To call Paulson response to the credit crisis improvised does a disservice to artists. Improvisation still requires a sense of direction and purpose, the thrust of a musical piece or the likely frictions between two characters. By contrast, the Treasury/Fed program looks completely reactive, an attempt to stabilize a system when they lack a good understanding of the playing field and the nature of the turbulence.
And lo and behold, the head of the new TARP oversight panel, Elizabeth Warren, says in a very straightforward fashion what any astute reader of the press has discerned, but the media has been unwilling to say: Treasury has been flailing about. If there weren’t such large amounts of money involved, it would be comical.
From the New York Times:
Elizabeth Warren, the chairwoman of the oversight panel, said in an interview Monday that the government instead seemed to be lurching from one tactic to the next without clarifying how each step fits into an overall plan.
“You can’t just say, ‘Credit isn’t moving through the system,’ ” she said …“You have to ask why.”
If the answer is that banks do not have money to lend, it would make sense to push capital into their hands, as the Treasury has been doing over the last two months, she continued. But if the answer is that their potential borrowers are getting less creditworthy with each passing day, “pouring money into banks isn’t going to fix that problem,” she said.
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Elizabeth Warren? Now that’s MY kind of fox guarding the henhouse!
Who put her in this position? NOT Paulson?!!!!!!!!!!!!!!!!!!!!!!!!!
CrocodileChuck
My biggest concern is that Paulson should have never stepped up to the microphone to usurp authority from Congress and Bernanke, because his actions have been chaotic and taken away confidence in central banking policy. We now have a neutered Fed & Treasury Teats that are now too big to to fail, or something like that …
I think the TARP is the biggest pile of leverage in history.
How much do you think Paulson pocketed? He’s immune from prosecution as per the TARP bill, after all.
Yeah, well, the CP bailout is about to have to grow a lot larger. Fresh financial ebola outbreak there today, by far the highest in this cycle and probably ever. They already own ~20% of the outstanding and we’re hitting a 6% spread? Are you kidding me?
If the answer is that banks do not have money to lend, it would make sense to push capital into their hands, as the Treasury has been doing over the last two months, she continued. But if the answer is that their potential borrowers are getting less creditworthy with each passing day, “pouring money into banks isn’t going to fix that problem,” she said.
Uh-oh. She also makes it sound like this might not be a liquidity trap after all.
Welcome to the solvency trap. I’ve been waiting for you here.
What is a solvency trap? Can one be trapped by solvency when one has a fiat currency that can be devalued, making nominal debts less onerous? Please explain.
What is a solvency trap? Can one be trapped by solvency when one has a fiat currency that can be devalued, making nominal debts less onerous? Please explain.
Why yes, one can, when that level of devaluation would lead to severe inflation and loss of faith in the currency. The cumulative NPV amount the government can recapitalize itself for under ideal inflationary policies is roughly 40% of GDP.
Also, it’s perfectly possible for an economy to go bankrupt without any debt whatsoever. Kotlikoff gives a fun, stylized example involving lots of corn. I guess that’s what you choose when you live in Missouri. :D
Bernanke and Paulson are playing a game of trillion dollar Whack-a-Mole.
The sums that are being looted are beyond comprehension. The inflation-adjust cost to build the World Trade Center would be a mere 2 billion dollars. We could be building thousands of World Trade Centers for the amounts that are being doled out.
to ndk:
40% of GDP is on a REAL basis. If one looks at the funded liabilities (I.e. treasuries), they are mostly nominal (except a paltry 500 bln in TIPS, something around 10% of govt liabilities), so 40% of GDP is well enough.
Unfunded liabilities (social security,medicare,…) are another story, because they are essentially inflation indexed. The Govt will have to default on these one way or another (probably by de-indexing them, a solution that did marvel in bankrupt Russia…).
Unfunded liabilities (social security,medicare,…) are another story, because they are essentially inflation indexed. The Govt will have to default on these one way or another (probably by de-indexing them, a solution that did marvel in bankrupt Russia…).
I agree that that’s a likely part of the outcome, anonymous. We’ve promised too much to ourselves collectively, and someone’s going to get screwed. Medicare is, tragically, the obvious place to start, based on CBO projections.
But we’re looking at a 10% of GDP fiscal deficit next year. That’s going to become really difficult to finance, and only $260B of that is debt service. A lot more things are going to have to get cut, or we’re going to have a radical reintroduction to the world of inflation. I don’t know which to hope for, to be honest.
Elizabeth Warren is awesome! She’s been a champion for the middle class. She’s got a great video lecture on youtube on the coming collapse of the middle class and written some great books on the subject, the two income trap comes to mind.
Also, if we do continue to run beyond-banana-republic-sized deficits, there’s been a lot of empirical study on the maximum amount of GDP that can be captured by inflation to fund the government in any given year, too. It seems to vary between 6-15% of GDP, with inflation rates between 30-100%. Lotsa papers if you search on maximum seigniorage.
Are you kidding me. Non-plan my ass. This was the perfect plan.
This is just one great theatrical play/con job put on by the Fed and Treasury.
The Fed and the Treasury just have to try their best to look incompetent. To look like they were hit by surprise by all this.
Just like those subprime ‘fraudsters’ (the runners for the Wall Street dealers) who maxed out their credit that they had no intentionability to ever pay back, the Fed and Treasury are doing exactly the same. The difference is that they will pay government debt, but what will be sacrificed will be social security and medicare (which the rich don’t need).
Wake up America, you’ve just been made debt slaves for live. Even at zero percent interest rates, you are going to work for the man, and in the end, your house is not going to be an investment, but a burden.
In no time, those decrying ‘socialism’, are going to be begging for/demanding it.
Strange days indeed!
What will be interesting is what they have planned for us after backing the masses into a corner.
As to “the plan” failures etc the real culprit is the general cluelessness by anyone who thought that there could be a plan, any plan in the first place. To even think, as so many did and continue to think, that a group of people, many of whom showed extreme bad judgment in the years past, could design and implement a “plan” is beyond believing in the man behind the curtain in the Wizard of Oz.
What we have instead are barnyard cocks thinking they make the sun rise everyday. History will show, as it has in the past, the best plan was/is no plan.
Oh, that’s right I forgot, if we don’t do something the sky would definitely fall, Armageddon would follow and the world would end and while you are thinking about that there is a huge fire in the theatre! Run for your lives.
Today’s excuse, GM!
I too have a favorable opinion of Elizabeth Warren (the Harvard bankruptcy law professor), from reading her book, ‘The Two Income Trap’. I think she has her head and heart in the right place.
Goodsoup
The luster of Bernanke’s “professional economist” credentials is finally, and rightly, fading fast. Up until the last week or so, liberals were blaming the politicians (Paulson and Bush especially) for the failures of every plan so far conceived to stem the bleeding. Bernanke was the sacred cow — by protecting him, they protected the general meme that all our problems are at root due to “ideology” and “incompetence”.
Once Bernanke gets fully tarred with the same brush used on Paulson, the ability of liberals to hide behind professional credentials and Obama’s team of uber-experts will be seriously compromised.
And then the *real* political struggle begins.
“And then the *real* political struggle begins.”
agreed…except the word ‘liberal’ should be in heavy quotation marks.
I am noticing lots of assurance on the part of many commentors as to the root causes of the financial crisis. These causes tend to vary widely. Rather than touting my own cause, I would rather take this as an opportunity to point out the need for some important work. I see this phenomenon as manifestation of the need for humans to cultivate more accurate perceptions. ISHK works exclusively in this area. My wife and I have a project that incorporates many ISHK principles in demonstrating nature linked low energy living, EntropyPawsed
With problems come opportunities. These problems are big enough to present big opportunities if we approach them in a positive way:)
Can one be trapped by solvency when one has a fiat currency that can be devalued, making nominal debts less onerous? Please explain.
Zimbabwe.
MC5 said…
Does anyone truly believe that Summers and Geithner can think outside of the Wall Street/Harvard bubble they have lived in for 30 years? The underlying assets that “caused” the bubble are for the most part homes that working people can no longer afford to live in because their wages have been eroding for 35 years. Let’s break up CitiBank, GS, etc. and let the local community banks take up the task of lending and protecting families’ savings. Increase the minimum wage, execute a sliding scale to facilitate universal health care, lower taxes for working people, and take some of the crumbs that fall off the bailout table and invest in public education, including college education for anyone who can qualify for it. That would be at least a start toward a more fair and decent civil society.
foff,
Comment ad hominem and nasty. Another one like that and you no longer get to comment here.
Anon of 5:29 PM,
I am never certain what to do. I do delete longer, slobbering at the mouth type of offensive comments, partly because they take up so much content real estate that it is harder to avoid them.
I have also deleted nasty comments of this type. Mind you it fortunately doesn’t come up often, normally once a month or so. Sometimes I get no pushback, sometimes I get a lot (and when I get arguments, I always wonder who is doing the arguing…..).
There were a couple of really over-the-top offensive comments over the holidays which I did not catch early enough. I am troubled by that. It may be a function of the general stress level.
Usually people like that come back to see if anyone fought back with them, so I suspect the offender will see the message.
Yes, he’ll probably see the warning, but I see no reason to leave pure obscenity posted on your site. If it had even a dollop of insight, I’d say let it stay.
Comments on comments.
Comments on causes and solutions.
Warren’s principal observation appears to be that there is no stated and accepted CAUSE for the problem that we have, which is quite prescient even in its simplicity.
Without an acceptance of the cause, it is hard to know if we are throwing fuel or water on the fire.
Methinks it’s fuel.
For I see the problem as so elementary as to be almost indescribable.
It is the debt-based nature of our, and the world’s money system.
ALL money is created as debt – repayable with interest, which is never created.
To throw TRILLIONS regularly onto the pile of debt that is causing the economy to STOP, is kind of back to that definition of insanity.
MC5 correctly clarifies there can be no expectation of needed change from the Geithner/Summers team.
But I would invite that writer to ponder that the only means to provide the social benefits that are identified is NOT from the crumbs of ANY bailout provision, but rather through a Treasury System of debt-free money creation, coupled with a return to community-based banking that includes substantial increases in cooperative banks and credit unions.
The Chicago Plan.
Monetary reform.
Or, begin the grand march to a one-world-bank modeled on our private federal reserve system.