com/October 6th, 2008 at 10:42 am

Shorts? What shorts? They didn’t want no shorts. They will not get no short covering rally.

CaponeOctober 6th, 2008 at 10:33 am

Are we in the middle of THE crash sequence ? Anybody ? A rate cut has ALWAYS saved the day. In gambling nothing works 100% of the time. Of course, this is investing not gaming – except for the occassional FNM / FRE / BSC / LEH stocks that essentially wipe out your entire bet I mean purchase/ investment… In the last days of the Roman empire speculation was rampant. It is no different now… Will this finally be the rate cut SOLD around the world in the equities markets ? I really wish I did not have to factor that SOB Cramer into the sentiment picture right now. 87 and 29 technicals sure show similarities… Back then we did not have every tool in the Fed / Treasury Shed working to stop it though.Quick edit the bill you just passed ! Quick pass another bill ! This time force the first born of every American family to be sold into slavery on the open market to the world. Wait, they have done so already in a way…

GuestOctober 6th, 2008 at 10:47 am

Cramer was just on MSNBC and told the world to sell sell sell ( I think his appearance coincided wth the intra-day low of -587). My guess is a lull during a 3 martini lunch and then the selling will continue hard and fast after 2pm. They want the rate cut but need to have it co-ordinated and that might take till the 4pm hour perhaps a bit after or maybe a bit before. Here’s what Cramer had to say and the link is below””Bullish investors should turn into shrinking violets as the stock market continues its shocking downward spiral, CNBC’s “Mad Money” host Jim Cramer told Ann Curry on TODAY Monday.In what Curry called a “dramatic statement,” Cramer emphatically urged any investor who has money they may need in the next five years tied to stocks to pull their dough out.“I thought about this all weekend,” Cramer told Curry. “I do not want to say these things on TV.”http://www.msnbc.msn.com/id/27045699/

GuestOctober 6th, 2008 at 10:47 am

and Iceland…Sarkozy issues guarantee for savings accounts…all European indices close down about 8%.

GuestOctober 6th, 2008 at 11:02 am

Will somebody please tell me how anybody can rescue Iceland? The country’s banks are in debt for $120 billion, and the national GDP is only $20 billion. Iceland is now asking their pension funds to release money to try to save the economy. Crazy!PeteCA

GuestOctober 6th, 2008 at 11:24 am

And Iceland’s currency has collapsed. The country is really only a fishing village and tourist destination.

GuestOctober 6th, 2008 at 11:21 am

The fact that all the G7 governments are issuing proclamations that peoples’ bank deposits are covered … shows that what they really fear the most is a massive run on the Western banking system. Nouriel Roubini’s headline on the last blog “Get Ready for the Mother of All Bank Runs” (or words with similar meaning) was a particularly good prediction.PeteCA

GMOctober 6th, 2008 at 11:32 am

Does this make sense?To prevent or reduce bank runs, governments would rather see big losses in equities to help convince people that the cash in the bank is safer vs the stock market?ie. The lesser of the two evils?GM

GuestOctober 6th, 2008 at 11:49 am

GM: The credit narkets and short-term loans between banks are the lifeblood of the economy. The stock markets take second place to what ultimately happens in the credit markets (though many small-scale investors are not aware on a day-to-day basis what the credit markets, or terms like the Libor, are really doing). Starting today, some employers in the USA may not be able to make their payrolls because they cannot borrow money … meaning that significantly larger layoffs will begin. This process will have a tendency to spiral. As more people lose their jobs, delinquencies on all kinds of debt (and home foreclosures) will move higher and higher. This in turn will increase the crisis in the credit markets. At the same time, people who are nervous about losing thier jobs are likely to grab cash from the banks. But this is what the authorities are seeking to prevent. There can’t be winners on both sides.PeteCA

AfAOctober 6th, 2008 at 11:50 am

GM,I do not believe so. People will get more nervous as they see their equity investments (bank stocks included) erode. The next move will be rush to their banks withdrawing unsecured deposits or even more.

2centsOctober 6th, 2008 at 11:48 am

Uh oh, the EU is in meltdown mode. Regional and country specific issues are stepping to the front of the line. Germany’s finance minister said Monday he is considering creating a “shield” that would protect the country’s entire financial sector, arguing it would not be possible to continue to address troubled financial institutions on a case by case basis.However, Finance Minister Peer Steinbrueck made clear that Germany does not envision making its move as part of a U.S.-style bailout plan for all of Europe. He said he and Chancellor Angela Merkel agree that the German government must remain the sole “master of the process.””The chancellor and I reject a European shield because we as Germans do not want to pay into a big pot where we do not have control and do not know where German money might be used.”Germany Considers National Financial ShieldBy the way what’s with the sparse postings today?

GuestOctober 6th, 2008 at 11:49 am

OHHHH THE PHONE CALLS THE IDIOT POLITICIANS MUST BE GETTING NOW!!! “At least by passing this idiot package, we can save your 401 K’s” LOLOLOLOLOLOL

AfAOctober 6th, 2008 at 12:06 pm

Yupi,In less than a cumulative 8 hours since the bailout plan was approved, the DOW has lost 1,000 points, i.e. more than $1 Trillion.Bravo Congress and bravo Paulson, if the PPT has shorted the market for only 1 day, the bailout plan would have largely been financed,

ptmOctober 6th, 2008 at 12:08 pm

NR has always said that a market will drop around 28-30% in a recession. Well 30% off a high of 14,000 is 9,800 and that’s where we are now.If you think this is not the bottom, then it’s going to be a depression!

GuestOctober 6th, 2008 at 12:06 pm

well … you raise an interesting point. But exactly how much would the Fed have to cut to get the market’s attention?? Forget 25 basis points. Probably even a 50-point cut would do nothing. So0 what are you saying? A 100 point cut, with Fed rate down to 1%The big question would be then … what if even that move DIDN’T restore confidence?What we’re really seeing here is a major breakdown in the public confidence that the Fed/Treasury can really fix things at this point.PeteCA

AfAOctober 6th, 2008 at 12:12 pm

Really, I am still calling for a 500 bps rate cut! And force banks to lend at a negative rate though too. Hopefully, consumers and corporations would be able to reduce their debt burden with debt interest income.Dammit, that too won’t work.

GuestOctober 6th, 2008 at 12:08 pm

Here in Brazil you can smell the panic in the air. 2 circuit breaks today (the first with -10%, the second with -15%).Now, it’s a little better: “only” 13%…

AfAOctober 6th, 2008 at 12:15 pm

And Russia is 20% off.Where all the oil money of 2008 H1 go? And if oil continue to slide, how could Russia and ME smuggle their revenues into treasuries?

GuestOctober 6th, 2008 at 12:28 pm

Emerging markets see bottom fall out. Russian shares down 19% and its stock market is closed off and on during session.

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