Some economic crisis links (10.14.2008)

Getting government off our backs…

Following Europe's lead if not also conforming to its demands, the United States intends to inject $250B into nine banks, according to reports (this, this, this, this, this). It also plans to guarantee new bank debt for the next three years, guarantee all non-interest bearing bank deposits and become the buyer-of-last-resort of commercial paper. It is significant that Paulson wants the banks to use this money, not hoard it.

In any case, for some obscure reason, the government's proposed intervention into the economy, along with the interventions it already has implemented, should not be considered a "take over of the free market," according to the President. Rather, this massive intervention is meant to "preserve" the market.

As Paul Craig Roberts points out, the price of these interventions sums to $2.1T!

Might Bush's disclaimer mean that governments "preserve free markets" whenever their interventions help if not also enrich big capital but "take over free markets" whenever they help the common folk? It seems that it can and does!

Roberts rightly notices the irony in all of this!

As we should always ask: Cui bono? Business Week reports that:

Among the firms expected to get funding: JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC) were to receive $25 billion apiece; Wells Fargo (WFC) was to get between $20 billion and $25 billion; Goldman Sachs (GS) and Morgan Stanley (MS) were down for $10 billion each, and the Bank of New York (BK) and State Street (STT) were slated for $2 billion to $3 billion apiece.

Stock prices look poised to rise again today in response to this massive and global government intervention into the economic system, according to Business Week.

Yet (via Naked Capitalism), EURO Intelligence reports that:

Economists warn against too much enthusiasm [about the rescue plan], as financial crisis and the economic slowdown are both going to get a lot worse. There are reports of a dramatic worsening of credit card and auto debt — as our next subprime crisis is now only months away.

The long-term dilemma, according to EURO Intelligence:

We continue to try to save every single bank, systemically relevant or not, in which case we will have successfully transfered a private sector credit risk into a public sector solvency risk. We will have done what Iceland did, on a bigger scale.

Or else, we would only guarantee the systemically important banks, which is effectively all we can afford, considering that we might also want to spend a bob or two on a fiscal stimulus to ameliorate this very sharp recession. But in this case, not every bank is safe, and consequently cross border issues can arise. In that case we would need some explicit money market insurance, with a cap perhaps.

So this leaves us with the inescapable logic of a pan-European bank rescue plan. If we had done this from the start, it would have been a lot cheaper, since it is cheaper to save 44 banks than all 8000, the total number of banks in the EU. The rules would be a lot more symmetric.

Update (10.14.2008)

The New York Times reports that the stock market has behaved erratically this morning, climbing 360 points before falling to 8 points below its starting position.