Hitchens brings me back into the fold

From this month's Vanity Fair:

In a statement on the huge state-sponsored salvage of private bankruptcy that was first proposed last September, a group of Republican lawmakers, employing one of the very rudest words in their party’s thesaurus, described the proposed rescue of the busted finance and discredited credit sectors as “socialistic.” There was a sort of half-truth to what they said. But they would have been very much nearer the mark—and rather more ironic and revealing at their own expense—if they had completed the sentence and described the actual situation as what it is: “socialism for the rich and free enterprise for the rest.”

I have heard arguments about whether it was Milton Friedman or Gore Vidal who first came up with this apt summary of a collusion between the overweening state and certain favored monopolistic concerns, whereby the profits can be privatized and the debts conveniently socialized, but another term for the same system would be “banana republic.”

What are the main principles of a banana republic? A very salient one might be that it has a paper currency which is an international laughingstock: a definition that would immediately qualify today’s United States of America. We may snicker at the thriller from Wasilla, who got her first passport only last year, yet millions of once well-traveled Americans are now forced to ask if they can afford even the simplest overseas trip when their folding money is apparently issued by the Boardwalk press of Atlantic City. But still, the chief principle of banana-ism is that of kleptocracy, whereby those in positions of influence use their time in office to maximize their own gains, always ensuring that any shortfall is made up by those unfortunates whose daily life involves earning money rather than making it. At all costs, therefore, the one principle that must not operate is the principle of accountability. In fact, if possible, even the similar-sounding term (deriving from the same root) of accountancy must be jettisoned as well. Just listen to Christopher Cox, chairman of the Securities and Exchange Commission, as he explained how the legal guardians of fair and honest play had made those principles go away. On September 26, he announced that “the last six months have made it abundantly clear that voluntary regulation does not work.” Now listen to how he enlarges on this somewhat lame statement. It seems to him on reflection that “voluntary regulation”

[It] was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate of the program and weakened its effectiveness.


Yes, I think one might say that. Indeed, the “perceived mandate” of a parole program that allowed those enrolled in it to take off their ankle bracelets at any time they chose to leave the house might also have been open to the charge that it was self-contradictory and wired for its own self-destruction. But in banana-republicland, like Alice’s Wonderland, words tend to lose their meaning and to dissolve into the neutral, responsibility-free verbiage of a Cox.

And still, in so many words in the phrasing of the first bailout request to be placed before Congress, there appeared the brazen demand that, once passed, the “package” be subject to virtually no more Congressional supervision or oversight. This extraordinary proposal shows the utter contempt in which the deliberative bodies on Capitol Hill are held by the unelected and inscrutable financial panjandrums. But welcome to another aspect of banana-republicdom. In a banana republic, the members of the national legislature will be (a) largely for sale and (b) consulted only for ceremonial and rubber-stamp purposes some time after all the truly important decisions have already been made elsewhere.

I was very struck, as the liquefaction of a fantasy-based system proceeded, to read an observation by Professor Jeffrey A. Sonnenfeld, of the Yale School of Management. Referring to those who had demanded—successfully—to be indemnified by the customers and clients whose trust they had betrayed, the professor phrased it like this:

These are people who want to be rewarded as if they were entrepreneurs. But they aren’t. They didn’t have anything at risk.

That’s almost exactly right, except that they did have something at risk. What they put at risk, though, was other people’s money and other people’s property. How very agreeable it must be to sit at a table in a casino where nobody seems to lose, and to play with a big stack of chips furnished to you by other people, and to have the further assurance that, if anything should ever chance to go wrong, you yourself are guaranteed by the tax dollars of those whose money you are throwing about in the first place! It’s enough to make a cat laugh. These members of the “business community” are indeed not buccaneering and risk-taking innovators. They are instead, to quote my old friend Nicholas von Hoffman about another era, those who were standing around with tubas in their arms on the day it began to rain money. And then, when the rain of gold stopped and the wind changed, they were the only ones who didn’t feel the blast. Daniel Mudd and Richard Syron, the former bosses of Fannie Mae and Freddie Mac, have departed with $9.43 million in retirement benefits. I append no comment.

I was against it, before I was for it

Here's Paul Krugman on Rachel Maddow's show bemoaning the failure of the bailout. He was one of the morons arguing the bailout MUST be passed. Now he's saying the bill was a terrible idea, time to go back to the drawing board . . . Ooh! He's angry! (Must be all that egg on his face.)

That trillion would have come in handy right about now.

It's official, the bailout is a failure

It’s official! The bank bailout has not worked.
-Peter Morichi, University of Maryland

If policymakers think that adding extra liquidity is going to solve the credit crunch on its own, they are going to be sorely disappointed. This is because upward pressure on interbank rates is a consequence, not a cause, of the crisis.

It is a shortfall of bank capital that has made financial institutions reluctant to lend to one another. Boosting liquidity is therefore only a necessary, but not a sufficient, condition for stabilising the financial sector. In fact, until banks are adequately recapitalised, funding pressures may even get worse.
-John Higgins, Capital Economics

Quick! Let's throw several more trillions down the drain before we have any idea what is really going on. The market needs to finish "correcting," then we can look for solutions. We deregulated and encouraged massive bubbles, and the bill came due. We planted the bulbs, and our tulips are blooming.

All you bushy-tailed optimists that insisted the bailout had to go through, or else: Fuck you! Running around half-decapitated has only made the hole bigger. Bet that last trillion we wasted still goes into bonuses.

The worse it gets, the better it gets. Pt I: Crisitunity!

The Senate passed the awful bail-out bill. As time progresses, my opposition has gelled. More on this later. But, at best, the bailout will keep things from deteriorating further, and at worse it will add massively to the debt while our economy contracts.

Jerry Mead-Lucero at Pilsenprole sees the silver-lining:

So now their lies are clear to all. NEO-LIBERALISM IS DEAD! We must repeat this everywhere and anywhere. It has to permeate all our discussions. The neo-liberal mantras that the ideologues deafened us with for decades finally ring hollow for nearly everyone. We must take the ideological offensive at this moment of crisis/opportunity. Because - beware – the neoliberal spin machine is already hard at work fashioning twisted logic to maintain their lock on the minds of many Americans. Take for instance the announcement today of a rejection of the most recent version of the bailout plan, being attributed primarily to conservative Republicans. Only in America, could the economic elite who have robbed us blind and created the crisis, then come off looking like populist Robin Hoods, rejecting billions for a “greedy few” on Wall Street. And what do they demand as their alternative to the Paulson plan – MORE DE-REGULATION AND TAX CUTS FOR CORPORATIONS AND THE EXTREMELY WEALTHY! It is time to end the surreal madness of U.S. politics . . . So where is the “opportunity” that I refer to in the title of this blog entry? Well let’s take a look at what the last Great Depression ultimately resulted in – Social Security, FDIC, the WPA, the FHA, the SEC, the TVA, and let’s not forget the 8 hour day and the 5 day work week. All the stuff that the ruling class has sought to dismantle in the last 3 decades.

I like how MoveOn.org isn't trumpeting their role in the failure of the bill to pass the House. Grow some cojones, You sent me the numbers to call! But, they had the right idea. Let's get to work on a good, long-term solution. This would be the time to get that done, with Bush in the cellar and the economy tanking, but that WON"T happen if there isn't a strong movement pushing for this. The first step is the left owning its role in tanking the bail-out, and the realization that it took a deep dive into the Depression for all the "progressive" legislation we hold so dear.

Props to the NY Post for their beautiful cover today:

Ask Dr. Farley

He has a Master's Degree in the Apocalypse.

Ask an Apocalypse Specialist

Dear Dr. Farley,

Should I be preparing a boat or a car?

Distressed in DC

Dear Distressed in DC,

The failure of the modern energy transportation network will make such distinctions irrelevant. It would be better to ask "horse or bike?" I recommend the former; horses can swim, and in a pinch can be eaten.

Dear Dr. Farley,

Is cannibalism really as bad as they say?

Preparing in Peoria

Dear Preparing in Peoria,

As in all things, it depends on who you're with.

"Loss Aversion and the Stock Market"

I thought a lot of the share transfers now occurred automatically following a set algorithm. If that is true, how does that amplify loss aversion? Sell! Sell! Sell!

The Frontal Cortex : Loss Aversion and the Stock Market

Over the next few days, lots of people are going to be poring over their investment portfolio, trying to figure out which stocks to keep and which stocks to sell. Unfortunately, many of these investors will make the exact same mistake, causing them to lose vast sums of money over the long term.

The problem is loss aversion. Kahnemanandtversky stumbled upon loss aversion after giving their students a simple survey, which asked whether or not they would accept a variety of different bets. The psychologists noticed that, when people were offered a gamble on the toss of a coin in which they might lose $20, they demanded an average payoff of at least $40 if they won. The pain of a loss was approximately twice as potent as the pleasure generated by a gain. Furthermore, our decisions seemed to be determined by these feelings. As Kahneman and Tversky put it, "In human decision making, losses loom larger than gains."

Loss aversion also explains one of the most common investing mistakes: investors evaluating their stock portfolio are most likely to sell stocks that have increased in value or, during a week like this, have gone down the least amount. Why? Because it hurts to take a loss. Unfortunately, this means that people end up holding on to their depreciating stocks. Over the long term, this strategy is exceedingly foolish, since it ultimately leads to a portfolio composed entirely of shares that are losing money. (A study by Terrance Odean, an economist at UC-Berkeley, found that the stocks investors sold outperformed the stocks they didn't sell by 3.4 percent). Even professional money managers are vulnerable to this bias, and tend to hold losing stocks twice as long as winning stocks. Because selling shares that have decreased in value makes the loss tangible - and losing sucks - we try to postpone the pain for as long as possible. The end result is more losses.

Take a hint: refuse to panic

“You don’t make the biggest financial decision in the history of this country in a few days’ time without hearings.”

-Rep. John Yarmuth, KY(D)

And in case anyone missed it:

European shares were mixed Tuesday, following a similar pattern in Asia, as investors refused to panic about the failure of American lawmakers to pass a financial bailout and were encouraged by gains in futures contracts on Wall Street indexes.

So nice of them to "refuse to panic." What a joke.

Seriously, the bailout sucks

Uncle Joe Stiglitz has an awesome break-down of the bail-out at The Nation. (Awesome because I agree with it. Nice to have someone of his stature backing me up on this.)

. . . the banks realized that they were about to get a free ride at taxpayers' expense. No private firm was willing to buy these toxic mortgages at what the seller thought was a reasonable price; they finally had found a sucker who would take them off their hands--called the American taxpayer.

The administration attempts to assure us that they will protect the American people by insisting on buying the mortgages at the lowest price at auction. Evidently, Paulson didn't learn the lessons of the information asymmetry that played such a large role in getting us into this mess. The banks will pass on their lousiest mortgages. Paulson may try to assure us that we will hire the best and brightest of Wall Street to make sure that this doesn't happen. (Wall Street firms are already licking their lips at the prospect of a new source of revenues: fees from the US Treasury.) But even Wall Street's best and brightest do not exactly have a credible record in asset valuation; if they had done better, we wouldn't be where we are. And that assumes that they are really working for the American people, not their long-term employers in financial markets. Even if they do use some fancy mathematical model to value different mortgages, those in Wall Street have long made money by gaming against these models. We will then wind up not with the absolutely lousiest mortgages, but with those in which Treasury's models most underpriced risk. Either way, we the taxpayers lose, and Wall Street gains.

Here are the reasons Congress should not hand the Treasury $700 billion.

There are four fundamental problems with our financial system, and the Paulson proposal addresses only one. The first is that the financial institutions have all these toxic products--which they created--and since no one trusts anyone about their value, no one is willing to lend to anyone else. The Paulson approach solves this by passing the risk to us, the taxpayer--and for no return. The second problem is that there is a big and increasing hole in bank balance sheets--banks lent money to people beyond their ability to repay--and no financial alchemy will fix that. If, as Paulson claims, banks get paid fairly for their lousy mortgages and the complex products in which they are embedded, the hole in their balance sheet will remain. What is needed is a transparent equity injection, not the non-transparent ruse that the administration is proposing.

The third problem is that our economy has been supercharged by a housing bubble which has now burst. The best experts believe that prices still have a way to fall before the return to normal, and that means there will be more foreclosures. No amount of talking up the market is going to change that. The hidden agenda here may be taking large amounts of real estate off the market--and letting it deteriorate at taxpayers' expense.

The fourth problem is a lack of trust, a credibility gap. Regrettably, the way the entire financial crisis has been handled has only made that gap larger.

Paulson and others in Wall Street are claiming that the bailout is necessary and that we are in deep trouble. Not long ago, they were telling us that we had turned a corner. The administration even turned down an effective stimulus package last February--one that would have included increased unemployment benefits and aid to states and localities--and they still say we don't need another stimulus. To be frank, the administration has a credibility and trust gap as big as that of Wall Street. If the crisis was as severe as they claim, why didn't they propose a more credible plan? With lack of oversight and transparency the cause of the current problem, how could they make a proposal so short in both? If a quick consensus is required, why not include provisions to stop the source of bleeding, to aid the millions of Americans that are losing their homes? Why not spend as much on them as on Wall Street? Do they still believe in trickle-down economics, when for the past eight years money has been trickling up to the wizards of Wall Street? Why not enact bankruptcy reform, to help Americans write down the value of the mortgage on their overvalued home? No one benefits from these costly foreclosures.

The administration is once again holding a gun at our head, saying, "My way or the highway." We have been bamboozled before by this tactic. We should not let it happen to us again.

Instead, put the gun down, and consider these simple ideas for how to structure the bailout:

The objective of the bailout should not be to protect the banks' shareholders, or even their creditors, who facilitated this bad lending. The objective should be to maintain the flow of credit, especially to mortgages. But wasn't that what the Fannie Mae/Freddie Mac bailout was supposed to assure us?

There are alternatives. Warren Buffet showed the way, in providing equity to Goldman Sachs. The Scandinavian countries showed the way, almost two decades ago. By issuing preferred shares with warrants (options), one reduces the public's downside risk and insures that they participate in some of the upside potential. This approach is not only proven, it provides both incentives and wherewithal to resume lending. It furthermore avoids the hopeless task of trying to value millions of complex mortgages and even more complex products in which they are embedded, and it deals with the "lemons" problem--the government getting stuck with the worst or most overpriced assets.

Finally, we need to impose a special financial sector tax to pay for the bailouts conducted so far. We also need to create a reserve fund so that poor taxpayers won't have to be called upon again to finance Wall Street's foolishness.

Praise the Lord, I finally found someone who looked at what this might mean for the debt. Stiglitz asserts our debt is now $9 Trillion, so my earlier figure was on the board. Looks like NYT was looking at an outdated figure?

If we design the right bailout, it won't lead to an increase in our long-term debt--we might even make a profit. But if we implement the wrong strategy, there is a serious risk that our national debt--already overburdened from a failed war and eight years of fiscal profligacy--will soar, and future living standards will be compromised. The president seemed to think that his new shell game will arrest the decline in house prices, and we won't be faced holding a lot of bad mortgages. I hope he's right, but I wouldn't count on it: it's not what most housing experts say. The president's economic credentials are hardly stellar. Our national debt has already climbed from $5.7 trillion to over $9 trillion in eight years, and the deficits for 2008 and 2009--not including the bailouts--are expected to reach new heights. There is no such thing as a free war--and no such thing as a free bailout. The bill will be paid, in one way or another.

Hat tip to Rdan. Check out the comments if you have steel stomach.

Cutting off one's nose? House rejects Wall St. bailout!

The House just voted down the bailout. Bam! Luckily, I had Veuve Clicquot on ice for just such an occasion.

TV punditocracy is saying the Leadership didn't work hard enough to sell the bailout, and people don't understand this will affect their ability to get loans, etc. While few people truly understand the bailout (I don't), I think most understand there is a serious crisis looming. People are pissed at these fat cats who have been gorging themselves the past eight years, and I think many feel the satisfaction I do at cutting our nose to spite the gluttons' face. We'll see if businesses can't meet payroll because of this, but gauging from Drew Pooters, unpaid labor doesn't cause enough of a stir in this country.

Two cents: there's no guarantee this thing would have worked. If the system stinks, why would this do the trick? And if it didn't, how many more trillions would we throw in the hole? And what about inflation? And the debt?

Congress should cancel its vacation and take the time necessary to figure this thing out. The markets will wait for them.

By the early-trading's light

So it looks like there's finally a bipartisan agreement, reached just in time before our Masters began early trading in the Asian markets, but, fingers crossed, it still has to get voted on.

A part of me still wants the deal to fall through, but not to feed my schadenfreude. I'm not the only one. Kos has been railing about the lack of transparency in the plan, and underhandedly praising Republican roadblocks. Here's the latest:

The congressional leadership has some sort of deal, 110 pages long (or so), that people are supposed to digest and vote on tomorrow. Whatever the details of the bill might be, the fact that the leadership of both parties have refused to take a breath and explore alternate and less costly (to the taxpayers) options is a disgrace. The only question is whether the rank and file will vote for this thing, and given that the voters aren't happy, we'll see what happens.

And it's always nice to see The Editors on one's side:

Yes, their reasoning was cynical at best; yes, they eventually moved from Devil’s Advocates to Satan’s Assholes; and, yes, there was always the suspicion - since confirmed a few billion times over - that, were they actually put in charge of things, they’d fuck it all up just for the hell of it. But, while annoying, there can be a certain value to being the asshole who responds with a dismissive “O RLY?” to everything you say. I generally valuate this in inverse proportion to my ability to understand the assertion being made; in the case of throwing $700 billion dollars at some kind of fancy Wall Street clusterfuck, for example, I actually value it pretty highly.

It looks like one of my biggest concerns might actually becontemplated in the bail-out plan:

The final version of the bill included a deal-sealing plan for eventually recouping losses; if the Treasury program to purchase and resell troubled mortgage-backed securities has lost money after five years, the president must submit a plan to Congress to recover those losses from the financial industry. Presumably that plan would involve new fees or taxes, perhaps on securities transactions.

Today's NYT had the following nice graphics on the national debt and the bailouts, and they stated it stood at $5 Trillion. On the one hand, that's half what I thought, but on the other that means the debt would be growing by 20%, not a measely 10%. Really, I will not be satisfied until the national debt is in a snug lock-box so it can't grow another penny.

Which primate's on top?

I wanted to live-blog the debate, but my wireless router wasn't working properly. I changed the DNS addresses and got back online but surfing molasses. Currently mobile blogging. I don't know that I would have added anything useful to the mass of punditry out there, so just as well. I'll link to an overview soon as I can.

I was trying to gauge if one of the candidates was dominant over the other, but not that much stood out. There's some talk that McCain made NO eye contact with Obama, indicating repressed anger and/or primate submission. I've read complaints about Obama offering too much praise to earlier McCain decisions or stances, and this might prove useful to future McCain ads, but for the unfiltered debates it seemed a dominance display. Patting McCain on the head while putting him in his place. I didn't feel Obama held back on criticizing the other Senator. If this was McCain's area of expertise, then young sizzle owned the old coot.

Let them sweat a little

Whatever their motives, I am so glad those elephant humpers put a halt to that charade of a thumbs-up photo-op they had planned for yesterday afternoon. I called my two Senators and Rep (PA) to complain about the damn bail-out, and I was shaking with anger. That probably had to do with low glucose levels, but it certainly added to the effect. Probably need to see a doctor about that. On the upside, my blood pressure is A-OK.

I certainly wasn't the only one calling blinded by rage. I had to try several times to reach the Senators--lines were busy or went to voicemail, and the inboxes were full. The staff for Casey and Specter were like zombies, completely flat, listened to what I had to say, and said nothing in return. I think they've been taking a serious beating. It pisses me off when I hear on TV that only conservatives are complaining. My district's Rep seems a lot more relaxed. I had a long conversation with staffers who discussed their support for Barney Frank's proposals. Helped calm me down a bit.

What is our GDP? $13 Trillion? Our debt is $10 Trillion? Just throw another Trillion on there. Can't hurt. Except there are no guarantees any bail-out will work, and if it gums the system up even more adding a Trillion in debt is going to help who exactly? At this point, I see no way that the faith in the greenback can be maintained, which means we will be forced to live within our means as we watch GDP slowly decline over the short term. Why do I see no discussion of the debt in all of this?

I know Germanicu$ is sure these "unpriceable" assets are worth so much more than the confused market claims, and the NYT printed this crap to back him up, but if the going rate is zilch you don't rush in offering a premium. Chrysler is no example. That was one company that produced durable goods. Here you're looking at a systemic problem, and I don't see how it can be solved through a rapidly appreciating I.O.U.

There's other reasons why I think this whole thing smells funny:

Here's one from Devilstower, at DailyKos, asking, Why can't the good assets be sorted out from the bad ones?:

Now the real question: how many of those loans are in trouble?

Foreclosures were up a steep 79% in 2007, reaching just over 1% of mortgages. The numbers are up again so far in 2008 (though not as steeply). We could top 2% in default this year or next. There are some expectations that foreclosures could triple from today's historically high levels, meaning ultimately 3% of mortgages could be in trouble.

And that's where we get that math problem. 1% of all mortgages -- the amount now in default -- comes out to $111 billion. Triple that, and you've got $333 billion. Let's round that up to $350 billion. So even if we reach the point where three percent of all mortgages are in foreclosure, the total dollars to flat out buy all those mortgages would be half of what the Bush-Paulson-McCain plan calls for.

Then we need to factor in that a purchased mortgage isn't worth zero. After all, these documents come with property attached. Even with home prices falling and some of the homes lying around unsold, it's safe to assume that some portion of these values could be recovered. In the S&L crisis, about 70% of asset value was recovered, but let's say we don't do that well. Let's say we hit 50%. Then the real outlay for taxpayers would be around $175 billion.

Which, frankly, is a number that Wall Street should be able to handle without our help. After all, the top firms on Wall Steet payed out $120 billion in bonuses alone between 2000 and 2006. If they've got that kind of mad money, why do they need us to step in now? And why do they need twice as much as all the mortgages that are even likely to implode?

In going for $700 billion, what the Bush administration is saying is:

Our pals on the street have been very creative in coming up with instruments in which they've entangled bad mortgages with good mortgages, and rather than untangle them, would rather we keep them from all that difficult paperwork.
Oh, and while we're at it, we might as well buy up a chunk of the swaps and derivatives that were created in an unregulated shadow market so they could double-triple-quadruple dip on the value of these loans.

There's a few more reasons in this mortgage protest from economists, including several from my own grizzled institution of higher learning:

To the Speaker of the House of Representatives and the President pro tempore of the Senate:

As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:

1) Its fairness. The plan is a subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.

2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.

3) Its long-term effects. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America's dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.

For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come.

Just to make sure no one thinks I'm letting Republicans off the hook, Ken Houghton at Angry Bear, explains why golden parachutes and bankruptcy protection do matter:

Let me say this slowly, so even a NYT reporter can understand it: If you are taking an equity stake in a firm, one factor is how much cash the firm will have on hand. Cash paid to executives is not cash on hand, nor can it be used to produce future capital, investments, and free cashflow, or even "the miracle of compound interest." So executive pay is very much a factor in equity calculations.

Changing the bankruptcy laws is more tangential, but let's again explain this slowly. Mortgage-backed securities are, well, backed by mortgages. Their value depends directly on those payments. If it becomes easier to workout a mortgage in bankruptcy court, the holders of those MBSes are liable to (1) receive a higher value and (2) know sooner how severely their securities are impaired. So changing the bankruptcy law will, again, make the value of the assets clearer sooner. Which is especially important if we're all going to pretend that this thing is going away after two years.

Let Wall Street stew in its juice a little bit longer, and figure out a way to get it to pay for the bulk of this mess.

I'm seeing black helicopters

When Bush entered office, he quickly got rid of a budget surplus, arguably to prevent Congress from doing anything productive--such as solving the health care crisis. Now, the bookend, he's in crisis mode asking for a massive increase in the national debt with a figure the Treasury admitted it pulled out its ass. Any chance this is a ploy to prevent the next Congress doing anything useful for the foreseeable future? No one's going to support additional expenditures once this boondoggle passes.

Nut Cutting Time

Too busy spit-polishing my douche-boots to blog, so I'll just crib the tubes.

A good friend posted this to my facebook in response to my Cranky McCrank (and no, you can't friend me):

cranky? how about fuckin pissed. the trick is either that the $1 trillion is enough, or they don't have a fuckin clue and it is just the tip of the iceberg (not to mention the $30 billion bear stearns bailout, the $150 billion "stimulus" checks) - either way, I hope the lesson isn't lost that there is enough money out there to cover real human demands (if the iraq occupation didnt already let us know that). universal health care should be right around the corner, free college? infrastructure development? rehabing neighbor schools?

but really, if they knew for sure that $1 trillion was enough that suggests the firms know how much bad debt they have, which in turn means they have been straight up lying about their write downs- in a post-Enron/ sarbane-oxley world, we should be seeing a bunch of CEOs in cuffs. which of course won't happen either way...but if they don't know, $1 trillion should just be the tip of the iceberg.

Capitalism is bad- idiot capitalism seems to be worse

And Paul Campos at LG&M had the following awesome left hook. If the Dems bend over for Bush on this, I'm voting Barr:

Bush's approval rating has sunk to 19% in the latest ARG poll. That's lower than Nixon's the week he resigned. Probably the most telling stat in the breakdown is that Dubya has an 8% approval rating among self-described independents. Basically every Democrat and almost every independent voter in the country hates him. His remaining support consists of slightly more than half the GOP, and Joe Lieberman.

As Matt Stoller points out, you could probably impeach him and nobody would notice.

So the question becomes, is Bush sufficiently weakened for the Democratic leadership in Congress to tell him thanks, but we'll be drafting any bailout legislation we consider necessary, and you'll be signing it? After all there are about five GOP senators that are no position to be backing the president on anything if they want to live to fight another day.

This is what LBJ used to refer to as "nut-cutting time." Somebody needs to remind Pelosi and Reid and the rest of them just who has the knife now.

But my absolute favorite comes from Angry Bear. Apparently this is making the rounds on Wall Street. I love you Angry Bear:

SUBJECT: REQUEST FOR URGENT BUSINESS RELATIONSHIP

DEAR AMERICAN:

I NEED TO ASK YOU TO SUPPORT AN URGENT SECRET BUSINESS RELATIONSHIP WITH A TRANSFER OF FUNDS OF GREAT MAGNITUDE.

I AM MINISTRY OF THE TREASURY OF THE REPUBLIC OF AMERICA. MY COUNTRY HAS HAD CRISIS THAT HAS CAUSED THE NEED FOR LARGE TRANSFER OF FUNDS OF 800 BILLION DOLLARS US. IF YOU WOULD ASSIST ME IN THIS TRANSFER, IT WOULD BE MOST PROFITABLE TO YOU.

I AM WORKING WITH MR. PHIL GRAM, LOBBYIST FOR UBS, WHO WILL BE MY REPLACEMENT AS MINISTRY OF THE TREASURY IN JANUARY. AS A SENATOR, YOU MAY KNOW HIM AS THE LEADER OF THE AMERICAN BANKING DEREGULATION MOVEMENT IN THE 1990S. THIS TRANSACTIN IS 100% SAFE.

THIS IS A MATTER OF GREAT URGENCY. WE NEED A BLANK CHECK. WE NEED THE FUNDS AS QUICKLY AS POSSIBLE. WE CANNOT DIRECTLY TRANSFER THESE FUNDS IN THE NAMES OF OUR CLOSE FRIENDS BECAUSE WE ARE CONSTANTLY UNDER SURVEILLANCE. MY FAMILY LAWYER ADVISED ME THAT I SHOULD LOOK FOR A RELIABLE AND TRUSTWORTHY PERSON WHO WILL ACT AS A NEXT OF KIN SO THE FUNDS CAN BE TRANSFERRED.

PLEASE REPLY WITH ALL OF YOUR BANK ACCOUNT, IRA AND COLLEGE FUND ACCOUNT NUMBERS AND THOSE OF YOUR CHILDREN AND GRANDCHILDREN TO WALLSTREETBAILOUT@TREASURY.GOV SO THAT WE MAY TRANSFER YOUR COMMISSION FOR THIS TRANSACTION. AFTER I RECEIVE THAT INFORMATION, I WILL RESPOND WITH DETAILED INFORMATION ABOUT SAFEGUARDS THAT WILL BE USED TO PROTECT THE FUNDS.

YOURS FAITHFULLY MINISTER OF TREASURY PAULSON

After you're done emptying your wallet for Paulson, consider signing this petition: Main Street before Wall Street.

At the very least, this can't be a handout. Since the fundamentals are sound, lets get that perpetually preferred stock at a 10% rate of return that Buffett's getting.

P.S. If the following is correct, Bear Stearns bailout actually cost $290 billion, not $29 billion, meaning we can't print any of the Trillion the Treasury requests. Is Buffet going to pony up for that also? China, please save us! Assholes.

On Your Own, Buddy

There's been a lot of talk over the weekend about how foreign firms successfully lobbied the Treasury to be included in the impending Mother of All Bailouts, so it was nice to see the NYT report that overnight G7 govts. told the US: "Good luck with that bailout, there. You're on your own, buddy."

Europe and Japan turned a cold shoulder on Monday toward a American request that they bail out banks in the manner now being proposed in the United States.

The German chancellor, Angela Merkel, also took the opportunity to criticize the United States and Britain for opposing German efforts to put greater regulation, or at least reviews, of the financial sector on the international agenda last year, when she was chairwoman of the Group of 7 industrialized nations.

“Everyone who produces a real product knows what it looks like and what standards it is up to,” Ms. Merkel said. “One also needs to know with a financial product what’s involved. Otherwise, these sorts of things happen that we then all have to pay for”. . . The German finance minister, Peer Steinbrück, said, “None of the other six G-7 members will adopt a similar program to the U.S.”

Apart from a manifest lack of sympathy for a crisis they view as created by American banks and regulators, European governments are also constrained by rules within the 27-nation European Union that limit budget deficits and public debt . . . The Association of German Banks hinted that it would oppose the emerging bailout scheme if it gave American competitors a sudden advantage.

“We need to assure that disadvantages for foreign institutions do not arise from the U.S. program,” said Manfred Weber, executive director of the association. “It was, after all, American products that created the crisis and that created the contagion effects."

Nice. I especially like those furein banks crying that we got them into this mess. The takeaway message for me is that this crisis is way more manageable than Paulson and Bush have been letting on. Sure, there will be plenty of pain all around, but if those socialist G7 govts. feel there's no need to intervene to prop up the financial system, things aren't all that bad. Bernie, please, please, please stick it to them.

"From Louis XIV to George W. Bush"

What!? $700 billion with no oversight? Vomit bucket, stat!
Did anyone miss my preference for replacing golden parachutes with the guillotine?

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Lawyers, Guns and Money

From Louis XIV to George W. Bush By Paul Campos Here, in just 32 words, is a summation of the state of American democracy in our time: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." Translation: Congress will take $700 billion from the pockets of ordinary Americans, and hand it to Henry Paulson. Paulson then has absolute, unreviewable authority to do with this money what he thinks best. Many people have pointed out in the past day or so that this is bad. What no one seems to be raising is the question of whether it's even legal. Of course after eight years of George W. L'etat, C'est Moi Bush, the question of whether the biggest financial rescue operation in American history is actually legal is considered nothing more than a bothersome technicality, if that, to be dealt with by the administration's lawyers to the satisfaction of Very Serious People everywhere.

Swallowing the Moral Hazard Chowder

I am no longer crashing Germanicu$'s party (hope you finished those pork rinds), which means I no longer have daily access to the FT. The upside is that I have my NYT sub back, but neither has really explained the urgency of the frantic last minute bailouts and nationalizations, or who ultimately pays for the wave after wave of moral hazard. Some people see irony in the current administration handling the largest financial intervention since the Great Depression, but I just see rich assholes continue their practice of wealth-transfers straight from the public trough to their pig friends and golf partners. Floyd Norris, writing in Friday's business Times, makes the point that the bailouts are not based on size, but recklessness: too big to fail, has been replaced by too reckless to fail.

If the government is forced to decide whether to save another firm, it will face the same question it faced with A.I.G. and Lehman Brothers. Would this failure cause systemic damage to the financial system?Lehman did not measure up because its chief executive, Richard S. Fuld Jr., simply was not reckless enough as he ran Lehman into the ground.Had he had the foresight to make a lot more bad bets in the derivatives market, the government would have feared financial chaos and might have nationalized Lehman, just as it nationalized A.I.G., Fannie Mae and Freddie Mac. Or it would have subsidized a takeover, as it did for Bear Stearns.

The Paulson-Bernanke Doctrine is not “too big to fail.” It is “too reckless to fail.” If you get your company into enough trouble to threaten the financial system, Ben Bernanke, the Federal Reserve chairman, and Henry Paulson, the Treasury secretary, won’t let you collapse.

It may be that they miscalculated. Lehman’s default caused a money market fund to suffer losses, and scared investors into pulling their money from similar funds. If those funds cannot find buyers for their assets, there could be more defaults, and perhaps more failures.The Paulson-Bernanke Doctrine was born not of theory or ideology, but instead from improvising as each new crisis erupted. The Fed’s briefing on the nationalization of A.I.G. did not start until 9:15 p.m. on Tuesday night, which is not a sign of carefully thought-out decisions. When they met with Congressional leaders Thursday night to seek a plan to get cash to banks before they fail, it was almost as late.

If these nationalizations smack of socialism, it is closer to the Marxism of Groucho than of Karl. The Cox Proviso to the Paulson-Bernanke Doctrine is that the rules will change, and change again, if that is needed to avoid another failure.

From unnecessary tax breaks[1], to gobs of lost cash handled by personal friends, to the Blackwater and Halliburton scandals, and the publicly-funded army of golden parachutes now unfurling across the sky, the keystone-cops style bailouts in progress really don't seem so surprising. Pride yourself on removing all oversight, then get all generous with OPM when the chips are called in. 

Still, I'm utterly confused about what's going on. And, I'm not the only one. The bailouts seem to be happening because no one has any idea what is actually going on. The ever chipper Mr. Brooks asserts that Freddie and Fannie were over-regulated, while the dismal dudes at Freakonomics assert the opposite:.

The Fannie and Freddie situation was a result of their unique roles in the economy. They had been set up to support the housing market. They helped guarantee mortgages (provided they met certain standards), and were able to fund these guarantees by issuing their own debt, which was in turn tacitly backed by the government. The government guarantees allowed Fannie and Freddie to take on far more debt than a normal company. In principle, they were also supposed to use the government guarantee to reduce the mortgage cost to the homeowners, but the Fed and others have argued that this hardly occurred. Instead, they appear to have used the funding advantage to rack up huge profits and squeeze the private sector out of the “conforming” mortgage market. Regardless, many firms and foreign governments considered the debt of Fannie and Freddie as a substitute for U.S. Treasury securities and snapped it up eagerly.

Fannie and Freddie were weakly supervised and strayed from the core mission. They began using their subsidized financing to buy mortgage-backed securities which were backed by pools of mortgages that did not meet their usual standards. Over the last year, it became clear that their thin capital was not enough to cover the losses on these subprime mortgages. The massive amount of diffusely held debt would have caused collapses everywhere if it was defaulted upon; so the Treasury announced that it would explicitly guarantee the debt.

But once the debt was guaranteed to be secure (and the government would wipe out shareholders if it carried through with the guarantee), no self-interested investor was willing to supply more equity to help buffer the losses. Hence, the Treasury ended up taking them over.

Paul Wilmott--unlucky fellow just invested in A.I.G.--says the cancer has metastasized, meaning it don't matter where you cut.

That’s what makes the question of whether to rescue each institution such a difficult one. Sure, people have to learn a lesson. But, and this is my final surgical analogy, would that be cutting off one’s nose to spite one’s face? . . . The moral hazard is so obvious you can almost taste it.

Since no one knows what's going on, and the risks appear too great to sit on our hands, I find these proposals sensible:

• Volcker et al's, proposal to create a new federal agency to buy up bad paper, enforce regulations, and hopefully  solve the crisis
  
• A failure tax, so these assholes have to pay for their own mistakes
  
• And, my own idea, strengthen and expand anti trust regulations so no company can grow too big to fail. Once a company reaches a certain size, it should reorganize or risk nationalization. SEMCO in Brazil is a great example of what this might look like[2].

Per Norris:

If an activity is important enough to justify a government nationalization to prevent a default, it is important enough to be regulated.

Update: On Friday, the hammer finally came down, and now we're all in with another Trillion dollars. But Paulson is proposing not an independent agency, a la Volcker, but more analysts working at the Treasury. Our country is run by a band of stooges.

Ben White, in Saturday's business Times:

Among the dangers cited by economists on Friday, as word of the plan began circulating: an explosion in federal debt, higher financing costs, an escalating reliance on foreign capital, higher inflation and a further erosion of American economic sovereignty. All of these dangers, these experts stress, are hypothetical — except for the cost, which by many estimates could exceed $1 trillion.

I'm sorry, what hypothetical country are these assholes living in? Explosion in federal debt? Check. Higher financing costs? Check. Escalating reliance on foreing capital? Check. Higher inflation? Check. Further erosion of American economic sovereignty? Check. This is a list of administration priorities, not a new-found risk. What a fucking joke.

1. Paying fewer taxes while enjoying all benefits of federal insurance and services is the same as welfare.
2. Of course, SEMCO spins off companies as it grows because it's the smart thing to do, not because they have to.