I wonder how the markets will be tomorrow...

[slngsht]

With JP Morgan's purchase of Bear Stearns.

 

Let's see... dropped 47% on Friday to $30 / share... sold at $2 / share on Sunday.

 

Wonder how other banks will fare in market valuations :ack:

[BobDrye]

 

By PAUL KRUGMAN

Published: March 17, 2008

O.K., here it comes: The unthinkable is about to become the inevitable.

 

 

Times Topics: Bear Stearns CompaniesLast week, Robert Rubin, the former Treasury secretary, and John Lipsky, a top official at the International Monetary Fund, both suggested that public funds might be needed to rescue the U.S. financial system. Mr. Lipsky insisted that he wasn’t talking about a bailout. But he was.

 

It’s true that Henry Paulson, the current Treasury secretary, still says that any proposal to use taxpayers’ money to help resolve the crisis is a “non-starter.” But that’s about as credible as all of his previous pronouncements on the financial situation.

 

So here’s the question we really should be asking: When the feds do bail out the financial system, what will they do to ensure that they aren’t also bailing out the people who got us into this mess?

 

Let’s talk about why a bailout is inevitable.

 

Between 2002 and 2007, false beliefs in the private sector — the belief that home prices only go up, that financial innovation had made risk go away, that a triple-A rating really meant that an investment was safe — led to an epidemic of bad lending. Meanwhile, false beliefs in the political arena — the belief of Alan Greenspan and his friends in the Bush administration that the market is always right and regulation always a bad thing — led Washington to ignore the warning signs.

 

By the way, Mr. Greenspan is still at it: accepting no blame, he continues to insist that “market flexibility and open competition” are the “most reliable safeguards against cumulative economic failure.”

 

The result of all that bad lending was an unholy financial mess that will cause trillions of dollars in losses. A large chunk of these losses will fall on financial institutions: commercial banks, investment banks, hedge funds and so on.

 

Many people say that the government should let the chips fall where they may — that those who made bad loans should simply be left to suffer the consequences. But it’s not going to happen. When push comes to shove, financial officials — rightly — aren’t willing to run the risk that losses on bad loans will cripple the financial system and take the real economy down with it.

 

Consider what happened last Friday, when the Federal Reserve rushed to the aid of Bear Stearns.

 

Nobody expects an investment bank to be a charitable institution, but Bear has a particularly nasty reputation. As Gretchen Morgenson of The New York Times reminds us, Bear “has often operated in the gray areas of Wall Street and with an aggressive, brass-knuckles approach.”

 

Bear was a major promoter of the most questionable subprime lenders. It lured customers into two of its own hedge funds that were among the first to go bust in the current crisis. And it’s a bad financial citizen: the last time the Fed tried to contain a financial crisis, after the collapse of Long-Term Capital Management in 1998, Bear refused to participate in the rescue operation.

 

Bear, in other words, deserved to be allowed to fail — both on the merits and to teach Wall Street not to expect someone else to clean up its messes.

 

But the Fed rode to Bear’s rescue anyway, fearing that the collapse of a major investment bank would cause panic in the markets and wreak havoc with the wider economy. Fed officials knew that they were doing a bad thing, but believed that the alternative would be even worse.

 

As Bear goes, so will go the rest of the financial system. And if history is any guide, the coming taxpayer-financed bailout will end up costing a lot of money.

 

The U.S. savings and loan crisis of the 1980s ended up costing taxpayers 3.2 percent of G.D.P., the equivalent of $450 billion today. Some estimates put the fiscal cost of Japan’s post-bubble cleanup at more than 20 percent of G.D.P. — the equivalent of $3 trillion for the United States.

 

If these numbers shock you, they should. But the big bailout is coming. The only question is how well it will be managed.

 

As I said, the important thing is to bai

[Kitcat]

One of the more amazing little tidbits abt the state of our economy that I read in the NY Times recently is this: There is a device called a credit swap (I probably have the details all screwed up) that companies issued to prevent huge losses. A mammoth market developed for these things with them being sold and resold, to the point that the money invested is 7x the value of the underlying obligation. These are now so over capitalized that they are 2x the value of the entire US stock market!

 

That can't be good.

[JBH]

I think we will know the depth of the problem when this week, much of the financial sector reports its earnings. I could easily see a panic sweeping over the market. It is a good time to be in cash (or maybe gold) because there will be great investment opportunities in the days ahead.

[Kitcat]

The problem is, if everyone decides it's a good time to cash out, then the market doesnt just drop, it collapses. Then there is the challenge of deciding when to get back in.

 

I am not disagreeing with you, just noting that this could be an historic few weeks and that it has the potential to lead to a very different world. I am not predicting that will happen, but it's maybe the only time I have ever thought it could happen.

[Kitcat]

Just noticed that Alan Greenspan has described this as the worst financial crisis since WWII. He must have discovered the skyrocketing increase in the cost of Caterhams: a financial bellwether for economic health if there ever was one!

[BobDrye]

Howl by Nicholas von Hoffman

Economic Chaos, Political Consequences

[posted online on March 17, 2008]

What's the single most important step the government can take to address the crumbling economy? Cast your vote in the Nation Poll.

"Fasten your seat belts, it's going to be a bumpy night!" --Margo Channing (Bette Davis) in All About Eve.

Bumpy is no word for it. The news coming out of Wall Street makes what the three presidential candidates are saying beside the point. Cancel the fun. The bad news also bids fair to change the daily lives of 300 million Americans. No, kidding, folks. What's going on in the business world is as serious as it can get.

Events unfolding this week on the lower end of Manhattan will cancel out all the projects John McCain, Hillary Clinton and Barack Obama have been talking about. McCain will have to deal with the home truth that, though he may dig up enough soldier boys for the Middle Eastern wars, there is no money to pay for them. And thanks to the ever-shrinking dollar, other countries are not going to lend us more money to carry them on. We have run out of money: it's time to cut and run.

The billions that Hillary Clinton and Barack Obama would have had to spend to do the wonderful things they are dangling in front of the voters do not exist. Tradition has always allowed campaigning candidates to make promises they will not make good on, but this time they are bumping up against the limits of the plausible, let alone the possible. It might be helpful if they would ease off with the pretty pictures.

There will be no health insurance for everyone. No long-needed increases in teachers' salaries, no big infrastructure projects, no decent-paying new jobs for those laid-off workers in Ohio, Michigan and Pennsylvania, and nothing for single-parent (read mothers) households. There is no money. As things stand now we may have to spend hundreds of billions to prevent millions of people from being thrown out of their homes and billions more to prop our crooked, avaricious, heedless and duplicitous financial system so it does not come crashing down on all of us.

Just a couple of days ago the Federal Reserve Board committed a mere $200 billion to Wall Street to back up their rotten bonds. The news of that expensive move had hardly been digested when it was announced that the Fed would pledge untold billions more to keep the investment banking house of Bear Stearns from sinking with all hands aboard.

The floatation device was a hastily arrange purchase of the once prestigious, 85-year-old investment bank by J.P. Morgan for $2 a share, which a little more than a year ago was selling for $170 and as recently as a couple of days ago for $30. God only knows how much this will cost the government by the time the expensive, gory details are ironed out, something that will take months.

This news prompted the New York Times's Gretchen Morgenson, one of the best business journalists around, to write, "What are the consequences of a world in which regulators rescue even the financial institutions whose recklessness and greed helped create the titanic credit mess we are in? Will the consequences be an even weaker currency, rampant inflation, a continuation of the slow bleed that we have witnessed at banks and brokerage firms for the past year?"

The answers to Morgenson's question may well be yes and even worse. As of now nothing is clear, nothing is certain and nothing can relied on. In the chaos which has taken over Wall Street, the Fed, the Treasury Department and the other organs of government concerned with managing the crisis, there comes a new announcement of a new remedy every hour.

Nobody knows if these remedies will blow off the hysteria and restore a modicum of order. Nor do we know who is being saved by our panicky federal officials. Are they saving some millions of jobs and homes, which may be in danger from the fallout stemming from this train of financial disasters? Or are they saving some of the most despicable rich guys to make an appearance in our society since the 1870s, w

[Kitcat]

In the last week gold has dropped from abt $1000 an ounce to $920 and the Dow is up 600 points. So much for knowing what the markets are going to do next (tho I have to admit, I have a hunch the other shoe has not dropped yet in the financial markets).

[Mondo]

I'm no economist but I don't know how we, as a nation (and has a population) can take on anymore debt.

 

Maybe they should let inflation take off, then when everything cost more and salaries increase, the debt won't seem so large. Especially if the loan interest is locked into today's rate.

 

Not good for me though as I've just started receiving my pension.

 

It is frustrating seeing these wild swings every few days...

[BobDrye]

I'm no economist but I don't know how we, as a nation (and has a population) can take on anymore debt.

 

Maybe they should let inflation take off, then when everything cost more and salaries increase, the debt won't seem so large. Especially if the loan interest is locked into today's rate.

 

Not good for me though as I've just started receiving my pension.

 

It is frustrating seeing these wild swings every few days...

 

 

 

Spending as if there were no tomorrow

 

We've all seen or heard about them. Perhaps they are friends or family members who have demonstrated financial irresponsibility: a college student who has a budget and quickly exceeds it on wild partying; a cousin or best friend who asks for a "loan" and then never pays it back; people whose credit cards are maxed out and they can't afford the finance charges.

Government behaves similarly, playing any or all of those roles. It now resembles an irresponsible parent, spending the children's wages and inheritance as if there were no tomorrow. Republicans lost the spending issue — and their congressional majority — because they behaved like overspending Democrats. Now Democrats in the House are going the Republicans one better. They are promising to increase spending should they win the White House and maintain their congressional majority.

According to an analysis of the fiscal 2009 House Democratic majority's federal budget by Brian Riedl of The Heritage Foundation, (www.heritage.org), every American household would pay on average $3,100 more in federal taxes. That amounts to $1.265 trillion more over five years and $3.911 trillion over 10 years. Worse (if that's possible) the Democratic budget proposal increases discretionary spending by 8 percent and does not eliminate even one wasteful program. It also ignores the coming explosion in the cost of Social Security, Medicare and Medicaid.

None of these increases will be paid for by "soaking the rich" with new tax increases. That means more borrowing from countries that don't have America's best interest as a priority, more inflation and a weaker dollar.

The spending virus has so permeated Congress that members won't even go on the wagon during an election year. The bipartisan DeMint-McCaskill budget amendment that would have required a one-year moratorium on earmarks was soundly defeated 71-29. This is how little respect most members have for those whose money they take through taxation, spending it like frat boys on a weekend bender.

The Washington Examiner newspaper determined that the longer someone serves in the Senate, the more likely they are to favor spending more money and to oppose any suggestion that they stop. According to the Examiner, "the average seniority of senators voting for DeMint-McCaskill was 12 years, while opponents averaged 22 years in the Senate." All three presidential candidates returned from the campaign trail to vote for the measure. Sen. John McCain is far more credible on spending reductions than Hillary Clinton or Barack Obama and the moratorium was about slashing earmarks, not the big-ticket items most in need of reform, but getting any politician on record favoring spending reductions (and then following through to see if they mean it) is worth something.

This year, according to Heritage, the federal government will spend $25,117 per household. The excuse one hears most often is that there is no place legislators can cut spending. Really? Last year, says the Heritage Foundation, the government made at least $55 billion in overpayments; the Pentagon spent almost $1 million shipping two 19-cent washers from South Carolina to Texas and $293,451 sending an 89-cent washer from South Carolina to Florida. Even the coming postal rate increases aren't that high.

 

 

Washington spends $60 billion per year on corporate welfare compared to $50 billion on homeland security. Suburban families are receiving large farm subsidies for the grass in their back yards, subsidies that many of these families never requested and do n

[slngsht]

Bob, I feel like the spending problem is so massive, that it is difficult to describe its scope to the average public. If it could be narrowed down to indisputable facts that could demonstrate the extent of the problem in a 5 minute presentation (sort of the old Ross Perot presentation), and shown over and over again, maybe it will piss people enough to make a shift in how .gov works.

[Kitcat]

For ''08 the Fed budget is about $2.9T. Included in that are:

Pensions $723B

Health Care $680B

Defense $727B

Interest $243B.

 

That totals $2,373B. And that spending is considered off limits-no cuts. In fact the pensions categories are indexed to go up by the inflation amount every year and health care is usually double inflation or more, ditto military

 

So everything else that the government spends is about $500B. Lets' say we cut back there by 10%, which would be huge. We save enough to offset some, not all, of the increases in the first 3 categories for next year.

 

Its not a pretty picture and government "waste" is actually a very small part of the problem. Any politician saying they will balance the budget by eliminating waste is dishonest. It will call for sacrifice, by everyone.

[slngsht]

government waste is built into each one of those numbers.

[spotcheck]

slngsht - You are right on target about imbedded waste. It is more subtle than the headline-grabbing stupid stuff on toilet seats, etc.

 

One trivial example: Nuke-powered subs and a lot of the other major warships are built on the east coast. Submarine drive shafts are built in the Pacific Northwest. Monstrous flywheels for the drivetrains of the blue-water Navy are manufactured in So Cal. The cost of the CRATING to ship these monsters is staggering, not to mention the shipping cost itself. This is just one small (relatively) component of one program of one branch of one department of the Fed Gov.

 

Gee - why aren't they manufactured where the end product is assembled? Like, say, the supplier network that is in the immediate vicinity of Toyota's Georgetown, KY facility? They invented lean processes 50 years ago, they have regularly whacked the comeptition in production costs. Maybe they know something? Oh - right - they don't run for elected office - they compete in real-world global markets.

 

"Senator + Congressman, if you vote for this program, we will be able to add-retain X,XXX high-paying jobs (read: votes) in your state-district."

 

As flawed and slightly wacko as Huckabee's Fair Tax or Forbes' Flat Tax may sound, the emilination of non-value added waste in terms of tax lawyers, tax accountants, IRS, tax code lobbyists, Congressional tax-code specialist aides, etc would be staggering. Tens of billions. The deficit goes down and then the tax rates go down. But then, these groups would all have to get a real job and actually produce something of value. Ain't gonna happen.

 

Even Alexander the Great and his sword could not cut through this Gordian knot.

 

 

[Mandurath]

A example of our country is the quicky loan/title loan/paycheck advance etc chains that seem to have multiplied in the past 15 years. With so many families living above their means, and doing so living paycheck to paycheck. With these thieving companies more than willing to give cash to people they KNOW will have problems paying at back at an interest rate that even a mafia loan shark would look at and shake his head. So they start the cycle of borrowing to live, but eventually, both Peter and Paul come to the door at the same time wanting their money.

 

I ran into the credit card problem when my wife and I first got married. Not bothering to read the fine print, that low interest starting rate of 9 percent (not that low now that I am bit wiser) jumped to 24.99 percent after a missed payment. With associated fee's, when you only make about 300 bucks a week, that was incredibly difficult to pay back on a 4k and growing credit card debt. I shudder thinking about these people now living in that same trap with 50k credit card bills, and the home loan sector doing to them about the same thing that the loan shark wannabes are doing to the poorer folks. Living above our means, and not paying attention just about ruined our marriage. I had seen many relatives fall into the trap mentioned above and thankfully we dug ourselves out of the hole without having to go to any of those money lenders. IMO, the government is not really that different, just on a bigger scale. Heh, except they are bailing out the money lenders that are having problems now that the people with bad credit are not paying back the money they owe. Gotta wonder who is going to bail out the Government when its ARM comes due. *Imagine the rate of interest charged for the White House*

[Mandurath]

As far as the market, I am not doing to bad, not a record year, but not a bad one either. Biggest thing affecting our budget is fuel prices. But as the raised fuel prices filter to all other markets, and that 2 liter of coke goes from $1.19 to $2.19 I am sure that will change. I am probably wrong, but I think things will balance out when our fuel prices are on par with Europe and Canada. Stocks, etc should do the same thing. I'll leave the bigger numbers to folks smarter than me.

 

LOL, perhaps that should be a requirement for elected office, prove that you can live and balance a budget on McDonald's wages for a period of time.

[drew...]

LOL, perhaps that should be a requirement for elected office, prove that you can live and balance a budget on McDonald's wages for a period of time.

 

Not a bad idea!!!!!!!!!!

[Boxologist]

could always use the vermont method of paying their state legislature....DON'T.

 

Congress sould get into DC, quickly get teh business done and go home to their real jobs.

[Mondo]

I always thought that Congress/Senate should only have a certain number of bills they could pass a year (give each rep 2-10). That would eliminate all the Flag burning, steroid use, and generally trivial stuff compared to what needs to be done. Same for State Legislatures.

 

On this private vs government work... you got to keep in mind the biggest rip offs are from private business trying to get one over (Haliburton, aircraft/defense companies etc..). It's not so much the lazy gov worker (though they are there too). Government really should spend more on accountability but it seems that's where they cut first. When I was in the military they had an incentive program that gave you a percentage of the savings that the Air Force would save with your suggestion. Some guys got thousands (and the government saved a ton).

 

Taxes - I wouldn't mind a flat tax but, and it's a big but, the tax should be on everything earned... yes, capital gains, inheritance, etc. If everything earned was taxed it would probably not be a big percentage of gross income and the middle class would likely see the least impact as they live from paycheck to paycheck now.

Of course that wouldn't happen because middle class have the mortgage deduction and businesses would complain they need tax incentives to grow... But if it was a level playing field I think it would be ok (overseas business would have to be different I imagine and being relatively naive there's probably a lot more I don't know about. But a national flat tax or sales tax (with all the existing exceptions for business/wealty) hurts the middle class the most in my humble opinion.