As we said when the idea of this bill was first mooted, bye bye US AAA rating, bye bye dollar. Not overnight, but the die is cast.
We have also said that the eagerness to pass this measure is based on the faulty premise that this package will actually do something to solve the problem. It won’t.
Trying to prop up assets at above market levels is DESTINED to fail, and worse, only digs us deeper in the debt hole in the process, making the ultimate resolution of our economic mess even more costly and painful
We are not alone in this view. Virtually no economist is in favor of the program (save Alan Blinder). University of Chicago even published an open letter with a long list of signatories against it. And commentary on econoblogs has been as close to unanimity as one sees in these parts against. it.
All it will do is provide a short-lived burst of confidence, then as market participants think through its operation and ramifications, the anxiety and stressed conditions will return. How long will the false euphoria last? Two weeks to six weeks, I’d hazard.
And worse, the existence of this program will block any other course of action being taken. It is so large and resource-intensive an approach that it precludes other remedies.
From Reuters:
Democratic Rep. Barney Frank said on Wednesday Democrats had reached an agreement to stem one of the worst U.S. financial disasters in decades, and that there would be enough votes to pass the measure and send it to President George W. Bush to sign into law.
“We now have between House and Senate Democrats an agreement on what we think should be in the bill, and we have a meeting scheduled at 10 a.m. tomorrow to meet with the Republicans,” said Frank, chairman of the House of Representatives Financial Services Committee.
Proponents of a rescue plan have expressed hope that a bill could be delivered to Bush within days.
While the Bush administration had asked Congress for $700 billion for an unprecedented Wall Street bailout, Frank said that amount might not be delivered all at once.
“One tranche doesn’t work,” he said, adding that “safeguards” were needed.
Frank said there would be tough congressional oversight of as well as limits on compensation packages for executives of companies that receive federal relief.
The Massachusetts senator said a limited number of details still had to be resolved, but thought it could be done quickly. These matters involved bankruptcy protections for families on the verge of losing their homes and giving the government a return on its money if the company being helped prospers.
Frank took a dig at Republican presidential nominee John McCain, who interrupted his campaign to return to Washington on Thursday to help work on a Wall Street bailout.
“All of sudden, now that we are on the verge of making a deal, John McCain here drops himself in to help us make a deal, Frank said.
He expressed fear that McCain, a U.S. senator from Arizona who has spent much of the year away from the Capitol campaigning, could end up slowing down work on the bill.
The Massachusetts Democrat noted that a meeting on Capitol Hill on Thursday will be interrupted for a “photo op” at the White House with congressional Democrats and Republicans as well as Bush.
“We’re trying to rescue the economy, not the McCain campaign,” Frank said….
The issue of government controls on compensation for executives of corporations that participate in the bailout had ignited a firestorm, with Americans complaining to their representatives in Congress that these corporate chiefs shouldn’t be rewarded for failure.
“On the executive compensation thing, it went to the core of their (the Bush administration’s) being,” said Frank. “It was like asking the chief rabbi of Jerusalem to eat bacon on Yom Kippur. It was the most unthinkable thing they could think of.”
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Dylan Ratigan, who I normally like, made a complete fool of himself on Fast Money today, by saying that the bill needs to be passed and that the problems related to the credit crisis and blame and all that is irrelevant right now.
What he fails to consider is that Bernanke and Paulson don’t have a fucking clue how to fix the problems and cannot be trusted, and that overpaying banks for bad assets is another sham that ultimately will fail because the payment is not a function of true supply and demand.
He too is just a puppet of TPTB, as well as the other morons on Fast Money. And Jeff Macke, who at least is familiar with a lot of smart people on Minyanville and their view that this bailout is another scam, doesn’t have the fucking balls to speak up and say that the plan should not be passed. In this sense Macke may be even more guilty than the other fools on CNBC because he knows better but refuses to speak up. Is he afraid of losing his job on Fast Money? I’m sure he’s in good enough financial shape that he doesn’t need CNBC paychecks. What a fucking clown.
What should happen is to let all these banks fail and if govt is going to bail anyone out, help people directly who are facing foreclosures, rather than propping up stock prices that will eventually crash because the free market is bigger and more influential than even the government and all of its puppets at CNBC.
Hi Anon..
Just send a email to Macke with a link to this post…. reminding him about some nice things you have said about him…. Normally I like him….. but I think there was an executive order at cnbc about bad-mouthing the bailout
This is not a bailout but a revolution and look who is running the show in both sides. So far not one single strong voice.
Democrats Say “Breakthrough” Enables Them
Poop. The only thing left is a fillibuster in the US Senate.
Any idea yet on how they will arrive at a price for these assets?
When will the auction for the fresh bonds be held? Any ideas… The U.S. debt ceiling has already been raised.
I know Yves has mentioned that 700 billion in fresh treasury bonds is enough to substantially raise yields given the potential reluctance of central banks to purchase them unless some cajoling occurs (maybe a plea that global credit markets depend on it).
Anyone else think the US taxpayer bailout of lending institutions should approximate Warren Buffett’s bailout/infusion of Goldman Sachs…
i.e. preferreds pay 10%, plus warrants equal to preferreds infusion???
This seems like perfectly rational terms for me. And it will buy the time necessary for the banks to unclogged their gooey balance sheets instead of simply temporarily and artificially inflating bids for the toxic waste in time for 3rd quarter financial reporting.
Sadly, we need to look at this surreal circus-like event for what it really is, i.e:
Are neo-cons really driving a neo-fascist agenda? See how many of the 14 defining characteristics of fascism exist today in America.
Neo-fascism in America by Jim Macgregor
Dr. Lawrence Britt, a political scientist, published research on fascism in which he examined the fascist regimes of Hitler, Mussolini, Franco, Suharto and several Latin American regimes. Britt found 14 defining characteristics common to each fascist State:
1. Powerful and Continuing Nationalism – Fascist regimes tend to make constant use of patriotic mottos, slogans, symbols, songs and other paraphernalia. Flags are seen everywhere as are flag symbols on clothing and in public displays.
2. Disdain for the recognition of Human Rights – Because of fear of enemies and the need for security, the people in fascist regimes are persuaded that human rights can be ignored in certain cases because of “need.” The people tend to look the other way or even approve of torture, summary executions, assassinations, long incarceration of prisoners, etc.
3. Identification of Enemies/Scapegoats as a Unifying Cause – The people are rallied into a unifying patriotic frenzy over the need to eliminate a perceived common threat or foe: racial, ethnic or religious minorities; liberals; communists; socialists; terrorists, etc.
4. Supremacy of the Military – Even when there are widespread domestic problems, the military is given a disproportionate amount of government funding, and the domestic agenda is neglected. Soldiers and military are glamorized.
5. Rampant sexism – The government of fascist nations tend to be almost exclusively male-dominated. Under fascist regimes, traditional gender roles are made more rigid. Divorce, abortion and homosexuality are suppressed and the state is represented as the ultimate guardian of the family institution.
6. Controlled Mass Media – Sometimes the media is directly controlled by the government, but in other cases, the media is indirectly controlled by government regulation, or sympathetic media spokespeople and executives. Censorship, especially in war time, is very common.
7. Obsession with National security – Fear is used as a motivational tool by the government over the masses.
8. Religion and Government are intertwined – Government in fascist nations tend to use the most common religion in the nation as a tool to manipulate public opinion. Religious rhetoric and terminology is common from government leaders, even when the major tenets of the religion are diametrically opposed to the government’s policies or actions.
9. Corporate Power is Protected – The industrial and business aristocracy of a fascist nation are often the ones who put the government leaders into power, creating a mutually beneficial business/government relationship and power elite.
10. Labor Power is suppressed – Because the organizing power of labor is the only real threat to a fascist government, labor unions are either eliminated, or are severely restricted.
11. Disdain for Intellectuals and the Arts – Fascist nations tend to promote and tolerate open hostility to higher education, and academia. It is not uncommon for professors and other academics to be censored or even arrested. Free expression in the arts and letters is openly attacked.
12. Obsession with Crime and Punishment – Under fascist regimes, the police are given almost limitless power to enforce laws. The people are often willing to overlook police abuses and even forego civil liberties in the name of patriotism. There is often a national police force with virtually unlimited power in fascist nations.
13. Rampant Cronyism and Corruption – Fascist regimes almost always are governed by groups of friends and associates who appoint each other to government positions and use governmental power and authority to protect their friends from accountability. It is not uncommon in fascist regimes for national resources and even treasures to be appropriated or even outright stolen by government leaders.
14. Fraudulent Elections – Sometimes elections in fascist nations are a complete sham. Other times elections are manipulated by smear campaigns against or even assassinations of opposition candidates, use of legislation to control voting numbers or political district boundaries, and manipulation of the media. Fascist nations also typically use their judiciaries to manipulate or control elections.
Benito Mussolini – who knew something about fascism – had a more straightforward definition: “Fascism should more properly be called corporatism because it is the merger of state and corporate power.”
Abraham Lincoln stated, “I see in the near future a crisis approaching that unnerves me, and causes me to tremble for the safety of our country. Corporations have been enthroned, an era of corruption will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people, until wealth is aggregated in a few hands and the republic is destroyed.”
Barney Frank has got to be one of the most repulsive US politicians ever.
Barney Frank is as retarted as he sounds.
Barney Frank has the brains of a frankfurter the further he hot dogs on the issues at hand. Seriously, we are all subprime now.
Barney Frank is a complete and utter moron and needs to be hung from his neck until dead. This is all treason – plain and simple.
Our great-great-great-great grandfathers at least had the balls to start shooting tyrants for transgressions FAR less than this.
I cannot believe that a single person in the mainstream media doesn’t call Barney Frank out for being a useless turd. The guy has never even had a real job – check his profile. He is an avowed socialist.
I love his completely idiotic statement that “the free market got us into this mess, now the government needs to get us out”
Are you fucking kidding me? The GOVERNMENT got us into this mess with the help of the useless paper-pusher idiots on Wall Street.
I can’t wait to see all these shitheads in a year when the problems are worse and they realize this was all a total waste of time and money.
Revolutions and uprisings have begun over less than this. I only hope Frank, Dodd, Paulson and the rest of them get torn limb from limb by an angry mob with pitchforks and torches.
I will be there to partake.
This is the turning point in history where we look back and say. If only I had 5 billion and I was from Omaha.
Unfortunately Ben like G-Money truly believed they are masters of the universe. They fail to see that the market like mother nature, precisely like mother nature will be unmoved by this peace offering.
What it signals to the world is panic, who is gonna buy our crap debt now? What does Bernanke think he can just print $700 billion out thin air.
Well Misery loves Company and the Champagne is popping in Tokyo. Craz y Americans..they no learn.
We need to bring duels back, I say Sarah Palin challenges Paulson to a duel over the bailout. Glocks at 50 paces.Moneys on the VP.
How about GWB Speech, I thought Pullman had more gravitas in ID4. GWB should have given the speech through a bullhorn. Standing on top of the remains of Lehman… Then maybe people will feel the urgency.
aww crap..im tired
Chinese regulators have asked domestic banks to stop lending to U.S. financial institutions in the interbank money markets to prevent possible losses during the financial crisis, the South China Morning Post reported Thursday. The China Banking Regulatory Commission’s ban on interbank lending of all currencies applied to U.S. banks, but not to lenders from other countries, the report added, citing a source.
I for one welcome our new Treasury overlords and I’m sure my children and grandchildren will also enjoy a life of debt peonage.
Barney Frank is just earning his salary. You do not get to his position without being vetted, then bought and paid for. How could anyone expect a different response?
I think the next step for wall street is a huge drop in trading volume, where The Great Depression will be like a rerun. If Congress would have had some integrity, confidence might have been restored, but with this abortion bill passed, massive damage will lie ahead as people bail out on these crooks! It will take a generation to re-awaken America! Fuck them all!
This just in: “You Lose; They Win.”
My letter to my senators (including Obama) and congresswoman:
Say no to the Bailout.
I am losing my home tomorrow to a foreclosure. I have tried to sell it for 18 months at progressively lower prices, but it just will not sell, even though I will take a loss and have to beg the banks to forgive the balance owed on the house.
Now, banks in the same situation I am in are going through their representatives in the administration and demanding Billions, without giving up anything, only letting their shills threaten that they will destroy the economy if they don’t get what they want.
If I, as a taxpayer losing my home were to do this, this same administration would call it an unfortunate pain due to adjustments in the economy. If I threatened to stop paying my bills, I would be hauled into court and forced to pay. However, if the banks do it, it is somehow a prudent and patriotic act to bail them out.
Say no to the bail out. My wife and I are out at least $110,000 on this home, on top of the shortfall that will be applied to us after the banks collect what they can at the sheriff’s auction. That will likely take our losses to over $200,000. Our credit ruined, no bank, no bureaucrat will come in to help us, despite the varied programs Congress and the Administration claim are out there to help distressed homeowners. I make too much to qualify for most assistance, but not enough to claw my way out anymore. I will likely end in bankruptcy, despite attempts to keep our heads above water for the past two years.
What is fair for taxpayers to suffer is more than appropriate for the banks who fueled this “crisis” with their self-aggrandizing financial schemes that have been revealed as hollow and fraudulent by their failure. The executives who profited from this should be called to account. The companies and shareholders who profited from this should be called to account. My accounting comes tomorrow–when will you give them theirs?
This plan is of course simply a re-capitalization plan (regardless of it’s appearance — any “premium” is of course a re-capitalization in disguise, etc). And in fairness, it’s a moderately well-designed instance of a re-capitalization method which could indeed allow a middle course that would not save every last one of the still-standing bad financial actors, *if* implemented with such a middle-course.
But aside from such a rosy hopeful view….
…is it time *now* for the re-capitalization?
I wouldn’t mind waiting for more bank failures first.
We’d just use fannie, freddie, and another stimulus “rebate” to buy a little more time at the moment.
oh, and of course the adding in a way for taxpayers to recover their investment once we do finally do any re-capitalization. Once it’s time to re-capitalize, then getting equity such as preferred stock or some such is of course appropriate. It’s a fool’s thought that the dregs have a long-term higher value by themselves.
Yves,
In a scenario in which debt deflation/deleveraging/contraction wins out (i.e., no matter how much money the feds spend/print, the battered and shellshocked banks just sit on it and refuse to lend), would you still expect the dollar to crash?
I assume the credit of the US is toast regardless, but wouldn’t the dollar become unmanageably strong instead, almost by definition? Isn’t this what happened in Japan in the ’90s? Could this be why the gold market, which has to have seen this likely outcome for at least a week, isn’t screaming toward $2,000/oz.?
Seems like an important question to settle if one is to keep one’s powder in a dry place. Expert guidance would be much appreciated.
First, the yen has been a seriously undervalued currency for over a decade, and they have deflation, low interest rates, and unlike us, a huge current account surplus. Unlike China, they are not believed to be intervening to keep their currency weak.
The size of our current account deficit alone, independent of the deflation issue, is expected to further weaken the dollar, and to a considerable degree.
Second, Bernanke, in his study of the Depression, has often said something along the lines of ” a determined central bank can always reflate.” His model was the US circa 1934, when the US went off the gold standard and the dollar fell by roughly 40%.
So Bernanke sees trashing the currency as a positive move in combatting deflation.
Agreement between House and Senate Democrats is a tiny step (and we don’t know exactly what they’ve agreed to anyway) — so far, the Republicans’ pose is anti-plan, to capitalize on public disgust — the way this is going to work is that the Democrats won’t push an unpopular plan without bipartisan support just before the elections. So in the absence of Congressional Republican support, I’d suggest virtually no progress has been made and that the chances of this thing becoming law didn’t move today. The Republicans are running event risk between now and the election by opposing the legislation, but at this point in the game they prefer that to constituents with pikes and torches.
If the $700 billion “bailout” packages passes Congress on the way to a Presidential signature, I would expect it to drain global liquidity out of the system. The U.S government will likely issue bonds to cover the costs. While it may free up bank capital, global creditors will have to pony up quite a few billions for this to work. Billons that could have been used for other purposes.
When you issue bonds, it drains liquidity.
But, if market participants feel the added sovereign debt increases the risk of default, the U.S could suffer a brief round of externally driven inflation.
I doubt the price rise in goods persists with nominal labor costs in check. At the most, the falling buck would cut real disposable income and lead to massive consumer bankruptcies, falling demand, and rising inventories. Neither of these factors point to sustained inflation by a bailout-package driven currency run.
Just my three cents.
I don’t understand. Money market funds are going to have much better insurance than deposits. Won’t everyone just pile into money market funds? What is going to stop a massive bank run if this bill becomes law?
richard,
the gov guarantee of money market funds only applies to funds that were in money markets on or prior to sept 19, 2008.
you showed the reason for this restriction very well: who would keep their money in bank accounts when money market accounts pay a higher interest rate and are guaranteed by the gov?
As your paper currency falls in value you can buy foreign paper via government issued t-bills like Swiss, Canadian or paper currency like euros and yuan. No guarantees those holdup so there is always buying and holding gold waiting for a strong currency(s) to emerge then dump gold and buy into those. Of course there is always US t-bills but at or near negative rates as inflation is your reward, this is why you buy foreign or gold.
Just paying off your own personal debt and cutting back on your spending would help a lot.
Investing in staples (corn, rice, wheat) and miners is always a gamble that could payoff.
IMHO
The Paulson bailout explained
http://en.wikipedia.org/wiki/Martingale_(betting_system)
Only works providing you have infinite money
That’s the whole idea with factional reserve-compounded interest banking, inflate to infinity until the currency value is zero and reset(depression and liquidation) then start running the same scam all over again from scratch.
Only the top of the pyramid wins.
Excess liquidity is what caused the problem in the first place. American spending, while bringing a boon for the global economy over the last few years, needs to be curtailed for long-term stability.
You can’t fix too-much-liquidity with even-more-liquidity!
A Simple Solution
I am a simple man from Alabama that does not like the 700 billion dollar bailout that is being proposed. While I understand the country is in economic trouble that it has not seen for decades, I DO NOT believe the bailout will benefit the people of this great land. This proposal will probably prolong our descent, it does not aide in actually stopping the fall from happening. The problem as you well know is house prices have been overvalued for the last several years. The banks and firms that overleveraged themselves with these bad loans have no one but themselves to blame. Therefore I see no reason to buy their bad debt as proposed. While this would aide in the liquidity problem the markets now face I see no benefit to the problem of falling house prices. The current bailout looks to aide Wall Street but does little to help our economy recover.
The solution is simple. The US government could start buying houses in regions that face the biggest price drops. With 400 billion dollars the government could buy 2 million homes at an average price of 200,000 / house. I understand this would take some time but if you could put a bottom to housing prices it would be money well spent. As far as liquidity take the other 300 billion and start offering loans to people that could actually pay them back. Standard lending 10 percent down with the interest to be paid to Social Security or some other government program that has been under funded. Then as housing recovered the government owned houses could be resold into a stable market recovering most if not all of cost. While this would not save all banks and lenders it would help them from further write downs.
There are 4.3 million homes on the market in the US now. The results of this simple plan could be great and have an immediate impact. I believe if something like this were put in place there would be a lot of private money flowing into real estate because they would know the bottom was near. Liquidity is a symptom of the real problem (HOUSING). If this is not the solution please find another way to fix the problem not ways to remedy the symptoms. At least if you spend 400 billion on houses you have assets, 700 billion in bad debt is potentially worthless!
Time for the physical removal of the US Congress. They would destroy the country to save their banker friends.
It’s Time!!!!!
Matthew Dubuque
The AAA rating of the USA will be directly dependent on whether the illiterate rabble takes away the independence of the Federal Reserve.
If you put the cretins at Congress who brought you Fannie and Freddie in charge of monetary policy, ALL bets are off.
And the Fed bashers may succeed in their desire to do exactly this.
But until then, the bull market in Treasuries looks well set to continue, especially in view of the likely coming Depression.
A Depression is now likely, irrespective of whether this bailout passes.
As far as I know, I was the first in the world to predict the Fed’s abandonment of Lehman.
In a similar mode, our likely global Depression poses a serious risk that the Bank of England (their central bank) will need to be recapitalized within 2 years.
Remember where you heard it. At http://www.nakedcapitalism.com
Matthew Dubuque
mdubuque@yahoo.com
I think Frank got outmaneuvered. He *should* have said, I will let you spend 700 billion but only if we raise taxes by 700 billion. A 5% wealth tax would do, wouldn’t it?
How could this be happening? A scheme to impoverish the marginally middle class and poor, and for others to hold up the stock market at least until after the election.
Even the sainted Warren Buffet hasn’t clean hands. A conflict of interest is just that -a conflict that can’t be trusted to sort itself out given the incentive.
The concentration of financial assets in 401Ks and pension funds was bound to attract the attention of government to control it.
John Crudele has been writing about the manipulation of government macro statistics for years as well as Paulson’s manipulation of the stock market. He’s accustomed to having his hands on government funds for manipulating markets.
http://www.nypost.com/seven/09232008/business /paulson_and_bernanke_and_their_bad_bank__130375.htm?page=2
This shameless Congress!
Fascism? What is this guy talking about? What does it have to do with the credit crisis? Dude- get out from your parent’s basement and smell the fresh air.