I also benefit from some good comments attached.

Ed Kunin @ 157:

Re (2): The Fed isn’t bailing out hedge funds with this recent injection of liquidity. It is lending to banks on one to three day recall of prime mortgage securities issued by outfits like Fannie Mae, Freddie Mac, Ginnie Mae, etc. They are quasi government securities because a proportion of these are guaranteed by the Fed itself. Banks should be able to pay these back come Monday. The objective of this operation is to stop any escalation in the interest rate which is inevitable when money/credit dries up.

I hate to be dense, but why are banks not liquid? the subprime stuff got sold to hedge funds or do some banks run hedge funds? If they are not liquid, how does this get cured over the weekend?

I’m not an economist and I can’t expect an economics course in the comments section, but I do not understand what is going on.

My concern is Bush and the Republicans aren’t in the slightest bit interested in bailing out borrowers. Bush may indeed thwart any Congressional attempt in that direction and argue instead for bailout for financiers and fall back on trickle down.

There is another concern, reading the comments to the link you posted above @ 163. Many Americans are too self centred, innumerate and have a mindset of ‘I’m a’rite jack’. I wish we covered more of Adam Smith and JM Keynes at high schools than we do. Keynes had the best argument of all for governments’ responsibilities towards ordinary people, as otherwise civic society is impossible. Perhaps coming from the other side of the Atlantic, he was more beware of the spectre of the masses’ penchant to storm the Bastille.

There should be more debate on the mechanisms to avoid a recurrence of this. Nothing really got fixed in the wake of of the S&L collapse almost 20 years ago. And here we are, walked into the same trap that created the 1930s depression despite numerous warnings over the last decade.

Who polices the lenders? The Fed has been remarkably quiescent re this. There needs to be an independent body but who should it report to? Who will exercise non partisan oversight? It should really be the Fed except it sees its primary role as keeping inflation in check.

BTW good exposition of comparative advantage in your post.

PS Should have added that liquidity injection is a fairly common device that central banks do on a regular basis because since the late 1980s their primary role is to control inflation. This recent foray is news because of the size of this market intervention and also because the credit derivative market really had blown into a huge bubble since Greenspan’s time. A lot of these will go belly up because they are chasing illusory rather than real assets.

There is a serious policy issue here but I don’t see any comprehension of that from any of the candidates seeking Presidential nomination or Congress members.

There will be many more foreclosures but mostly at the middle and lower ends of the market. Top end of the housing market is likely to remain buoyant. Deafaults and bankruptcies too of a fair few hedge funds and subprime lenders unless they have much real assets outside the USA.

FDL should be asking politicians who they are going to bail out if such a package is considered by the Congress. Shady financiers or homeowners? Which homeowners?
How would you avoid another meltdown? However you look at it, this may be the start of the end of easy credit.

Yeah, I wrote about how to do it, in a way that helps the borrowers, not the financiers and makes a profit for the government as well, here.

Ian Welsh @ 141

I think we’re at the end of this cycles expansion, and heading into the recession. Whether this one will kick into depression or not, I don’t know, but I exect a protectionist backlash over the next few years and I expect a depression sometime in the next cycle or two. A lot will depend on how the next President and Congress handle things, which is why I’m getting very worried about how the Democratic nomination is going. (Clinton and Obama, in my opinion, will not make the fundamental changes needed. Edwards – not sure – but of the big 3 he’s the only one who looks like he might. Gore almost certainly would.)

I’ll probably write about the interesection of politics and economics and demographics and the 2008 election next week or the week after. I’m still thinking how to approach it.

Ian,
question, I have quite a bit of bank stock in my IRA should I be concerned, very concerned?

Seems like all the people I discuss this with are basically uninterested.

I’m not a good investment person (having no real money myself). However, I wouldn’t worry too much about banks – the FED will keep them a going concern and IRAs are long term investments – any short term declines shouldn’t matter too much to you unless you’re very close to retirement. I expect they’ll lose some value – liquidity doesn’t make bad loans magically good loans; or bad investments good investments, but the big boys won’t go under, or anything. Bernanke understands he can’t allow that to happen, his academic career was largely about the Great Depression.

As usual, remember, advice you get here is worth what you paid for it.

There is a serious policy issue here but I don’t see any comprehension of that from any of the candidates seeking Presidential nomination or Congress members.

There will be many more foreclosures but mostly at the middle and lower ends of the market. Top end of the housing market is likely to remain buoyant. Deafaults and bankruptcies too of a fair few hedge funds and subprime lenders unless they have much real assets outside the USA.

FDL should be asking politicians who they are going to bail out if such a package is considered by the Congress. Shady financiers or homeowners? Which homeowners?
How would you avoid another meltdown? However you look at it, this may be the start of the end of easy credit.

LS @ 135

Ian, so how do you think this economy is going to shake out..really?

Personally, I think they will just keep “printing worthless paper money”…at least for awhile to stabilize things. It really is a house made of paper…the problem is the value of that paper. Something’s gotta give ultimately, but maybe I’m wrong. The “rich” will make out okay, the middle rich are gonna take a bad hit and end up back with everybody else. That will be a rude awakening…McMansions and all…

I think we’re at the end of this cycles expansion, and heading into the recession. Whether this one will kick into depression or not, I don’t know, but I exect a protectionist backlash over the next few years and I expect a depression sometime in the next cycle or two. A lot will depend on how the next President and Congress handle things, which is why I’m getting very worried about how the Democratic nomination is going. (Clinton and Obama, in my opinion, will not make the fundamental changes needed. Edwards – not sure – but of the big 3 he’s the only one who looks like he might. Gore almost certainly would.)

I’ll probably write about the interesection of politics and economics and demographics and the 2008 election next week or the week after. I’m still thinking how to approach it.

Ian,
question, I have quite a bit of bank stock in my IRA should I be concerned, very concerned?

Seems like all the people I discuss this with are basically uninterested.

Re (1): Yes it is true. He got UN approval to sell Iraqi oil for Euros rather than US$. The approval was granted because the USA had mandated sanctions against Iraq at the time which included ceilings on the US$ value of any import for Iraq.

Re (2): The Fed isn’t bailing out hedge funds with this recent injection of liquidity. It is lending to banks on one to three day recall of prime mortgage securities issued by outfits like Fannie Mae, Freddie Mac, Ginnie Mae, etc. They are quasi government securities because a proportion of these are guaranteed by the Fed itself. Banks should be able to pay these back come Monday. The objective of this operation is to stop any escalation in the interest rate which is inevitable when money/credit dries up. European central banks have been doing the same since many EU banks have invested heavily in the credit derivatice market. Central banks, including the Fed, are essentially buying up some of the safer investments for a time limited period so that banks can keep on meeting their customer demand for liquid money. Once the time period ends, the banks repay the central banks and buy back these securities. These securities have higher loan premises, are NOT subprimes and are not considered bad loans.

Banks essentially make their profits from the difference in interest they charge and interest they pay out. Problem is they got far too inventive for their own good in devising of loans to make against questionable ‘assets’.

We are at the point whereby producing ARMS is the only industry left standing. The war industry is the Cutting Edge.

The reason for the bailout is LIQUIDITY; but liquidity to deliver the vastly expanding new arms production cycle and the new rush to MINING to produce ever more materials to produce ARMAMENTS .. that is why the price of URANIUM is soaring! More nukes, more computer (they call it high tech) generated target systems!! All this started with THATCHER, who killed the entire UK economy under her WAY TOO LONG reign.

Henry the K was right “in there” then and is right in there NOW (Just came back from Moscow) trying to consolidate all the resources of the world for the elite. We are watching (in horror) as the Security and Prosperity Protocol is put into place and ALL of Canada’s and Mexico’s resources are laid at the feet of the US WARMONGERS. No coup d’etat necessary; it is already fait accompli .. these ruling individuals have long known how to bail themselves out.

The war for the Arctic is ON, the nukes are being moved into the Arctic region DAILY.

So’s who telling you this .. certainly not the mainstream, lamestream media . they, the owners of these megoliths, have THEIR dollars riding on more development!! Watch very carefully the ascent of MINING STOCKS .. or miss it if you just care to focus very narrowly on what is happening. The real news is in the mining newsletters these days!!

I attended a closed-door briefing given by a senior Federal Reserve official, who laid out the grim state of the markets. “What can we do about it?” asked one participant. “Pray,” replied the Fed official.

See, that is EXACTLY what they would tell YOU to do .. they would not suggest that halting mining activity would be a good idea if we are all to save our skins, and that is what it is down to now.

assured investors that everything would be all right. And the panic subsided.

The panic for WHO? People who want to keep eating and working in SAFETY have plenty to be panicking about. In a few months try to get a job without an ID . and ID provided by employers! but issued by governments. Sound like fascism to YOU?

right now we’re suffering from a serious shortage of saviors. And that’s too bad, because we might need one.

Really? Are we not ALL the messiah now? I mean seriously folks, there are OTHER problems besides Bush’s lack of credibility .. it’s the fracturization of all oppposition to warmaongering that is really the problem. We are forced to “attack” from many, many different fronts .. economic, political, social, physical (everything really is falling apart and Big Pharma and the insurance co.’s race for profits makes real health nearly impossible) .. and getting the Big Picture is nearly impossible.

This $130.2 billion dollar bailout is just something that hinders more people grasping what IS going for a bit longer, but the ruling elite has known for a long time. The last BIG BAILOUT was on 9/12/2000 (ring any bells) when $86 billion was pumped into the economy. Ca$h is pretty easy to print, iffen the presses don’t fall apart while its being printed. The Fed Reserve and the ECB have long known THAT.

liquidity has dried up. That is, markets in stuff that is normally traded all the time – in particular, financial instruments backed by home mortgages – have shut down because there are no buyers.

Oh, the liquidity IS there .. for armament manufacturers and the governmets that need to pay THEM. Have a look around and see just how high the price tags on these weapons systems are, now much it is going to cost us all to have THEM control us with RFIDs, eyeball scanning, surveillance cameras, and on and on … there are vast vast vast sums of money to made off the byproducts of WAR .. including paying people to do psyops, counterintel pro activities .. and those companies (which include Checkpoint, the mercenary Blackwater, KBR, Halliburton, the Carlyle Group, and on and on)are doing right well thank you! Just as Exxon Mobil is making a KILLING keeping all them jets fueled, the military bases heated and doing VERY well at that; the last Q4 profits for them were the highest posted in human history! WOW!

What does this have to do with the collapse of the housing bubble? Well, folks, they mortgaged America to make it possible to keep issuing all those lovely Treasury bills and the dopey yuppies in the Great White States, just keep coming up with new structures to deliver the ca$h to create ever new and wonderful manufacturing plants for ARMAMENTS and running think tanks to figure out how to control everyone who disagrees with the utter control of weapons producers. There’s a “new kid” on the block in the model of the article; it’s the huge huge plant making every type of weapon, figuring out how to build a nuclear perimeter around everyone and control all the neighbors down the block, each one ratting out the other!!

This could turn out to be nothing more than a brief scare. At worst, however, it could cause a chain reaction of debt defaults.

In my opinion, this could be the GREATEST thing that ever happened. Hard on many many folks short term, very freeing in the LONG term. But with the profit system firmly in place, who’s paying attention? This PANIC is an opportunity for folks to finally grasp the picture, a real walk around the “neighborhood” is obviously the next step … I don’t think anyone is going to like what they see, EVEN IF their neighbors and family are working there.. It’s SCARY …

The origins of the current crunch lie in the financial follies of the last few years, which in retrospect were as irrational

They were not irrational at all. The rationale being “do whatever it takes to keep the war industry going .. these ‘dupes’ will never “get” it . “
and they didn’t . .
and most still don’t.

Obviously, the House of Saud, the Bushes, Henry K, PM Brown (who controlled the UK purse strings for YEARS), and others clearly saw the rationality of what was going on and encouraged it every bit of the way. You can bet your last dollar they will continue to back the war machine, too! They have a PLAN, and it’s not benefit you or I in most cases.

investors also snapped up high-yield corporate debt, a k a junk bonds, driving the spread between junk bond yields and U.S. Treasuries down to record lows.

Well, yeah, of COURSE they did . and the smart money now has moved onto mining stocks or if they haven’t, “well, that’s their loss” is the REAL thinking on the part of the ruling elite controlling the war industry. They’re redecorating THEIR homes with new fixtures in Moscow, in London, in DC and NYC, in Argentina, whrever their fancy takes them and their huge sense of ENTITLEMENT takes them .. and as landlords in our global city . they are throwing US, and other inconvenient “useless eaters” Out.

I don’t entirely understand your post so my questions may be off topic

1) I had heard just before the invasion Saddam Hussein was demanding payment in euros for Iraq’s oil instead of dollars. Do you know if this is true?

2) The fed injected 67 billion into the credit markets. I know the fed keeps bank reserves and changes interest when it loans them to other banks, but I don’t know that the fed issues a balance sheet. I guess the 67 billion was credit on some sort of account to be paid like a futures contract if someone demands it. What happens when the fed injects money? Is it all to bail out hedge funds and banks?