9.30.2008

Chalmers Johnson looks at that other grand swindle

Chalmers Johnson recently discussed the similarities between the financial crisis that originated on Wall Street, with Washington's indispensible aid, and the awesome size of the aggregated budgets for America's empire. Johnson believes money spent on 'national security' to be "pure waste." He believes this because Americans are neither secure nor well-armed for all of the money spent on the security apparatus. Johnson's conclusion:

Spending hundreds of billions of dollars on present and future wars that have nothing to do with our national security is simply obscene. And yet Congress has been corrupted by the military-industrial complex into believing that, by voting for more defense spending, they are supplying "jobs" for the economy. In fact, they are only diverting scarce resources from the desperately needed rebuilding of the American infrastructure and other crucial spending necessities into utterly wasteful munitions. If we cannot cut back our longstanding, ever increasing military spending in a major way, then the bankruptcy of the United States is inevitable. As the current Wall Street meltdown has demonstrated, that is no longer an abstract possibility but a growing likelihood. We do not have much time left [emphasis added].

The Denver police

Defenders of the constitution…

It looks as though Denver's cops were envious of all the great publicity earned by the St. Paul cops!

The President ‘ain’t too proud to beg’

The New York Times reports that President Bush and other leaders from both major parties remain determined to get the bailout Plan through Congress.

President Bush and Senate leaders of both parties vowed on Tuesday to work toward quick approval of a financial bailout plan despite the House's rejection of a $700 billion proposal that the White House had negotiated with Congressional leaders of both parties.

"We are at a critical moment for our economy," the president said. "Congress must act."

The riff raff seem restless

An image found on CounterPunch

Obama increases his lead over McCain

538.com's latest:

Some financial crisis links (9.30.2008)

Stephen Colbert discusses the bailout plan and its failure to make it through the House:


Naked Capitalism looks at the Plan's Congressional prospects after yesterday's (9.29.2008) stunning defeat.

Josh Holland of AlterNet lists and defends the reasons "Why Conservatives Led the Fight Against the Bailout Deal."

Jim Cramer tells us that it "Feels like Financial Terrorism."

Scott Thill of AlterNet asks "Will Wall Street's Meltdown Turn America Into a Police State?"

Pam Martens asks and answers "What Wall Street Hoped to Win."

Chris Floyd argues that

…Monday's rejection of the bailout plan is not a catastrophic political defeat for George W. Bush; he has no political standing, no political future. But it is a vast and humiliating defeat for the Democratic leadership, across the board…

9.29.2008

The House refuses to pass the Plan

The New York Times link.

The Washington Post link. According to the Post article:

The 228-205 vote amounted to a stinging rebuke to the Bush administration and Treasury Secretary Henry M. Paulson Jr., and was sure to sow massive anxiety in world markets.

The Wall Street Journal link. The Journal tells us that

The defeat is a massive setback for the Bush administration, specifically the Treasury Department, as well as lawmakers who have been working throughout the last week on the legislation in the wake of the collapse of Lehman Brothers Holdings as well as the government's bailout of American International Group Inc. and its takeover of Fannie Mae and Freddie Mac.

The White House expressed displeasure with the defeat of financial-market bailout legislation in the U.S. House of Representatives, and said President George W. Bush will meet with his economic team later Monday to determine the way forward.

The Financial Times link.

Update I (9.29.2008)

Bloomberg link.

Mike Whitney link.

Talking Points Memo roll call of the House bailout bill link.

Update II (9.29.2008)

Paul Krugman's take (via Naked Capitalism): "OK, we are a banana republic."

Robert Lovato addresses the 'march to dictatorship' thesis here (via AlterNet).

William Greider asserts that today's vote "…adds another deep shock to the system, both in politics and economics, but what an invigorating moment for democracy."

Some financial crisis links (9.29.2008)

America on the road to dictatorship?

Joseph Stiglitz writes in the Nation that

To a skeptic, Paulson's [bailout] proposal looks like another of those shell games that Wall Street has honed to a fine art. Wall Street has always made money by slicing, dicing and recombining risk. This "cure" is another one of these rearrangements: somehow, by stripping out the bad assets from the banks and paying fair market value for them, the value of the banks will soar.
There is, however, an alternative explanation for Wall Street's celebration: the banks realized that they were about to get a free ride at taxpayers' expense. No private firm was willing to buy these toxic mortgages at what the seller thought was a reasonable price; they finally had found a sucker who would take them off their hands — called the American taxpayer.
Daniel Gros and Stefano Miccosi of the Financial Times observe: "…the largest European banks have become not only too big to fail, but also too big to be saved." From this point they conclude:
With banks that have outgrown their home turf, national treasuries and regulators in Europe are living on borrowed time: they cannot simply develop "road maps" (the only result of various Ecofin discussions of regulatory reform by finance ministers), but must contemplate a worst-case scenario.
To Gros and Miccosi's point, Wolfgang Münchau, also writing in the Financial Times, adds:
Banks once considered as too big to fail have become too big to save. Unlike the German government, the US administration is in a position to save its largest bank, but is not big enough to save its entire financial system.
And:
Without a contraction in the financial sector, the US administration risks a debt explosion, and a sudden withdrawal of foreign financial investors. This is the other big catastrophe looming large in the background. We are facing two big tail risks from different ends. Failing to rescue the banking system could lead to a depression. But so could a rescue if it produced macroeconomic instability [emphasis added].
Yves Smith of Naked Capitalism, the lead source for the comments above, then observes:
But in the course of his discussion, Munchau makes the observation that none have dared face up to: the financial system is too big for governments to rescue. We've given the weaker form of that argument: the US, or even the US plus all the world's central banks, cannot keep a massive, multi-market asset bubble from deflating. But not only can the current financial system be saved, it shouldn't be saved. The debt binge means it is at an unsupportable, bloated scale. It needs to be scaled down to a more viable size, and only that level should get government support [emphasis added].
As reported by the Financial Times, Peer Steinbrück, the German Finance Minister, told the German Parliament that
"The US will lose its status as the superpower of the world financial system. This world will become multipolar" with the emergence of stronger, better capitalised centres in Asia and Europe…. "The world will never be the same again."
And:
"When we look back 10 years from now, we will see 2008 as a fundamental rupture. I am not saying the dollar will lose its reserve currency status, but it will become relative."
John Gray also does not mince words in his assessment of America's predicament. He points out that
Our gaze might be on the markets melting down, but the upheaval we are experiencing is more than a financial crisis, however large. Here is a historic geopolitical shift, in which the balance of power in the world is being altered irrevocably. The era of American global leadership, reaching back to the Second World War, is over.
You can see it in the way America's dominion has slipped away in its own backyard, with Venezuelan President Hugo Chávez taunting and ridiculing the superpower with impunity. Yet the setback of America's standing at the global level is even more striking. With the nationalisation of crucial parts of the financial system, the American free-market creed has self-destructed while countries that retained overall control of markets have been vindicated. In a change as far-reaching in its implications as the fall of the Soviet Union, an entire model of government and the economy has collapsed [emphasis added].
Unfortunately, for those of us who must live with the consequences of the plan, which is to say, of the political response to the financial crisis, the "creed" in question is likely to survive in some form. In America, Market fundamentalist talk has long coexisted with the remnants of the New Deal State. Economic conservatives made their peace with the New Deal order during Reagan's time. We know, then, that such talk does not need a solid basis in reality to be effective as an ideology. Consequently there is no compelling reason to believe that Americans will completely jettison market fundamentalism because America's finance capitalists have taken a few blows. One possibility has the crisis affirming market fundamentalism because it would serve to legitimize state repression of dissent.

The Chilean option — liberal dictatorship, military or otherwise — stands before America as one 'attractive method' to conserve market fundamentalism as an ideology and a practice.

Floyd Norris of the New York Times reports that the Secretary of the Treasury will gain significant powers because of the bailout legislation.

9.28.2008

Treasury Department provides privileged briefing to investors

The bailout has yet to come to a vote and already the Bush regime has created the opportunity for select firms to engage in insider dealing, according to Naked Capitalism:
Various readers wrote us, and it was confirmed by a detailed report on the call at DealBreaker, that the Treasury Department held a conference call this evening for investors on the bailout bill. A memo was evidently sent to SIFMA members; others may have been contacted by other means. But the report I got from one person who was on the call was the the [sic] questions came from financial services industry members. In other words, this was most assuredly not intended to be a call open to the public at large [sic] If anyone from the media or other member of the great unwashed was listening in, it was by accident.
This is simply scandalous. To have a group of interested parties get a privileged briefing by government officials on a matter of keen public interest flies in the face of what a democracy is supposed to be about. The proper method would either be a published FAQ on the Treasury website or a briefing with the media included. But why should I be surprised? Favoritism has been a staple of the Bush Administration [links added].

Obama continues to best McCain

According to 538.com:

The trend:

The discussion draft of the bailout plan

The text can be found here (.pdf). The House may vote on the bill tomorrow.

Some thoughts relevant at this moment

A cliché:

In a bear market (or recession or depression) money returns to its rightful owners.

James Galbraith (2008, p. 102) on inequality and a bubble economy:

An economy that moves from bubble to bubble is unsustainable, and bubbles of this kind create a particular kind of wealth, vastly greater than any other in our society. They generate the billionaires who now dominate the Forbes 400. They therefore foster a particular concentration of economic power in the target companies and in their banks. Economic power naturally translates into political power. And so one has to ask, Are the people most favored by an inflating market also those best suited to govern the country and, by extension, the world? That is, naturally, the view they take. It is a view often reflected in the public media, which they tend to own. But it is not entirely self-evident that this view is actually correct. The deepest issue raised by the inequality of economic incomes is, therefore and as ever, the distribution of political power. The term of art, in other countries, for people who control power in this way is oligarch. That word, which is not meant to flatter, reflects a general understanding that private persons with such wealthy cannot be expected to serve any interest other than their own.

While discussing the lesser 'evil argument,' Hannah Arendt (2003, pp. 36-37) observes:

Politically, the weakness of the [lesser evil] argument has always been that those who choose the lesser evil forget very quickly that they chose evil.

The general circulation of the lesser evil argument forms a mechanism, according to Arendt:

Acceptance of lesser evils is consciously used in conditioning the government officials as well as the population at large to the acceptance of evil as such.

This use of the argument thereby makes evil an unavoidable 'fact' of the world.

McCain aide has a meltdown after the debate

So reports the Washington Independent:

"The Bullet" looked downright angry with Sen. Barack Obama after Friday night's debate. Standing in the Spin Room next to the debate auditorium, McCain strategist Steve Schmidt drew a larger clutch of reporters than other surrogates — a vaunted list that included a former secretary of state, several governors and even "America's mayor" — and unloaded a double barreled attack on a "biased" press and a "shameless" Obama campaign.

"Shame on them," he thundered, striving for the higher ground against the campaign of Hope. "Shame on them!" he repeated, ticking off attacks by the Obama camp that he decried as "absolutely untrue," and blasting Obama as the gutless loser of the first debate. Obama agreed with McCain "11 times," Schmidt said, which revealed a defensive posture.

Although agreeing with McCain on any point is not an insane act per se, doing so is hardly a mark showing excellent judgment. So, Obama ought to rethink those positions on which he agrees with McCain.

That said, I wonder if Schmidt believes Obama ought to alter his opinions just to distinguish himself from McCain? If Schmidt strongly believes that McCain and Obama must have unique positions on the issues, then he should advise McCain to adopt positions which differ from those held by Obama! Or, McCain should copyright his ideas!

Life is simple, is it not? Why make it complicated with phony conflict?

The ‘predators’ come to an agreement

Paulson's horrible plan looks to be near competition (see this, this and this). According to the New York Times report, the final version should include the following:

…pay limits for some executives whose firms seek help, aides said. And it requires the government to use its new role as owner of distressed mortgage-backed securities to make more aggressive efforts to prevent home foreclosures.

In some cases, the government would receive an equity stake in companies that seek aid, allowing taxpayers to profit should the rescue plan work and the private firms flourish in the months and years ahead.

The White House also agreed to strict oversight of the program by a Congressional panel and conflict-of-interest rules for firms hired by the Treasury to help run the program.

The revised Plan may make it to the House floor on Monday (9.29.2008) and the Senate on Wednesday (10.1.2008).

The coup is nearly complete.

A third party candidate speaks plainly and directly

From TPM:

9.27.2008

The nationalization option

The economist Brad DeLong advocates the nationalization path on his blog (via TPM):

It might work like this. Congress:

  • grants the Federal Reserve Board the power to take any financial firm whatsoever with liabilities and capital of more than $25 billion that is not well capitalized into conservatorship
  • requires the Federal Reserve Board to liquidate any financial firm in its conservatorship when it judges that the firm is insolvent (paying off in full or not paying off in full the liabilities of the firm at its discretion), unless
  • the Federal Reserve Board finds that preservation as a going concern is in the interest of the taxpayer, in which case Congress
  • grants the Federal Reserve Board the power to transform equity stakes in the firm into junior preferred stock at par value and then transfer ownership and custody of the firm to the Treasury
  • requires the Federal Reserve to terminate conservatorship if the firm becomes well-capitalized once again.

In addition, Congress:

  • grants the Treasury the power to issue up to $500 billion of troubled asset redemption bonds, the proceeds of which are then to be loaned to the Federal Reserve to be used to cover the liabilities of those liquidated firms that the Federal Reserve judges it is in the interest of the taxpayer to have their liabilities paid off in full.

With all thanks due to market fundamentalist prejudice, deeply entrenched business interests and the lack of a nationally viable opposition party, the nationalization option seems to be quixotic. It is unlikely to come up for discussion.

On the banker’s coup

The New York Times reports that a consensus is emerging on the Plan. The Washington Post reports that a deal is near.

Yet some professional economists, situated on the right, strongly advise against implementing the Plan. American citizens mostly oppose the Plan (also this). Even a significant number of congressional Republicans oppose the plan. So, is it that surprising that Wall Street pushed the crisis toward the precipice (see this and this) this past week in order to shove the Plan through Congress? No! And, as Mike Whitney adds

Financial industry rep. Paulson is the ringleader in a bankers' coup the results of which will decide America's economic and political future for years to come. The coup leaders have drained tens of billions of dollars of liquidity from the already-strained banking system to trigger a freeze in interbank lending and hasten a stock market crash. This, they believe, will force Congress to pass Paulson's $770 billion bailout package without further congressional resistance. It's blackmail.

As yet, no one knows whether the coup-backers will succeed and further consolidate their political power via a massive economic shock to the system, but their plan continues to move jauntily forward while the economy follows its slide to disaster.

9.26.2008

The tally (9.26.2008)

Obama has pulled in front of McCain since the Palin interlude completed its term. His lead can be seen in this 538.com graphic:

Presently, the obvious question is: Are the voters rejecting the Republican Party or opting for Barak Obama? The answer to this question matters because the two share much with respect to the issues.

9.25.2008

Labor protests the Plan

The New York City Labor Council sponsored a protest at Broad Street and Exchange Place in lower Manhattan today. According to a Reuters report (thanks to an email from Robert B), both Jesse Jackson and John Sweeny spoke at the event. The NYCLC statement may be downloaded here.

Some financial crisis links (9.25.2008)

Vikas Vajaj of the New York Times wonders about the real worth of these toxic assets. He wonders because "…the difficulty in valuing these assets could result in the government's buying them for more than they will ever be worth, a step that would benefit financial institutions at taxpayers' expense." But I thought overpaying was the whole point!

Yves Smith of Naked Capitalism takes Vajaj to task for "spreading disinformation"! Smith asks "How can Vajaj not understand what this program is about?" He wonders because the Plan intends

…to pay above, in fact considerably above, current market prices for the illiquid (frankly, often dud) assets. There is no point to this exercise otherwise. The banks are free to sell now at market price, but they aren't willing to. Hence the government is stepping in, paying over the mark.

This is a feature of the program, not a bug. The financial firms most assuredly do not want price discovery at current levels, and paying above market serves as a back door recapitalization of the banking system. But the operation is badly flawed, since it's the companies with a high proportion of assets for which the Treasury overpays most who benefit most. That given priority to those with the biggest exposures, when not all of them may be worth saving, and within that group, the level of subsidy will likely be arbitrary, since the degree of overpayment will vary from asset to asset.

Vajaj seeming accepts as true the belief that this is a liquidity crisis. But this is an insolvency crisis, one generated by the magnitude of toxic assets now in the system.

Michael Hudson fleshes out his "Plan as monumental fraud argument" in his most recent article. Why would Paulson consider perpetrating this fraud? After arguing that a wave of write-downs and -offs are necessary for the economy to move toward an equilibrium position, Hudson proceeds to state that

Such debt writes-offs are a precondition for writing down America's mortgage debts to levels that are affordable [emphasis added]. But Mr. Paulson's plan is to fight against this tide. He wants the Wall Street to keep on raking in money at the expense of the economy at large. These are the big banks who lobbied Congress to appoint de-regulators, the banks whose officers paid themselves enormous bonuses and gave themselves enormous golden parachutes. They were the leaders in the great disinformation campaign about the magic of compound interest. And now they are to get their payoff.

Briefly put, Paulson, according to Hudson, merely wishes to help America's renteir capitalists to cash in big while they can.

Ralph Nader asks "Who will show some backbone against the bailout?" before enumerating the conditions he believes a bailout would need to protect the public interest.

James Galbraith questions the need for a bailout in the Washington Post (via Naked Capitalism). The bailout would only help Wall Street, according to Galbraith, "…where deregulation, greed and fraud ran wild."

David Herszenhorn of the New York Times reports that Congressional Democrats and Republicans have agreed on the form of bailout (see also the reports in The Wall Street Journal, Business Week and The Washington Post). The agreed upon bill seemingly will reflect the Paulson-Bernanke Plan but for a short-term spending cap,

…limits on pay packages for executives whose firms seek assistance from the government and a mechanism for the government to be given an equity stake in some firms so that taxpayers have a chance to profit if the companies prosper in the months and years ahead.

It appears that the Congress will pass a bill which contains the appalling Section 8, which reads:

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

The agreement has collapsed, according to an Associated Press report. The cause? "[C]onservatives were still in revolt," according to the AP. Moreover, the New York Times reports that "It has become abundantly clear, that members of Congress are hearing from their constituents, many of whom are furious about the proposed rescue."

9.24.2008

Bush’s pep talk

Tonight (9.24.2008) the President informed the hoi polloi that the America must implement the Plan if the country wishes to avoid an economic disaster. What would the Plan accomplish? According to Bush:

It would remove the risk posed by the troubled assets, including mortgage-backed securities, now clogging the financial system. This would free banks to resume the flow of credit to American families and businesses.

Any rescue plan should also be designed to ensure that taxpayers are protected. It should welcome the participation of financial institutions, large and small. It should make certain that failed executives do not receive a windfall from your tax dollars.

It should establish a bipartisan board to oversee the plan's implementation, and it should be enacted as soon as possible.

In other words, the Plan ought to protect American citizens, which it would accomplish by removing the risks posed by the near worthless assets now vexing the big financial institutions. It would place the burdens posed by these risks on the American citizens as a whole. Americans would derive a great benefit from their act of kindness. The benefit would take the form of an opportunity. The plan will enable the financially strapped commoners to put themselves further into debt to the financial institutions that manage to survive the crisis! Furthermore Americans can rest easy knowing that their government will justly implement the Plan because members of both parties will oversee its execution!

Why would Americans need good jobs working in a diverse and growing economy when dollars are so cheap?

Democrats prove their irrelevance once again

Nancy Pelosi appears willing, according to The Hill, to support the wicked bailout Plan but only if Congressional Republicans do the same!

…Pelosi (D-Calif.) has effectively sent the message that if she is going to jump off a cliff to rescue Wall Street, she wants House Minority Leader John Boehner (R-Ohio) and George W. Bush holding her hands when she leaps.

Pelosi made this scenario clear at a lengthy closed-door meeting of House Democrats on Tuesday. Many of those present said they took Pelosi's message to mean that a "majority of the minority" needs to support the bill before she will bring it to the floor.

It does not matter if the Plan is a constitutional mistake, irrational and immoral to boot. What matters to Pelosi and her party is that they avoid taking the blame for passing this appalling bill.

Disgraceful.

McCain to suspend campaign because of the crisis!

This is according to the wire report contained in the New York Times. It is unclear what the suspension means in practice, as Greg Sargent notes.

Update (8:42 pm, 2.24.2008):

Senator McCain's initial statement claimed he wanted to skip Fridays (9.26.2008) debate. Senator Obama intends to continue campaigning and Friday's debate remains on schedule, according to the New York Times.

Do we have a choice?

Maybe…. Kinda…. Sorta….



A Nader/Gonzalez campaign ad.

Some financial crisis links (9.24.2008)

James Henry uses a forbidden phrase to describe America's current political and economic situation:

Ladies and gentlemen: pardon my intemperance, but it is time for some moral outrage and perhaps a little good old-fashioned class warfare as well — in the sense of a return to seriously progressive taxation and equity returns for public investments. After all, as this week's proposed record-setting Wall Street bailout with taxpayer money demonstrates once again, those in charge of running this country have no problem whatsoever waging "class warfare" against the rest of us — the middle classes, workers and the poor—whenever it suits their interests.

Henry then points out that the Plan is just a program meant to throw "good money after bad."He concludes by stating his program of progressive reform.

Nomi Prins points out that the Plan would only create and give Wall Street and the relevant government agencies what amounts to "a self-licking ice cream cone." To avoid this fate any bailout plan which makes it through Congress must include a new regulatory regime. (via AlterNet and CommonDreams).

Bert Ely believes Wall Street can clean up its mess without help from the Federal Government:

I have run the numbers looking at the capacity of the industry to pay the tab. Assuming that bank insolvency losses don't get way out of line, which I don't think they will, then the industry can handle it. It's not going to be cheap, but the banks can handle it and clean up their own mess. The losses will feed back through the industry to depositors and borrowers in the form of lower rates on deposits and higher cost of loans.

One caveat: Ely's claim issues from a market fundamentalist position. (Via Naked Capitalism).

Chris Bowers of Open Left wonders if the economy is in crisis. If not, then what are the Bush administration's intentions with their Plan?

Mark Thoma of Economists View, on the other hand, would not wish to risk the consequences that could follow any failure by the government to act. His argument rejects any Main Street-Wall Street dichotomy: Saving Main Street entails saving Wall Street.

Writing in the New York Times, James Grant warns that the dollar, the world's hard currency which currently floats on air, so to speak, will not survive the crisis and return to the status quo.

Some political links (9.24.2008)

Joshua Frank takes a close look at the very inadequate Barak Obama — another "centrist Democrat" — before he suggests

…standing up and voting for what you believe in, no matter how fringe or foolish you are made out to be by others who claim to know better than you. Our democracy is in peril. War rages on. Jobs are scarce and the environment is being destroyed at an exponential rate. Voting on the likelihood of perceived social gains in the short-term is not only erroneous; it is without a true understanding of what it is going to take to bring about real change in this country.

Paul Starr, on the other hand, believes the two parties are sharply divided because of their different and opposed social bases — i.e. he offers a race-based explanation of America's party polarization.

McCain and Obama stand in as proxies for two versions of America. When voters hear Obama, they are responding not just to him but to a new multicultural America that they find attractive or frightening. And when they hear McCain, they are responding to a traditional America — or rather, an idea of that America — that they are determined to preserve or willing to see change.

Paul Craig Roberts believes the Plan to be unfeasible. One reason: The rest of the world has grown tired of American's "arrogance" and empire. This reaction is significant because, as Roberts states, "The US cannot be a hegemonic power without foreign financing." Hyperinflation beckons.

According to a recent Washington Post/ABC News poll, Obama's star has risen with the grim economic news coming from New York and Washington (via Huffington Post).

Patrick O'Conner of Politico reports that House Republicans refused to support the Plan when they met with Vice President Cheney.

The Army Times reports (via Greenwald) that

But this new mission marks the first time an active unit has been given a dedicated assignment to NorthCom, a joint command established in 2002 to provide command and control for federal homeland defense efforts and coordinate defense support of civil authorities [link added].

Glenn Greenwald rightly adds:

There's no need to start manufacturing all sorts of scare scenarios about Bush canceling elections or the imminent declaration of martial law or anything of that sort. None of that is going to happen with a single brigade and it's unlikely in the extreme that they'd be announcing these deployments if they had activated any such plans. The point is that the deployment is a very dangerous precedent, quite possibly illegal, and a radical abandonment of an important democratic safeguard. As always with first steps of this sort, the danger lies in how the power can be abused in the future. [emphasis added]

9.23.2008

Some financial crisis links (9.23.2008)

Federal Reserve Board Chairman Bernanke testified today (9.23.2008) before the Senate Committee on Banking, Housing, and Urban Affairs. One highlight of his talk:

Despite the efforts of the Federal Reserve, the Treasury, and other agencies, global financial markets remain under extraordinary stress. Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy. In this regard, the Federal Reserve supports the Treasury's proposal to buy illiquid assets from financial institutions. Purchasing impaired assets will create liquidity and promote price discovery in the markets for these assets, while reducing investor uncertainty about the current value and prospects of financial institutions. More generally, removing these assets from institutions' balance sheets will help to restore confidence in our financial markets and enable banks and other institutions to raise capital and to expand credit to support economic growth.

But I thought this was an insolvency crisis? Is there not too much liquidity in the system, as Michael Hudson argues?

Naked Capitalism believes Chairman Bernanke to be deluded (or dishonest if he is not deluded).

Daniel Nicolas believes Bernanke "…has played us all as fools," thus taking the dishonest option.

Jesse Jackson, Sr. believes the Plan is a "breathtaking insult to the Constitution" and that Wall Street, along with its governmental enablers, wishes to extort the bailout money from American taxpayers and others (by threatening to generate a world economic collapse.

David Lindorff tells us that the Plan is

…not about saving Main Street, as Paulson claims. Main Street, under the bailout, is toast. It's about helping the banks and investment banks and insurance companies that brought on this crisis to ride it out in style, their astronomical losses bankrolled or absorbed by the American public, so that they can shift their operations overseas and continue with their rape and pillage of the global economy.

In other words, for most Americans, the political contest now in progress approximates a zero-sum game: Civil society and the subordinate classes v. American finance capital. It might even be a negative sum game for America with the political gains made and profits pocketed by Wall Street failing to equal the loss of well-being most Americans will experience in the near future!

James Galbraith and William Black briefly list the conditions under which any reasonable bailout will proceed. They intend their conditions to protect the greater and diverse public and the general good.

Thomas Ferguson and Robert Johnson also identify conditions which any bailout will need to meet if the play is to protect the public interest. They also urge Congress to seize the initiative and to stand firm when defending Main Street against Wall Street's assaults.

Otto Spengler believes "Paulson's dreadful scheme will become law…" Why? "…because Americans love their bankers." He adds further insult to America's collective injury with his lament: "Where, oh where, is America's Vladimir Putin, who will drive out the oligarchs who have stolen the country's treasure and debased its currency?"

And David Brooks, the New York Times columnist, welcomes what he believes to be the emerging Wall Street Washington junta! (via Greenwald)

Is it safe?

With roiling markets becoming the norm, anxious investors ask the obvious question. The answer, according to Michael Hudson: No. What do they fear? His answer:

Investors — especially in Germany, whose banks have been badly burned — are seeking to be safe from fraud and misrepresentation. U.S. banks and firms have lost the trust of large institutional investors here and abroad, because of year after year of misrepresentation as to the quality of the mortgages and other debts they were selling. This is Enron-style accounting with an exclamation point — fraud on an unparalleled scale.

Clinton reminisces

Looking at the Gramm-Leach-Bliley Act in the rearview mirror

Might the President feel any remorse about what he helped bring about?

One policy Clinton said he doesn't regret is his 1999 repeal of the Glass-Steagall Act, which, for the first time since the Depression, allowed commercial banks to engage in investment banking activities. Clinton said the commercial banks were an important moderating force on the risk-taking of the big investment firms that collapsed this week. "In the case of the current crisis, I believe the bill I signed allowed Bank of America to take over Merrill Lynch," he said [link added].

Nah!

To those that have, they get more…

The world abounds in irony, as Jeff Matthews notices:

All in all Friday [9.19.2008] was, we think, a black day for free markets: those who got it right are being punished; those who got it wrong are being rescued.

To be sure, Matthews' conclusion supposes that markets can be free and rational, a belief which has been ruthlessly tested these past months.

9.22.2008

When is bipartisanship more than hot air?

When the Democrats need the Republicans to get something right

Glen Greenwald notes and lists some of the rightwing opponents of the Plan. He then observes that "Right-wing opposition to the Paulson plan is vital for having any meaningful chance to stop it." What makes this cross-aisle collaboration vital? Greenwald continues:

Does anyone have any confidence at all in the Democrats' willingness and/or ability to impede this bailout train if the Bush administration and the Right were vigorously behind it, warning the nation of impending doom unless we submit to vast, unchecked government power of the type Henry Paulson is demanding? The instances of complete Democratic acquiescence under those circumstances — including when they "controlled" the Congress — are far too numerous to allow any rational person to think Democrats, standing alone, would stop the Paulson plan. As sad as it is, meaningful right-wing opposition is critical for that to happen.

Oh, dear… The Dow fell…

It appears investors were unnerved when they learned Congressional Democrats — and some Republicans! — were not wholly sincere when they genuflected over the weekend. Why, Senate Democrats want Uncle Sam to get in on the getting and to soften the blow landed on the nearly bankrupt. They even want to limit the compensation paid to executives of the firms that receive Uncle Sam's help. It is clear these closeted socialists do not understand the market mechanism which grants liberty to us all.

Update:

Naked Capitalism published the following quote taken from an email sent by a Congressional staff member.

From the members' meetings that I've been in today, I can tell you that large portions of the rank and file from all across the spectrum really don't like this bill. Leadership is trying to ram it through, and Barney Frank, who's been great all Congress has totally turned into Paulson's lapdog. Very disappointing.

9.21.2008

Paul Krugman judges the plan

"No deal," Krugman avers. Why? Because

  • the plan might work, but only if the Treasury Department pays above-market prices to collect Wall Street's garbage and, more importantly, God smiles on the wicked;
  • the plan fails to identify and express the reasons that it will work;
  • and the plan refuses to impose a quid pro quo on the miscreants.

In other words, the plan is morally bankrupt and irrational, although Krugman is much too polite to say this. He is also too polite to point out that the plan in effect transforms the federal government into Wall Street's bagman.

Yet another Bush power grab

The text of the bailout plan (known as the "Legislative Proposal for Treasury Authority to purchase Mortgage-related Assets") contains three disturbing but not unexpected provisions:

Sec. 2. Purchases of Mortgage-Related Assets.

(a) Authority to Purchase. — The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

(b) Necessary Actions. — The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation….

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

It is worth noting that the Act, if passed by Congress without modification, would not only authorize the Secretary of the Treasury to purchase American "mortgage related assets," it also authorizes the Secretary to make these purchases "without limitation" or effective oversight. Briefly put, the Plan will give the Secretary a blank check. This check would enable the Secretary to become a finance dictator working unconstrained by the rule of law. The proposal does include a sunset clause (two years, Section 9), a spending limit ($700B, Section 6) and requires the Secretary to report to Congress (Section 4). But these limits are weak and the only ones contained in the text.

So, the Plan intends for American citizens to become debt slaves in perpetuity. What is more, the Bush administration wants American citizens to forfeit some of their remaining political powers, meager as they are, to the Executive branch. Just as it did during 9.11's aftermath, the administration wishes to use a national catastrophe and the sensible fears it promotes to usurp political power. In return for enduring these thefts, the Act only requires the government to protect American citizens by saving Wall Street from the worst consequences produced by its own past actions! Virtue is its own reward for the common folk, it would seem, whereas the coldest rapacity earns gold and much else besides for the greedy and reckless few.

I cannot say that I was surprised by this outrageous gambit. It is dishonest and vicious, and so it precisely reflects the Bush culture the world has come to know since 9.11. But it is disappointing nonetheless since the Plan is likely to set limits to the debate over what the country must do to overcome the crisis.

Update:

Mike Whitney makes an important point when he states: "The banksters own this country, always have; only now they've decided to strip away the curtain and reveal the ghoulish visage of the puppet-master. It ain't pretty." No, it is quite ugly. Yet the real insight contained in this passage can be found in the second clause of the first sentence, which rightly points to the contempt Wall Street feels for Main Street. What is good for American finance capital is good for the country, so far as the Street is concerned. Naturally it is impolitic to actually say this. Thus America's democratic institutions and the rule of law limited and masked Wall Street's domination of Main Street. But the financial crisis has given an opportunity to this unprincipled scoundrel, and Moneybags excels when it is a matter of exploiting an opportunity. Apart from the opportunity the crisis has created, democratic governance and the rule of law are inefficient when considered from the vantage point provided by Lower Manhattan. They can be radically altered or eliminated according to what finance capital needs, wants and can achieve. If enacted as written, the Plan would produce a double effect: 1) It will promote another massive transfer of wealth to finance capital; 2) it will complete another stage on America's road to dictatorship. The Plan ought to never make it out of Congress.

Update II:

Adam Ross Sorokin of the New York Times rightly equates the Plan, especially Section 8, with the Patriot Act.

David Hilzenrath of the Washington Post suggests that Washington's recent bailout work will promote the growth of larger financial firms (the too-big-to-fail survivors of the crisis) while also decreasing the competition within the industry (through the destruction of the smaller players). This outcome would be neither fair nor sensible, the article suggests.

9.20.2008

New documentary footage of police misconduct in St. Paul


The footage was originally published at GritTV.

The Wall Street coup?

This is Michael Hudson's summary judgment

Overnight, the U.S. Treasury and Federal Reserve have radically changed the character of American capitalism. It is nothing less than a coup d'êtat for the class that FDR called "banksters." What has happened in the past two weeks threatens to change the coming century — irreversibly, if they can get away with it. This is the largest and most inequitable transfer of wealth since the land giveaways to the railroad barons during the Civil War era.

The $700B gift?

It appears that the Bush administration wants to use the taxpayer's money to buy Wall Street's illiquid debt but not to attach strings to the gift [see the Text of the Draft Proposal here]. Even the New York Times noticed this problem: "The [administration's] proposal does not specify what the government would get in return from financial companies for the federal assistance."

Can you say moral hazard?

9.19.2008

Reenter Keynes?

Or a Marshall Plan for American finance capital?

It seems that the Bush administration prefers the corporate Marshall Plan option even though Bush believes governmental intervention into the economy to be necessary given the magnitude and significance of the crisis. Yesterday Fed Chairman Ben Bernanke and Secretary of the Treasury Paulson addressed Congress and proposed a new stabilization plan to save finance capital from the judgment day it had created for itself, a plan which conspicuously lacks an economic stimulus package, according to the New York Times. The plan goal is made clear: It is to restore "…the strength of our financial system so it can again finance economic growth." The plan means to achieve this end by removing the "…illiquid assets that are weighing down our financial institutions and threatening our economy." Although the plan lacks a stimulus program, a reindustrialization program (manufacturing still does not matter), relief for threatened mortgage holders or even a federal criminal investigation into the practices and parties which produced this catastrophe, Paulson denied the intent of the Administration's plan was the rescue Wall Street.

Mike Whitney does not agree with Paulson's defensive claim. He also finds it ironic that "…the very people who created this mess…are the ones who will decide how to resolve it…." He then asks a relevant question: "Where else but Washington would such massive failure be rewarded with more power and authority?"

Nor does William Greider, who argues that:

Financial-market wise guys, who had been seized with fear, are suddenly drunk with hope. They are rallying explosively because they think they have successfully stampeded Washington into accepting the Wall Street Journal solution to the crisis: dump it all on the taxpayers. That is the meaning of the massive bailout Treasury Secretary Henry Paulson has shopped around Congress. It would relieve the major banks and investment firms of their mountainous rotten assets and make the public swallow their losses — many hundreds of billions, maybe much more. What's not to like if you are a financial titan threatened with extinction?

He then states:

The scandal is not that government is acting. The scandal is that government is not acting forcefully enough — using its ultimate emergency powers to take full control of the financial system and impose order on banks, firms and markets. Stop the music, so to speak, instead of allowing individual financiers and traders to take opportunistic moves to save themselves at the expense of the system.

It is becoming clearer every day that Bernanke, Paulson, the Bush administration and the Republican Party as a whole are betting that they and Wall Street actually can fool most of the people nearly all of the time. The story has yet to conclude, though. Americans will soon learn that the effects produced by this crisis will easily dwarf those attributed to 9.11 and the GWOT. What will happen then?

Update:

Pam Martens chimes in with her assessment of the planned bailout:

There is no sincere plan by this administration to help America or Americans. There is only a plan to slow the financial collapse until after the November elections by throwing a politically palatable amount of money at it and a plan to continue to blame it on a housing bust.

If we, the American people, allow this to happen, we're enablers to the unintelligent design model. Before one more penny of our taxes are spent on this ruse, we must demand a seat at the table (I think Ralph Nader should occupy that seat) to discuss breaking up Wall Street, crushing this model, innovating a sensible model that serves the individual investor and deserving businesses, and promises our children a future of more than a banana republic.

Update II:

Mike Whitney's most recent (9.21.2008) assessment of the Paulson plan:

The Paulson strategy is to create another ocean of red ink while refusing to face the underlying problem head-on. This just further exacerbates the consumer-led recession which economists know is already setting in everywhere across the country. Demand is down and consumer spending is off due to falling home equity, job losses, and tighter lending standards at the banks. The broader economy does not need the added downward pressure from higher taxes, bigger deficits, or inflation. Paulson's plan is a band-aid approach to a sucking chest wound. The debts are enormous and the pain will be substantial, but the problem cannot be resolved by crushing the middle class or destroying the currency.

The hidden dilemma posed by the plan is not whether it will work in some way which improves the common good but whether it is meant to work in a manner most Americans would consider acceptable. Why believe the former to be true when the plan appears to be little more than a massive transfer of wealth to America's finance capital? We should not believe it true given the present situation and the historical record. In their analysis of the 1970s crisis, Duménil and Lévy (2004) tell us that

The shift to neoliberalism [in the 1970s] had two types of consequences. First of all, finance managed the crisis according to its own interests, which prolonged the crisis; second, this stretching out of the crisis made it possible for finance to shift the course of history in its own interests. Both elements, the management of the crisis and the setting up an alternative society, are indeed linked — the crisis created the conditions for destroying the old order [p.16].

One could add to Duménil and Lévy's point that the crisis also provided the elements needed to create and legitimate the neoliberal order which 'resolved' the crisis. It is this neoliberal system which has recently faltered and which the plan seeks to defend.

9.18.2008

Nasty business in Michigan

GOP caught kicking people when they are down

A local Michigan Republican Party Chairman (Macomb County) planned to use a mortgage foreclosure list to strike registered voters from the rolls, according to the Michigan Messenger.

"We will have a list of foreclosed homes and will make sure people aren't voting from those addresses," party chairman James Carabelli told Michigan Messenger in a telephone interview earlier this week. He said the local party wanted to make sure that proper electoral procedures were followed.

The Messenger also reports that the Michigan GOP, along with the McCain campaign, plans to conduct a statewide program of voter disenfranchisement.

This disenfranchisement strategy would mostly effect minority voters caught by the mortgage crisis, according to the Messenger's report.

The Michigan GOP quickly issued a denial and demanded a retraction from the Messenger. In support of its rebuttal, it then 1) left-baited the blog; 2) produced a tu quoque assertion which also conflated the actions of ACORN with those of the Democratic Party as a whole; 3) had Carabelli claim that the Messenger
libeled him with the alleged falsehoods contained in its story; and 4) asserted that the Messenger is a partisan political entity, a claim based on tenuous evidence.

Jefferson Morley, the Editorial Director for the Center for Independent Media, the organization of which the Messenger is a part,
refused to retract the article, denied that the Center was a partisan political entity and supported the investigative work contained in the article.

Finally, he discussed the matter this morning (9.18.2008) with Amy Goodman and Juan Gonzalez of Democracy Now.

The panic continues

Rust never sleeps

Nor, it would appear, will anyone worried about their future.

The New York Times reports:

But there was little relief from the paralysis that has gripped the credit markets this week, which has sent investors flocking to the safety of Treasury bills and threatened to starve businesses of capital as Wall Street grapples with its most dramatic shake-up in decades.

The Wall Street Journal:

Fears about the safety of money-market funds — traditionally one of the most conservative investor haves — grew after Putnam Funds closed its institutional Putnam Prime Money Market Fund following a surge of redemption requests.

The move comes days after The Reserve Primary Fund, one of the largest money-market funds, said at least a dozen large investors pulled out almost $40 billion of their money earlier this week and caused the fund to "break the buck." That is, its net asset value fell below the time-honored standard of $1 a share.

When asked about the future of the remaining banks, the Financial Times observed:

No one knows [what their fate will be] — hence the panic. Most analysts assume that governments will continue to protect big retail banks. However, some weaker groups are now being removed from the system, via mergers, and the fate of others is unclear.

Business Week asks and then answers its question:

Are we safe yet?

In the short term, no.

Der Spiegel reports that: "Panic is the word of the hour on Wall Street."

Desperate times, sensible measures

The ruin of America's great private financial institutions requires decisive but thoughtful government action if the coming depression will be a short one. Effective reregulation would only make for a good beginning. A new regulatory regime would be a necessary but insufficient condition for addressing the problems which have produced the most recent crisis. The situation requires something more. Steve Fraser, a historian of Wall Street, agrees, and rightly asserts that the

[s]tringent re-regulation of FIRE is not enough anymore. Washington's mission may, at this late date, be an even greater one than Roosevelt's New Deal faced. The government must figure out how to deploy its power to shift the flow of investment capital out of the mine-fields of speculative paper transactions and back into productive channels that will help meet the material needs of American society. Real value must be created in place of chimeras. In the meantime, we all have ringside seats — in fact, far too close to the action for comfort — as another gilded age is ending. What comes after is, in part, up to us [link and emphasis added].

9.17.2008

An involuntary pull on the ‘brake handle’?

Having already considered the significance of the AIG bailout for the course of the financial crisis, David Lindorff concluded by noting that:

The good news is that, if the US economy collapses, the Pashtun farmer in northeastern Pakistan, the Iraqi shopkeeper in Fallujah, the Iranian worker in Tehran, and the peasant in Venezuela, will no longer have to worry about being bombed or having their children mowed down by a US helicopter gunship. The US would no longer have the funds to pay for such foreign wars. And because a collapse of the US consumer economy would also drag the rest of the world into a prolonged global slump, perhaps reminiscent of the 1930s, we might actually see a significant enough drop in carbon emissions from idled cars, factories and power plants that the global warming catastrophe that is threatening us all will be significantly delayed, giving humanity time to come up with a serious long-term response.

A collapse means the 'indispensible nation' will have received its comeuppance and that much of the world might live a little easier, freer and safer after the crisis takes its toll on America's empire.

Investors run for cover

Worst panic since World War Two

Thus was judgment of London's Financial Times:

The panic in world credit markets reached historic intensity on Wednesday, prompting a flight to safety of the kind not seen since the second world war.

Business Week's dour assessment:

Investors were getting a lesson in gravity Wednesday.

Not the Newtonian kind, mind you. This was a sharp, sudden education in just how grave the crisis in world financial markets has become, featuring a multibillion dollar bailout of an ailing financial giant with extensive ties to other investment firms, freeze-ups in world credit markets, desperate moves by regulators to curb stock speculators, a new borrowing plan from the Treasury, and a huge jump in gold prices amid rising investor fear.

But maybe the physics part is relevant after all, for the force of all this gravity sent global stock markets sharply lower Wednesday.

And:

Fear was the name of the game Wednesday. Middle East traders were selling securities and buying gold as a result of one of Wall Street's worst-ever financial crises, according to S&P MarketScope. Russian markets were also in financial turmoil.

If the fall of the Berlin Wall reflected the success of the Revolutions of 1989 and the demise of neo-Stalinist socialism, and it did, perhaps the Wall Street crisis will become the signature event marking the end of market fundamentalism (i.e. the supply-side/monetarist revolution and the Washington Consensus).

It ought to be clear, in any case, that Reaganomics (conservative economics) is, as James Galbraith might put it, a 'project which failed,' for "[t]he reality is that the disciplined application of conservative principles to economic policy leads to disaster" (p. 9).

Update:

William Greider of The Nation observes:

For the first time in this unfolding financial crisis, I felt personally scared by the news. Not about my money, but about the potential for catastrophe. The Federal Reserve's lightning rescue of AIG has the smell of systemic fear. The house of global finance is on fire and everyone is running for the exits, no sure way to turn them around. What's next? The question itself is ominous, because there are no good answers.