Solid, scary, economic reasons why we shouldn't bailout Wall St.

[MadHound]

I'm not an economist, though I took a few economics classes in college. However my wife is an economics professor, and I know several other economics professors and economists through my work. I've talked to , and more importantly listened to these experts to find out what they thought of the bailout, whether it is a good thing or not. Here's what I found.

First, injecting nearly a trillion dollars or more into the system to solve a liquidity problem will drive down the value of the dollar and raise inflation considerably. This is basic macroeconomics, something that even I recognized from my classes and had confirmed by others.
Furthermore, the bailout itself will spook money markets abroad and at home, again weakening the dollar and further hiking inflation. We're already seeing some of this happening, as the dollar has been on a declining glide path ever since this plan was announced.

Then, to cap off the inflation angle, there is going to be a huge temptation to print our way out of this debt. This one will be up to the next president. I suspect that Obama will have enough sense to not do this, however I think that a McCain administration will succumb to the pressure and temptation and will start quietly running the presses. Can you say post WWI Germany hyperinflation? I hope you've got a wheelbarrow.

Now, turning to the mechanism of the debt itself. Currently we're nearly 10 trillion in debt, with a debt to gross GDP ratio of 67%. This is staggering, but given our economy, and wise leadership, we can recover from this. However this bailout will add at least a trillion more dollars to the debt, raising our debt to gross GDP level to 72%. This is red alert territory, this is territory where our US Treasury bonds will get downgraded. These bonds are the mechanism whereby we finance our debt, and since we're currently financing our government via debt and these bonds, having them downgraded means that people around the world won't be buying them. Without people buying these bonds, we're royally screwed. The government runs out of money, the country runs out of money. This is uncharted, terrifying territory. Several of the economists that I talked to stated that this scenario is worse that if Wall St. collapsed into another Great Depression, for while we can recover from a depression, it will be tough, if not impossible to recover from having our economy, government and country collapse.

The current shouters on television and elsewhere are screaming that we'll be entering another Great Depression if we don't do this bailout(some are even saying that will happen if we don't get this deal done by the end of the week). We're being bull-rushed here folks, stampeded into a really, really bad decision that will bail out the wealthy few, provide a bridge for Bush to be able to skate out of office on before everything goes belly up, leaving the mess for those who follow. The claim of another Great Depression and not being able to get money out of your ATM are being exaggerated for effect. But the fact of the matter is even if all these claims are true, even if this bailout will save us from another Great Depression, the fact of the matter is that it would be better to face another Great Depression than the total collapse of economy, government and country that will happen if we do accept this bailout.

There's a reason why the powers that be are pushing this shit so hard and so fast. The want you to panic, to not think, to blindly go where they want you to go. Don't fall for this. Step back and think. If you don't believe me, go do some research until you are satisfied. Don't believe what the talking heads on the tube are saying, people like Jim Kramer and other such pundits. These guys are in the tank for Wall St and aren't going to tell you the truth. The only guy I heard mention downgrading bonds last night was, thankfully, Senator Jim Tester of MT. Go talk to an economist, go do some research. And once you have satisfied yourself, don't support this bailout. It will be the death of this country.

[mediaman007]

1. I agree completely. Banks are still in business right now.

This is the last hurrah of Bush*/Cheney.

[ShortnFiery]

2. We, the DEMOCRATIC constituents, need to convey your well reasoned arguments to Schumer, Dodd

and Franks. These corporate crones need to KNOW that we, THE PEOPLE, do not support this SCAM in *any form.* :( :grr:

[magellan]

3. We must be reading the same economists

I've been against a bailout for a couple of days now. Seems to me the economy is screwed either way, it's just a matter of whether we prolong the agony or not.

If we have to suffer, the thieves who dropped this country in the shit should suffer too. The ponzi system they've been running needs a good colonic.

[MadHound]

5. Yes, I'd like to see the thieves who created this suffer

But the main reason is that this bailout is simply catastrophic from an economic point of view. Having our bonds downgraded, while having either high or hyper inflation ravaging the country is unknown territory, and will collapse this country.

There are good things about a Depression, the scoundrels will be punished, the weak players in the market will be culled out, regulations will be reinstated to prevent this mess in the future, and money will have to be spent on the real economy. If there is a bailout, none of this really happens, especially since we won't have any money to spend anywhere.

[magellan]

9. I'm in full agreement

It simply doesn't make sense to throw good money after bad if it isn't going to help, and in fact stands a good chance of only accelerating and intensifying the collapse.

I've been reading DU long enough to know what's coming next no matter what they do. Two years ago, my husband laughed when I said we were heading for another depression. I didn't want to believe it myself, but I couldn't deny the evidence certain DUers put forward.

I hate 'told you so' moments.

The real question is does Congress get it yet? I'm afraid they don't.

[bbgrunt]

41. I wish a depression were as simple as clearing out the deadwood

from our economy. Yes, we may get to punish those who are at the root of it, but many many innocent people will suffer. Pension funds and the value of all assets will plummet. There will be no incentive for any business since no one will have any income to speak of. Production and employment will shut down.

During the 1930's people were much closer to means of production. They knew how to grow their own food, how to fix a car, and were much more self reliant. Today most of our food and other kinds of production involves large scale operations that cannot be supported by local small community production. Twenty some percent of our economy is involved in the financial services industry. What will these specialists do when the checks stop coming?

The armies of the unemployed will destabilize society and there will be a significant increase in crime and disease. This will produce the ideal situation to take us that one last step to becoming nazi germany. People unemployed, our only real manufacturing based on military. Gosh, I can see the impetus for more wars to resolve the situation becoming a drumbeat.

Don't get me wrong. It seems we are screwed either way. But a "purge" of the rot in our economy by depression may not lead to the future that is palatable either.

Perhaps the best we can hope for is that temporary prudent measures are taken to stem the panic until we can get some grown-ups in charge.

[cabluedem]

69. What will the crooked moneymen do? Jump off their skyscrapers, I wish. nt

I am not paying for a bailout anyway.

[On the Road]

89. If There is a Depression

the 'crooked money men' will make a forture off buying cheap assets and more working people will lose their homes and life savings. You may get your wish.

[ixion]

4. you've laid it out very plainly

I hope that people who are confused about this issue will understand the ramifications of what our government is considering, and will join us in sounding the alarm.

[rucky]

6. I think you nailed it.

And the fallout affects us directly (and first). Not bailing out affects Wall Street first, then the trickle-down part actually works when there's a loss.

[AllieB]

7. This is the most succinct and cogent explanation of this mess.

Thank you for posting MadHound!

[malaise]

8. Good post

I agree 100%. It's time to listen to real economists and ignore the MBAs.
Hubby is an economist :D

[Gin]

10. we haven't hit bottom yet...so this is just a hand out.....imagine

Phil Graham in charge of 700 billion dollars. Yikes!

[malaise]

75. Scary indeed n/t

[pberq]

11. Let's keep the phone lines to Congress busy with this message

[HamdenRice]

12. Some answers and questions

I would really like your wife's take on these questions. It seems to me that economists may look at these issues in a way that is different from the way people in finance might.

1. "First, injecting nearly a trillion dollars or more into the system to solve a liquidity problem will drive down the value of the dollar and raise inflation considerably. This is basic macroeconomics,..."

I don't see this as injecting money into the system, in the way we normally think of it in macroeconomic, fiscal and monetary policy terms. When we think of this danger, it comes from the fed or some other central bank increasing the money supply.

In this case, there is no net increase in the money supply in the banks, but only a change in form and increase in liquidity. As I've tried to explain in many posts, mortgage backed securities have, over the last few decades, become the "money" of the banking system. Right now, no one trusts which money is good and which is bad -- kind of like early 19th century panics. The idea is to value what is still performing in the underlying pools of mortgages, and for treasury bills or real money to be exchanged for that amount. Exchanging and fixing suspect mbs "money" for treasury bills and real money, is not an injection of money supply; it's a swap of suddenly illiquid money supply for a liquid supply -- in other words a return to the amount of money that was in the system before it froze up. Hence I don't see why this would create inflation; it's designed to prevent a catastrophic deflation that would result from our current drastic decrease in the money supply within the banks.

How could the money supply be increased by a swap of actually less money (assuming a discounted purchase price for mbs) for what the money supply was before the crisis?


2. "the bailout itself will spook money markets"

If you mean "money markets" by its proper definition, then you are talking about the market for commercial paper. (Did you mean "currency markets"? That's a completely different market) That market -- the $1.7 trillion money market for short term capital -- has shrunk drastically and almost froze last week. Nearly $200 billion flew out of money market funds as redemptions last week on fear that the entire market would seize up.

http://www.ft.com/cms/s/0/efce6352-88ce-11dd-a179-0000779fd18c.html

That would have meant that people with money in money market accounts would just be out of luck; and companies that rely on the money markets for short term capital would not be able to roll over their paper. That means immediate layoffs by the tens of thousands -- like next week. How much more spooked than that could they get? The bailout caused the money markets to calm rather than get spooked:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aw990wjDl_1c&refer=home

If you mean "currency markets," that's a different story. But the big players in the curreny markets have an overwhelming interest in dollar stability, and if you can get across point 1 to them, I don't see why they would dump dollars in an extreme or disorderly fashion. This is a matter for monetary diplomacy, and mainly means convincing China's State Administration of Foreign Currency, and the central banks of Europe, Japan and the middle east not to dump dollars.


3. "there is going to be a huge temptation to print our way out of this debt."

That's a temptation, but that would be down the road in the next administration. Clinton faced similar problems, but did not turn on the printing presses; instead he raised taxes on the rich and cut defense spending.

The fiscal situation is dire, but it's not anything that a Clintonian fiscal and monetary policy can't fix within a few years:

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=4066006&mesg_id=4066369

4. "really bad decision that will bail out the wealthy few"

This is the most stupefyingly perplexing -- and inaccurate -- meme I've come across, and one that is endlessly repeated without question on all sides of the debate.

The institutions being "bailed out" are institutions that hold mortgage backed securities. Mbs are the money of the banking system. All financial institutions hold this stuff, not just ones that made bad decisions. It was sold to them as the closest stuff to treasuries that the market could produce. It was marketed in terms of its spread over treasuries. People who bought it were lied to; they did not make "bad decisions."

For some bizarre reason, the press and public have latched onto the idea that this is a bailout of Wall St. It isn't. It's an exchange of mbs for liquid money to be offered to every bank and financial institution in the country.

The institutions that made "bad decisions" were the ones that packaged this stuff, that failed to disclose the nature of its risks in Prospectuses and SEC Registration Statements, or the ones that made bad loans. But there isn't a correlation between the makers of bad decisions and the holders of bad mbs. The exceptions are Fannie and Freddie, which late in the game got into the business of packaging this stuff and keeping it on its books, and the Wall St firms that both made the stuff and kept it on their books. The Treasury seems content to let the Wall St firms that made the stuff and kept it on their books justly fail -- Lehman, Bear Stearns, Merril, et al.

This is an attempt to solve the liquidity crisis; not the solvency crisis on Wall St.

But the makers-combined-with-holders of bad mbs in general is not how the system works nor where the problem is.

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=1561876&mesg_id=1561876

I could repeat this all day: Mbs are the money of the system. In the olden days, banks of all kinds used to hold mortgages; now banks of all kinds hold mbs.

How this is seen as a bailout of the wealthy few is simply beyond me. Maybe it's a regional thing, but here in NYC regular people were panicked because they were facing the loss of their money market funds last week. It wasn't the wealthy few lining up to get their money or who face losing everything.

As for the danger being exaggerated, all I can say is that everyone who has had to look at the scope of the potential disaster -- Barney Frank, Hillary, Obama, Dodd, progressive economists

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x4057340

-- think it really is that catastrophic. They want to change the terms of the bailout and impose controls, but who exactly doesn't think we're skating on the edge of financial catastrophe?

I would really appreciate your wife's view and your view of this.

[dixiegrrrrl]

18. I have been reading that the Credit Default Swaps are the real underlying problem

esp. in relation to AIG.

"AIG was too big to fail because it could owe an astronomical amount—allegedly about $300 BN—on credit default swaps issued to support mortgage-backed securities.
Credit default swaps are essentially unregulated insurance contracts. Not technically securities, they do not have to be registered with the SEC. Not technically insurance, their issuance by AIG was not overseen by state regulators.

Among other things, this meant that AIG was apparently not required to disclose the full extent of its liability, or to hold reserves against these contingent liabilities, as they would for the life insurance policies their (currently) healthy subsidiaries write. So, when the rating agencies threatened to downgrade AIG, it is not surprising that the counterparties to these contracts would have required AIG to pony up more collateral.

This, AIG could not do.

Thus, a liquidity crisis."

http://www.concurringopinions.com/archives/2008/09/the_loophole_th.html


thoughts?

[HamdenRice]

27. Credit default swaps are a casualty not a cause

But they are a big, big problem, especially for AIG.

A credit default swap is an insurance policy that a bondholder buys. Paraphrasing the colorful names used in the Wiki article, let's say that Penion Fund wants to buy bonds from Risky Corp. It buys $10 million in Risky Corp's bonds which are 7% bonds for 5 years.

Risky Corp pays 7% interest or $700,000 each year. If Pension Fund gets scared that Risky Corp will default, Pension Fund can go to AIG and ask to buy a credit default swap.

Let's say the credit default swap costs 300 basis points (that's a fancy way of saying 3%). So Pension Fund pays AID $300,000 per year out of the $700,000 per year it gets from Risky Corp.

That may sound like a lot but it means (or was supposed to mean) that there was no chance that Penion Fund could lose money. If Risky Corp sends out a letter saying, we've run out of money we're not paying interest and may not be able to pay you your $10 million in year five, under the credit default swap, Pension Fund can go to AIG and say, here's Risky Corp's bond, we want our $10 million back and AIG has to give it to them -- even if Risky Corp's bonds are now selling for $2 million on the open market because of the default.

The worst thing about credit default swaps is that the repugs put a clause in the bankruptcy code that says that credit default swaps are basically exempt from waiting in line during bankruptcy if the issuer (AIG) of the credit default swap goes into bankruptcy.

That means that while AIG's bondholders, suppliers, employees, contractors -- everyone who was owed money -- would have had to wait in line if AIG had been allowed to go bankrupt, while the bankruptcy court tried to figure out how to pay off AIG's debts, holders of credit default swaps, like Pension Fund could just go and demand payment and get it.

Credit default swaps were purchased on trillions of dollars worth of mortgage backed securities, which means that the default of mbs means that certain issuers, like Lehman, are on the lines for billions and billions -- supposedly to be paid before bankruptcy even starts.

[MadHound]

29. Some questions and answers for you

First off, you're correct. Unbiased economists without a dog in this fight do tend to look at these things differently. They tend to be more objective for one thing, and more willing to tell the truth for another. That comes to my second question, sourcing. Granted, I can't give you references of whom I'm talking to on this, simply because I don't out friends and family on anonymous internet chat boards. Hopefully you'll take my word that these people are indeed nationally and internationally known economists, who know what they're talking about. That brings me to a question about your sources. You reference the Financial Times, Bloomberg, etc. These are trade magazines with a vested interest in this matter, and as such they're not terribly objective. What makes you think that their analysis is the correct one? Sorry, but I think that is like referencing Fox News on the subject of media bias.

1. You may not think of this as injecting liquidity into the system, but that is indeed what it is. Perhaps you need to go back and brush up on your college macro. MBS' aren't "money" of the banking system, they are assets that are bought, sold and traded. What is proposed is that the government will take over X amount of these assets for a price tag ranging from, depending on the person you're talking to or version of the bill you're reading, 700 billion - 2 trillion dollars. Since these assets aren't worth nearly what we're going to be paying for them, then yes, we will be injecting more cash into the system. This is the same basic premise as when the Treasury buys back bonds, they are adding liquidity, increasing the amount of cash in the system, driving down the value of the dollar and driving up inflation. Basic Macro 101.

2. My bad, early morning, lack of coffee is my only excuse. I did indeed mean currency markets. Yes, many big players have an interest in keeping the dollar stable. Many big players don't. However that really doesn't matter because again, Macro 101, by increasing the supply of dollars out there you are going to drive down the value of the dollar and drive up inflation. That's what's be slowly but surely happening over the few years as interest rates were cut, more money released into the system, and the value of the dollar goes down. Also, many players, especially oil players, have a vested interest in going from the petro-dollar to the petro-euro, and this will only exacerbate that problem. Being the currency of choice in the oil market kept the value of the dollar stable for a long time. With that gone, we're going to have even more problems.

As far as your money market analysis, and banks seizing up, we've faced this sort of crisis before(S&L in the ninties) and we didn't seize up then. Frankly I think that this is a lot of exaggeration as banks, especially large ones, are trying to find a buyer for their MBS' that will give them the price they want(somewhere around 50-60 cents on the dollar) as opposed to the price that those MBS's are truly worth(20-40 cents on the dollar). Yes, we had a Break the Buck scenario in the Reeves Primary, but honestly, considering that they took did a sweep out of 785 million dollars worth of Lehman's that they considered worthless, and only took a three percent hit, that's not a sign of impending implosion. The commercial money market took a short term hit, which they actually put off for a week thanks to the Investment Company Act of 1940. Meanwhile, the government money markets are still rock solid, and other commercial markets are moving to limit their damage. As Peter Crane of Crane Data put it: "People are acting as if everything is melting down, when the truth is that virtually all money market securities have done what they are supposed to do, and have held up in the face of these conditions." But this money market correction is now being touted as some sort of impending disaster, as you've put it, people wouldn't be able to write checks or get money from ATM's. Sorry, I realize that you're getting that information from biased players in the markets, or Paulson himself, but the meme is simply not so.

3. Frankly, we're already trying to print our way out of this debt already. What else is lowering the interest rate repeatedly if not a way of printing more money and bringing down the dollar. As far as Clintonian fiscal and monetary policy, let's not go there. After all, it was Clinton who really got the deregulation of the financial sector going(yes, Congress helped with that also), along with transferring a lot of the tech bubble straight into the mortgage bubble. I would prefer if we went back to something a bit more stable and regulated, like FDR, JFK or even LBJ and Carter.

4. Sorry, but this is simply a stop gap measure to primarily benefit the wealthy few. Yes, there might be some spill over to the rest of us, but it won't be much, nor will it last long. I can almost guarantee you that if this bailout goes through, the markets will go back up for awhile, allowing the rich and institutional investors to quickly and quietly sell out while the price is right, and then it will crash right back down, leaving us, the little guy, holding so much worthless paper. Meanwhile, freed of all that bad paper, the financial sector will be free to go on their way, suffer few if any real consequences, pay those big buck bonuses to their CEO's, and perhaps the extra added bonus of actually managing that huge trillion dollar fund of bad paper, the one they made such a mess out of the first time, since the Bush administration is kicking around the idea of outsourcing that management right back to those institutions:banghead:

Yes, there is no denying that we're facing a huge problem. But the trouble is, once again, the Bush administration is whipping up fear and panic in order to stampede the public and everybody else into doing something that will benefit them and their cronies, not what the right thing to do is. The cure to this problem is actually going to be worse than the problem itself. Do you really think that even another Great Depression will be worse than our Treasury Bonds getting downgraded? Do you honestly understand what will happen if those bonds are downgraded? Besides, we've seen this sort of play before, where Bush panics the public and Congress into doing something stupid. Do you think that this time will work out any better than what happened with the Patriot Act, the Iraq War or any other such fear driven actions did? I don't think so. As they say, fool me once, shame on you, fool me twice, shame on me. We've already been fooled a couple of times already, don't you think that it's time we wised up and simply said no?

[PRETZEL]

38. If I may follow up on your point #2,

and the effects of the euro vs. dollar on the oil market. It seems to me that this effect could have been foreseen. We've seen trends over the last few years as more countries (i.e, Iran Saudia Arabia (?)) that have made that decision. Under what circumstances would that reverse itself? How does the dollar strenghten against the euro when there are external factors (namely those oil producing countries) making internal decisions to trade their resources in a currency other than their own?

[MadHound]

42. Probably a major reworking of our economy

Including returning the manufacturing sector to our shores, among other things. A couple of great books on this subject for you to read, both by Kevin Phillips, "American Theocracy" which describes in great detail how our switch from a manufacturing economy to a service economy has undercut our entire economy, and "Wealth and Democracy"

If we get ourselves out of this mess, reregulate the financial sector, we could probably prevent a further switch from dollars to euros. However that's a big if at this point.

[PRETZEL]

49. I've read "American Theocracy"

but may need to go back and re-read it. But from what I took of that book would also seem to indicate that this may actually be a natural course of what he describes as an "empire" with the most recent example being the decline of the British Empire at the turn of the century. I got the impression that the switch to oil over coal as the major resource for manufacturing undercut existing British technology over advances being made by US manufacturers. Those advances were a direct result of US oil production which allowed for more effecient, effective processes. Also, the significance of the US' relationships with Middle Easern oil producing companies that allowed them the technology and capital to get their oil out and allowed us to indirectly control price has also contributed. The flip side of that was to allow ruling sects (or those groups that controlled the land where the oil was) to become a sort of "ruling class" which ultimately became drunk with money and power.

I'm not so totally sure that there have been technological advances which would precipitate our loss of manufacturing. What would precipitate that would be cost of manufacturing on US soil vs. cost of manufacturing abroad. Personally, at this stage, I don't see where this trend will reverse itself.

[HamdenRice]

48. I was hoping for a more substantive response

1. "Unbiased economists without a dog in this fight do tend to look at these things differently. They tend to be more objective ..."

I wasn't attacking the bias of your sources, and I'm puzzled why you would respond that way. I cited Bloomberg, et al, not for analysis but factual reporting of what is going on. I also cited DemocracyNow.

My main point in saying (without snark or condescension) that there is a difference between economists and finance people is just that one side tends to be more theoretical. As a former part time academic, I can't tell you how many papers I've commented on by economists that assume, for example, that bond covenants are negotiated between bondholders and bond issuers. Sounds logical, of course since it's a contract. But in the real world there are agency problems because bond covenants are actually negotiated between underwriters and issuers, which is why bondholders are so treated like crap. It's just an observation, especially since very, very few commentators seem to actually understand what mbs are or how they are performing, but are taking for granted certain memes floating through the mainstream media.

2. "You may not think of this as injecting liquidity into the system, but that is indeed what it is. Perhaps you need to go back and brush up on your college macro."

Again other than throwing around insults, do you have any evidence or any explanation of this? I didn't say it wasn't injecting liquidity. It is injecting liquidity. But it's not injecting money. It is injecting liquidity because there is a liquidity crisis. Did you read this? Can you offer a rational refutation of this model? Can you explain why this isn't replacing lost liquidity rather than injecting new money?:

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x4074948#4076839


3. "MBS' aren't "money" of the banking system, they are assets that are bought, sold and traded."

Obviously you don't like metaphors even when in quotes, but do you doubt that they are used as mediums of exchange and that when they can't be traded there is a liquidity crisis?


4. "What is proposed is that the government will take over X amount of these assets for a price tag ranging from, depending on the person you're talking to or version of the bill you're reading, 700 billion - 2 trillion dollars. Since these assets aren't worth nearly what we're going to be paying for them"

That's the whole point of the political stuggle going on right now -- you are assuming that Obama will lose the game. The whole point is to create a system in which they are purchased for what they are worth, not more. This is, as several commentators have said, an attempt to solve the liqudity crisis, not the solvency crisis. Can you explain why the plan is objectionable if the Treasury pays for them what they are worth, or why that would be an increase in money supply to replace illiquid assets with liquid assets?

5. "Frankly I think that this is a lot of exaggeration..."

I find this troubling in the debate because lots of people who are opposed to robust action by the Fed just say anyone who disagrees with them has to be lying. This isn't exaggeration. Do you have evidence that what happened last week isn't exaggeration -- evidence other than your opinion?

6. "this is simply a stop gap measure to primarily benefit the wealthy few. Yes, there might be some spill over to the rest of us, but it won't be much, nor will it last long."

Could you actually address the question of the difference between Wall St and the holders of mbs who would be able to trade them for t-bills? Could you actually address the plan, rather than make predictions based on what you "know" will happen?

7. "I can almost guarantee you that if this bailout goes through, the markets will go back up for awhile, allowing the rich and institutional investors to quickly and quietly sell out while the price is right"

You realize that this is not a bailout of the market -- as in the equities market -- and that equities in failing financials have been wiped out at Fannie, Freddie, Bear Sterns and Lehman? Although the crash of the stock market is a symptom of the disease, no one is saying that the stock decline is the disease. The disease is in the credit system and if we solve that, it doesn't matter if the stock market records serious declines.


It seems to me that like so many others who don't realize the gravity of the situation, you're just saying they lied before and they are lying now -- as though this is being engineered by Bush, Cheney, Rumsfeld et al, rather than by the grown ups, including Obama (whose people sat in on the Fannie/Freddie bailout), Hillary, Barney Frank, Dodd, etc.

Maybe if you don't want to discuss the actual facts and issues you could put your wife on the phone? I'm really interested in principled, rational discussion from opponents of the plan rather than snark and rhetoric.

[sniffa]

68. Thank you for this

This needs to be understood by all.

[yodermon]

13. Moody's was warning about losing our AAA rating back in January

This could accelerate that.
http://www.reuters.com/article/bondsNews/idUSN1017237120080110

NEW YORK, Jan 10 (Reuters) - Moody's Investors Service said on Thursday the United States' "triple-A" government bond rating could come under pressure in the very long-term if the Medicare and Social Security programs are not reformed.

"These two programs are the largest threats to the long-term financial health of the United States and to the government's Aaa rating," Moody's analyst Steven Hess said in the agency's annual report on the United States.

[dixiegrrrrl]

43. Wasn't Moodys under fire for improperly rating AIG and other banks?

[RUMMYisFROSTED]

55. Threats:

Medicare 11% of budget
SS 20%

"Defense" 21%
Debt interest 9%

[slipslidingaway]

14. This article talks about the cost of funding of these bailouts...

we really need to think how this will affect the average citizen.


Posted here the other day...
http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x4053996

Treasury Market and Mortgage Rates...chart at link 1977-2007
http://mortgage-x.com/general/treasury.asp


Fun With Funding
September 2008
http://contraryinvestor.com/mo.htm


snip>>

"... It's the cost of funding that will be key to forward outcomes both in the real US economy and financial markets.

In the past we have suggested that perhaps THE most important chart we can think of is the long term chart of the 30 year US Treasury bond. What we have described above simply puts an exclamation point behind this thought. The following is nothing but an update of the non-logarithmic 30 year UST. To suggest the red rising bottoms trend line is important is a multi-decade understatement. Will the whole forward funding question ultimately be the straw that breaks the proverbial camel's back for the US bond market?

...You already know we'll be following the magnitude and character of foreign capital flows intensely as we move forward. We believe it will be one of the most important analytical exercises to investment decision making in the years ahead. Fun with funding ahead? Naw, it's probably not going to be much fun at all. In fact, quite the opposite."

[liberalla]

15. K & R

I've heard that this requested bailout is not a solution, but only a delayer of economic doom. It will buy us 6-7 weeks - enough to take us through the election or so, (giving them the chance to orchestrate a McPalin steal)... Then, they'll be back again with another impending financial armageddon, catastrophic-type event just days/weeks away.

We need to do something, but not this give away. Thank you for taking the time to write this post.

[DemReadingDU]

30. The financial credit bubble is collapsing

Please watch the excellent series of videos by Dr. Chris Martenson
http://www.chrismartenson.com/crashcourse

This collapse will occur with or without the signing of this bailout bill


From a comment I found by Dr. Chris Martenson about the bailout bill:
9/21/08 "Mark my words, this is the largest looting operation ever in the history of the US, and it's all spelled out right in this delightfully brief document that is about to be rammed through a scared Congress and made into law."
http://www.chrismartenson.com/blog/what-latest-bailout-plan-means/5149

and here is someone's reply to Martenson that bluntly says it all:
Submitted by machinehead on Sun, 09/21/2008 - 16:13.
Correcto-mundo, Doctor M. This is bigger than 9/11. Bigger than the Crash of 1987. Probably bigger than the New Deal, which was the greatest expansion of central government ever. Some are calling it the "PATRIOT Act of Finance" in its sublime high-handedness. If this gets done, words such as "capitalism," "democracy," "economic freedom" and "representative government" will no longer apply to the US. I call the new system Kleptofeudalism. Under this system, a one-percenter group of privileged Kleptocrats owns and operates the country. Meanwhile, Worker/Suckers -- the remaining 99% of the population -- serve as their livestock. Worker/Suckers exist only to service the Treasury debt, and breed more Worker/Suckers to keep servicing the debt in generations to come. As in feudal times, class lines will solidify into iron curtains. The chances of your children advancing from Worker/Sucker to Kleptocrat will be virtually nil. This is literally the most radical event which has happened on North American soil since the Declaration of Independence was issued on 4th July 1776. But this is an anti-Revolution, a rollback of liberty, an enslavement. It is a fundamental and irrevocable alteration of our form of government. The only certainty, under the coming tyranny, is that the dollar is doomed to become a weak, Third World currency, which may not even be accepted outside CONUS borders. As refugees from 1930s fascism learned, gold is good. But diamonds may be more concealable and transportable. Frankly, I fear social unrest. If busted plutocrats can loot the Treasury for $700 billion on a whim, why shouldn't the jobless homeless loot stores for clothes and shoes? There is no answer, other than than "the 'law' is only for little people." And such an answer may not be satisfactory. Congratulations on proclaiming -- well in advance -- "The End of Money." Ding ding ding, it's here. Now what?
http://www.chrismartenson.com/blog/what-latest-bailout-plan-means/5149#comment-624

If you do not want to become a Worker/Sucker, please call your Senators and Congressman to vote NO on the bailout bill. If not available, their staff will take your message. Do it NOW!

note: Don't let anyone tell you the passage of this bill will prevent the collapse of the banks. It won't. The bubble we are in is going to burst anyway. Watch the excellent Crash Course videos...
http://www.chrismartenson.com/crashcourse


edit to correct a link

[liberalla]

66. Thanks for the links and info.

I'm on dial-up, so watching the videos will take a while (at least they're short). It looks good and I thank you again for pointing me in that direction.

I've listened to Ravi Batra on Thom Hartmann a few times and was impressed with his thinking and perspective. I just ordered (not yet arrived) his newest book:



Thom raves about this one and Greenspan's Fraud (also by Batra). Read that title above. I love it. It sounds so hopeful (eventually). We've been needing a revolution, and this current environment is the way.

There's a great review or two on Amazon.
http://www.amazon.com/New-Golden-Age-Revolution-Corruption/dp/1403975795/ref=pd_sim_b_1

[earth mom]

16. K & R. nt

[earth mom]

17. K & R. nt

[Not the Only One]

19. Bush should go down as the President that out-Hoovered Hoover

We are being bamboozled by the rich bankers that run our economy with their shell game. Fuck them. I'm sick of it.

[tom_paine]

20. K & R

[Locrian]

21. what does this mean??

this case, there is no net increase in the money supply in the banks, but only a change in form and increase in liquidity.

Exchanging and fixing suspect mbs "money" for treasury bills and real money, is not an injection of money supply; it's a swap of suddenly illiquid money supply for a liquid supply -- in other words a return to the amount of money that was in the system before it froze up.

In


Can you explain this? I mean exchange for WHAT treasury bills and real money? Why isn't that the same as borrowing more money form the FED? Are you saying there is some type of trillon dollar reserve?

Not trying to be snarky - just dont get what you are saying.

[HamdenRice]

25. I assume this is addressed to me and not the OP, so I'll answer

It's always easiest to understand this by creating a simple model of reality.

First let's understand what it means when the Fed increases the money supply. It goes something like this:

Suppose there is like $4 trillion "out there" in banks. Let's say this is all deposits by consumers and businesses. The banks then turn around the lend this money to other consumers and businesses -- some directly and some buy purchasing/owning mortgage backed securities and some by purchasing t-bills. These t-bills, loans, mortgages and mortgage backed securities are the banks "assets." Each bank is required to keep some amount of that total $4 trillion in reserve, and deposit some at the regional Fed. Each bank is also able to borrow money from its regional Fed. The Fed is basically the banks' bank.

The Fed can "increase the money supply" in a number of ways. It can lend money to the banks directly for example, which they will turn around and lend to us. The effect of "increasing the money supply" would be that eventually there would be not $4 trillion in banks, but $5 trillion. Increasing the money supply in this way when there is not a corresponding increase in goods and services is likely to lead to inflation (more money chasing the same amount of goods, so prices rise).

Now let's look at what is actually happening. Let's say that of that $4 trillion in the banks, $400 billion was in mortgage backed securities. Before the crisis, banks thought of that $400 billion as an asset, including an asset on their balance sheets. If they needed to raise money to make loans, they could sell those mbs. If at the end of settlement, they needed to pay some other bank they could pay them in mbs.

Now the crisis hits. No one knows how much that $400 billion in mbs is worth (even though most of it is performing and some of it is only in default because of crazy "contractual" reasons like cross defaults). Each bank takes a hit and writes down its assets. Instead of there being $4 trillion out there, there is $3.6 trillion "out there" -- $4 trillion minus $400 billion.

The Treasury's plan says, we'll buy that $400 billion, based on what it is worth, what is actually performing and what we project will continue to perform, by exchanging your mbs for t-bills. Let's say they decide that the $400 billion is worth after discount $300 billion.

Fine, everyone agrees, and the banks trade $400 billion in mbs for $300 billion in t-bills.

Now the amount out there is $3.9 trillion -- the post write down $3.6 trillion plus the $300 billion value for functioning mbs. Note that this isn't really a "bailout." It's an exchange of assets for exactly what they are worth, after careful study by Treasury and a severe discount.

Overall, the money supply did not increase; in fact it decreased -- from pre-crisis $4 trillion to post crisis $3.9 trillion.

That's very different from it increasing from $4 trillion to $5 trillion.

I don't see where the "increase in money supply" happened and therefore don't see where the inflationary pressure is supposed to come from.

[Tigermoose]

64. I think I have identified the error in your logic

You say the following:

"Each bank takes a hit and writes down its assets. Instead of there being $4 trillion out there, there is $3.6 trillion "out there" -- $4 trillion minus $400 billion."

This assumes that the banks had to write-down 400 billion of their assets. But if the Fed steps in and buys the mb asset for the original market value via this bailout, then there is no write-down and no loss. Therefore, there would be a 4 billion dollar increase in the money supply rather than simply a liquidity swap.

What do you think? From my limited accounting experience, I know that these mb assets are being valued at their original price, and it is not until they go to market that they have to re-evaluate and get written down if the market price is lower. But if the Fed is propping up the market values via this bailout, then no significant write-down would occur. And thus the Fed's 4 billion creation of money would increase inflation.

What you are suggesting is that the companies are going to take a loss on their balance sheets, and then the government is going to "donate" 400 billion in T-Bill assets to the companies. If that was the order of events, then I guess your example would be true. But I do not think that is the case with this bailout plan. I think the Fed is trying to help these companies avoid having to write down their mb assets at a loss by propping up the market value.

[HamdenRice]

86. I don't think so, but thank's for engaging so thoughtfully

Let's say the mortgage crisis had never happened in the first place; otherwise same facts and numbers, with banks holding $400 billion in mbs.

Suppose the feds announced, we'll buy any mbs you want to offer with t-bills. If banks exchange $400 billion of mbs for t-bills, total money supply still remains unchanged.

So an exchange of the form of bank assets has no effect on total money supply.

Now going back to the scenario with $400 billion in bad assets. Many banks have written down their assets already, as widely reported in the news, and that's why some have declared insolvency.

But if they haven't you are absolutely correct -- namely that an exchange of good assets for bad assets that haven't been written, even if the bad assets are paid for at their real performing value and not their face value, will inflate something -- but it will inflate their balance sheets, not their money supply.

So you are correct to notice a possible accounting anamoly, but it was on the wrong side of the ledger, so to speak.

[Tigermoose]

92. TBills will be redeemed for US $

As soon as companies convert the T-Bills into US Dollars, the money supply will be increased. I think that in the past, the Fed already had a budget for the number of T-Bills available for this sort of thing. But for this bailout, new T-Bills and thus new money will have to be created that was not a part of the current Fed asset portfolio. Thus this is an increase in the money supply.

[PRETZEL]

22. Great post,

If I can keep my head from spinning too much, I have a couple of questions.

I see where the effects on the dollar come in and taken in conjunction with the US having to trade at a greater level in euro's for oil could conceivably drive the dollar even further down. I believe it's been within the past few years that more and more countries are using the euro as its basis for selling on the open market.

My question then (naive as it may be), with all the discussion of the Credit Default Swaps and it's preference in bankruptcy, what effect would that have on our financial institutions if those swaps are to be repaid in euro's rather than US dollars? If, by chance, those holders of the CDS' were foreign banks or oil producing countries or Asian banks, I would suspect that it would be advantagious for them to require repayment in a currency other than the dollar.

On the issue of liquidity, what effect would a run on mutual funds and 401(k)s would there be if this infusion of capital was not made? At what point would companies who have their plans under management of some of these Wall Street firm start to panic? What effect would a massive re-allocation to cash markets have on Wall Street?

[PRETZEL]

23. k&r,

all discussion on this is important

[Tesla]

24. K&R!!!

Email this to people!!

[Raster]

26. This "bailout" is just another nail in the middle class's coffin.

Wall Street wants this bailout to gloss over their mistakes and continue business as usual. THE LAST THING WE NEED IS BUSINESS AS USUAL! We need an honest, in-depth, non-partisan examination of the facts and possible solutions. And guaranteeing that the rich, fat cats of Wall Street can continue to plunder and pillage at will IS NOT THE BEST POSSIBLE SOLUTION. It's good for certain elements and entities on WALL STREET, NOT MAIN STREET.

And let's be frank: the cheney*/bush* pResidential mis-administration is claiming they knew about this for months! MONTHS! Here's a reality check: they've known about this for YEARS!!! cheney*/bush* have been WILLING CO-CONSPIRATORS in the financial farce. It doesn't matter if you're a Rethuglican or a Democrat, white or black, lower class or middle class. You're being set up to take it in the shorts.

[redqueen]

28. So why didn't Sweden go down the tubes? (nt)

[MadHound]

32. ?

I don't understand, could you clarify a bit.

[redqueen]

33. Sweden faced similar crisis... bailed out banks... got equity stake...

no decimation of the country to be found.

[MadHound]

35. First because the Swedish government and people got actual equity for their bailout

Followed by a thorough, even invasive investigation into every single banking institution. They also instituted smart, sound regulations. None of these moves are on the board for our current bailout proposal. We're basically going to be buying fairly worthless paper, with no investigation or regulation of the banking system, they get to skate away clean. In fact, if Bushco gets their way, they will outsource all the management of that wonderful paper back to the same people who caused this mess in the first place.

[redqueen]

37. That's not what it says in your OP... it seems to say no bail out at all, under any circumstances.

IOW - let the banks fail. (OR... do you not think they will fail without this?)

Did you mean to say no bailout in its current form? OK to bailout with regulations, equity stake?

Cause you're getting lots of recs and it's not even clear (to me) what you're saying here.

[MadHound]

39. You were asking about why Sweden didn't go down the tubes when they did a bailout

I told why in my post above.

As far as my position goes, I'm against this bailout scheme that is being put forth by the Bush administration, one in which there are no investigation into the financial players, no equity for the taxpayers, and no regulations to prevent further problems.

Does that answer your questions?

[redqueen]

40. Halfway.

I still don't see why you wrote the OP in a way that seems to convey you are against any bailout in any form.

Maybe I'm reading that into it...

:shrug:

[MadHound]

44. Perhaps it was because I'm being so vehement in this argument

I'm pissed as hell about how we're all, once again, be panicked into doing whatever Bushboy proposes. We've seen this happen time and again with Iraq, the Patriot Act, etc. Yet once more, with Pavlovian reflexes, Bushboy says "Booga Booga" and the US, from Congress on down to us regular folk stampede right on over that cliff.

So yeah, maybe my tone was a bit strident, but frankly that is only out of frustration.

If Bush would come out with a plan similar to Sweden's, I would probably go for it. But first, I need to be convinced of a real need for such a plan(and I'm nowhere near convinced), and secondly, Bush isn't going to propose such a plan, in fact he would veto such a plan if it came from Congress.

However even if the situation is as dire as they say it is, I would rather take a Great Depression over Bush's plan, because the Bush bailout will do much more harm to our economy, government and country than another Great Depression would.

[redqueen]

45. Understood... I just hope people are proposing what they'd like to see added to the bill...

and not just calling and saying "let the banks fail". That seems to be a popular sentiment around here lately, and I find it worrying.

I've been calling congress repeatedly for days... everyone I can get through to... demanding an equity stake. Also passing around Bernie Sanders' petition.

I just hope people are taking constructive action... and not just saying "this bill is bad". Most of the country, both democrats and republicans, are already in agreement on that.



http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x4076190

[Romulox]

31. Every 10-15 years, the Corporate Sector demands another massive concession from the taxpayers

Did the S&L bailout "reform" the financial sector?

[Greyhound]

90. So at least a few people have noticed.

Our "economic powerhouse" has been broken since at least the 70s, and each time we have been forced to prop it up over and over by "leaders" on both sides of the isle.
:hi:

[AntiFascist]

34. K&R, also we may have to kiss universal healthcare goodbye...

and perhaps even Social Security?

Some are predicting that this will only be one of several huge bailouts that will be required, just like what happened in the Japanese economy...and they haven't even recovered yet!

[AzDar]

36. K & R ...

:kick:

[brindis_desala]

46. We need to get people back to work

Total unemployment increased by 11.6% from 6,532,000 persons in April of 2007 to 7,287,000 persons in April of 2008.
The number of people who lost their job, or were no longer holding a temporary job, increased by 21.0% from April 2007 to April 2008.
(The number who have permanently lost their job increased by 30.1% during this same period.)

JOBS! WE need: NEW DEAL II

[hfojvt]

47. most of that does not sound right

First, there is no money creation, and hence there would be little inflation from this bailout.

Second, the bailout is calming markets, reducing uncertainty, not the other way around.

Third, printing money is not all that inflationary. That's only M1, when most of the money supply is M2 - notes in an accounting ledger rather than actual cash.

Fourth, at the end of WWII our debt/GDP ratio was over 100% and we survived just find. 72% is too high, but not the end of the world. After I got fired from my job, my debt to income ratio was something like 200%, but I never lost my house. Debt/income ratio is not the most important number. If our credit rating is bad, it's perhaps because we seem unwilling to actually reduce our debt by collecting more in taxes than we spend.

I don't think we should hurry, but I don't think we should do nothing either. I don't buy the Bush frame that the only choices are a) their plan or b) do nothing, but you do seem to be suggesting the latter.

[HamdenRice]

50. Japan is at 1.7 -- yup that nation of savers

and the Japanese Yen isn't even "the" reserve currency (although it's pretty damned near "a" reserve currency).

By Japanese standards, our debt would be $23 trillion. Of course, they have better fiscal policy and more household savings, which is why the world is willing to lend proportionally more to them.

But you are right. As horrible as Bush has been, we still have a ways to go, and it is worth borrowing if it staves off the great depression of the "oughts" or the "twenty teens"

[SlipperySlope]

60. Nation of savers does not equal a saving nation

Japanese are prolific private savers, while their government has become a prolific spender. While their public debt is huge, their private debt is manageable.

We are about the enjoy the consequences of our double-barreled spending - private and public.

[Kartius]

52. I agree with almost everything the OP has said

These are scary times. We MUST have a bailout in one form or another SOON if not NOW. Currently the banks are not willing to lend to each other unless it's for high interest rates and that is only because they are expecting a government bailout soon to inject more money into the markets. Yes, the rich men and women at these banks will benefit greatly, however it may the only way to get banks to start lending to each other and the rest of the economy, even though it may only be temporarily. This includes corporate lending, small business lending, credit card lending, etc. If credit stops, then America will most likely enter a Great Depression.

Hyperinflation will occur regardless of the bailout. If we enter a great depression now, revenues for next year will fall and we will not have the money to pay off our debts. This means bankruptcy and collapse of the dollar. If we lend the banks the trillions (the problem is much more than 700 billion) for their arguably worthless assets (at least I think it is) we can borrow from other countries to delay the collapse. Whether other countries will continue to buy our debt is an honest question. These sovereign wealth fund nations depend on our imports for their economy (mostly China). If they stop buying, their economy will take a major tumble. This sharp turn south would cause incredible panic and unrest in the other countries as well. So China has a vested interest in softening or delaying the fall of the US. This means continuing to buy our debt for the short term future.

We must delay for a prayer's chance at righting the ship and softening the fall. The next president will have to cut almost all spending including medicare and social security, announce a policy of a stable dollar, and pray to god. Again, this won't fix our problem, but hopefully it can soften the fall. Delay, delay, delay.

[HamdenRice]

53. "cut almost all spending including medicare and social security"

Or cut defense spending by 80%, and we're basically home free:

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=4066650&mesg_id=4066650

[Kartius]

56. Cut Defense, Cut Spending, Cut Everything

I mention Social Security and Medicare because it is a 40-50 trillion dollar obligation (payments that are already guaranteed) in the future. This means that we would have to raise that much money to cover the elderly. Generally in accounting you would include obligations incurred but to be payed later in the books, of course the US thinks otherwise.

[SlipperySlope]

58. I disagree with a few points...

> First, there is no money creation, and hence there would be little inflation from this bailout.

This bailout will be funded by increased treasury borrowing. In our fiat currency system, money is created by the act of borrowing. When you borrow $200,000 on your mortage, that creates a new $200,000. So, yes, this bailout will lead to the direct creation of $700B to $1.8T of new money.

> Second, the bailout is calming markets, reducing uncertainty, not the other way around.

The proposed bailout is somewhat calming the STOCK market, because most of this money is going to flow directly into the pockets of the financial system. It is not calming the currency markets, commodity markets, or bond markets - all of which are reacting to this bailout as a threat to the value of the dollar.

[hfojvt]

67. admittedly I cannot remember the money and banking course I took

24 years ago, but I don't see how credit creates money. Except by circulating money that is already there. If I borrow $10,000 from a bank, that $10,000 is not created, it must already be there for the bank to be able to lend it. Of course, you could figure that 100 million households have an average of $7,000 that they keep in their mattresses and a solid government investment might lure that money into circulation, but that seems far-fetched to me.

Even if borrowing does create money, the government is only crowding out private sector borrowing. It's borrowing money that is already available to be lent. The government is borrowing money that might otherwise have been lent to Freddie, or Lehman Brothers or AIG, etc.

As for the currency markets, are they reacting to the bailout, or are they reacting to the crisis?

[SlipperySlope]

72. How Credit creates Money

If it helps, I'll give a simple example. This doesn't illustrate all the details but it should get the point across.

I'm going to track the history of $1,000 through a short span of its lifetime. Let's say it is your $1,000 - which you currently have hidden inside your mattress, but you are ready to do something more fruitful with.

Say you go to your local bank and deposit your $1,000 into a checking account. You then drive home, open up your account status on the bank's website, and look at the balance. Sure enough, you have $1,000 in the bank. You are neither richer nor poorer for having deposited the money. The system as a whole is neither richer nor poorer for you having deposited the money. And believe it or not, your bank is neither richer nor poorer for you having deposited your money.

Why is your bank neither richer nor poorer? Because on their books two things happened. Although there was a $1,000 credit made to their cash reserves, there was also a $1,000 debit made against your account. They have $1,000 more in cash than they did yesterday, but they also have a $1,000 debt that they have to repay you someday.

So far, so good.

Now the bank isn't in the business of keeping money sitting in their vault doing nothing. Lucky for them, the owner of a local business stops in and asks if he can borrow $1,000. Your bank says "sure", has him fill out an IOU for $1,000, and then gives him the $1,000 you deposited.

Oddly enough, the system as a whole is now $1,000 richer. There is now $2,000 in circulation, where there was only $1,000 before. The businessman looks in his wallet and sees $1,000 - you look in your checking account and see $1,000 - so money was created by the act lending.

So that's it in a nutshell. Your deposit of $1,000, once lent out, created total money in the system of $2,000. In the United States, under our current financial system, borrowing is the ONLY way money is created.

> Even if borrowing does create money, the government is only crowding out private sector borrowing.

If I understand you, you are saying "even if this borrowing creates money, that money was going to be created anyway".

Not necessarily.

Imagine that you are sitting on money that you don't feel like lending out (like the money under your mattress) because you don't trust any of the borrowers out there. Suddenly you Uncle Sam comes knocking on your door asking if you have any money to lend. Because you LOVE your Uncle Sam, you decide that you will lend this money to him after all. In other words, the additional government borrowing enticed you to put money into the system that you otherwise wouldn't have.

Another example. Imagine your name is Rasshid and you live in Kuwait. You've got a big pile of dinars under your mattress, and you were planning on depositing them into your cousin Sven's nice European bank. Suddenly your distance Uncle Sam comes knocking on your door asking if you have any money to lend. Because you LOVE your Uncle Sam much more than your cousin Sven, you decide to lend your money to Uncle Sam instead. In this case, there was going to be money created either way, but Uncle Sam's actions caused that money to be created in the United States instead of in Europe.

> As for the currency markets, are they reacting to the bailout, or are they reacting to the crisis?

Let me be completely honest in answering that. I think that anyone who says they can specifically tell you the reasons why the markets do what they do is like someone who tells you that it hasn't rained in 30 days because the Gods are angry. If the crisis is a windstorm, and the bailout is a strong gust of wind, do you say the flag waved because of the windstorm or because of the gust?

That said; I believe the currency markets have been consistent in this message: Any clear government action that signals the creation of more dollars has lead to a reduction in the value of the dollar. Currency markets fell 3% (if I remember correctly) immediately after the bailout plan was announced.

[DeschutesRiver]

51. Our family history with regards to the reality of a wheelbarrow full of worthless notes,

First, thanks so very much for sharing more info. I am trying to rapidly bone up on this and every bit of reasoning out there is fair game for my perusal.

Including ancedotal family stories. You spoke of "wheelbarrows", and just so no one thinks that was an exaggeration, here is what I know. Dh's mom was German, long passed now.

He distinctly remembers her telling of taking a wheelbarrow full of nearly worthless paper down to the local bakery to exchange for baked goods. He remembers the other bad stuff too, that she didn't speak as much of, like the forced march she and other civilians were rounded up for (they were supposed to just march out POWs, but the civvies were just accidents, casualities of war as they call it), which had huge health impacts on her for the rest of her shortened life. I know there are many alive today in America whose entire life has not be filled with such chilling events; heck, many have never even experienced more than the mildest downturn in the economy. These are times when people are on the brink of living in tents/cars, losing their homes, when the spectre of war looms larger in the background than many of us can imagine or even want to wrap our minds around. History has been soft to us, and now we are living history.

It happened, it is not some tall tale. And people who lived through that never forget it. I wish she was here, because I'd be picking her brains. Or similarly that my depression era grandparents on either side were still alive - there is simply nothing better than learning from those who lived these things.

At least at this point, we are all able to discuss what a bailout would mean more rationally, without the emotion. I couldn't figure out how this was anything more than a random stab in the dark, and one almost doomed to failure. If my personal budget were in the same condition as the national economy, I wouldn't embark on this kind of bailout path by borrowing from my elderly parents, because it wouldn't solve a thing. The longer we focus on imaginary wand wavings of bailouts, the shorter the time becomes to hope we can find a real solution. Although I do understand there is no real solution any more that won't involve suffering for the majority of Americans.

[SlipperySlope]

59. Pictures from Weimar Germany

Money worth more as fuel for the furnace than for spending:



Money valued by the pound, not the denomination:



Survival:



Pocket change:



Care to mail a letter:



Child's play:

[DeschutesRiver]

62. Thanks for sharing those photos. I said to dh last night

that we'd never spoken of the wheelbarrow story for almost, gosh, 30 years now. And the fact that it has arisen in our lifetimes as something you'd consider (way way far out there, but not in tinfoil anymore) is startling.

We have tons of family letters and documents, which I plan to finally take a look through this winter. Dh's dad did diplomatic service amongst other things, and I imagine there might be a lot of gold to glean from those voluminous family letters. Which I've never thought I should make time to read in the past 30 years, not until now.

[TBF]

54. Do we bail out gamblers at the casinos next? Enough already. No bailout.

[SlipperySlope]

57. Debt Ratio isn't a good talking point

I agree with you in concept, and I agree that this bailout will be an unmitigated disaster, but I don't think talking about the debt ratio is a good talking point.

Using 2007 numbers, the Debt-to-GDP ratio of the US is 60.8% (I'm not arguing with your numbers, I just want to use a single year I can get consistent numbers for many countries from).

The Debt-to-GDP of Germany is 63.2%, France 64.0%, Canada 68.5%, Italy 104%, and Japan is 195.5%.

It is hard to convince people that the US is having a debt-to-GDP crisis when so many other "seemingly healthy" countries have higher ratios. Americans tend to look at places like France, Canada, and Japan, and think that those countries are going ok - when in fact they are in many ways more bankrupt than us.

[robertpaulsen]

61. Dmitri Orlov has a good analysis on the foreign debt angle.

Adieu, stage 1 collapse!
by Dmitry Orlov
In February of this year, I wrote The Five Stages of Collapse, connecting each stage of collapse – financial, commercial, political, social and cultural – with a specific mental milestone, where faith in some aspect of our status quo is shattered in the face of dramatically altered circumstances. Here is what I had to say at the time about Stage 1: Financial Collapse:

Financial collapse, as we are currently observing it, consists of two parts. One is that a part of the general population is forced to move, no longer able to afford the house they bought based on inflated assessments, forged income numbers, and foolish expectations of endless asset inflation. Since, technically, they should never have been allowed to buy these houses, and were only able to do so because of financial and political malfeasance, this is actually a healthy development. The second part consists of men in expensive suits tossing bundles of suddenly worthless paper up in the air, ripping out their remaining hair, and (some of us might uncharitably hope) setting themselves on fire on the steps of the Federal Reserve. They, to express it in their own vernacular, "fucked up," and so this is also just as it should be.

The government response to this could be to offer some helpful homilies about "the wages of sin" and to open a few soup kitchens and flop houses in a variety of locations including Wall Street. The message would be: "You former debt addicts and gamblers, as you say, 'fucked up,' and so this will really hurt for a long time. We will never let you anywhere near big money again. Get yourselves over to the soup kitchen, and bring your own bowl, because we don't do dishes." This would result in a stable Stage 1 collapse - the Second Great Depression.

However, this is unlikely, because in the US the government happens to be debt addict and gambler number one. As individuals, we may have been as virtuous as we wished, but the government will have still run up exorbitant debts on our behalf. Every level of government, from local municipalities and authorities, which need the financial markets to finance their public works and public services, to the federal government, which relies on foreign investment to finance its endless wars, is addicted to public debt. They know they cannot stop borrowing, and so they will do anything they can to keep the game going for as long as possible.

About the only thing the government currently seems it fit to do is extend further credit to those in trouble, by setting interest rates at far below inflation, by accepting worthless bits of paper as collateral and by pumping money into insolvent financial institutions. This has the effect of diluting the dollar, further undermining its value, and will, in due course, lead to hyperinflation, which is bad enough in any economy, but is especially serious for one dominated by imports. As imports dry up and the associated parts of the economy shut down, we pass Stage 2: Commercial Collapse.

So far so good. In terms of mental milestones, we can tease apart financial collapse into a number of psychological levees that are being breached one by one. The first one to go was people's faith in home equity: that the value of their homes will serve as a nest egg to sustain them in retirement. What we have been witnessing for the past week or so is the demise of people's faith that their investment portfolio will sustain them. It is still easy to find investment advisers who will tell you to "go long on equities" because, you see, "eventually the economy will recover," but their reassuring words are starting to sound like a death rattle to all those whose retirement savings suddenly look laughably inadequate.

Eventually, faith in the magical, mystical properties of the US Dollar will be lost, but it seems very important to all concerned to make the process gradual. It seems safe to assume that in the limit, as time goes to infinity, the value of the US Dollar goes to zero:


limt→∞US$ = 0

It also seems safe to assume that it is negligible even for finite, foreseeable values of t. The problem is making it look like a continuous function. If the value of any given type of dollar-denominated garbage jumps to zero suddenly (because it cannot be sold at any price) then that produces a discontinuity: a rift in the fake financial space-time continuum.

This is what the current bailout plan is generally about. It is not about making anyone here happy: the fascists think that smells of socialism, the socialists think that it smells of fascism, and everyone (except for Bush, Paulson and Bernanke) agrees that it smells. Some people would like to see some heads roll, but as Robespierre discovered in the course of the French revolution, that just puts you knee-deep in headless aristocratic corpses, still with neither bread nor cake to feed to the peasants.

Speaking of peasants, everyone continues to repeat that the bailout is being financed by "the taxpayer," although it is unclear why our soon-to-be jobless and destitute taxpayer should be expected to cough up an extra trillion or more. The taxpayer may soon need a bailout too. If this mythical taxpayer actually tried to borrow her share of a trillion dollars against her future earnings, what sane person would want to give her that loan? Clearly, the gratuitous mention of the taxpayer is just a ruse designed to hide the rather obvious truth.

The bailout is actually going to be financed by foreign interests that hold US Dollar assets. Yes, the value of their holdings will go to zero, but they do not want this to happen suddenly. They wish to continue redeeming their US Dollar holdings for all manner of things of value, from capital equipment and intellectual property, which can be expatriated, to farmland and other means of production, which can be used in situ to grow food, mine ore, and so forth, which are then expatriated. There is some optimal function for this great unwinding, which will allow foreigners to expropriate the maximum amount of value in the minimum amount of time before their efforts to redeem their remaining US Dollar holdings stop paying for themselves in terms of the value of the available stuff.

As this process runs its course, the US will lose access to imports. Most significantly, it will find it more and more difficult to obtain the 2/3 of the transportation fuels that come from abroad, which are needed to keep the economy functioning. And that will bring on Phase 2: Commercial Collapse. That is probably what we are getting for Christmas this year, or shortly thereafter.

In the meantime, enjoy Stage 1. You will miss it once it's over.

http://www.energybulletin.net/node/46667

[Joe Chi Minh]

63. A brilliant article under this link on another thread:

http://www.blackagendareport.com/index.php?option=com_content&task=view&id=801&Itemid=1

[Wilber_Stool]

73. HOLY SHIT!!

Is that number real? $750 trillion in bad paper? Derivatives and swaps and other shit. That's a little hard to believe. I can't wrap my little brain around that.

[AzDar]

65. Kick...

[Kartius]

70. The Economy is in Dire Straits

I am very frightened right now. I don't understand how people can still talk about Palin and Debates. The economy may collapse on Monday when the bailout dies and Congress goes on vacation. Yes they may have an emergency meeting, but the market will realize that these idiots have no clue what is going on.

[earth mom]

84. The reason is that there is NO guarantee that the 70 billion will fix anything & we won't still have

the Great Depression 2 after those god damn theives have run off with our money.

Also, people want to see the debate because it's obvious that McCain/Palin are hiding, no, running from it. Why is that? That's the question.

[spooky3]

71. I trust Barney Frank and Paul Krugman more than the Wall Street enablers.

[2Design]

74. foreclosures are going to continue and the economy is going

to tank even without this money because housing is overpriced and the ponzi scheme has to continue to unwind - this putting money in now means there will be no money later - if these dems pass or give this admin any more money - I will have had enough - this is wrong in so many ways and if they have not learned anything from the rest of the cry wolf this admin has done - this ticks me off to no end

[greyghost]

76. Exactly right, I've been saying the same thing for months. The

economy is going to continue to fail. The proposed bailout makes a bad
situation worse.

[Lydia Leftcoast]

77. That was my instinctive reaction, too

We don't actually HAVE $700 billion. We're already over our heads in debt. The only way to come up with an extra $700 billion (aside from raising taxes, which Bushboy won't do) is to print money or borrow more from other countries. But they're not going to consider us very credit worthy.

[bertman]

78. Thanks to all who have posted and TRIED to enlighten us about this mess our country is in.

I must say that I am no closer to feeling that I know what's going on or how it should be dealt with. And I've been devouring the threads that are related to this topic.

Kartius, the reason we must still focus on the debates and Palin is we are going to elect (we hope) the leader who is going to help us weather this awful storm. And maybe, if we elect the right one, that leader will be wise enough and smart enough to do what is best for the country and NOT just the elite.

Of course, all bets are off if BushCo gets to declare martial law and "postpone" the election. After the last week's events it has dawned on me that BushCo may actually be planning to leave office and leave the shell of a country to someone else while he retires to Uruguay. But only time will tell.

[Kartius]

79. We need to do something to maintain confidence in the markets

I am sick of this argument that its going to fail anyways so why not let it fail. ARE YOU DEMOCRATS? What has happened to the mantra "YES WE CAN?" Can we hope that this economy can be fixed? Why are we defeatist? Everything else in this world can wait until we have some form of resolution to this problem. If this fails, the economy completely collapses on Monday. Why not give ourselves as Americans a chance of fixing the problem by giving ourselves more time? Why are we giving up hope? HOPE PEOPLE, YES WE CAN

[2Design]

80. if you let it unwind totally, then you can clean it up - it would be like

adding a addition to a house in Galveston while the hurricane was running through - let it finish and when the economy is under democratic control then fix it - these guys have shown they have no interest in us and only in themselves and their rich friends

[MadHound]

81. I'm not making that argument of let it fail anyway

The argument that I'm making is that we have two bad choices. The one facing us without the bailout could be as bad as the Great Depression. Well, we've survived the Great Depression, and the Great Depression before that, and before that, etc.

In fact good things come out of such depressions, the scoundrels lose their ass, the weak are culled from the corporate herd, regulations are reinstated, and money is spent on the real economy ala the New Deal etc.

However if we do this bailout, we're putting ourselves at great risk for something much much worse. If our Treasury Bonds are downgraded, we're screwed. There won't be any money for a New Deal, no money for any government program on the federal, state or local level. No money for infrastructure, no money for defense, no money for any damn thing because our budget currently runs on a debt structure, and our debt structure depends on the full faith and credit of those bonds. If they are downgraded, nobody will buy bonds, not for the bailout, not for the war debt, not for any debt.

To further complicate matters, we could very well be looking at high inflation, and possibly hyperinflation if this bailout goes through. The large injection of liquidity will weaken the dollar, the added debt will weaken the dollar, all of which will spur a high inflation rate. If the government decides to turn on the presses and print our way out, watch out.

I'm not sitting here blindly cheering on the crash of the economy. I like(OK, liked) our economy. It has permitted me to live a modest but fulfilling life, buy a house and some land, put some aside. I don't want to see that collapse. I don't want to live through the hell of a Depression my mother and father did. However I don't want to see something much worse happen, which will be the case if this bailout goes through.

That is why I raised this alarm. It isn't blind cheerleading, it is a warning, a shout in the night. Make of it what you will, do with it as you wish. Just don't say you weren't warned.

[Kartius]

83. Sadly, I think it is too late to stop hyperinflation

We have too long printed more money than the growth in our economy. This was masked by the purchase of our currency by foreign nations. Since they were just holding our dollars in banks, it did not flood the market. Now, if we regress into a recession, we will suffer a revenue shortfall in the federal as well as state level (most states are in debt as well). With our expenses remaining the same for the foreseeable future, we will have to borrow more money just to stay afloat. If not, we won't be able to pay for everything and at that point we will be officially bankrupt. Countries will be rushing to sell their dollars and I don't know.

[HamdenRice]

87. This is just wrong -- economically, historically and morally. Nothing good came from the Depression

That's why it is imperative to prevent a new Great Depression. As I wrote in another thread, my own mother was hungry for five or six years as a child growing up during the Great Depression, living off discarded day old bread from the grocer and rotten tomatoes -- this even though her father was working because wages were so low. My father, growing up on his parents' tobacco farm at least ate, but in the year that commodity prices crashed, the family was offered $5 for the entire crop -- for an entire year's work.

Hitler rose to power as a result of economic distress in Germany, and the record of depressions leading to good political outcomes is very thin.

You seem to be pointing to good things that came out of the New Deal, not out of the Great Depression. But you don't need a Great Depression to have a New Deal. Just recall Teddy Roosevelt and Lyndon Johnson.

It is morally unacceptable to say "good things come out of such depressions, the scoundrels lose their ass, the weak are culled from the corporate herd," without adding that "the poor are also culled human herd and many good, honest hardworking people lose everything, through no fault of their own."

[yourout]

82. Thom Hartman nailed it.........Hoover tried it and Failed....the Japanese tried it in the 90s and...

failed.

The only way out is to put people to work.

I love the idea of .0025% tax on stock transactions to minimize speculation. I also love the idea of a labor cost equalization tariff to help keep jobs here.

Jobs create capitol liquidity.

Bubble up.....not trickle down.

[earth mom]

85. Bingo. SPEND 70 BILLION ON JOBS. Fuck the corporate bastards that have only STOLEN from all of us!

:grr:

[bertman]

88. The New GREEN Deal? The GREEN New Deal? Whatever the moniker, we could mobilize this nation

for a new energy-independent and carbon-neutral future and put millions to work doing good things for America and the rest of the world.

The technology is here, the knowledge is here, all we are lacking is the NATIONAL WILL and the LEADER to implement this.

I'm with TheGoldenRule on this one. If we have to give SOME $$ to stabilize the fiscal situation that's fine, but let's put the balance into a new American future.

We could lead the world in a new direction if we only had the will to do so.


Edit: This would be the equivalent of what was done industrially to fight World War II. Turn our patriotism and national creativity and hard work into a force for changing this planet for the better for all humans and other critters.

[Supersedeas]

91. why not start new banks with that money--why should we mortage middle class jobs to save Wall Street

incompetents. If they, fail then that is the nature of capitalist evolution.

If the financial sector needs help after their failure, then provide the stimulus/tax dollars directly instead of through a proven faulty and fraudulent filter.

750 Billion ought to buy at least one alternative to an old failed system.