((( Ian )))

Where do you find the time ?

Hey Ian.
So, how far off the mark is Krugman on this stuff? My impression is that he wants to stay clear of seeming alarmist in the eyes of… whoever, and he knows how much worse it is than he is letting on. But since I don’t understand it myself…

Ian, that would be rationale…

and the rational of supporting mortgage markets through this is transparently stupid.

Whatcha think the G7’s gonna come up with? Gotta be a few actual triple-digit-IQ clear thinkers in that big room.

Thanks. Thank goodness I have my commenters as line editors. :)

Sorry folks can’t sleep either…! ;-)

Thanks Ian.

digg

I think Krugman is on the optimistic side of things right now. Fundamentally Krugman believes that people like Paulson are neither completely incompetent nor operating in bad faith. So he gives them the benefit of the doubt. I don’t do so.

((( CT )))

How’s life in Paradise ?

I hope we can rally liberals such as Donna Edwards, the black caucus, and unions to halt this. This wasn’t what they signed up for when they backed the Wall Street bailout.

What matters now is the balance sheet of the U.S. government. No reason to take on this crap, unless they are getting it at a firesale.

Ian any idea who Paulson is using as asset managers and how much is he bilking the taxpayers to pay them? I fear he’s using Goldman Sachs, PIMCO, people like that.

Feeling mighty good… I inadvertently ended up as a front pager here and the BoSox won game 1…! :D

My 11 was for ya…!

I think Krugman is on the optimistic side of things right now.

It looks to me like Dr. Doom, himself, is optimistic. Roubini is looking for Dow at 7000 witihin a year.

If Paulson were acting in good faith, he’d have nothing to fear from transparency. This looks like a back door move to me. He’s going to use the $700 billion from the bailout to buy non-voting equity in the banks. He’s going to use Fanny and Freddie to transfer the crap onto the taxpayer’s balance sheet.

I guess, then, “right now” is the key phrase.
Is there even one honest broker with a national platform, or are they all divided into one of 2 camps – knowing the score but cowardly enough to withhold the bad news so as not to get scalded for bringing down the markets with the truth, or deluded and not able to comprehend the scope?

Coordinated worldwide measures seems like the right track, would you agree Ian? What would the political fallout be in other countries, to a coordinated worldwide invalidation of CDS’s?

It doesn’t have much further to fall… to reach 7,000…!

I was surprised to see Mr. ‘Mad Money’ Cramer to say bail out for the next five years…!

This is a minor update of something I posted on the LLN thread, but I’m interested in Ian’s take on this suggested course of action.

Per MoonOfAlabama.org:

A really decisive move over the weekend would be to Declare All Credit Default Swaps Null And Void. That would solve 80% of the problems the banks have right now. Some would still fail, but with the big issue removed, interbank lending and commercial lending would carry less risk and revive.

IMHO, banks can’t afford to loan now, in part, because they have no idea what reserves they need to cover the credit-default swaps they’ve sold.

Think of the world of securities as a giant bookie ring, where anybody can bet on any thing. For example, you could bet that Lehman would default on their bonds even if you didn’t own any. And, I could cover that bet even though I don’t have a prayer of covering all of the Lehman defaults I’ve sold already.

Declaring those bets null and void would let swap sellers off the hook and leave the swap buyers high and dry in spite of the premiums they’ve payed. But, in fact, each month’s (or six-month’s) premium is for insurance for that period. The buyer has already gotten his/her coverage (fair value) for the period covered by that premium. That month’s premium is spent, and the value for it has already been received. So, I don’t feel that there is any (moral) to the buyers to refund past premiums for credit-default swaps.

And that’s why I say that Dr. Doom (Roubini) is being optimistic when he says that take on the order of a year.

Can’t resist a chance to link to Jim Cramer’s “Bear Stearns is fine.”

We need a “Branchflower Investigation” of Henry Paulson, eh?

Yes, now that the profits were privatized, Kramer wants us to socialize the losses.

How Cramer keeps a job, much less his hide…

Yes, now that the profits were privatized, Kramer wants us to socialize the losses.

My father used to call that “cry-baby capitalism.”

Bullseye.

Once Sherman was whittled down to a nub, isn’t it all “cry-baby capitalism?”
nite guys. i’m beat

Aloha, Newt! I’m joining ya…! *poof*

Russ Feingold voted against the bailout. I contribute to his Progressive Patriot’s fund. I’m going to email him a copy of Ian’s latest. Russ could lead a liberal revolt against Paulson’s massive abuse of Fannie and Freddie.

Good idea. Feingold seems to be the most intelligent and progressive voice in the Senate.

Nature loss ‘dwarfs bank crisis’

By Richard Black
Environment correspondent, BBC News website, Barcelona

http://news.bbc.co.uk/2/hi/sci…..662565.stm

The global economy is losing more money from the disappearance of forests than through the current banking crisis, according to an EU-commissioned study.

It puts the annual cost of forest loss at between $2 trillion and $5 trillion.

Instead this seems designed to help Hank’s friends offload trash, more than to clear a market blockage.

Which raises the question of what the “market blockage” really is. Why aren’t bankers making loans.

* Insolvency? The govt will buy their toxic assets and/or buy their non-voting preferred stock, providing that upper management is willing to relinquish their golden parachutes and other perks.

* Can’t make a profit? The govt is now loaning money to banks below the rate of inflation, i.e., at effectively a negative interest rate.

* Don’t know near term cash needs (see #19)?

Thanks T-Bear. A frightening perspective. But, it’s important to get a grip on the difference between “big” and “little.”

I tend to give Krugman the benefit of the doubt. He’s operating in good faith. It’s a consistent mistake from him, for example, he gave Bernanke a ton of rope. Sometimes being inside is good – you know things outsiders just can’t know. But it has its price.

I’m honestly not sure. I think, given their nature, it might not work out too badly.

I guess another way to ask the question might be: Who has been paying premiums on CDS’s and how do they view those payments — have they already received the expected benefits? If so then yeah, it seems that they should be fairly cool with seeing them fade away.

have they already received the expected benefits?

Which is the point I tried to argue in the affirmative at #19.

Sounds like we three have consensus, then. Who wants to the call to Hank?

It seems like Jane is the person who has the serious clout around here. She seems to have a knack for making things happen. ;-)

Paging Ms. Hamsher… Paging Ms. Hamsher…

But I’m not so sure about how much of the bankers’ reluctance to loan now is due to uncertainty about their CDSs.

I heard that today’s auction of Lehman bonds yielded 9.75 cents on the dollar and that a lot of swap sellers now have to pay up that other 90.25 cents. Big doo doo for them.

Yes, on the balance, probably best to cancel them. There are ways to fix them going forward, I talked to a friend about the math on them and he says it was done very very badly. Basically the random distribution on them is not such that, say, a 10 year CDS reduces risk by 10% a year. In fact, the risk is almost all not gone till it’s over. But the dipwads were booking the profit on them at 10% a year, as if the risk was gone.

They were also underestimating the risk severely.

They were also underestimating the risk severely.

Exactly! They were viewing this as “spreading the risk,” never thinking that there could be what system engineers call a “common-mode failure.” They were viewing each institution’s inability to pay up as independent events.

I had the (perhaps wrong) impression that a big part of the interbank lending freeze is because bank A has no way of knowing how much flaky CDS exposure bank B may have, that could make it difficult or impossible to make good on a new loan — so the loan doesn’t get made. Take all CDS’s out of the picture, and that part of the problem goes away.

I assume there are also several other classes of overleveraged higher-order derivatives causing problems too, that will probably need to be dealt with in other ways.

I’ve read that there are, in aggregate, $45T in notional value in CDSs, compared to 60T dollars on the entire planet. Getting rid of the CDSs would greatly simplify the problem. IIUC, we have something like $110 B of mortgages in default, a much more manageable number.

So if decreeing the death of the CDS makes so much sense, why wasn’t it the first thing everybody thought of?

I have no idea why the professionals didn’t get to this. I thought about it early, but developed what I now consider to have been an unreasonable sympathy for the purchasers of CDSs. I can imagine them as managers of pension funds, trying in good faith to minimize risk to their retiree clients. “Why should we let the greedy bastards who sold them that insurance off the hook?” So I set that idea aside until MoonOfAlabama (burkhard?) brought it up again.

And frankly, it was your questions that got me to rethink the buyer/seller relationship in the swap sale (and premium payment).

I mean there must be some significant downside, to somebody, that we’re not considering here.

Like anybody who gets their insurance cancelled, the purchasers of CDSs will be very shocked and disappointed. But, AFAIK, they’ve not prepaid for future insurance. Rather they pay period by period. Of course, their insurance likely has a non-cancellation clause, which is would be rendered void by world governments. So, they could protest that they are the ones getting screwed. But really, month-by-month they’ve gotten what they paid for. Now they can argue that they were paying not only for protection but for the right to continued protection, etc. And, in that sense they are getting screwed, unless the world governments want to simply purchase the sellers’ ends of $45T of credit default swaps. ;-)

Exactly. Events tend to cluster on this stuff.

What I think might be the case is this:

a lot of credit default insurance/swaps was used to meet reserve requirements and to allow people to buy stuff they normally by law wouldn’t be able to buy. So pension funds, say, might have to dump stuff if the CDSs went away, and banks would have to increase reserves against default because they would now have credit risks that were unsecured.

That’s my suspicion. I do know that credit insurance was used by banks heavily so they could take on risks they otherwise wouldn’t have to be.

So I suspect that cancelling CDS’s will cause accounting events.

The mortgages themselves are in highly leveraged instruments in many cases. But I agree, CDSs are complete out of control and at the very least need to be wound down until they either no longer exist or are done properly (no booking profits till the term is done, have to keep collateralized properly, no selling to people who don’t have an interest in the question at hand, etc…)

It would force them to reckon true risk costs… but how will they be able to know what that is any more than they do now? The not knowing is the problem.

Of course the bailout law drastically reduced or completely removed deposit reserve requirements.

So I suspect that cancelling CDS’s will cause accounting events.

The on-the-books risk of a lot of assets would go through the roof. The pitch on CDSs was always that they were purchasing their way out of risk, spreading the risk amortizing the risk. Many reassuring phrases that caused people to underestimate the risk. And now the fickle finger of fate has caught up with them.

but how will they be able to know what that is any more than they do now? The not knowing is the problem.

They know now that they didn’t know then. And the fact is that estimating risk, aka actuarial science is a very arcane art form, best left to the professionals. The rest of us, including the insittutional investors should be very cautious.

Cautious would be a refreshing break from rapacious.

Of course the bailout law drastically reduced or completely removed deposit reserve requirements.

Which leaves the question I posed at #32: Why the hell aren’t bankers loaning?

‘Cause while the rules would allow it, they’s a-feared the money won’t ever come back?

Cautious would be a refreshing break from rapacious.

“Rapacious” is an excellent word that I’ve used to deadly effect in various committee meetings.

‘Cause while the rules would allow it, they’s a-feared the money won’t ever come back?

IIUC, the only way we got out of the Great Depression was by getting money into the hands of the working class, especially via WW-II production salaries. The key thing is that those bombers and tanks weren’t capital investments and didn’t have anything to do with ending the Depression. We could have just as well dumped them in the ocean or, better yet, never built them at all and let the workers stay home a play bridge. My point is that all it took was getting money into the hands of the working class.

OK, but you asked about a bank lending to a bank.

Ah, sorry, I’m wrong about that!

OK, but you asked about a bank lending to a bank.

The key is to get the banks as a system to loan to non-banks, i.e., state and local governments, businesses, universities, school districts, etc. I suppose that for that to happen they have to loan to each other.

Getting that $45T of CDSs off their books should help; with those hanging around nobody knows what they might owe and/or what the banks they might loan to might owe. The second thing they should do is go back to mark-to-market accounting, so the solvent banks can tell who is truly insolvent. I guess that the third thing would be to get money into the hands of the insolvent banks by buying what Ian calls Buffet shares (which are IIRC voting preferred shares that get 10% return befor any other dividends get paid, and have an attached coupon for a common share. Or something like that.

Oops! It’s 3:00am here, well past my bed time.

Thanks for the discussion. It was enjoyable and really helped.

G’nite.

I thought mark-to-market had the problem that it was way too quick to take assets of any unconfidently-known values all the way down to zero value (balance-sheet-wise) in a down market, and that produces your solvency crisis. So maybe a modified, more finely-grained “Son of Mark to Market” this time?

Yeh, I have to sign off too, almost 3:00am here. Hope other folks will continue, I’ll check in in the morning.

IMHO the problem for the lender is to know who is insolvent and who isn’t. If they have permission to lie to you, then you have to assume that they are all insolvent, regardless of what their books say.

Thanks again. Later.

Thanks much, wigwam, this has been good.

Excellent thread, thanks to all.

Goldman Sachs is a name being burned into the brains of every person who will not be retiring.
Goldman Sachs is a name to be passed down to the next generation.

I said from the very start, congress can NOT give this money to the very theives that stole it in the first place

paulson is a theif, he is one of thSUe people responsible for the crash, we are OUT OF OUR MINDS giving this very theif ANY kind of money

congress needed to simply give him a 100 billion tops and kick it down the road

now, there us SUPPOSEDLY oversite, let’s make sure they use it

we need to man the phones and make CERTAIN paulson doesn’t get this money to his friends

the name burned into our brains is reagan, bush, paulson.

now, we NEED to get congress to rescind any money that is given away in this rediculous gift back to theives

we need to rebuild our infrasturcture it is in disrepair

we need to begin the new industries of cooling the planet and alternative fuel

that gets the money into the working class and we get product out of it

Was away getting taxes into the post, hope you get this later.

A frightening perspective. But, it’s important to get a grip on the difference between “big” and “little.”

I think there is an even more important distinction to be made, that is between actual economic utility and the artificial activity devised as “superstructural” to actual economic activity; this from a definition of economics as comprised of meeting mankind’s ecological needs, wants, desires and the superstructures mankind has devised to further meet those economic needs, wants, desires.

I read the study as putting an economic value upon what land produces in the form of forests annually. What the banking bailout represents is a scheme by which certain institutions are facilitated in parking enormous liquid assets (moneys) in a manner that provides maximal returns on those assets without actually having to produce those returns in the actual producing economy which would not be able to sustain those returns directly. This scheme, like its Ponzi precursor, will work provided there is no limit to spread and growth; but will collapse when faced with limitations (and knowledge). What the bailout is is simply the attempt to put the costs of the Ponzi scheme onto the books of the actual productive economic system. Either the Ponzi scheme is allowed to fail, or the possibility of bringing down the productive economic system becomes at some point overwhelming.

Good morning! You made some excellent points. The only thing that I would add is that we need to bring our soldiers home. It’s time for us to stop pumping money into Iraq.

I think Krugman is on the optimistic side of things right now.

That is certainly not the feeling that I get when I read his blog.

Thanks for the link. (I think) Krugman’s blog gave me the chills especially when I read the following. And while I generally despise body language/tone of voice stuff, I have to say that Paulson sounds terrified.

W doin’ more cheerleading on bailout plan.

W sounds drunk. Slurring words badly.

W threatening other nations that they have to do what U.S. wants them to do. Sounds like Iraq Plan.

damn straight the US has a special role to play in this, we started this mess.
what a moran.

oh and Good Morning

What I think Krugman is doing, particularly in his blog and on his appearances on TV (Rachel gets him a lot) is letting everyone know exactly how unnerved he is without screaming “run for your lives” with his hair on fire. It’s a delicate balancing act.

Paulson looked sick! Let’s just hope that he has the flu.

Kudos for having the intestinal fortitude to listen to him. I simply can’t do it. I turn the radio off or mute the TV lest I start raving and breaking things.

I think Krugman’s right, he’s scared to death.

That is my normal approach. However, I as pouring coffee when he started, and since he can’t talk about this for more than 6 consequative sentences, I left the sound on.

Ha. Host on WJ just articulated the “paradox of thift” without knowing it. That is, if consumers start saving now, as Roubini is saying, the economy will plummet.

Do we have any guesses on whether or not the MSM will cover Palin’s abuse of power! I think that we will all watch in horror as the MSM continues pushing the Ayers story and gives the Palin’s 30 seconds.

Morning all, It is pretty early here Not sure I can be coherent but in grad school I read a book that had a impact on me. “The Structure of Scientific Revolution” by Thomas Kuhn. Part his thesis was that as a paradigm begins to be unable to provide answers to the questions that need to be answered some will look for a new paradigm that will answer those questions. We can see this happening today in the area of physics with the evolution of string theories. It has been my belief for a very long time that economic theory has been fundamentally flawed and that the flaws are more fundamental than what we are seeing now. One of these flaws that I see is the concept that it is either growth or death and that growth has been pushed to a frenzied pace without any concern for the consequence of that growth. Thus we see this fixation with things like productivity and absolutely no concern to quality. We should be striving quality. What I would like to see us move to is a 4 day 32 hour work week with incomes at a place that can maintain a quality life.

Seconded.

Thanks for the link.

Many want to blame Greenspan for extended period of low interest rates, without realizing that if he hadn’t done that the economy would have been in long run doldrums starting in the 1990s. So the choice was between that and a bubble and crash. That’s the way the discussion should be framed. Then you can argue either side.

Actually what little I have seen the coverage has been extensive.

I believe they will try to make “the abuse of power” charge look like a democratic witch hunt even though it was a largely republican board

they can do that, they own the media

in addition, the wing nuts will look at that abuse of power as a badge of honor.

so long as it is a republican it’s a good thing, so long as it’s a democrat it becomes an impeachable offence

true

Well, we’re about to go help the economy then. Shopping for bird seed, and then a trip to Sam’s Club to stock the freezer and pantry. This year I’m looking much more deeply into dried beans — tasty, full of fiber, and if I save some out I can plant them in the garden come spring…

isn’t the real problem the fantasy derivatives where investments of real money were made in actually meaningless pieces of paper?

but what about a bubble and then a soft landing?

why couldn’t that be orchestrated?…was it bush’s desire to always make the economy appear to be doing well?

There’s nothing wrong with economic theory that requires a new paradigm. The trouble is that U.S. economic policy has been captured by the economic equivalent of christian fundamentalists, i.e., economic extremists.

More mainstream economics (to continue the religious analogy) has become increasingly shoved aside, but it contains many of the tools needed to have handled the stituation better.

Your short version is accurate enough.

but what about a bubble and then a soft landing?

Nope. Can’t be done.

I agree, but the GOP rode that bubble and demolished legitimate regulation on the way. Among other things, the GOP rode the housing bubble to two wars of choice and disinvestment in education and infrastructure. At least after a railroad bubble or an internet bubble, you still are left with working railroads and a working internet.

Won’t happen. Just like if my employer decides it can’t sustain enough workers, we go to running a pharmacy with 3 techs, 2 pharmacist and no one else. With no compensation at all in terms of living wage. I’ll be one of the 3 techs, but there will be no such thing as a living wage given to those of us keeping the business running. To the point where we make them more money than the 5 of us are worth on a weekly basis.

softer then the landing we are going through now though?

And where are my manners? Good morning, pups. It’s Collins and Herbert today. Ms. Collins is nostalgic for the “Dear Old Golden Dog Days.” She says she misses the good old days. She misses August. August was neat. The Dow was over 10,000 and nobody had ever heard of Gov. Sarah Palin. I does seem like years ago, doesn’t it? I wonder if McCain threw her off the plane too… Mr. Herbert points out that “The Mask Slips.” He says the G.O.P. has masked the terrible consequences of much that it has stood for over the decades. Now the mask has slipped. And McCain gets booed at his rallies by knuckle-walking throwbacks for calling Obama a decent man while the economy is in shambles, Iraq drags on and New Orleans is still on its knees.

http://mgpaquin.wordpress.com/

The coffee and tea are ready, and I’ve got corn muffins today. More rain for us last night, and it seems like more is on the way. We’re pleased beyond words. I hope that the rest of the state is also getting some… Have a great day.

Have you read Charles R. Morris’ “THE TRILLION DOLLAR MELTDOWN?” Ian hosted him at an FDL book salon. He does not share your compassion for Greenspan.

The trouble is that U.S. economic policy has been captured by the economic equivalent of christian fundamentalists, i.e., economic extremists.

That’s got to be the clearest, most succinct explanation for what’s going on that I’ve heard. Thanks.

There’s nothing wrong with economic theory that requires a new paradigm. The trouble is that U.S. economic policy has been captured by the economic equivalent of christian fundamentalists, i.e., economic extremists.

echanomics, barak could take that and stick it in one of his speaches, that would play PERFECTLY!

It was definitely possible to shave some off the top of the bubble, regulate better, especially on leverage & worthless derivatives & CDSs, and then the landing would have been gentler. But the landing depends on what was done during the bubble. Without managing that, you gotta take what you get afterwards.

The fundamental problem is that the consumer is the engine of the economy and the healthy underpinning of consumer spending is growth in real income, and that just ain’t happening. So policy makers pursued policies to get consumers to send by borrowing. And we see the result.

egregious is upstairs.

Nope. Wasn’t on deck for that book salon.

Egregious invites us to Pull Up A Chair upstairs.

this all reminds me of the tulip craze back in Holland in 1634-1637

THANX ecahn for that explanation

now if barack would take these two paragraphs and string them together, we have a winning platform, the only thing I would edit is that now overused word “fundamental” it has become the new “groovy”

The trouble is that U.S. economic policy has been captured by the economic equivalent of christian fundamentalists, i.e., economic extremists.

The fundamental brutally ovious problem is that the consumer is the engine of the economy and the healthy underpinning of consumer spending is growth in real income, and that just ain’t happening. So policy makers pursued policies to get consumers to send by borrowing. And we see the result.

So policy makers pursued policies to get consumers to send by borrowing. And we see the result.

Unions for example pressured Democrats to raise CAFE (Corporate Average Fuel Economy)standards, so US Auto manufacturers could sell more gas guzzlers. This increased crude imports and a huge wealth transfer. If we had invested/borrowed to make more fuel efficient cars, we would have transferred less wealth out of the US and been increasing value and the sustainability of the US economy.

Bear was OK until JPMC got a look at their book and saw a $12 million long position in gold. As JPMC is typically short on gold, it was an aha! moment. Thus the delay from March to April 8, which gave them time to drive the price of gold down $100, and merging the shorts and longs, they were laughing all the way home.

it would have also been investing in the new technology that was needed for efficiency, we could be half way there to energy independance if that magot named reagan didn’t rescind the programs put into place by carter to make us secure

these republicans have torn down this country and her future

According to Christopher Hitchens, Congress willingness to bend over at the drop of a hat is an essential element of what constitutes a banana republic. Ours is a banana republic. Mmmmmmm, bananas!

Have you seen Soros on Moyers last night. A man Hungary during the communist/Fascist struggle in Europe as the world was sliiding into war as Hitler’s imperialism was enacted. It was economics. Socialism vs. FAscisim. How much influence government has in market distribution.
He is opposed to Paulson in the drivers seat.
He prefers well regulated free markets. Soros says for almost 3 decades the markets have been building up to this meltdown upon the edge we are teetering. They waited 3 months to long to get in to fix it. They are using the wtrong approach, He favors the Buffet approach of buying the banks stock to recapitalixe the financial industry. Reregulating and controlling leverage.
We are in for quite a stretch of contraction.

Feeling mighty good… I inadvertently ended up as a front pager here and the BoSox won game 1…! :D

Please do so again for the same effect!!

Go Sox!

Congress will not return to session until after the election break…so that gives Paulson all the time he wants to utilize the “privileges” to rape the Treasury and future middle class taxpayers as best he can. We definitely need to use the returns of our Congresspersons to pressure them to rescind many of the provisions of this law. The problem, of course, is it’s law…and it could easily be vetoed by Bush, now. And who knows whether the lameduck Congress would jump away from Bush (as they are certainly going to get lucrative jobs from the Banks and Financial Houses if they support Paulson).

But it could obliterate any future chance for them to run for office in their districts. I’d suggest that folks like Donna Edwards, Feingold, etc. at least push revisions. Maybe they could get some votes on the record that could be used for progressive opponents down the road.