Friday, September 19, 2008

Echoes of the recent past

--"When you listened to him describe it, you gulped." Schumer (New York)

--"...we're literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally." Dodd (Connecticut)

These are NYT quotes from senators describing the frightening effect of their closed meeting with Bernanke and Paulson, sounding very much like another rendition of the old mushroom-cloud trick, from another election year not so long ago (Oct 2002 Iraq War authorization).

(Not that there isn't an actual crisis this time, as opposed to a phony one. The point is that panicking Washington in an election year has become the pattern. In the interests of--how can I put this. What could well turn out to be the same kind of arranged boondoggle for the financial elite that Iraq has been for the military/security establishment).

10 Comments:

Anonymous dan said...

I've no doubt that there was some fruity hyperbole involved in the discussions, but the underlying reality is that the Bush administration-Wall Street combo have actually managed to break the $US-based financial system.

Nationalising Fannie, Freddie and AIG, the shotgun marriages, the death of the investment banks are somewhat more "tangible" than smoke'n'mirrors rhetoric about the dangers that Saddam's fictional WMD's posed. These are, after all, things that have happened in full public view in the past couple of weeks.

Let me lay the basics on this out for you:

Money market funds were starting to break the buck ( the line on this is the DJIA at 10,500-10,700 ). MM's are, amongst other things, a liquid way for companies to park short-term money that they then call on to pay things...such as their payroll. MM's that break the buck go into redemption lockdowns for at least 7 days, the results of this being that you would start to see monies for payroll not being deposited in some company accounts at month end, a few at first, but this kind of thing tends to snowball very quickly as redemption panics set in. Ouch

When people start hearing that payrolls of otherwise solvent and profitable concerns aren't being paid - it only takes a relatively small number of instances for this to happen - the most likely reaction is the mother of all runs on retail banking deposits. Ouch.

As an aside, Bush is still "president", but First Secretary of the Treasury, Commissar Paulson, is now in charge of the US - and the first thing that this means is that nothing that might further rock the currently broken financial system will be tolerated.

In the USSR this would usually mean that Deputy First Secretary of the Party, Commissar Cheney, would quietly retire over the weekend, citing health reasons, to be replaced by Commissar Paulson; in the US, this means that Commissar Cheney will now be performing janitorial duties and overseeing the document shredding.....from a secret location, naturally.

4:54 AM  
Blogger badger said...

you and your fruity hyperbole

5:30 AM  
Anonymous Anonymous said...

Commissar Paulson, is now in charge of the US - and the first thing that this means is that nothing that might further rock the currently broken financial system will be tolerated.

absolutely!

i especially appreciate the timing. how unusual that after years of years of unorchestrated deregulation everything would start to go haywire in the middle of the new presidential campaign.

this is not a time to take any chances with untried (muslim?) community organizers. we better stick with the old white guys.

10:17 AM  
Blogger badger said...

I was trying to make a point about the Oct 2002 echoes in the "legislative response" to this (if you can call it that--see three-page draft text in the NYT this morning) not about the crisis itself, which is of course real. Sheesh.

11:03 AM  
Anonymous dan said...

Badger

I should have added the sarconol tag :)!

The legislative response is, well, nothing short of an enabling act giving Treasury First Secretary, Commissar Paulson, absolute powers beyond the purview of judicial review.

On the funny side: Bush does get to call himself the 6 trillion dollar man after this.

11:17 AM  
Blogger badger said...

Exactly. The no administrative or judicial review clause--if it is passed and isn't immediately struck down as unconstitutional--would give the Secretary unlimited power to enter into sweetheart deals with campaign contributors, say, or with his own GSachs, and there would be no recourse. Even Cheney didn't get that far, I don't think. It will be interesting to see the price action in GS and MStanley on Monday, among other things...

12:04 PM  
Anonymous dan said...

The closest that Cheney got was sweetheart "no-bid" contracts to Halliburton.

BTW, Anon, rather suspect that the opposite is the case, as the foreign creditors are generally not that enamoured of McCain/Palin - one of the "stabilisation" conditions may well be an insistence that Obama gets elected.

12:20 PM  
Anonymous Anonymous said...

thanks dan

12:48 PM  
Anonymous Anonymous said...

Executive Power Grab in Banking Bail Out Bill

this bill also appears to constitute the greatest transfer of political power from the Congressional to the Executives Branches ... Possibly ever.

3:07 PM  
Anonymous Juan Moment said...

What could well turn out to be the same kind of arranged boondoggle for the financial elite that Iraq has been for the military/security establishment

That pretty much nails it. With the $billions and trillions !!!! that are being stripped from the US treasury, alas the US taxpayer, there will be a few (whopping) winners, balancing out the many (smaller) losers. Wealth is in some sense like energy, you can easily change its form, much harder to cancel its substance. That hole of $1 trillion dollars on Wall St balance sheets did not just appear. Whilst some of it went into peoples pockets who sold their overvalued real estate in the build up to the peak, it is more than likely that in addition to the ridiculously high executive packages and golden handshakes to top level bank managers, huge commissions were earned all along the supply line of repackaged and as AAA rated marketed junk sub-prime housing loans.

For generations have politicians and bankers been in bed with each other and I wouldn’t be surprised if there are Republican as well as Democrat fingerprints all over this crime scene. The irresponsible borrowing required to run expensive wars, the continued increase in trade deficits, a stagnating US economy, eventually foreign creditors double checked on their loans and found they were sold more or less worthless mortgage backed securities.

The takeovers and bankruptcies of longstanding investment banks and brokerage firms have reduced the number of key players on Wall St down to only two major investment banks, Morgan Stanley and Goldman Sachs, and even MS might go under or end up being taken over by Wachovia, god knows whats gonna happen in this environment. But whatever it is that happens in the world of high finance, it is as much a product of speculation as it is one of policy and politics, such as the GLB Act in 1999. And as Roosevelt said, in politics, nothing happens by accident. If it happens, you can bet it was planned that way.

As dan pointed out above, the risk of leaving the mess unattended would be too risky, a helping hand from the Fed was certainly needed in order to not have the cage rattled to the extent that enough liquidity in the banking sector for ongoing operational expenses such as the payroll is not ensured. But what we are seeing now is nothing short of corporate welfare in its crudest form.

So what are the banks going to do with the cash they get from the Fed in return for their potentially worthless securities? Loan it to other banks, businesses and real estate buyers as they are supposed to? I have my doubts. This injection of funds will be soaked up in the upper echelons, and very little benefit will trickle down. $1 trillion dollars pumped into the economy, but no liquidity injection for the Smiths who are close to defaulting on their mortgage. No siree, the banks get the carrot and you get the stick.

11:17 PM  

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