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What was causing the panicked "must pass bill now" gasps from Senators and the Treasury was not the various bank failures. They have been pretty orderly and no one who failed wasn’t expected to fail. Instead the problem was that banks aren’t lending to each other. This isn’t because they fear that other banks won’t repay if they fail, in every case when a bank has failed, the Fed has made sure that banks with outstanding interbank loans got their money back. So this isn’t a question of systemic risk causing fear.
Instead the fact of the matter is that banks can make more money lending elsewhere and, more importantly, by causing the system to seize up they were making it likely that they’d get a huge, oh 700 billion to 1.5 trillion dollar bailout. Whatever you can get for lending overnight to other banks kind of pales in comparison.
Now that this bill has failed, the real risk is that banks will pile on the pressure. Since just not lending to each other has not been sufficient, the next step is to severely tighten credit to consumers and businesses. They will claim that this is because they just can’t afford to lend.
We need to make sure this doesn’t happen. Here’s how we do it:
1) If a bank stops making regular loans we take that as evidence that they must be insolvent. After all, if a bank’s business is to make loans, and they’ve stopped doing business, then it must be because they can’t do business. In this case the FDIC steps in and takes over the bank, since they clearly need to be taken over. Give the FDIC a hundred billion to tide it over to January with this additional mission. We can be assured that banks that can lend, will lend, otherwise they won’t be in business any more.
2) Get the Fed to start making the necessary interbank loans itself. To do so, have the Treasury sell some bonds to expand the Feds balance sheet (which is filled with trash due to their fruitless efforts to do what Paulson wanted more money to do). 150 billion should do it.
This gets you to January without the banks being able to collapse the economy to blackmail the public into bailing themselves up.
In the meantime, the election issue is now what sort of bill occurs in January so that the new President has a mandate to get it done and to fix the economy and the finance sector long term by doing it right. I’ll point readers who want to know what a good economic reform bill would look like to this outline.
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Bailout Bill a Bust Among House Members in Competitive Races
http://www.cqpolitics.com/wmsp…..0002966213
The congress has to outlaw complex financial instruments.
Mortgages need to ALL be set as fixed rate fixed term. They cannot be bundled, leveraged and traded and must remain with the originator. This applies to every mortgage for a primary residence.
SBA needs to have money to support businesses with credit needs for PAYROLL only and not rely on banks.
Fer starters
“This gets you to January without the banks being able to collapse the economy to blackmail the public into bailing themselves up.”
Jefferson Quote:
“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power
should be taken from the banks and restored to the people.”
Blackmailed is right!
Digging
I think this emergency was in part related to the end of the quarter. Let’s see how urgent things are at the end of the week.
no waiting for january. for all the reasons i gave in the previous thread.
Let’s see if there is a rush to buy cheap stocks at some point and another rally.
I am waitng to hear actual stories about companies folding because they can’t meet payroll.
what’s the big deal about waiting until january? who’s pushing for that?
How bout the banks come forward and ask for help and explain what they need and why they need it and what they will do for the help?
Paulson must resign.
Thanks guys, having told us for years you are in charge of the financial system you are going to allow your feuding politicians to destroy us all. Sorry Ian I accept your theoretical approach but this isn’t theory. And by the way SanderO, don’t think cos it hasn’t happened it won’t. What will happen is that the highly geared companies taken into private equity won’t be able to renew their term loans. Then the payroll won’t be met.
Who would you stick in there for four months? How long would it take for him to come up to speed?
Why are the Democrats siding with President Bush?
CNN: Civil War in the Republican Party (Female talking head)
Bob in HI
1,780 DAYZ AND THE KILLIN’ GOEZ ON AND ON AND…
Citizen ubetchaiam and the Firepup Freedom Fighters:
This got EPU’d at the bottom of the last thread but in my opinion what we saw today is the emergence of the one significant segment of the House of Representatives that has any balls, and that’s the progressives who wouldn’t give the toothless old lady from San Fransisco any cover and left ‘er standin without a stitch on right next to her naked emperor for whom she has carried the weight lo these last two years. It’s clear that the majority of the population is done with Reaganomics and corporate fascism and that those in close races for the House who voted against the bailout or are runnin against an incumbant who voted for it are gunna score in November. The “bipartisan” mantra is dead as a doornail, the bill that comes out this next week will be enough ta get us to January and a new Congress and President…no more’n $150 million and only a 90 day window on that.
What that will do is make economic reconstruction THE issue for the rest of the campaign…and for those, like myself, who don’t want the Iraq war forgotten this will place the end of the war economy as central to any reconstruction package.
Pelosi and Stungun Stenny Hoyer must be replaced in leadership next session and the folks who lead the progressive solution to this immediate crisis will be in a good position to make that happen.
KEEP THE FAITH AND PASS THE AMMUNITOOPN, BUT DON’T FIRE UNLESS ONE A THE BASTARDS RUNS ACROSS YER YARD!!
With the defeat of this latest incarnation of the Paulson plan, it is time for Paulson to resign. He is not part of the solution. He is part of the problem. He is a Wall Street banker dedicated to bailing out Wall Street, his Wall Street. There was no reform or re-regulation. There was no help for homeowners. These were never priorities for him and it showed. This bill was about helping his guys not changing them.
k.. as a former banker, I have to jump in here with a contrarian view. First of all, the market isn’t blackmailing anybody. Individual bankers, firms, and their lobbyists may be, but the market itself responds primarily to fear and greed and itself lacks volition. If its collapsing, most likely it has legitimate concerns of imminent failures. The market itself does not cry wolf.
Secondly, I simply don’t understand why we’re saying ‘wait’ to do this in January? Maybe OMO’s and opening the fed window wider, as suggested here, will tide us over, or maybe it’ll just push us so far down the j-curve to the point that we render further priming ineffective, right when we may be heading into economic catastrophe.
Furthermore, do we really want to saddle President Obama and his mandate with this messiest of all clean-ups? I say, get it done now and get it done right. There’s a right solution, that is NOT a kitchen sink solution, and we need to convince our legislators to stay at work until they finish it. Shrub won’t have any choice but to sign whatever we put in front of him, and if he doesn’t, then his legacy will be permanently locked at even further below zero than it is now. Which would be a good thing.
It was a bad bill. It deserved to die. If you’re bleeding out on the floor and I pump you full of heroin you may be able to get up and act like everything’s fine, but you’re still bleeding out.
It’s people who wouldn’t listen to theory who got us into this mess. We told them “look, the numbers say, this won’t work”. And they said “we’re the practical people, we know what works”.
Maybe it’s time to listen those people who called this right all the way?
Nah, listen to Paulson.
The mind boggles and I am frankly disgusted and tired and dismayed by the unending unwillingness of people to listen to anyone with sense. Almost everyone who called the Iraq war right was demoted or fired and the people who got it wrong were promoted. Now in a financial crisis, folks are still saying “listen to Daddy Paulson, because he called EVERYTHING, every single thing, wrong.”
Ok, listen to him. And in a few years, when you’ve lost 50% of you standard of living, we can have this discussion again.
Because they, rightly or wrongly, honestly fear the destruction of the economy. Warren Buffett warned them as much when he talked to them over the weekend.
Oh, I wouldn’t have the Senate spend time confirming a new Treasury Secretary. Just let whoever is Paulson’s #2 run things until we have a new Administration. But don’t let Paulson continue to be the face of the crisis — his ideas, proposals, and deals have been utterly discredited the past ten days. The guy isn’t truthful. And he is a self-dealer.
He must go.
We want it done right and it won’t be done right by the current Congress and administration. It is better to wait 3 months and do it right than do it wrong now and it will not be done right now. The market is responding to greed. They can get higher returns by using the money other ways, and by blackmailing the politicians they can get hundreds of billions of dollars.
Go here for more details.
That’s part of the problem though – getting it done now and getting it done correctly are pretty much mutually exclusive with the current administration.
Agree absolutely.
ABC News has on a former Clinton deputy secretary of the Treasury: blah, blah, blah, Paulson bailout necessary, blah, blah, blah.
Poor Charlie Gibson, I guess he won’t have to worry about the capital gains tax anymore.
Its worth a try, but to be honest we are not going to know how this hiest was pulled for many years.
Heck the 620 Billion wealth transfer from the other day did not causer a blink.
The Democrats could have used their press conference after today’s vote to call for Paulson’s resignation. It would have been the perfect time, with no negotiations for two days. All they had to say was “We need someone from the Treasury department who has the trust of the President’s party on Capitol Hill.”
After his jittery performance in the White House driveway this afternoon, it looks like Paulson could use the rest, frankly. Not confidence-building in any way.
You are right that this whole bill was scripted for Paulson and that clear heads operating from a different paradigm need to be brought in to guide the legislation – are your bags packed.
We do indeed need a tipping point & reverse disaster capitalism.
I’m not arguing that the bill we just defeated was unacceptable – the combination of drastic reserve-requirement-relaxation + toxic assets purchases alone made it unacceptable — that type of thing would’ve seriously incenvitized exactly the wrong type of behavior, but I am very concerned about the type of OMO and prime-pumping you’re suggesting for the interim. I think that what you’re proposing will come very close to turning a moderate recession (what we have now) into a full-blown structural crisis, through effective immunization.. even only for three months. The market needs some other type of signal, and we need to figure out how to give it.
Dugg, thanks for the link.
Thanks Ian.
My EPU question. Off the record the Dept. of Treasury spokesliars, say we are slipping into panicky disaster. Why is Congress shutting down for a religious holiday few of them observe?
I wish I had a brilliant thought to add here, but I don’t. And, neither do the brilliant economists and financial people I bumped into today.
Ian,
Every business person I know is hording cash. I’m told that most receivables are only being paid when it becomes necessary to keep a business in production.
So now more and more sales are being done on a cash only basis.
Most businesses are not set up to operate on cash flow, the need credit so today’s vote has only exacerbated the cash situation.
I don’t understand your logic is saying that all that’s needed it tinkering around the edges to make the US economy work.
It seems you have never made payroll or long term capital investment to grow a company.
There is a big difference between receiving a paycheck and singing the paycheck when it comes to credit.
Again I have been screaming about the thieves on Wall St for years, I used to be a bond trader, so I of what I speak. Ever since 1988 the Fed has not allowed the stock market to go through a real bear market, always injecting cash to pump the market back up. I call it the Smokey The Bear market, like forest management rules that said any fire was bad, until the debris piled up so high on the forest floor that when a fire did break out the results were more disastrous than what the original fire would have done.
The stock market sell off this year has it roots in 20 years of allowing bad management to artificially succeed. So a pox on all their houses.
That being said allowing the fire to burn out of control is not good. As we all know there is always too much collateral damage to the environment and humans.
I think you need to consider that sometimes it best to do something, that may not quite right, instead of nothing at all.
how many time have i seen that phrase? i think it’s almost as many times as i’ve seen: “The Democrats should…”
Give that man a cigar!
So why isn’t everyone jumping on board the tax-per-transaction plan? $0.25 per transaction, and current Dow Jones volume, would generate almost $250 billion in one year, by Wall Street, without a penny coming from taxpayers.
That way, Wall Street can fund their own “bailout.”
Other international stock exchanges do it, so why not this one?
thanks again for a needed post. Bigshot macroeconomists as mainstream (I think even rather conservative) as Ken Rogoff have said there is evidence of moral hazard problem going on. Bad securities are held by large corporations that have an incentive to explicitly or implicitly collude. There are estimates of of up to $400 billion in private offers for the bad securities. But the big financial corps don’t like selling the stuff for 25 to 30 cents on the dollar. So, if they have the lobbying heft to effect legislation why not hold out for a government bailout.
This is another reason for my suggestion that your plan in previous post should just ban mortgage securities outright, or do it with a limited number of standard contracts on formal exchange (if either of those are dumb ideas let me know).
Also I have read the smaller regional institutions are not suffering yet, in fact some are doing well, because they have had limited involvement in the unregulated securities markets, so they are safe to deal with.
Maybe the liquidity story is BS. It is really insolvency and uncertainty about insolvency, and maybe things are unfolding in way that it cannot be hidden anymore.
I don’t see how anyone can have confidence in anything having to do w/ wall street until the necessary oversight requirements are codified and put into law.
And, that’s brilliant? Of course you are right! What else!
In previous post Ian suggests seeing if $150 billion enough to get us until after election or next administration (right, Mr Welsh?).
You don’t think that is enough?
Me, I say the government needs to make it own market processes right now and bypass the whole unergulated financal market mess. Make a new Home Owners Loan Corporation to buy up or refinance distressed mortgages. New Resolution Trust Corporation to liquidate insolvent financial firms in an orderly fashion that minimizes disruption to real economy.
not with the pressure of an election. this may be our best chance.
but even if you disagree – why not work on it now just in case?
The Carlyle Group should show confidence and lead the way by buying stuff and making loans. Let the Bush family finally show tha they are Americans first.
I can’t recall anywhere saying that tinkering around the edges is what is needed, and if you read my regularly, you should know that in fact what I’ve said is that the exact opposite is needed – huge structural changes. In fact the changes I outlines just 2 posts back are pretty damn fundamental.
What I am saying is that we aren’t going to get a good bill that makes fundamental changes right now. Not going to happen. An election needs to be fought on the issue. No version of the Paulson bill is going to be good.
Yes, I know everyone’s in a panic, but I will tell you right now, no simple bail out will work, because more money is in fact owed than exists. Structural changes need to be made.
This is the beginning of a big cram down. The questions are “how big” and “who gets it in the neck”. Do it wrong, and you’ll be regretting it for 20 to 30 years, minimum.
Jane has a new post up entitled: McCain: “Now Is Not The Time For Blame, But I Blame Obama”
Well, keeping them as simple as the underlying contracts, would in effect ban MBS’s as the vast majority are currently constituted. You could sell mortgages in packages, but you couldn’t slice and dice them like they do now.
I think that what we have now is already a structural crisis, and that it is going to keep getting worse no matter what. The patient is walking dead (the patient being a good chunk of the financial sector) and won’t admit it. “As long as we all pretend everything is ok…”. That’s why I keep using Tinkerbell as a picture in my posts. “If we all pretend the banks are solvent”.
I think where we differ is on how serious the situation is. While I don’t think the sky is falling right now, a la Paulson, I do think that there’s a huge problem finally come to head and that it’s more serious than a mild recession.
(Among other things, I think the Chinese and the Arabs are about to stop lending to the US pretty much entirely. The bailout was for them, really.)
Keep in mind that based on inflation/value of the dollar stocks crashed long ago. If the dollar is down 40% and stocks value a company (granted in some rare cases there is cash in the company) – then stocks had crashed that 40% already.
Here’s an interesting fact…
Among 38 incumbent congressmen in races rated as “toss-up” or “lean” by Swing State Project, just 8 voted for the bailout as opposed to 30 against: a batting average of .211.
By comparison, the vote among congressmen who don’t have as much to worry about was essentially even: 197 for, 198 against.
Ian – I sent links to your last two articles to the Obama Campaign:
http://my.barackobama.com/page/content/fpilp (h/t ffein)
Here’s what I said:
This is time sensitive and related to the Bailout Plan failure.
Please get this to Mr. Obama’s Economic Advisors, and please don’t short-change the proposal below – It’s Presidential.
There is an Economist/Blogger at Firedoglake – Ian Welsh – who makes a lot of sense – that has put together a Timely, Rational and Sensible Plan.
Here’s the Summary: Give Paulson $150 Billion with Emergency Controls, and Come Back in January to Build the Right Bill.
Ian’s Plan is two simple articles that are each very short, but amazingly sensible in a compact form. Here they are:
“Give Paulson 150 Billion and Come Back In January and Do it RIGHT (And here’s how to do it right)”
http://firedoglake.com/2008/09…..-it-right/
and, the second one:
“The Danger of Wall Street Blackmailing Us Back Into a Bad Bill”
http://firedoglake.com/2008/09…..-bad-bill/
Thank you for reading this note and putting it in the hands of the right people to influence Mr. Obama’s response to the Wall Street Meltdown.
Sincerely,
radiofreewill
It’s time to start measuring Pelosi against that Congressional giant (and for once I’m talking figuratively concerning Denny’s girth), J. Dennis Hastert. This was a bad plan from the get-go. This debacle, combined, with her steadfast refusal to entertain serious investigations with real consequences–including making sure impeachment of the President and other officials is on the table–into what’s been going on for the last eight years is going to be her legacy, one that is rapidly going down the same drain as Harry Reid’s. I understand her wish to get the Democratic agenda moving through Congress, but that should not have been her first goal. Protecting and defending the U.S. Constitution and upholding the laws of the nation, something she took a solemn oath to do, should have taken precedence. To her everlasting shame she ignored her first duty as Speaker of the House, just as Hastert did.
Large parts of the country have been in recession for years, getting by by going further in debt. Now the recession has hit the rich, and suddenly politicians and the media take notice.
yeah.. I think you’re right.. we differ on where we are on the curve. Hence, you think that the Fed still has scope to act, and I think that scope is limited and we are already well into the red zone. Either one of us may be right.. this is a much easier problem to assess with historical hindsight and even thenm as you know.. but my question is, can we afford to be wrong? Balancing between disequilibrum and structural crisis is a delegate balance, and overpriming could tip the balance either way. If I’m right, we’d be saddling President Obama with a problem nobody deservesa and that we cannot afford.
I’m just watching Larry Kudlow and Steve Forbes on CNBC. The last segment confirms what you wrote in this post. The journalists are pounding Forbes that this was a bailout of Wall Street robber barons. Forbes is stuttering and Kudlow, the ultimate mouthpiece for the filthy rich is backing down a little.
Bullseye.
Thank you.
KO is going to have one hell of a show tonight! I can’t wait. ;-)
Exactly Hugh. The rich are fine when the middle class and the poor are suffereing, but man, take their candy bar away and they cry like children! Good. I hope they have to eat hot dogs for dinner like the rest of us do and if they want to help me clean toilets for a living, well then, get in line assholes! Maybe I’ll hire you….or maybe I won’t.
Whereas I think there’s a big problem and that President Obama should be able to create his own bill with his own Congress and that what we should do now is the minimum to get from here to there. We differ on what the minimum is. Mind you, I’m willing to give Paulson 150 billion and tell him “go for it” and then see in January. If there is a huge crisis, then more is needed. If there isn’t, then it can wait, as I see it. It seems to me your position may be a bit contradictory.
why do you think obama would put forward anything different than the bill that got killed today? he supported this one.
Ian
If you buy the bad mortgages at current face value you will excelerate the drop in home price. Now if you buy bad mortgages at maturity prices you are overpaying for the asset. So there is no good solution either buying the paper or the houses.
Yes 150 would be good to start with, sorry I missed that.
The real issue here is that the Rt Wingers want to kill all social programs. They want to use Wall St red ink to drown the Federal government in the bathtub.
That is why we had the revolt today, it was not about real market issues, the Rt Wingers want to put the government in deeper debt. If they succeed in allowing the change to mark to market rules the debt bomb gets moved down the road and explodes with more velocity.
Yet I see so many progressives cheering the demise of this bail out with out understanding that a much worse bill can and maybe crafted.
Until the progressive understand the Wingers real objectives, they will play into their hands.
This bad bill was the best to get us to January when the Dems, if they capture more seats in both houses, can rewrite the bill so that it makes sense for main street.
Why give ANYONE 150BB$ with no strings?
Geez louis that’s a lot of cash.
Give it to Main Street!
When the economic house of cards comes tumbling down and their are massive layoffs, business closings, followed by food and fuel riots it will be time to carve up the carcass that was the U.S.. New England, the Upper Midwest and the Pacific Northwest including California can petition for entry into Canada. What’s left can consolidate into the Cracker States of America with the Confederate constitution as their model.
I don’t know that either Obama or McCain explicitly allowed themselves to be painted into a corner on this one. Maybe I’m wrong.
The film “Escape from New York” gives a look at what the future holds for the U.S.. Ignorance, hubris, greed (The cornerstones of Republican ideology) has brought the U.S. to the verge of collapse. The next conflagaration will make the French or Russian Revolutions look like tea parties.
In January, Obama (hoping) and Democrats will want the economy rebounding going into the 2010 elections. That suggests that 2009 will be very painful. No guarantees, but I think it’s reasonable to think liberals will never be in a better position than January 2009.
As an owner of a Raymarine C 80 I can declare that they user interface is awful.
There is lots of crap in there and a MFD seems neat, but if it goes south you lose a lot of data.
I prefer Furuno or Garmin.
My recommendation is to get an MFD and use it as a radar and perhaps add in inexpensive AIS such as the NASA.
Get a separate hand held plotter for use in the cockpit. I have one and I don’t use the nav station plotter as a plotter.
I DO have cockpit repeaters for the GPS functions so I can load a waypoint at the nav station and see the “progress” data in the cockpit. For a picture I use the hand held.
I would not integrate the autopilot with the GPS. Get a stand alone unit – take the course to waypoint data from your GPS and input it into the auto pilot.
I have an Alpha 3000 which I am very pleased with (below decks) and especially like the way it has a 360° dial /compass interface for setting courses. I do not like the push button autopilots increments of 10 and 1 degree.
The KVH sail comp is a flux gate, can export to an MFD and is a GPS repeater. Reliable.
hahaha posted the comment in the wrong forum… I am outed!
I don’t think he had any other choice but to support it – he certainly didn’t like it much and made that clear, but as bad as it was it was the best that Pelosi, Reid, Frank et al could get out of the negotiations.
With more analysis and without the intense pressure from Wall Street and the rest of the “greed is good” community I think the Obama administration can put together a much better solution.
Well, he said something needed to be done. I have a feeling Barack knew the current bill would die in the House. As of right now, we don’t know how Barack would really vote because no bill has reached the Senate yet. ;-)
The more I think about it (TOILET paper from upstream) the more I like it. You don’t have cash, but people know the government is going to be around.
So, the government buys assets from firms at about 60% of face value (or some other percent) and pay for them with government bonds (the TOILET paper) to mature in about 10 years.
This means the value is set and the firms will get paid back, so banks can offer them credit. And, it gives government time to fix/renegotiate the mortgages.
Are mortgages & other things bundled together inextricably in CDOs?
What makes you think Dems DON’T understand the Right’s objectives AND plans to get there?
The crash today was planned long ago and was expected when we saw Cox blocking short-selling. That was guaranteed to set up a crash!
As you said, they want to drown us in red ink. But, is $700B or even $2T so much debt we can afford to NOT fix the health care system, shrink the military, end our addiction to oil, end the wars, go Green and so on? Our plans are forever. They aren’t handouts. They aren’t choices. They’re required!
Republicans think they can bludgeon us, but they can’t. Every time they try they just hit themselves like the Three Stooges.
Question is, how do Dems use that knowledge to meet it for the good of the country.