Rolf Englund:
- There is no such thing as rational expectations.
John McCain:
"Wall Street has betrayed us.
News Home
Index - News - 1992 - EMU - Cataclysm - Economics - Wall Street - US Dollar
Plan A: $700 billion rescue plan
Ambrose Evans-Pritchard - Black Swan - Edmund Conway - The Economist - Bert Ely - Bill Fleckenstein - James Grant - Bill Gross - Gary D. Halbert - Suzy Jagger - Paul Krugman - John McCain - John Mauldin - Wolfgang Munchau - Barack Obama - John Plender - Richard W. Rahn - Robert J. Samuelson - Dominique Strauss-Kahn - Martin Wolf
In one form or another, the package will surely be passed in the next few days,
since the alternative would be the failure of every leading bank in America,
the inability of the US Government to honour its guarantees to retail savers and
the bankruptcy of many large US corporations, probably including General Motors and Ford.
Anatole Kaletsky, The Times September 30, 2008
At first, nobody could quite believe Mr Paulson was incompetent.
Was it really possible that the Treasury Secretary had no idea of what to do with this unprecedented financial firepower?
Anatole Kaletsky, The Times, September 25, 2008
Why did the bail-out bill fail?
BBC, 29 September 2008
Votes in the House of Representatives are not official until the Speaker's gavel is lowered and - for what felt like an eternity - the speaker's gavel remained suspended above the desk. News services waited for several minutes before calling the result - a rare enough occurrence in a world of instant information.
Rumours began to circulate that attempts were being made to change the minds of some of the members who had voted "no".
It would be an extraordinary step in a democracy to ask a member of a legislature to simply reverse a vote on an issue vital to the national interest without any extra revision or debate, and the rumours may not be true.
But it captures something of the mood of stunned apprehension in the House that they were believed even for a moment.
In that moment, the House appeared to be absorbing, very slowly, the sheer magnitude of what it had done
Those whom the gods would destroy, they first make mad
Opposition to the proposal came from two different sources.
Willem Buiter, FT September 29, 2008
Opposition to the proposal came from two different sources.
A few remaining libertarians and believers in unfettered free enterprise voted against. Even when they recognise the risk that a calamitous collapse in economic activity may result, they view this as a form of creative destruction that is an integral part of a Darwinian market economy. I don’t know anything about Gresham Barrett, a Republican congressman from South Carolina but his statement fits the bill: “My fear is the government will be forever changing the face of the American free market. Because I believe so strongly in the principles of the free market and the belief in freedom, I will be opposing this bill.” Those who genuinely hold these views are mad, but honest and principled.
I wish them a good depression.
A larger body of nay-voters consists of populist rabble-rousers or, worse, politicians who know better but follow the whims, fancies and passions of their constituents, even when this means that before long the real economy risks falling off a cliff.
Opportunism guides them rather than principle.
I wish them a rather nasty depression.
The Beltway Crash
WSJ SEPTEMBER 30, 2008
The majority party is responsible for assembling a majority vote, and Speaker Nancy Pelosi failed in that fundamental task.
Her highly partisan speech on the floor -- blaming "right-wing ideology of anything goes, no supervision, no discipline, no regulation" for the financial distress -- is no excuse for Republicans to vote no. But it is indicative of the way she has governed for the past two years -- like Tom DeLay without the charm.
The cynics are saying Ms. Pelosi deliberately tanked the bill by giving 95 Democrats a pass, knowing failure would hurt John McCain, and given her track record we can see why people would believe it.
House Republicans share the blame, and not only because they opposed the bill by about two-to-one, 133-65. Their immediate response was to say that many of their Members turned against the bill at the last minute because Ms. Pelosi gave her nasty speech. So they are saying that Republicans chose to oppose something they think is in the national interest merely because of a partisan slight.
Thank heaven these guys weren't at Valley Forge
Once they were "masters of the universe," corporate jets at the ready.
But on Wednesday, eight top U.S. bank chief executives will fly commercial or ride Amtrak to explain themselves to Congress,
testifying before the U.S. House Financial Services Committee about what's happened to some $176 billion in taxpayer money.
CNBC 10 Feb 2009
What Went Wrong -- Forces Lined Up Against Bailout
In the end, the financial markets did not stand a chance against voter antipathy, partisanship and election year politics.
Have the Masters of the Universe lost their super powers?
CNBC 29 Sep 2008
The defeat of the extraordinary $700 billion financial rescue package represented a perfect collision of the forces of modern politics -- a fast-moving Internet campaign, vulnerable incumbents, a weakened and unpopular president, and a roiling presidential campaign -- all working against the so-called Masters of the Universe.
Have the Masters of the Universe lost their super powers?
When novelist Tom Wolfe used the term to describe Wall Streeters with too much money and not enough humility, he was borrowing the name of a line of action figures and a comic book series popular with kids in the 1980s.
In Wolfe's "The Bonfire of the Vanities," published in 1987, the term "Master of the Universe" is popularized as a term for a Wall Street giant. The central character, Sherman McCoy, leads the excessive lifestyle of a 1980s bond trader until it comes crashing down over a car accident in the Bronx.
If the current saga on Wall Street follows the typical superhero plot line, their loss of power will be only temporary. Any humility experienced by once high-flying investment bankers is likely to pass once the market recovers.
"The market goes through cycles: hope, greed and fear. Right now it's in the fear mode," Fitzgibbon said.
Or, as financial titan Gordon Gekko says in "Wall Street," a 1987 movie: "Greed is good."
The bravado and hubris has been well chronicled, as in the 1989 book "Liar's Poker," a semi-autobiographical account by Michael Lewis of his time as a bond trader at Salomon Brothers.
Full text
Bonfire of the insanities
The Economist, September 25, 1999
The defeat in Congress of a proposed $700 billion economic-rescue package followed an intense outpouring of voter anger,
fanned by politicians, interest groups and media on the left and right,
that overwhelmed calls from the president and top lawmakers to pass the deal.
Wall Street Journal 30 Sept 2008
"The vast majority of my voters looked at this as a bailout for Wall Street," said Rep. Darrell Issa of California, one of the most outspoken Republican critics of the proposal.
House Republicans demanded changes in the plan last week, got some of them, and yesterday delivered just 65 votes -- a third of their members -- for a rescue package that their party's president, their party's Treasury Secretary and their party's House and Senate leadership all called vital to the nation.
Then on Monday, it was Democratic House Speaker Nancy Pelosi's turn to hurt the effort. She chimed in with a bizarrely timed and distinctly partisan floor speech blaming Republicans for the market mess, just minutes before her party needed scores of Republican votes to make the bailout work. Whether she turned votes against the plan, or gave Republicans a convenient excuse to vote against it, was being hotly debated in the Capitol late Monday. But either way, the atmosphere is even more sour as a result.
WSJ
Let me explain now in more detail why we are now back to the risk of
a total systemic financial meltdown…
This is not just a US financial crisis; it is a global financial crisis hitting institutions in the US, UK, Eurozone and other advanced economies (Iceland, Australia, New Zealand, Canada etc.).
Nouriel Roubini Sep 29, 2008
US can ride out financial turbulence if it follows lessons of Swedish crunch
Carl Bildt, Arab Times 27/9 2008
This is a difficult time to defend free markets. Nevertheless they must be defended,
It is hard to defend a system where top banking executives walk away with millions in compensation when their businesses are, in retrospect, fundamentally flawed. This looks like a reward for failure. We have witnessed two financial crises – the dotcom crash and the current banking disaster – in the first decade of this century. That is hardly a record which inspires confidence in the current efficiency of capital markets or their transparency.
Market freedom is not a “fundamentalist religion”. It is a mechanism, not an ideology.
The Financial Times is proud to defend it – even today.
Financial Times editorial September 25 2008 19:02
Stopping a Financial Crisis, the Swedish Way
A vain effort to defend Sweden’s currency, the krona, caused overnight interest rates to spike at one point to 500 percent.
The Swedish state would guarantee all bank deposits and creditors of the nation’s 114 banks
Carter Dougherty, New York Times/CNBC September 22, 2008
Bankinspektionen:
"Det är svårt att vara olyckskorp när allt går som smort"
Click
Millenniets värsta börsras
Klicka här
Ron Paul:
Bailout Will Destroy Dollar, World Economy
Monday, September 29, 2008
Stating that the passage of the bailout bill would only make the problem worse, the Congressman from Texas said, “This has nothing to do with free market capitalism, this has to do with a managed economy, an inflationary system, corporatism, a special interest system, and this has nothing to do with the failure of our free markets and capitalism.”
“Long term this is disastrous,” continued the Congressman, “we’ve already pumped in $700 billion dollars, here’s another $700 billion dollars - this is going to destroy the dollar - that’s what you should be concerned about - if you destroy the dollar you’re going to destroy a worldwide economy and that’s what we’re on the verge of doing.”
Paul expressed his frustration that free market economists who predicted the crisis were being ignored while the people who created the problem were being given the responsibility to offer a solution. The Congressman was not afforded the time to read his full prepared remarks, but they were entered into the Congressional record and can be read at Paul’s Campaign For Liberty website.
If September 11, 2001 was the day that we had to reassess our ideas about America's role in world politics,
September 15, 2008, the day Lehman Brothers went bankrupt, may well be remembered as the day we had to reassess our ideas about America's role in the world economy.
Anne Applebaum, Daily Telegraph, 28/9 2008
The US government's $700bn (£376bn) bail-out package is designed to avert a complete financial meltdown.
BBC News 23 September 2008
The money markets on the verge of a nervous breakdown
The money market, not the stock market, is where this financial crisis is playing out first and foremost. On this market, banks lend each others funds for short periods of time with no collateral. A favourite way to measure distress in the way money is the difference between the interest rate on 3-month Treasury – which are considered safe – and 3-month Libor. This is known as the TED spread. If you consider your counterparty bank safe, you would expect to receive only a slightly higher interest rate on 3 Libor than you would on 3 month treasuries. But if you expect to receive more than 300 basis points, as banks do now, then you doubt the financial viability of your counterparty.
Yesterday, the spread briefly peaked at 333bp, which must be an all-time record.
eurointelligence 26.09.2008
Enligt demokraterna rådde kaos i överläggningarna sedan det framkommit vid mötet i Vita huset
att John McCain ställt sig bakom en alternativ räddningsplan som markant skilde sig från den som diskuterats. En grupp konservativa republikaner i representanthuset har lagt fram förslag om ett slags bolåneförsäkring, som alternativ till regeringens plan på att ta över osäkra fordringar från banker och andra finansinstitut.
Han sade också att han visste inför mötet att det inte fanns någon färdig uppgörelse i kongressen, trots uttalanden från Dodd om motsatsen.
DN 2008-09-26 06:20
Markets braced as bail-out talks hit deadlock
World markets are braced for a tumultuous day of trading after high-level talks to broker a final deal on the proposed $700bn (£380bn) bail-out of the US financial system ended in stalemate.
Daily Telegraph
Once President George W. Bush had warned the American people in near-apocalyptic language that, if Congress failed to approve his $700billion bank bail-out, the entire US economy was in peril, it became hard to conceive of the deal being blocked.
Such once-in-a-lifetime threats can never be made — or taken — lightly. So, despite immense reservations on Capitol Hill, on both sides of the aisle, about the implications of the rescue package and the alarmingly slapdash way in which it appears to have been constructed, no one was under any illusion last night that, if it is not approved, the impact on world markets will be catastrophic.
Daily Telegraph
Ireland leads euroland into recession as property crashes
Ireland has become the first country in the eurozone to slide into recession as the torrid housing boom of recent years turns into a deep slump.
Construction was 21pc of GDP at the peak last year, which is even worse than Spain (18pc) and far worse than America (11pc) at the height of the bubble,
Ambrose Evans-Pritchard Daily Telegraph 25 Sep 2008
The banking system needs another $500 billion to survive beyond the $700 billion rescue plan being contemplated by Congress, said Pimco founder Bill Gross.
CNBC.com 25 Sep 2008
Gross said on CNBC that the government bailout plan will help free up bank balance sheets so they can start lending again, but will provide only about $50 billion in real capital to the system.
"The plan goes far but it doesn't go far enough in terms of recapitalization," he said. "The banking system and the investment banking system in total really requires about $500 billion more. Where that comes from is still up in the air."
Bert Ely: Bailout Not Necessary, Industry Can Take Losses
Naked Capitalism SEPTEMBER 24, 2008
Bert Ely, one of the leading experts on banking and finance in the Washington policy community. An accountant by training, Ely has specialized in deposit insurance and banking structure issues since 1981. In 1986, he became an early predictor of the S&L crisis and a taxpayer bailout of the FSLIC. In 1991, he was the first person to correctly predict the non crisis in commercial banking. In 1992, he predicted an eventual taxpayer bailout of the Japanese banking system.
If a bank truly is solvent, it can raise additional capital or sell itself, if its present owners are realistic about what their bank is worth. The reason solvent banks have a problem raising capital, or selling themselves to a stronger bank, is that they set their price too high, as did AIG. As an aside, I am glad to see AIG's shareholders getting whacked by the warrants associated with the Fed's taxpayer's loan to AIG. There is absolutely no need for the taxpayer to subsidize banks so they can stay independent, provided no barriers are erected to prevent new entrants into bank or specific banking markets.
I can think of three good reasons that our representatives should take big, calming breaths before committing $700 billion of our money.
Jim Jubak 24/9 2008
If we don't nail down these details, we risk:
(1) creating this mess all over again;
(2) giving Wall Street executives a free pass on any criminal acts they may have or might commit; and
(3) putting the same Wall Street companies that got us into this mess in charge of the cleanup.
At the end of 2007, no less than $9.4 trillion in dollar-denominated securities were sitting in the vaults of foreign investors.
United States has run heavy and persistent current account deficits — $6.7 trillion in total since 1982
James Grant, New York Times September 23, 2008
For years, liberal Democrats in Congress and some Republicans pushed for banks and other institutions to make home loans to unqualified borrowers, and suddenly we find many of these people cannot repay their loans.
A Chicago "public interest" lawyer named Barack Obama was active in this movement.
Richard W. Rahn, Washington Post, September 23, 2008
The reaction from members of Congress, like the "surprised" Speaker Nancy Pelosi, is to demand investigation of "greedy bankers," while ignoring the fact that it was her left-wing colleagues who created the Community Reinvestment Act (CRA) that required the banks to lend to people who were poor credit risks in the name of "housing rights." A Chicago "public interest" lawyer named Barack Obama was active in this movement.
A majority of members of Congress seemed to be surprised that Fannie Mae and Freddie Mac became insolvent when many of the subprime mortgages they had been pressured to buy (by members of their oversight committees, such as Barney Frank and Chris Dodd) became nonperforming. Some members of Congress (including John McCain) did try to pass legislation to limit the size of Fannie and Freddie, but it was blocked by - surprise, surprise - Rep. Frank and Sens. Dodd, Charles Schumer, Barack Obama, et al. who just happened to have taken major contributions from Freddie and Fannie
Många har förundrats över över hur vårdslös utlåning till låginkomsthushåll i USA kan dra in världsekonomin i en allvarlig kris.
Johan Schück, DN 2008-09-19
It was two years ago that Nicholas Taleb wrote those words in his book The Black Swan:
The increased concentration among banks seems to have the effect of making financial crisis less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur ….I shiver at the thought.
James Quinn, September 22, 2008
In a week, the financial crisis of 2008 changed everything
— and now comes the cleanup: if the administration's $700 billion Wall Street bailout plan is approved by Congress, the United States will see changes to its political economy that were unimaginable a week ago.
Time Magazine Sep. 22, 2008
Europe's vulnerable banks
Are European banks insulated from the panic in America?
The Economist print Sep 25th 2008
Strains on capital will also intensify if European economies stall more severely than expected. The rates of deterioration in certain markets are striking. Bank of Ireland issued a starkly gloomy trading statement on September 17th, forecasting rising loan losses and cutting its dividend by half. In Spain the poorly diversified savings banks are warning that non-performing loans could rise sixfold from their levels in mid-2007. In Denmark the central bank felt obliged to bail out a small lender on September 22nd.
När och hur spricker EMU? - EMU Collapse
Questions abound over a $700 billion rescue plan for Wall Street
Mr Paulson’s plan is stunning in its brevity (two-and-a-half pages) and audacity.
It would authorise him to purchase any “residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages,” implying the right to take over derivative positions.
Economist.com Sep 22nd 2008
The treasury secretary’s decisions “may not be reviewed by any court of law or any administrative agency.”
He would report to Congress three months after the programme begins and every six months thereafter.
Audacity:
Bold or insolent heedlessness of restraints, as of those imposed by prudence, propriety, or convention.
A fact sheet later distributed by the Treasury broadened it to include “other assets, as deemed necessary to effectively stabilise financial markets.” The government could, in effect, buy anything it wanted: student or car loans, loans, equities, entire companies.
The fundamental problem with the Paulson scheme is that it is neither a necessary nor an efficient solution.
It is not necessary, because the Federal Reserve is able to manage illiquidity through its many lender-of-last resort operations.
It is not efficient, because it can only deal with insolvency by buying bad assets at far above their true value, thereby guaranteeing big losses for taxpayers and providing an open-ended bail-out to the most irresponsible investors.
Martin Wolf, Financial Times, September 23 2008
Over the past few weeks three experiences have helped clear my mind on this crisis.
First, I reread Hyman Minsky’s masterpiece, Stabilizing an Unstable Economy.
Martin Wolf, Financial Times, September 16 2008
DEBUNKING THE PAULSON PLAN
The good news is that the bail-out of Wall Street will probably save us from an imminent collapse of the financial system.
But it raises disturbing questions.
Wolfgang Munchau 23.09.2008
The Case-Shiller national home price index has already declined by 25 per cent in real terms since the start of the crisis. Another 15-25 percentage point drop would bring US house prices back towards their long-term trend.
The public will be less able and willing to service debts while house prices are falling and unemployment is rising. As the recession gets worse, corporate bankruptcies will increase, as will the default rate on corporate bonds. This, in turn, will reverberate in the market for credit default swaps, an insurance market in which buyers can protect themselves against payment default.
Uncle Sam's $700+ Billion Toxic Securities Fund
Three questions emerge: 1) Is this massive bailout necessary?; 2) Is it the best way to solve the credit crisis?; and 3) Will it work?
Unfortunately, the answer to all three is, we just don't know.
Gary D. Halbert at John Mauldin, Sep 23 2008
We are now past the issue of "moral hazard," in my opinion. We are now truly in a financial crisis that could easily spiral out of control very quickly. Something major needs to be done quickly, and there is no time for political games. People are on the verge of panic, and the stock markets may continue to plunge. Expect volatility to remain sky-high for a while longer.
I now believe this financial crisis will send us into a recessio
I now believe that the housing/financial crisis and the massive government bailout may hand the presidential election to Barack Obama in November. The general public does not fully understand the seriousness of the credit crisis, and will deem the massive bailout as just one more example of President Bush bailing out his rich cronies on Wall Street
If this trend continues, it will be Obama, a Senator for less than three years, who will be in charge of solving the worst financial crisis in most of our lifetimes.
Sorry for a depressing E-Letter, but things are what they are.
A systemic crisis demands systemic solutions
Dominique Strauss-Kahn, Managing director of IMF, FT September 22 2008
US dollar set to be major casualty of Hank Paulson's bailout
“This may prove to be the dollar’s epochal moment – the moment historians look back at as its major turning point.”
Edmund Conway, Daily Telegraph, 22 Sep 2008
Whether or not tomorrow’s accounts of today’s turmoil prove David Owen of Dresdner Kleinwort right; whether or not this is the beginning of the end of the dollar’s pre-eminence in the world’s central banks and foreign exchanges, the economic landscape has undoubtedly changed forever.
The US taxpayer bail-out of America’s banking sector is an event whose significance will reverberate for many years. What it means for free markets, for the way Western economies are run, for the prosperity of the world economy, must remain to be seen.
Capitalism in convulsion:
Toxic assets head towards the public balance sheet
John Plender, September 19 2008
In the space of just two momentous weeks, the landscape of global finance has been dramatically transformed. President George W. Bush’s administration has mounted a multi-billion-dollar rescue of the financial system at the cost of inflicting severe damage on the US model of free-market capitalism.
The crisis began with losses in the $1.3 trillion market for "subprime" mortgages, many of which were "securitized" -- bundled into bonds and sold to investors.
With all U.S. stocks and bonds worth about $50 trillion in 2007, the losses should have been manageable. They weren't, because no one knew how large losses might become or which institutions held the suspect subprime securities.
Moreover, many financial institutions were thinly capitalized.
They depended on borrowed funds; losses could wipe out their modest capital.
Robert J. Samuelson, September 22, 2008
Maybe we can let Wall Street implode and Main Street would escape largely unscathed.
But that’s not a chance we want to take.
Paul Krugman New York Times September 25, 2008
Cash for Trash
If the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.
Paul Krugman September 21, 2008
That’s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It’s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)
But Mr. Paulson insists that he wants a “clean” plan. “Clean,” in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review “by any court of law or any administrative agency,” and this adds up to an unacceptable proposal.
This is one of the most extraordinary periods in U.S. financial history.
We had crossed over from "too big to fail" to "too big to bail out."
Bill Fleckenstein, 22/9 2008
An almighty crash has been averted, very narrowly.
By taking the colossal wreckage of the credit bubble onto its own books in a $700bn taxpayer sink, Washington has forestalled a run on the world banking system, and may hopefully have saved the viable core of modern capitalism.
Europe has embedded paralysis in its treaty law. Maastricht prohibits a Keynesian blitz. Budget deficits above 3pc of GDP are not allowed until an EU country is already in dire straits, and even then approval requires a committee vote by 27 states. So Ireland, Italy and France must now tighten fiscal policy into the downturn.
Ambrose Evans-Pritchard, Daily Telegraph 21/9 2008
End of the Wall Street investment bank
Times Online September 22, 2008
Goldman Sachs and Morgan Stanley last night abandoned their status as investment banks in a move marking the end of an era on Wall Street.
The two investment houses yesterday received the regulatory approval to transform themselves into traditional bank holding companies.
While the change appears to be a technicality, it means that both banks have equal and permanent rights to access emergency funds from the US central bank, the Federal Reserve. They will also be far more tightly regulated.