NOLA (0.00 / 0)

It was, and is, in our interest to build protective levies and safeguard the port of New Orleans, but we didn't and haven't, found the money to do so. It is in our interest to pay for the recovery from Katrinia, never mind Gustav. It is in our interest to have a proper health care system. But somehow the money is never found for these things. But somehow, in a matter of hours, days at most, money is found to bail out the biggest fnancial institutions in the country.

Now maybe these bail outs are for the best, but we need to induce a sense of shame among the richest and most powerful members of American society and we need to make clear they have not been fullfilling their obligations as citizens.

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by: AliceDem @ Wed Sep 17, 2008 at 16:24:31 PM UTC

How? .. (4.00 / 1)

When the rule of law doesn't apply to them?  You've seen the newest nonsense in TrooperGate, right?  The Republicans basically are saying that laws aren't worth the paper they are printed on.  While I am a little optimistic, this country is coming very close to jumping the shark.  I doubt Jefferson, Madison and Franklin would be able to make sense of what has happened.  They'd be even more baffled than Progressives/Liberals/Non-DC Democrats are.

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by: Calvin Jones and the 13th Apostle @ Wed Sep 17, 2008 at 16:37:07 PM UTC

[ Parent ]

I'm no economist, but.... (0.00 / 0)

...seeing what's gone before, and listening to wiser heads than myself regarding this, I think we can expect...

1) Very strong uncertainty regarding existing debt.  Every municipality, county and state government should be reviewing their assets with a microscopic comb to prove beyond a shadow of a doubt that their exposure to bad debt is nil.  It won't be easy, but people just plain aren't going to to lend to you unless they trust you.  And if you can't trust AIG, you trust no one, presently.

2) Very strong pressure to minimize the value of the debt.  Expect the Dollar to drop like a stone against all other major currencies over the next year or so, if not sooner.  Our present Federal government will probably enable this process.

3) Very strong pressure for someone to pay off bad debt.  Yes, we're picking up the debt of these financial institutions, but that doesn't quite guarantee payment.  This situation will end up being much like one of the core issues of health care in this country - who pays what percentage for health care service?  Companies exist to make it be you, the citizen, that pays, and I suspect where net interest increases are coming our way will be through dramatic changes in credit card interest rates or severe reductions in interest-bearing accounts, among other things, but what do I know?

4) Eventually, strong pressure to "flush away"/"write off" bad debt.  People in power will eventually move toward this solution because they just don't want to deal with it anymore, and the cost of restricted capital flows due to uncertainty of who to lend to will seem more of a pain than accepting writeoffs.

Does this sound reasonable to anybody with real experience in finance or economics?

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by: palamedes @ Wed Sep 17, 2008 at 16:41:23 PM UTC

Im not happy about AIG Deal, BUT (4.00 / 3)

I think your analysis needs to be more sophisticated than labeling all these deals as just "socialize the losses of very wealthy Wall Street executives".

There are different terms by which things are taken over, and they mean something in terms of level of accountability and whether executives are being bailed out or not.

For example. JPM got a discount loan from the Fed to buy up Bear at a bargain basement price. Specifically because the Bear board agreed to the sale the DOJ and Treasury did not pursue criminal charges against the board members. Additionally their preferred shares where honored by JPM in the form of bonuses and jobs. Nice work if you can get it, especially seeing as the Board under a vague SEC rule decided the deal would not be subject to a shareholder vote as it normally would. Shareholders would have done better in a Bankruptcy filing and the board holders would have been prosecuted for triggering a financial meltdown. Instead tax payers bailed out the board and gave JPM an early christmass present - because JPM got the loan on the cheap, had been interested in acquiring parts of Bear, and liability on related Bear failures was backed by the Fed.

another example: FNM and FRE were bailed out under much better terms (tho not enough for me and this is where speaking in deals really matters). The leadership of FNE and FRE were deposed (but should have been prosecuted), and common and preferred shares were basically nulled in value. New preferred shares were issued to the govt with a guaranteed rate of return. This is a far better deal and more in keeping with common private sector bailout deal structures. However the underlying bond holders (like china and russia who hold nearly $1 trillion in Fannie Mae and Freddie Mac bonds) were left unscathed, and they should have seen their value knocked down too. But that would be a bit harder to do politically with China holding so much US currency.

I've not looked at the AIG deal in detail. But its not just a welfare program on the surface it seems. It seems at a glance similar to the FNM and FRE deal. With common stock getting nearly whipped out, and the govt getting preferred return (approx 11% from what I've read) plus governing control. Again, DOJ and Treasury should be putting the board members in jail -  but this is a political will problem of not just the Bush administration but people like Chuck Schumer.

-

why these details matter? because there is a good reason to not just let these companies go in the crapper in one fail swoop (a topic for another comment - but a lot of it has to do with protecting rank and file workers from not losing their jobs when parts of the companies are sound, and not triggering runs on other banks where they could be avoided). so when the govt does step in citizens need to know how all this shit works so they can require the govt to at least get a preferred deal. this recent cycle of govt rescues so far looks better than how the SnL stuff went down. still nobody is going to jail and bond holders are indeed getting bailed out. so some fat cats are definitely paying the price, and some are getting off scott free.

Personally for my money I think aggressively prosecuting board members would be the easiest accountability measure to sell the public and the easiest to get done. Its shameful that we've had investment/trading reform proposals around since March and congress has done shit about it. Yes, the Democratic congress! has done shit and is about to go on vacation. Some jail time would be easier and at least make me feel better about how much Dem reps suck as much as GOP reps.

Michael Bloomberg, prince of corporate welfare

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by: Will @ Wed Sep 17, 2008 at 17:06:29 PM UTC

What about repayment of bonuses, etc? (0.00 / 0)

In the Google, I see a London Times article that says in 2007 Lehman Brothers paid out $8.7 billion in bonuses. Just curious if anyone has heard anything about repayment of bonuses and salaries, say, for over $1 million dollars per year for companies bailed out by the US government? This stuff did not happen overnight. And it seems reasonable to ask those who benefited the most (probably not the rank and file workers) to give some of that money back in cases where taxpayers are paying out money.

To your point, to talk in terms of deals, sadly I don't hold much hope that standard media outlets will know enough, or want to know enough, to educate their listeners. We'll see. Doing so would help taxpayers pin the blame certainly.

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by: TSlavin @ Wed Sep 17, 2008 at 21:21:56 PM UTC

[ Parent ]

Good question. (0.00 / 0)

Today the Dow, Nasdaq, S&P 500 and presumably all the rest of the stock indexes hit 52-week lows by a significant margin. Billions of dollars have been taken out of the US economy. Tax writeoffs on the losses seem certain to further bankrupt the federal government, which has already, thanks to Bush and the Republican Party, achieved the largest deficit in the history of the world. On top of a likely sharp decline in revenues, the fed is now on the hook for bailout liabilities that should amount to $hundreds of billions if things continue to deteriorate, plus hundreds of billions or trillions more on military costs that will have to be paid whether we have the money or not.

Anybody who claims to have any idea of what the financial future will bring is bullshitting. The nature of chaos is that, like climate change, its consequences are unpredictable. Our economic situation now amounts pretty much to chaos.

The greatest fear of what's coming may also be the silver lining: It's hard to see how the US will come out of all this still able to claim status as "the world's number one economy" or even "the world's only superpower". Yet even for those of us who welcome that outcome, the shift at ground level will be terrifying and painful. The biggest question of all is how Americans respond politically and societally. We may not be in for a 1929-level financial crash, but the societal fallout could be at least as great. There are abundant ideologies, prejudices, and superstition-based nostrums out there waiting to challenge the failed old order. It's up to us to move America in the direction of the New Deal or Euro-socialism and preclude the direction that tends toward a Third Reich or Mussolini-style "reform". Either choice seems possible. We live in interesting times for sure.

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by: DaveW @ Wed Sep 17, 2008 at 17:10:01 PM UTC

AIG was different (4.00 / 3)

AIG is a huge insurance company that operates in 100 countries.  They have many, many subsidiaries that write and reincure all kinds of insurance.  The problem area is the kind of insurance that insured against defaults on mortgage bonds as well as bonds of corporations and municipalities.  AIG was facing potential defaults because of the defaults of Lehman and potentially WaMu and others that exceeded their assets.  This would have meant that the default risk shoots up, and banks and others that hold the bonds have to write down their value under mark-to-market rules.  This in turn means that the banks have to raise their reserves to meet federal reserve requirements.  Voila, there is no money to lend and the financial systems of several countries freeze up.  

Many companies don't operate on an real cash basis, but constantly issue short-term commerical paper that has to be rolled over.  When this market freezes, they are stuck, as are entrepreneurs and anyone weanting a loan for anything.  And then AIG would try to raise capital by taking it from the solvent insurance subsidiaries, and all of a sudden people making insurance claims would find the company can't pay them.  Layoffs would result and more defaults, spiraling downward to Depression.

The purpose of the loan is to allow AIG to sell valuable assets off to raise the capital to meet their side of the credit default swaps (the insurance on the bonds) as other instruments go into default, sell the assets in an orderly manner instead of selling everything at fire-sale prices.  The hope is that they make enough so that the gov't has doesn't lose much.  In fact the gov't has made money on the assets from Bear Stearns bailout.

In this case it isn't just bailing out the rich guys, it is an attempt to keep capital markets from freezing up and stranding lots and lots of companies and people.

When the dust settles there needs to be mugh more regulation of hedge funds, investment banks, futures trading and financial instruments.  Some officers and directors of companies that issued the toxic paper should go to jail.  But it is much harder to get to that point if the whole system freezes up.

John McCain--He's not who you think he is.

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by: Mimikatz @ Wed Sep 17, 2008 at 17:18:43 PM UTC

Finally meaning not just class warfare (0.00 / 0)

Well written Mimikatz.

A forced fire sale of assets would not help anyone.

Further if AIG leaned too heavily on underlying subsidiaries for capital, not only would that expose them (the subsidiaries) to unnecessary risk, it could force them to raise rates - so rates for unrelated insurance for lots of every day stuff could suddenly go up. not good.

But man, they really need to throw some people jail.

Michael Bloomberg, prince of corporate welfare

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by: Will @ Wed Sep 17, 2008 at 17:58:05 PM UTC

[ Parent ]

Well Said (0.00 / 0)

I am no fan of the denziens of Wall Street but this goes much further and has major impacts on the ability of people and businesses with good credit to get loans.  A collapse of the financial markets will have huge and deep impacts and it would not be a good thing.

What worries me is that we don't seem to be getting in front of this crisis.  We are lurching from one problem to another.  I am not exactly sure how we get in front of it but we need to do so if at all possible.  We also need to come up with a regulatory structure for the "shadow banking system" to prevent this from happening again.

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by: jmnyc @ Thu Sep 18, 2008 at 01:16:28 AM UTC

[ Parent ]

we have no sense of scale (0.00 / 0)

The world financial system totters, and what do we have to say?  Make the rich feel ashamed?  Say yes or no to various bailouts?  More vigorous enforcement -- of what?

In the tech bubble bust of 2000+, there were individual criminal acts that were or weren't prosecuted, centering on the cozy relationship between research and banking.  Now, it could be argued that we totter on the brink, WHETHER OR NOT any actual laws were broken (though I'm sure some were).

In other words, the problem is the system (remember the system?).  Solutions have to be systemic, not tinkering around the edges.  And where are our broad proposals to change the system?

Often, we note that while Obama or Biden (bankruptcy bill Joe) can't realistically be expected to offer anything dramatic, progressives can have their own ideas and proposals.  But on the economy, we offer nothing but increased funding for the band-aid factory.

That the American empire is in a state of slow collapse is irreversible, and not wholly unwelcome.  But I'd rather not be crushed in the rubble.

Full Court Press!  http://www.openleft.com/showDi...

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by: jeffroby @ Wed Sep 17, 2008 at 17:27:39 PM UTC

where are our broad proposals to change the system (0.00 / 0)

currently they are in stall number 2 of the congressional bathroom.  

there are no shortage of sweeping reform proposals out there.  getting congress to do something about them is another story.  Even while the likes of Frank, Dodd, and Hoyer talk in the press about reform, you can also sense they don't exactly have a fire under their ass about doing something.

http://ap.google.com/article/A...

more hearings, more discussions, more trying to figure out what happen. they act like there is some dark mystery out there about what is going on. seriously, its tiring to listen to any of these people talk.

Michael Bloomberg, prince of corporate welfare

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by: Will @ Wed Sep 17, 2008 at 18:09:29 PM UTC

[ Parent ]

please state which proposals would constitute an effective package (0.00 / 0)

Will, I'm not sniping.  You probably know more details than I do and I would like to know.

My question is whether they are sufficient to impact the systemic problems.  Derivatives are legal, at least in principle.  The problem is that they result in piling paper on top of paper until we are Wile E. Coyote suddenly looking down at the distant canyon floor.  Legally.

The system is worldwide.  Would the effect of serious reform here in the USA merely destroy the American economy as it becomes incompatible with the Empire (the Hardt and Negri Empire)?

How about socialism -- nationalizing the banks -- and having a workers/middle class government take stern measures necessary to maintain production in the face of the ensuing fallout?

I am not arguing that we now become socialist revolutionaries.  But I would argue that it at least addresses the problem on the scale that I think it must be addressed on -- however socialism as a specific proposal would fall apart in the details.

We have to start thinking big.

Full Court Press!  http://www.openleft.com/showDi...

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by: jeffroby @ Wed Sep 17, 2008 at 19:37:38 PM UTC

[ Parent ]

Actually Obama has offered some suggestions (0.00 / 0)

for more oversight of financial markets.  But basically we need a DOJ and SEC that really want to enforce the laws.  They have looked the other way or even facilitated criminality for the last 8 years, some practices extending back into the Clinton years when Glass-Steagall was repealed.  We need to have a few show trials where big names actually go to jail, like Michael Milken in the junk bond scandal, or Ivan Boesky in the insider trading scandal, or Fastow in the Enron scandal.  But lots more of them.  

And the Dems have resisted banking regualtions almost as much as the GOPers--Barney Frank, Chuck Schumer, Chris Dodd all have shirked their responsibilitiers as much as Biden if not more.  We need serious regulation to protect consumers and much mroe transpasrency.  And higher taxes on the rich to pay for this regulatory apparatus.  But mostly we need some real ethical standards set at the very top of government that permeate down the ladder to the troops in the trenches.  The fish rots from the head.

John McCain--He's not who you think he is.

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by: Mimikatz @ Wed Sep 17, 2008 at 20:19:09 PM UTC

[ Parent ]

scale scale scale (4.00 / 1)

Yes, we need all of the above.  But suppose we would still be in this mess without a single law being broken?

To bring things into even a semblance of normalcy, we need to, for instance, raise collateral requirements and limit debt ratios, instead of allowing Wall Street to run amok with its derivatives which pile paper on paper in a massive house of cards -- all of which may be perfectly legal yet nonetheless disastrous.

But such restrictions would slow the economy, raise unemployment, etc.  How do we handle the repercussion of that?  My answer is that we need a massive redistribution of wealth.  But do we have the guts to even contemplate that?

Where is the political coalition that can drive that through, since these days progressives focus their pity on the middle class (who certainly need it) but find it too uncool to talk about poverty any more unless it's the middle class being driven into poverty?

Without that coalition of middle-class AND the poor, we're only subsidizing the band-aid industry.

Full Court Press!  http://www.openleft.com/showDi...

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by: jeffroby @ Thu Sep 18, 2008 at 00:27:03 AM UTC

[ Parent ]

Surcharge on Golden Parachutes (0.00 / 0)

and sweet-heart retirement deals that let execs depart failing and failed corporations with their personal fortunes intact.

Slap a surcharge on that income and use it to pay back the general fund, or wherever the cash to bail out these banks came from.

 

"It sounds wrong...
     ...but its right."

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by: SpitBall @ Wed Sep 17, 2008 at 17:38:02 PM UTC

From my armchair... (0.00 / 0)

It seems like this quasi-principle of "too big to fail" is pointing at something. Bear Stearns was too big to fail, so they helped it get sold. Fannie and Freddie were too big to fail (and too big to sell), so they got bought. Lehman brothers, not too big to fail. AIG, too big to fail.

There used to be 5 major investment banks, now there's two left. Shouldn't there be more competition in the finance industry, or something that ensures that instead of 2 firms or 5 firms, we have 20 or 50? Then, none of them would be too big to fail. Perhaps something should have been done to prevent Fannie and Freddie from backing so many loans -- not just so many bad loans, but so many loans -- by creating a third entity, and a fourth, and so on.

I've got no idea what sorts of mechanisms or regulations would encourage a system like that, but maybe that's where we need to head. When the Asian monetary collapse happened, one big reason was that all of these countries had single large central banks that contained the entire monetary supply, and taking down one took down an entire currency. What happens if panicked short sellers take down the last two investment banks? Wouldn't it be better if they were two of twenty?

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by: corax @ Wed Sep 17, 2008 at 18:31:10 PM UTC

short sellers aren't panicked (0.00 / 0)

They bet that a stock will be down at a certain future date, and if it is, they reap the difference between that price and current price.

Though disdained as scavengers, they perform a vital task in seeking out over-inflated stocks and tearing apart the phony research that hypes them.

Sound stocks can't be seriously hurt by short-sellers, but bubble stocks can.  That is why they are despised by Wall Street.

Full Court Press!  http://www.openleft.com/showDi...

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by: jeffroby @ Wed Sep 17, 2008 at 19:26:42 PM UTC

[ Parent ]

Perhaps Velvet Glove Fascism? (0.00 / 0)

Think about it.  Financial markets power is now essentially concentrated in two large banks.  Even Morgan Stanley and Goldman Sachs will become reliant on JP Morgan Chase and BOFA to syndicate many of their deals.  And rumors are rampant that Morgan will sell to a commercial or universal bank.

The only other large US headquartered financing options now operating are industrial capital firms like GECC.

Plus, The US government now owns the world's largest insurance company and for all intents and purposes controls the US residential housing market through it's control of the GSE's and their ability to make loans and set lending criteria in that market.

Then we have Dick Cheney's "daughter" running for VP.  Her operating style is just like Dick's, high degree of secrecy, carefully chosen and orchestrated public appearances, personal vendettas and revenge, close ties to the extractive energy industry.

Remember what Sinclair Lewis said:

"When facism comes to America it will be wrapped in the flag and carrying a cross."

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by: northcountry @ Wed Sep 17, 2008 at 18:54:37 PM UTC

Unemployment (0.00 / 0)

just because it seems unlikely we'll be able to avoid this financial meltdown forever, I'm wondering what does it actually look like?  

The official unemployment rate during the Great Depression was 25%, but economists believe the true rate was more like 40%.

Think of it, every 2 in 5 people, almost 1 in 2, unemployed (as opposed to 1 in 20 or 1 in 12, depending on how you measure it, today).

Gary Hart described working on the railroads one summer when he was in college.  The guys who had experienced the Depression worked like dogs, they were so terrified of reliving that experience.

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by: Taylor @ Wed Sep 17, 2008 at 19:33:44 PM UTC

What does it look like? (4.00 / 1)

Argentina, after its crash, only on a much larger scale and Americans much more desperate bc they're more used to having it easy.

Remember, in Argentina, people who had been middle class took up digging through trash piles to find stuff to sell to pay the bills.

Given how many people are going to be out of work, given how many people have and will lose their homes, and given how many small business will fail, I think you're going to see a dramatic fall off in quality of life for a large percentage of the country.

And all that's assuming the bailouts, for the most part, work. If it doesn't, then you are quite literally risking a breakdown of world markets, so that you stop being able to buy certain products, which for some areas of this country and some countries entirely, will be devastating.

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by: emptywheel @ Wed Sep 17, 2008 at 21:35:56 PM UTC

Global Meltdown + McCain/Palin = (0.00 / 0)

...the rise of Amerikkka.  Seriously.  He's a warmonger, she's a Christian fascist.  If McCain reverts back to some semblence of his former Maverick self and DOESN'T start a war or two...should he pass away in office, Palin will take over.  

And THAT is one seriously messed-up individual.  She is a complete right-wing Christian nutjob.  She's worse than the Martin Sheen character from the Dead Zone.  The worst fiction writer in the world wouldn't pen a scenario in which a wacko like her gets as close to the presidency as she's already gotten.  We'll be a fascist theocracy in three years with her at the helm.  

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by: BeerNotWar @ Wed Sep 17, 2008 at 22:23:35 PM UTC

exactly what is to be 'melted down'? (0.00 / 0)

I think it would be very hard to model or deduce what a period of austerity will actually look like. It will have to be characterized in practice through experience and fieldwork. Modes of adaptation in one country may, for various reasons, differ from those in other countries.

My short answer is that people will increasingly rely on economic structures and solutions that lie outside the two poles of market rationality and state ownership. Most economic thought refers to these poles, but in the mid-20th century Teodor Shanin of Birmingham University almost singlehandedly started framing an alternative.

Peasants inhabit an economic structure entirely different from either capitalism or socialist state ownership, he came to argue. Their work, food and housing are dependent on what he calls the "informal economy" - the network of family, unofficial and even criminal activity. Marxist and market economists had always dismissed such activity as marginal. He argued: "How can you call it marginal when half of mankind lives like this?" The Guardian, Tuesday September 10 2002

'Expolary' is his term for a wide variety of economic activities that exist apart from the two organizing poles.

Applying the idea to a real country in a crisis state, Shanin produced the following on Russia in the late 1990s;

INFORMAL ECONOMIES AND EXPOLARY STRUCTURES IN CONTEMPORARY RUSSIA
(cached. English version of the new site is lagging.)

"Records and reports describe factories idle and wages unpaid, production and productivity down in cities and villages alike, services in decline, welfare institutions bankrupt....."

"Yet, vis-a-vis this tale of woe, the most significant surprise is the relatively limited impact of all that if looked at "from below" that is at personal, family and community level. To be sure, the average diet worsened, life span shortened and there are many strains, but there are no signs of widespread famine (and that is something practically impossible to hide in the long-term). Nearly everywhere, basic services work: underpaid and/or unpaid, teachers teach, medics tend patients, officers command troops, police direct traffic, in most of the cases the city streets get cleaned, water, electricity and gas are delivered to dwellings. Shops of basic necessities proceed to do brisk business."

On the expolary structures that make all of the above possible:

"...we are facing not a tightly packaged concept but a syndrome of partly overlapping characteristics, not only economic. It is a social economy, the traits of which most often mentioned have been:

• aiming at survival rather than accumulation of capital;

• aiming at the generation of employment rather than the maximisation of profits;

• flexibility and multiplicity of ways of earning, usually rapidly changing;

• labour intensive tasks in unregulated markets with a high level of uncertainty;

• the pool of unprotected labour within societies where a continuous job within state services and places of unionised labour is at a premium;

• family units of production based on family labour, not on wage labour (and aiming at family labours optimal use);

• ease of entry into such occupation and use of family related and/or indigenous resources in it;

• mutual support and credit arrangements based on trust and/kinship rather than on formal and contractual arrangements:

• kinship, neighbourhood, ethnicity and regional - origins defined networks of social relations in which the economic action is "embedded" (to use that description the way Polanyi used it) (Polanyi, 1994);

• unregistered institutions, following strategies of avoidance vis-a-vis the state;

• integrated legal, a-legal and criminal activities of the poor;

• lifestyle incorporating many of the above characteristics, to which different generations of scholars referred to as "communal" (say, Gertzen, 1957) "culture of poverty" (Lewis, 1951) or "moral economy" (Scott, 1976)."
  

The phrase "legal obligations become incredibly ambiguous" is what tilts me toward saying this is what we're in for. Filter the above list through something called the American Experience, or variations on it, and you'll be as close to your answer as you can get without fieldwork.

Young Scotty Jenkins, so big and able
Saw his fair colleen stretched by the wall
Tore the left leg from under the table
And smashed all the dishes at Flannigan's Ball


rjt12@.....

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by: Richard Taylor @ Thu Sep 18, 2008 at 03:41:00 AM UTC