The Missed Opportunity

For a snapshot of what’s wrong with our banking policy, look at the front page of the business section of today’s New York Times. On the left side: “U.S. in Standoff with Banks over Chrysler.” On the right side: “Banks Show Clout on Legislation to Help Consumers.”

On the left side, a consortium of banks holding Chrysler debt is refusing to agree to the current restructuring plan, which involves bondholders holding $6.9 billion in secured debt getting about 15 cents on the dollar – roughly where the bonds are currently trading, according to the Times.* The banks are playing the ongoing game of chicken with the government, betting that the government will cave and give them a better deal rather than take a risk on a bankruptcy.

On the right side, the banks are using their lobbying clout to block the administration’s proposals to help consumers and households, including the mortgage cram-down provision (which would allow bankruptcy courts to modify mortgages on first homes) and added consumer protections for credit card customers. They currently have all 41 Republican votes in the Senate tied up, which means nothing can pass.

The banks leading the charge over Chrysler: JPMorgan Chase and Citigroup. The banks opposed to cram-downs: Bank of America, JPMorgan Chase and Wells Fargo. The banks blocking credit card protections: American Express, Bank of America, Capital One Financial, Citigroup, Discover Financial Services, and JPMorgan Chase. All or almost all are bailout beneficiaries. But don’t blame them: they’re just doing what they can to maximize their profits at the expense of the taxpayer, which is perfectly legal (and even ethical, depending on your conception of shareholder rights). Instead, you should be wondering why they are in a position to be maximizing profits at the taxpayer’s expense.

If you’re Tim Geithner or Barack Obama, you’re probably thinking that now would be a nice time to have a controlling interest in these banks so they would stop blocking your efforts to help the rest of the economy. But the government has consistently bent over backward to avoid gaining control over the banks. It began with Henry Paulson (Bush administration) taking non-convertible, non-voting preferred shares last October; it continued with the Citigroup and Bank of America bailouts in November and January (during the transition period), in which the banks got underpriced asset insurance in exchange for more non-voting shares; and it peaked in the third Citigroup bailout in February, when the Obama administration insisted on forcing other investors to convert preferred shares into common, precisely to avoid getting a majority stake.

If the government had simply accepted the ordinary consequences of its actions – majority ownership – it would at least not have to plead for favors from Citigroup and Bank of America, who desperately needed help on any terms the government chose to dictate. Arguably JPMorgan and Wells are in a different situation, since the government was never in a position to buy a majority stake, and they are claiming they only took TARP money as an act of patriotic solidarity. But leaving aside TARP capital, the government has gone to extraordinary lengths to protect the financial system – guarantees on money market funds, increased guarantees on deposits, guarantees on bank debt, massive programs to lend against or purchase securities, not to mention the AIG bailout conduit – without which none of these banks would be in a position to make a profit. Yet it has left the banks in a position to capture the entire surplus from its actions, without getting the kind of concessions that would come in handy now.

Now, there is an ideological position that says that the government should stay out of the private sector, even to the point of making it more difficult for that very same government to achieve its legitimate policy objectives. This is a coherent position, though not one I agree with; it’s basically the “keep government weak” philosophy. I would just be surprised to hear that Geithner and Obama are in that camp.

By James Kwak

121 responses to “The Missed Opportunity

  1. Obama better wake up and get these banks under control or he is going to be a one-hit-wonder!

  2. silly things

    Well, a very important area to look is trace out how Fannie Mae and Freddie Mac got in trouble during the current crisis. This is just one of many examples of how government influence/control can lead to disaster.

  3. banker shills

    Agreed. Obama is going to be a poignant one-term president unless somebody puts a little person in Jamie Dimon’s lap, purges him and the rest of the executive-level bank parasites, and enforces meaningful structural regulation going forward.

  4. There are 2 emotions the Obama guvmint can feel now: 1)Satisfaction, because the banksters can get away with it and they can stay weak.
    2)Utter frustration, because they’re screwed by the dudes in pinstripe suits and the banksters can get away with it right before the eyes of millions of taxpayers.

    Anywayz, I was a fan of Jezu…oops Obama, but I get the increased, and bad, feeling that he takes his aim to “keep government weak” too literalty.

  5. Perhaps that is what FM’s CFO did, and now look where he is at now…

  6. Regardless of the level of one’s outrage at “the situation,” I think it is misplaced to direct anger at bankers. As James mentioned near the top of his post, we can ask no more of bank management than to do their best to maximize shareholder value. Otherwise, the whole concept of public ownership is one giant ponzi scheme, and private capital will be driven away from the capital markets for over a generation.

    No, anger should be directed at the government. As soon as they decided to prop up Bear Stearns, they got in too far with the economy. With each successive step forward, they are finding that as every advocate of a free market preaches, every inverventionist action by the government produces of flood of unforeseen side effects whose negative aspects outweigh the positive intentions of the interviention.

    We have two cases of the principle-agent scenario: 1)bank management acting as an agent for bank shareholders, and 2) our government working as an agent for tax-payers. One “agent” has proven incredibly adept at maximizing value for their principles. The other…incredibly inept.

    The thing that scares me the most is the fact that the discussion, while highliting all the important symptoms of the problem, is looking at the wrong source. As long as bankers are viewed as criminals and the government is viewed as the savior, we will be in for an extremely difficult and depressed few decades. The debate needs to move toward the failings in government which sowed the seeds for the problem…and away from sensationalist talk which fuels the pitchfork wielding mobs.

  7. “Now, there is an ideological position that says that the government should stay out of the private sector”

    Got that half-right Jim. That ideology only applies when profits are being made.

  8. silly things

    Also, our government were significant part of the root cause of the current crisis.

    1. Our government has relaxed bank regulation for the last 2 decades

    2. Our government has consistently push for higher home ownership. The politicians used their influence of Fannie Mae and Freddie Mac to affect this in the mortgage securities market.

    3. The Greenspan Fed has kept the interest rate low for too long. This is the most directly cause of the housing bubble.

  9. banker shills

    Note how the shills try to twist this around. They try to focus you on government influence over private-sector banks, when the problem is banks’ influence over government. That way they can blame each new failure of corrupt policies on dirigisme.

  10. As James mentioned near the top of his post, we can ask no more of bank management than to do their best to maximize shareholder value.

    Not exactly. We can ask them to do their best to maximize shareholder value through all legal means. Which sounds like a great American free-market loving principle.

    Except “for every problem, there is a solution that is simple, elegant, and wrong”. What if the banks do things that should be illegal, but they have bought the politicians who write the laws? That is not American or free market at all, and it is what we have today.

    This entire situation is not about free markets versus state ownership, nor left versus right, nor liberal versus conservative. This is about an emerging oligarchy of financial firms versus everybody else. And we are losing.

  11. 4. Interest on mortgages are tax deductible.

    5. Interest on corporate bonds are tax deductable but dividends are taxed as income (talk about skewed incentives to overleverage your company).

    6. The government wasted too much time on the anti-trust issues of microsoft while banking consolidations reached a breakneck pace over the 80s, 90s, and 00s.

    and most importantly, your point number 3 above. Politicians consistently value social quietude and an easy political climate over the healthy creative destruction that comes from recessions and reorganizations. The efforts to “prop up” failing industries such as the autos, manufacturing, miners in the UK, etc. are all testament to the fact that a politician would rather keep an inefficient enterprise going, than allow it to fall apart and be rebuilt more efficiently….

    The list goes on and on…

  12. When the timing conditions for Chrysler & GM were originally announced, I quietly wondered if putting Chrysler up to bat for an April 30th drop dead date was the Administrations way of playing chicken to the end. It seems that if they need to make someone an example, Chrysler is the less painful choice and its outcome could be benefitial on other fronts with the banks.

  13. silly things

    Andyb,

    Actually, a significant part is what the US government did to Fannie Mae and Freddie Mac. US politicians has always pushed for higher home ownership and they used their influence of Fannie Mae and Freddie Mac to affect the mortgage back securities market. This is a matter of public record that you should be able to dig up. Russ Robert on EconTalk podcast has a good session on this.

  14. “There were, of course, some facilitating factors behind the crisis. Top investment bankers and government officials like to lay the blame on low U.S. interest rates after the dotcom bust, or even better – for them – the flow of savings out of China. Some on the right of the spectrum like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader home ownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.
    But these various policies – lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership – had something in common, even though some are traditionally associated with Democrats and some with Republicans: they all benefited the financial sector. The underlying problem was that policy changes that might have limited the ability of the financial sector to make money – such as Brooksley Born’s attempts at the Commodity Futures Trading Commission to regulate over-the-counter derivatives such as credit default swaps – were ignored or swept aside.”

    From Simon Johnson’s testimony.
    Worth a read.

    http://www.jec.senate.gov/index.cfm?FuseAction=Files.View&FileStore_id=20a37890-6f4f-4d11-92e3-449be6b7cbba

  15. I appreciate that…but if someone tries to bribe a policeman, are you outraged that there exists people out there who would attempt bribery? or are you outraged that the policeman accepted the bribe?

    Call me cynical…but I will always believe in the greed of humans and that some proportion of our population will be criminal. But I don’t hold the broad population to a high standard…I hold my elected officials to a high standard. If bankers are trying to bribe politicians, its not the bankers’ fault for trying to do so. Its the politicians fault for bending over backwards. Trust me, in my ideal world, Bear Stearns would have been let to go bankrupt, and the entire industry would have realized that there is no implicit govt guarantee for their businesses, so all of this pain and deleveraging would have occured a year ago, with less ambiguity on who Obama likes and who he doesnt.

  16. Alas, it’s not hard to predict who will win when you’re too big to fail, massively well connected in Congress and using hardball negotiating tactics against the public sector.
    The marginal propensity to raise inter-generational taxes is infinite

  17. I feel the pain of these poor bankers, forced to make fortunes from the securitizations and loan fees they were forced to make to Americans at the credit-unworthy bottom of the pyramid scheme.

  18. Dr. Kwak —

    Now, there is an ideological position that says that the government should stay out of the private sector, even to the point of making it more difficult for that very same government to achieve its legitimate policy objectives.

    My own ideology actually leans in that direction… But “staying out of the private sector” went out the window with the very first bail-out. What ideological position argues for throwing billions in taxpayer money at the wealthiest people in our society? Nobody believes in “privatize the profits, socialize the losses” except those who keep the profits (and the politicians they own).

  19. James – thanks for making it so clear that you’re a socialist.

  20. Its a good read. And I dont necessarily disagree with the points that he makes. All I’m saying is that there are two ways to view it: 1) its the bankers’ fault or 2) its the government’s fault. I say its the second one.

    Its the government’s fault for not upholding anti trust regulation as it should have. Its the government’s fault for bailing out the economy every time it took a dive (which in turn bailed out the financial sector). And its the government’s fault for being too weak to accept unemployment and a few small episodes of social unrest in the hope of protecting capitalism. If we had a government that would allow bankrupt companies to go bankrupt, and insolvent banks to be wound down, then we would be a lot more efficient in solving these problems. Unfortunately, our government seems more worried about a few million in bonuses rather than a few billion/trillion in bailouts.

  21. why wouldn’t you expect a “game of chicken” scenario, both for the banks and for chrysler? why is it not optimal for each stakeholder at this point?

  22. I agree with you.

  23. People who are paid tens of millions of dollars to lead companies (ostensibly) to sustainable profit – who’ve been educated at the very best B-schools in the world – have opted out of the “we’re just government victims” defense.

    Government certainly is complicit in this meltdown.

    But to assert that government is the sole source of the problem means that the past actions of these highly paid bankers is completely irrelevant – thus, logic follows, their astronomical salaries are irrelevant as well. They get paid the big bucks precisely for their ability to navigate the tricky terrain found in Wall Street.

    And who exactly is wielding pitchforks these days? The bankers – who talk about the catastrophe that will follow if they are reined in in any way.

  24. but if someone tries to bribe a policeman, are you outraged that there exists people out there who would attempt bribery? or are you outraged that the policeman accepted the bribe?

    I am outraged at the policeman. But I am even more outraged at the person who offered the bribe.

    Suppose you could choose between living in a society where nobody ever attempted to bribe policemen, and one where no policeman ever accepted a bribe. Which would you choose? I would choose the former, because those are the sorts of people I want to have around me in day-to-day life. I like living in a civilized society, and I believe civilized society flows from the character of its citizens, not the barrels of its guns.

    Put another way… When I go to the local store, I know the owner will not try to rip me off. That is not because of “consumer protection laws” or any such nonsense; it is because he is not a scumbag.

    Which brings me to the big banks. I believe the people running them are scumbags; that they are motivated entirely by their own personal interests, not by their shareholders'; that they have hijacked our public institutions so that whenever they lose money, the state confiscates my wealth and hands it to them; that they have also manipulated the political system so that smaller competitors are at an insurmountable disadvantage; and that we really need a modern-day Teddy Roosevelt to emerge and smash them into little bitty pieces.

    And I would characterize everything I just said as quintessentially American. And conservative.

  25. James Kwak: “On the right side, the banks are using their lobbying clout to block the administration’s proposals to help consumers and households, including the mortgage cram-down provision (which would allow bankruptcy courts to modify mortgages on first homes) and added consumer protections for credit card customers. They currently have all 41 Republican votes in the Senate tied up, which means nothing can pass.”

    What that means is that a filibuster could succeed. OTOH, with people losing their homes and suffering interest rate hikes by their credit card companies — despite a “lack of demand for credit” — would the Republicans filibuster? After all, a lot of their constituents are mad at the large banks, too. They may not be paying particular attention to the maneuvers of Congress, but a Senate filibuster would make a front page headline on their hometown paper. I doubt if they would be amused. If the Republicans mounted a filibuster, I think that they would lose 5 – 10 votes in a week.

    Coffee Boy: “I appreciate that…but if someone tries to bribe a policeman, are you outraged that there exists people out there who would attempt bribery? or are you outraged that the policeman accepted the bribe?”

    How about both-and? Put both the briber and the recipient in jail.

    Nemo: “What ideological position argues for throwing billions in taxpayer money at the wealthiest people in our society? Nobody believes in “privatize the profits, socialize the losses” except those who keep the profits (and the politicians they own).”

    Nobody — except almost everybody who can get away with it. What about the industrialists who are quite happy not to pay for the health costs of their pollution? What about the businesses that get to keep the “sales tax” on their sales? And in particular, the big bankers. “Too big to fail” has been applied to banks for decades. In 1985 (!) Garrett Hardin pointed out, in “Filters against Folly”, that the big U. S. banks had already been, uh, banking on bailouts since the oil crisis of 1973. That is why they made risky loans abroad instead of lowering interest rates at home. More recently, they have made risky loans at home, in the sure and certain knowledge of bailouts if they got into trouble.

  26. markets.aurelius

    This is special-interest maneuvering gone wild.

    This is actually a facinating subject. The AEI had an interesting article re special interest politics, which supports many of the contentions made in recent Baseline posts:

    http://www.american.com:80/archive/2009/april-2009/the-coming-of-the-fourth-american-republic

    It’s dense in some places, but worthwhile reading to the end, vis-a-vis the Special-interest state. It does seem we are at the end of one era — remember “what’s good for GM is good for America” and the power of the industrial elite — and the beginning of another, which may resemble TR’s day.

    Oh, and Coffee Boy, I feel compelled once again to point out that, at best, the “bankers” you refer to were amoral. At worst, a plausible case can be made that these people subverted the legal-regulatory processes of the markets via the 2004 changes in the SEC’s Consolidated Supervised Entities rules. This process was led by Hank Paulson when he was GS’s CEO in 2000. As Treasury Sect’y he had the rare historical opportunity to see all of the rule changes he advocated enacted, only to find himself at the helm when these very changes led to the complete destruction of the investment-banking industry AND world financial and trading markets. And now Hank’s former colleagues and proteges at Treasury (many of whom, like him, are GS alums) are left behind to see that the favored few insiders survive and prosper, as the rules of the game are once again re-written.

    (There’s a longer development of this in my reply to your comments in “Is Goldman Really That Good” the other day, Coffee Boy.)

    “Not ignorance, but ignorance of ignorance, is the death of knowledge.” — Alfred North Whitehead

  27. Game of chicken?

    Sure, but the banks are in the driver seat of a 20-ton semi and Timmy is riding in the passenger seat. The taxpayer is in the VW bug.

    The better analogy here for a missed opportunity here is amputation. Cutting of the gangrenous toe before it affects the whole body. Now it’s at the rotten leg stage.

    Stats if you’re there, on your reply a few posts back. Tanks, ships, planes in WW2 were an enormous ROI for the US. These armaments leveled half the world, so as the victors, we became the major producer of goods as the free world rebuilt. Of course, this situation does not apply today, there are no such hostile warmongers, not even Russia. (In fact the world increasingly looks as the US not so much the fair cop but as the mobster bully.)

    Fixing bridges roads etc today will have little benefit other than keeping people busy. The infrastructure is already there, there will be nothing new that the next business cycle can enjoy for the next up cycle. Rather, it is largely keeping what we already have from crumbling. In fact with things like bullet trains and new superhighways, and green this or that, we may have malinvestments, actual drains on the economy and budget.

    There is so much debt that needs to be destroyed, that no amount of inflation will inflate it back. Better to get it over and deflate and liquidate. We do we fear this? People will reset to the new level of production and services needed to sustain a balanced economy, but we have never let get there. The elite try to prop this and that up, so they are made whole, with the net result of more printing that puts the entire nation at risk.

  28. why do you think that the elite would not disproportionately benefit from mass liquidation?

  29. Really, we don’t have much of a government today.
    What would LBJ have done? Eisenhower? Truman? FDR?

  30. “[The] banks are using their lobbying clout to block the administration’s proposals [...] They currently have all 41 Republican votes in the Senate tied up, which means nothing can pass.”

    This gives an entirely new meaning to the word “bankrolled”. Obama is handing public money to private institutions so that they can fund lobbying efforts that block his own legislative agenda. It is not him that is “bankrolling” the banks, they have him rolled – “bankrolled”.

    The staggering shortsightedness of Obama’s day-to-day “pragmatism” resembles the fallacy of US military operations – to paraphrase Lind: What ‘wins’ at the tactical and physical levels looses at the strategic, mental and moral levels… Obama buys himself another day, another month, and mortgages the future – his and ours.

  31. markets.aurelius

    TR’s the model here

  32. Because there is an end to deflation. People will be able to feed and clothe themselves, the laws of supply and demand will work with the money on hand, the general populace will reach an equilibrium: that which is within our means.

    But the elites who have massive leveraged losing bets made possible by their inside access to the money supply, OTOH, have disproportianately further to fall. They need to be wiped out, as it should be, for very little of their wealth is real.

    The whole game for them is to spin their losses into winnings at our ultimate expense.

    Those that are rich and have acted wisely, more power to them, as long they do not receive a penny in taxpayer money to scoop up deflated assets. They will help set a floor when buying up assets.

  33. Obama’s presidency is over. As a businessman, I’ve got to figure out how to survive ten-year’s-worth of the Japan scenario.

    The only thing worth speculating about is who Obama’s replacement will be.

    Sarah Palin? It’s possible. She’s an expert on banking. She’s got a checking account.

    A crypto-fascist might make a nice change.

  34. “And I would characteriz everything I just said as quintessentially American. And conservative.”

    I don’t disagree with you. I’m just a bit more cynical than the average conservative. I’m probably in the minority of people who tries to live their lives as Homo Economicus, but I truly believe that everyone in the world is inherently selfish, and the only difference between people is their relatively willingness to break the law. Nothing in my (ok relatively short) life has led me to believe otherwise. And because I’m such an ardent believer in this system, I would expect nothing less of individuals than to be selfish…to me its patriotic.

    However, the system only works when you have a strong, neutral, third party to enforce the rules of the game which we all have collectively agreed upon. In the case of this metaphor, we need honorable policemen. Milton Friedman’s Capitalism and Freedom lays it out best when he mentions that capitalism actually requires a strong and stable government. However, it only works when the rules are consistent and fair. Our current government has failed on both accounts. And everytime a government pushes some social agenda through, the rules becoming increasingly less consistent and less fair, and the economy suffers because of it.

    The stock markets have not tanked because of a disbelief in the ability of Americans to run businesses and turn a profit – I’m a huge bull on our ability to run businesses (large and small…financial and otherwise) and maximize value for shareholders and owners. Few nations are filled with such enterprising and ambitious people (and I’ve spent considerable time abroad). No, the markets have tanked because the referee of this capitalist game has thrown the rulebook away and is running this game on the fly. Bear Stearns bondholders are saved. Fannie’s and Freddie’s are saved. Lehman’s are not. AIG’s counterparties are saved. Car makers get special loans because politicians don’t have the balls to stand up to Detroit. Investors and entrepreneurs who once took market risk and economic risk are now having to navigate around political risk. Any good investor/trader knows not to risk anything on something that you have no view on or that you can’t control. As long as this nation is run on Obama’s and Geithner’s whims, investors will stay on the sidelines because you can’t have a view on political risk. This nation has turned into their own real-life Sim City…we’re all just pawns.

  35. At the Moon of Alabama blog, b asserts that, because of credit default swaps that would be paid in the event of Chrysler’s demise, Chrysler’s death would financially benefit those banksters who have bet on it. They have an incentive to prevent Chrysler’s survival. B advocates nullification of CDS contracts, arguing that the “greater good” is more important than helping gamblers collect from those who lose wagers of this sort.

    http://www.moonofalabama.org/2009/04/lenders-press-for-chrysler-bankruptcy.html

  36. Except of course that:
    A) if you think banks are near insolvency now, imagine how insolvent they will be when the protection they bought has been deemed null and void
    B) you’ve just bailed out whomever sold the insurance contract…most likely AIG, as the largest net seller of insurance.

    People who whine about derivatives forget that its a zero-sum game…for every winner there is a loser. (This is not to be confused with securitization. A CDO of mortgage backed securities can be called a derivative, but that isn’t a zero sum game, its a collection of real assets).

    Lastly…how is it in the public good to allow the continuation of an enterprise that has proven to be a fundamentally inefficient allocator of capital? Bankruptcy exists to move capital and labor from unproductive to productive enterprise. The US automakers should have gone out of business (in current form) a long time ago…

  37. Of course this view presupposes shareholders to maximize value for…

    Arguably, for some banks there would be no current shareholders without the government’s prior financial support.

  38. Who do you think nurtures, owns and runs politicians – taxpayers? CB, you are young, with much hot air.

  39. So much for getting loan shark interest rates and credit card reform. Republicans are voting for the banks and against the American people.

    I will fight against every republican candidate from now on, even for dog catcher, since their only interest is their party. I say this as a 25 year former republican turned democrat, btw.

  40. Since I can’t edit, I meant to say,

    “So much for getting loan shark interest rates and credit card reform under control.”

  41. And you are old…with a chilly breeze? Please, give me an argument, not a quip.

    For those who’ve been reading my recent posts, I hope you understand my main point, otherwise I’m not communicating myself clearly: I’m not at all defending the status quo. Wall Street and Washington are in bed with each other, the system is corrupt, and the confidence of our citizens (both as taxpayers to the government and investors in the economy) has been lost.

    HOWEVER, I find it incredibly counterproductive and petty to continue to lambast bankers for maximizing profits. My point is that if our politicians are “nurtured,” “owned,” and “controlled” by bankers, then we need new politicians. Of course, we should probably get a new banking system to boot, but the market sorts that out for us anyway…IF WE LET IT. If the government had the balls to let both financial (Bear Stearns) and non-financial (GM/Chrysler) companies go bankrupt, then the market can decide whether Rick Wagoner should stay in power or Lloyd Blankfein should go or neither or both. The blame for this mess lies on our government, not our private sector. And the solution won’t come from trying to legislate morality and do-goodery into our citizenry, because that’s an exercise in futility – people will be greedy and there’s no amount of made for TV hallmark movies that will convince me otherwise. The solution comes from requiring a high standard of morality and ethics FROM OUR GOVERNMENT. If our politicians are in the pockets of bankers, then we need new politicians…its as simple as that.

  42. I read your post this morning, and after a few thoughts,
    it became apparent what the dependencies are:

    Chrysler and GM must both be settled in or out of bankruptcy to unwind CDS transactions affecting European banks and investors. Citigroup had a large presence in Germany, and likely has snarled a pool of investors that could be friendly to a rescue of Opel.
    Chrysler has bond debt to JPM and other banks that must be shaved before FIAT and others will play. Chrysler will probably not survive; GM Europe will not belong to GM beyond bankruptcy.

  43. Uhm, dude. “Politicians consistently value social quietude and an easy political climate over the healthy creative destruction that comes from recessions and reorganizations.” This will *always* be true in a democracy. You might as well whine that water is wet and snow is cold. Only a brutal dictatorship can afford to ignore the requirements of social quietude and easy political climate. The question is how to work around this political constraint to do what is necessary to do in the case of an insolvent industry.

    There are some, such as economist Brad DeLong, who argue that Obama is setting up the banking industry by making them look the bad guy, therefore setting the political stage for nationalization. If so, then the banks are playing right into his hands. I’m not sure I buy that theory, but nationalization becomes more and more realistic politically the more that the bankers resist doing the sane and sensible things needed to maintain a working American economy. We’ve all called for either nationalizing or liquidating the insolvent banks, but without the political backing to do this action, it is infeasible. But if the banks keep behaving like this, not only will the left-wingers be ranting to nationalize them, but the right-wingers will be doing so too… and at that point, there will be no alternative.

  44. “But the elites who have massive leveraged losing bets made possible by their inside access to the money supply, OTOH, have disproportianately further to fall. They need to be wiped out, as it should be, for very little of their wealth is real.”

    Didn’t that pretty much happen in the Great Depression? And in the bursting of bubbles throughout modern economic history? But wiping out the elites also cripples a lot of other people. Equilibrium is not a good in itself. Cushioning the fall of the elites can help create a better equilibrium for everybody.

  45. CB, you mean ‘simplistic’ right, and quite bored but thanks for trying. ‘better politicians’ worth a chuckle anyway, cheers. Ever had a conversation of any length with your ‘respresentative’, once, twice, never? Know who they do speak with, daily, hourly.

  46. “People who whine about derivatives forget that its a zero-sum game…for every winner there is a loser.”

    It only looks like a 2 person zero sum game. Even though Chrysler was not a party to the derivative, it was a player. The buyer and seller joined together in an alliance against Chrysler, and others.

  47. Katrina did it for me. I am sad to see the Grand Old Party of Abraham Lincoln become the party of plutocracy: government of the rich, by the rich, and for the rich.

  48. I think several people adopt the position, most eloquently argued by CB, that I would term the “ideal economic gas.” If we reform the political system and adopt a non-interventionist policy, the market will have correct incentives and right itself. There will be deflation and several companies will collapse, but in the end the market will recover faster than if we continue to intervene. I agree with this position.

    There is however the small and probably unimportant problem that during the period of deflation and collapse, a large number of individuals, especially those in vulnerable positions in society, will lose a considerable amount of their personal assets. They will lose jobs, houses, savings and security. Even a quick market recovery will take several months to return to pre-crash levels.

    Proponents of non-intervention can empirically demonstrate the relative triviality of this lag period by refraining from eating for the next six months. With the money they save, historical precedent suggests that tarpaper is a wise investment.

  49. The GOP pushed hard to strip gov’t agencies of their lobbying ability. This should be part and parcel of the TARP. Next time the banks blow up, make them stop lobbying efforts as part of the deal… or maybe do it tomorrow.

  50. I can only hope that when you speak of ROI (in terms of destroying the world), you are speaking tongue-in-cheek.

    On other issues, here are some simple facts:

    1) The argument that the elite have further to fall does not count the “survival tax” – this is the minimum amount a family must pay to survive. Once you account for this, the poor (and middle class who lose jobs, thereby becoming poor) suffer the most as a class.

    2) There is, I assure you, some amount of inflation that would wipe out debt.

    3) You maintain that “green this or that” are malinvestments. Certainly, coal is cheaper in the current anti-market environment.

    So let’s fix that. EPA reports show that particular pollution alone causes 70000 deaths a year, 600000 additional asthma cases, and up to 55 billion dollars in _direct_ health costs (not counting lost life).

    http://www.lungusa.org/atf/cf/%7B7A8D42C2-FCCA-4604-8ADE-7F5D5E762256%7D/key_air.pdf

    So, rather than subsidizing pollution, let’s equalize the playing field by taxing emissions and transfering funds to harmed individuals (or populations who have been subjected to harm). Let’s create property rights to 100% pure free air, that individuals are endowed with upon birth, and that they are allowed to sell in the free market if they choose. Or, let’s grant individual citizens standing to sue (either individually, or in class action) coal plants for probable damages.

    Any of these solutions would work… But to call green energy investment bad is painfully innaccurate in ignoring the true costs of alternatives.

    The arguments against using government to enforce environmental standards – either through regulation or through a property-rights system – amounts to nothing short of “freedom of convience” – that is, freedom when it’s convenient to special interests.

  51. markets.aurelius

    Obviously, you’re referring to the “banks” — mostly the former investment banks (FIBs) — when you say: “Lastly…how is it in the public good to allow the continuation of an enterprise that has proven to be a fundamentally inefficient allocator of capital? Bankruptcy exists to move capital and labor from unproductive to productive enterprise.”

    In the history of the world, never have so few been responsible for so much capital destruction — multiple trillions of $$ vaporized by the FIBs and AIG. Come on, now …

  52. It’s ugly. The banks in October/November could probably have been talked into almost anything to save the system and themselves. Now that Armageddon seems to have been cancelled this time around and the politicians are terrified of allowing “another Lehman” the banks feel untouchable. Obama could bring them to heel (cut off FDIC debt guarantees and other funding programs, start making noisy investigations into bailout program fraud, and in general reminding the banks why you don’t want to bite the hand that feeds you) but that would be at the expense of 1) another banking panic the he would in part be blamed for, 2) another slug of bank bailout money, and 3) another panic that will take the economy down another 5-10%. The bankers don’t believe he’s going to do it and now they aren’t even polite anymore in blowing him off. They just snort derisively and go back to looting (and up the numbers on their next ransom note). We are facing the costs of regulatory capture.

  53. That’s a good point. One read is that the administration put Chrysler first because they are actually willing to let it go bankrupt. So they will win that game of chicken, and then dare the banks to play again with GM (which they will not want to let go bankrupt).

  54. I don’t think anyone is suggesting a quasi-governmental institution like Fannie Mae or Freddy Mac, but rather a rapid nationalization or FDIC-like take over and then return the cleaned up banks back to the private sector. A very different animal from Fannie or Freddy.

  55. That sounds very, very feasible!

  56. Suddenly, I am really warming up to the idea of converting those Preferred shares to Common stock.

  57. Pingback: Those Meddlesome Banks | Refinancing

  58. Kwak: They currently have all 41 Republican votes in the Senate tied up, which means nothing can pass.

    Min: They may not be paying particular attention to the maneuvers of Congress, but a Senate filibuster would make a front page headline on their hometown paper. I doubt if they would be amused. If the Republicans mounted a filibuster, I think that they would lose 5 – 10 votes in a week.

    The reason that the first statement will continue to be true and the second will not come to pass, is that the Dems don’t make the Reps actually stand up on the floor of the Senate and talk. Everyone looks at the number of votes and a “default” filibuster wins. The Dems will only win when they **make** the Pubs do it all in public as Min imagines it.

  59. some guy in a cube

    The banks have lined-up all 41 Republicans you say?

    Who says we don’t have a true opposition party in this country!

  60. If banks are safer now than before, why were CDS prices on bank debt rising?

    The counterargument is that the more stable the economy becomes, the more banks lose their bargaining power.

  61. Well said. I’d make a further point regarding Coffee Boy’s arguments. He appears not to understand the role of government in legalising incorporation. Some reading of history from the 1800s would clarify this. The banking system as it has existed, in fact the modern economy as it has existed, depends on incorporation. It was introduced, by government, to allow business-people to reduce the risk of personal loss they faced from doing business. If you truly want government out of business, argue for the end of incorporation, and see whether any politician (moral or otherwise) can get elected on that platform.

    Going without food for six months? Forget that. The remedy CB proposes would take years if not a decade to work through the system, even if you assume that Americans are superlatively enterprizing people (I don’t).

    Washington needs to crack down hard on these finance sector oligarchs whose behaviour shows they are not business-people but rent-seekers. Unfortunately I’d rate it a thousand-to-one chance that Washington actually will.

  62. you also have to look at when debt matures. in the case of GM there is a bond totaling $1B (i think it is a convertible preferred) that matures june 1. on that date either GM pays bondholders $1B or defaults and will go into bankruptcy. so delaying the process longer than that would cost GM $1B, and that would get paid by you know who.

  63. Louis Raymond

    The government is on the wrong track. Why should we sacrafice out auto industry and let Europe and Asia dominate U.S. sales? I really wonder what the Obama administration is thinking.

    We should be thinking of creative ways to save our auto industry rather than seeking to break the backs of unions. I wonder if the Obama administration has a clue about our true economic situation.

    “It seems as though no coherent message is coming from the administration as to what to do about the economy. The latest word from the Whitehouse is President Obama has asked his cabinet to identify $100 million in budget cuts. The media and talk radio are having a field day deriding the paltry sum of $100 million in budget cuts when the country is facing a $1.75 trillion budget deficit in 2009. The comparison being thrown around is this amounts to a family that spends $60,000 per year looking for ways to cut $6 from their annual budget. It’s as though the administration is like Dr. Evil and having awoken from a time warp still thinks millions is real money in Washington.

    My concern is that President Obama and his advisors are sending a mixed message, the decidedly wrong message, when they talk about cutting $100 million from the budget….”

    http://www.escapethenewgreatdepression.com/

  64. some members of the elite got wiped out in the 30s, others did not. it just depended where your money was. i am not even sure it was so different in the 30s than any other decade — those who make up the ‘elite’ come and go.

    also — it’s very hard to see that many people or companies which were hugely levered when the bubble burst are going to make it through this without bankruptcy or significant pain. that goes for the elite as well as the common guy. this is true whether their company gets a ‘bailout’ or not. the world isn’t going back to 2007 any time soon.

  65. dingo ate my baby

    sticks and stone can break my bones but a socialist can never hurt me. A “capitalist” however……

  66. i’d bet there’s almost no cds on chrysler debt — these cds were never cheap, and it’s a private company.

  67. silly things

    If we return the cleaned up banks to the private sector then the private banks will once again act on self interest. These banks will fight whatever that aren’t in their interest.

    James is complaining about private banks fighting government.

  68. Pingback: More Market Follies - Fondo Libre

  69. Sigh!

    I am afraid that you are right, Bill. The Dems blow almost as much hot air as the Reps. And they are not as good at it. Why has the minimum wage never been pegged to inflation? Because the Reps are against it, and the Dems like to threaten to raise it from time to time. It makes them sound good.

    But if the Dems really wanted to pass this legislation, they would call the filibuster bluff. However, they get a lot of mileage out of proposing it, even if they don’t pass it.

  70. angry_liberal

    Them banks done got him under control.

  71. riverdaughter

    >I would just be surprised to hear that Geithner and Obama are in that camp.

    Really? Funny, that doesn’t surprise me at all. Why else would the bankers go out of their way to help elect a guy who has so little experience and almost no earned coalitions upon which to draw for help against a well-financed juggernaut?

    You were being facetious, right?

  72. Any entity that was in trouble in the fall, should have been taken into receivership–it took weeks to get tarp passed, and easily, if paulson and bernake has any sense of not protecting the oligarchy, could have addressed the situation honestly. In receivership, the smaller banks could have taken over the roles of the larger banks–and Sarbanes-Oxley could have been restated in an emergency to separate the powers of the investment side of business from the commercial banking side.

    We were terrorized in the fall, not just by watching the markets decline, but by the incredible scare tactics VOICED by our supposed leaders paulson and bernake. Looking back, clearly, if there had been any honesty to the public, we would be in the same spot, but less that the current 12 trillion out and we would be on the way to correcting a corrupt system. Instead, Lehman is left to die to put the other banks in an even stronger spot, and large banks are encouraged to get larger by using the TARP money.

    The whole issue of demonizing nationalization turned out to be an incredible manipulation of the public. What has happened is not nationalization, it was the RAPING OF THE US TAXPAYER and possibly our future creditworthiness as a nation! All in the name of the sacred too big to fail banks.

  73. Mr. Obama, in his role as President of the WORLD, is the perfect tool for the bankers agenda of a world currency and one world bank.

  74. After the Stiglitz testimony, it’s pretty clear that Geithner and the banks are obstructing recovery.

  75. Bear Stearns would have had the fed window in the summer of 2007 and the the imbalances of the repeal of Glass-Stegall would have been addressed sooner….i don’t buy the idea that no on else saw the injustice of the situation.

  76. BINGO

  77. I think that the US people are in the same kind of trap that your calling James a socialist creates–we are supposed to belive that big, bloated, corrupted entities ( the too big to fail “systemically” important entities) have to have either “loans” or free money (through AIG) or the world will end…if you ask questions or wonder why, you are a socialist…and with all this “bailout” money down the road, and many of these entities, in possibly no better shape, now we are told to shut up, give more money, or you are a socialist– this is a mnaipulation to further the bank monopoly agenda.

    In the world without lies and manipulation, if an entity becomes corrupt (like Enron) and/or uses accounting tricks to make the investors thing they are OK ( also, like worldcom ) there is no question, they are shut down. But, our large bank machine, has its power in the our government from the federal reserve, to the treasury, to so many of our elected officials.

    Capitalist, you are wrong.

  78. AWESOME!

  79. The fault lies with BOTH the government and the banks. Different sides of the same coin, if you will.

  80. “If we return the cleaned up banks to the private sector then the private banks will once again act on self interest.” – Exactly! That’s why we need tougher anit-trust laws. Dr. Stiglitz stated at the 04/21 JEC hearing, “We’re not taking this opportunity to begin to think about what kind of a financial system we want to create…We’re reinforcing a failed system rather than creating a new system, at very great cost to our future.” We need to clean up the solvency problem of the banks – it’s not a liquidity problem. We need tougher anti-trust laws because some smart PhD is gonna figure out a way to skirt the system, they will, but the damage won’t be so catastrophic if the bank can never grow to be too big to fail.

  81. second

  82. Coffee Boy, Redleg is right!

  83. That ideology is called fascism, Italian flavor.

  84. Methodman is apparently not an engineer.
    Infrastructure is the foundation of our economy, including the financial sector and government – the US economy as we know it could not exist without modern infrastructure.
    Infrastructure has a design life, which is usually ranges from 50 to 100 years. This assumes that it doesn’t become obsolete in the meantime.
    The WPA and its cousins built water, sewer, and transportation infrastructure 70-80 years ago, and are nearing the end of their design life. Same with the electrical infrastructure (the TVA and the Rural Electrification Act). The Freeway system is slightly younger, but still at about 50 years old but is often obsolete given the design conditions are trumped by congestion we see today.
    For disclosure, I am a member of the ASCE. Assuming that the infrastructure we have now will not only function indefinitely without investing in maintenance, not to mention that the infrastructure designed a century ago will continue to meet modern need without upgrades, is at best naive. You only have to look as far as the I-35W bridge collapse in Minnesota, the TVA sludge spill in Tennessee, Louisiana’s flood control system, the Blackout of 2003, or sit in LA’s rush hour to see the effects of infrastructure that has been taken for granted.
    *steps off soap box*

  85. Isn’t it sad that all the 12trillion dollars and counting, is being spent on padding the pockets of the interest makers, and doing nothing but enslaving our county with possible bankruptcy and shame! Think of how even the amount GIVEN to AIG would have gone so far to help strengthen our country’s infrastructure!

  86. Apologies if this has been raised before but if the bondholders have “insured” themselves with CDS what incentive do they have to negotiate?

  87. “The buyer and seller joined together in an alliance against Chrysler, and others.”

    How does the seller of CDS benefit at all from a bankruptcy? Its like saying an insurance company sold someone insurance and then caused a fire in their house…the seller’s incentives are to prevent bankruptcy.

    SO – if every CDS contract has a buyer and a seller, then for everyone person on the sidelines cheering for bankruptcy, there’s someone else out there cheering for the bonds to be saved.

  88. The obvious flaw in the assertion that “1) its the bankers’ fault or 2) its the government’s fault.” is that the opinion ignores or excuse the glaring fact and truth that both the bankers and the government are colluding, working in concert to perpetuate a system that defends, shields, and advances the best interests and offshore accounts predator class cronies, cabals, klans, and oligarchs, – and so it i both the bankers and the government are responsible for the brutal rape and pillaging of the Ameican tax payer.

    The question now is what do we do about it. Apparently the Obama government, like their fiendish predecessors in the bushgov are deep in the pockets and hold close to the ear the best wishes and interests of Wall Street alone. Every other sector in the economy is practically ignored, while trillions ($12trillion!!!?) in government largess has been lavished on the shades, shaitans, charlatans, swindlers, and PONZI scheme thieves on Wall Street.

    The FAILED companies and FAILED managements bruting FAILED models who caused, profited wantonly from, cloaked, and exacerbated the worst economic crisis since great depression – are now majikally shielded and rewarded with trillions of taxpayer dollars for failure, fraud, collusion, bribery, graft, predator lending, tax evasion, and numerous instances of systemic financial malfeasance and perfidy? Have we gone mad?

    Are we insane?

    Why are these fiends and criminals still employed and dictating policy to the US government, and spitting in face of American tax payers?

    Why do we tolerate this wanton abuse and freakish disconnect from the other 99.5% of the population who are not predator class, or superrich?

    Frame your poor and middle class fellow Americans as “nasty” if you will for reacting to unprecedented desperation, and responding to lost wealth, lost jobs, to lost homes, lost opportunities for thier posterity, to lost hope – but how then do you frame the thieves and swindlers, and PONZI scheme collusionary frauds and predators on Wall Street, in the regulatory agencies, and in the government who are gleefully robbing and pillaging poor and middle class children to feed the superrich?

    Nasty indeed! In a world where there are no laws, – there are no laws for anyone predators!!!

  89. Like I said, Redleg: keeping what we already have from crumbling. Of course this needs to be done. But there’s nothing new added to the infrastructure base by repaving an existing road, no new benefits to business that they did not already have.

  90. Alas the most have not awakened yet to what we see, are not aware of the forces at work to rob us of our future.

    It will take about 4 or 5 more years, at this rate, then we will see things that make the 60’s look like a smooth political process.

  91. I agree with Nemo’s comments 100%. What I want to know is why didn’t the Congressman subpoena or force some of these folks from the financial industry to testify yesterday when Stiglits, Johnson, and Hoenig gave their testimony?? I think Stiglitz and Johnson could be allowed to ask these guys why did they invest in CDOs??? How do CDOs help to make America’s economy better?? Why would one bank sell CDOs to other banks if they felt they were good investments? You get the idea when you see these fat faced pigs (for example the leader of the Bank of America when he was interviewed on NBR on public television) that they still don’t get it. Here is a quote from the Bible. I find this Bible verse comforting when listening to banks’ CEOS tell their lies:
    Psalm 37 verses 16-17 A little that a righteous man has is better than the riches of many wicked. For the arms of the wicked shall be broken, but the lord upholds the righteous.

  92. Steve Pejchl

    I just have a few points. If antitrust laws actually ever got enforced is too big to fail even an option? I doubt it.

    How hard is it to pass a usurious law. I mean 30% interest is just crazy. Eventually the people will get it, and credit cards are probably not a going concern as it is now. Banks may fight, but the people will just eventually say screw you.

    As to housing, if people are under water with their mortgages, an argument could be made to just walk. They would be looking at what 1 year free rent. They signed the mortgage in the first place, because the appraisers said it was such and such a price. The banks are the ones who contacted the appraisers. The typical person really doesn’t know the value of properties, and obviously the appraisers didn’t either. If everyone who owns an under water mortgage right now walks. There are no banks as we currently have.

    I have been in my house for 10 years, and am probably around break even, even though I have done a lot of work. If I were severely under water, I would be tempted to walk. I have already canceled all my credit cards.

  93. Black Coffee

    Government OF the “Financiers” FOR the “Financiers” and BY the “Financiers”.

    Who should we blame?

  94. Black Coffee

    Obama show some balls already..

  95. I tell y’all; only a revolution will break the power of the banks…

  96. Leopards don’t change their spots. The govt were dumb to think US bank staff would be grateful to taxpayers and act to help others keep their jobs in a recession.

  97. Pingback: Irreversible Errors « The Baseline Scenario

  98. Deterioration and consequent loss of function over time is a cost that affects business. Repaving a road does not account for the cause of the deterioration, it looks good and is cheap so it is a politically expedient way of paying lip service to infrastructure maintenance. Eventually, the roads are too bumpy or dangerous, sewage no longer flows out of the buildings, there are electrical brownouts, drinking water becomes salty, etc. all for the cost of nothing more than upkeep. There are only so many upgrades a piece of infrastructure can take before it needs replacing. By not improving, the liabilities of bad infrastructure cause business to relocate, which can lead to a deflationary loop on a local scale.

  99. Coffee Boy: “The buyer and seller joined together in an alliance against Chrysler, and others.”

    How does the seller of CDS benefit at all from a bankruptcy? Its like saying an insurance company sold someone insurance and then caused a fire in their house…the seller’s incentives are to prevent bankruptcy.

    —-

    I take your reply to grant that the sale of the derivative was to the disadvantage of Chrysler. It increased the probability of Chrysler’s going bankrupt.

    As for the seller of the derivative, if he did not price in that increased probability, he got took. If he did price it in, he may not want Chrysler to go belly up, but he got paid for accepting that risk.

  100. Erich Riesenberg

    “James is complaining about private banks fighting government.”

    If we had a coherent administration there would be no fight between Treasury and private banks over Chrysler because Treasury wouldn’t be involved. If Citibank were in receivership large chunks would have been sold already and price discovery would be in the past tense. The evil banks should be fighting each other not the taxpayer.

  101. Me thinks you have this one backwards: 2. The politicians used their influence of Fannie Mae and Freddie Mac to affect this in the mortgage securities market.

    Perhaps it was not the Gov’t influencing FM & FM but vice-versa.

  102. The only guy known to pay 100 cents on a CDS is Henry Paulson.

  103. I think Global tourism hit hard by economic downturn

  104. Pingback: Top Posts « WordPress.com

  105. Pingback: Bankers and their GOP friends battle American people, cont’d

  106. Pingback: Friday: Simon Johnson on Bill Moyers Journal tonight « The Confluence

  107. Pingback: www.Likvidnost.com » Blog Archive » The Missed Opportunity

  108. Pingback: Realtime: The Banking Crisis: 'Wait and See' vs. the Cost of Delay

  109. This is one of the main reasons why all these former banking execs working in the Obama administration becomes a moral hazard. This is every bit former Vice-President Cheney acting on behalf of Haliburton and it stinks to high heaven. There seems to be no political will to even identify conflicts of interest. No former bank personnel should even be allowed to advise the administration on anything regarding the bank bailouts. It seems counter intuitive at the least and if you believe Wall Street dangerous. Yet, neither of those descriptions comes close to the flagrant and corrupt alternative this country is not facing.

    That the banking industry is even allowed to engage lobbyist after having received bail-out money is only the beginning of the insult. How they muster the gall, something the appear to be in great supply of, to then fight its lender, the US gov. on terms of the Chrysler negotiations is beyond obscene. Translation, treat us the way we want to be treated but bankruptcy for everyone else.

    President Obama if he is looking, should really recognize the error of his judgement. There can’t be two sets of standards in dealing with the banking crisis or rather large banks vs. any other corporation or business. The banks clearly demonstrate a sense of entitlement in their dealings with the administration. Had the banks been treated as the law actually requires, this discussion would not be taking place now.

  110. Pingback: self-evident » Links

  111. You’re right, we shouldn’t have people who understand the banking industry from the inside out working to resolve the problems of the banking industry. Instead, we should have Joe The Plumber, Rush Limbaugh, Noam Chomskey, and Keith Olberman working to resolve the problem, because the skills of a plumber, a right wing gasbag, a linguist, and a left wing gasbag are far more relevant to solving the problems of the banking industry than, like, the skills of people who actually understand the banking industry. Thank you for letting us know this, we would have never come to such a conclusion without your help!

    As for Darth Cheney’s Haliburton excesses, I’ll just state that this just shows the necessity of oversight. Taking advantage of Cheney’s oil industry experience without allowing Cheney to steer policy in a way that advantaged a company in which he retained a financial interest would have been quite possible if President Bush had been interested in oversight. As we all know, he wasn’t. President Obama doesn’t appear to be that loose, thus far he has a fairly tight and disciplined hold on his administration where the buck stops on only one desk — his.

  112. What are you saying, that the only people who understand Wall Street are bankers. Not so. The term “Conflict of Interest” exist to describe previous relationships that may result in biased decisions from those designated to provide input and make decisions.

    There is a process for banks in the predicament of Citi and co. Yet that process is not being followed. The banks are already on shaky ground and yet they act as though they have all the cards. Could those cards be all the former Citi employees now a part of Obama’s inner circle. Starting with Paulson (Goldman Sachs) under the Bush adminstration, and now continued by the Obama administration, the banks continue to be dealt with on terms roughly dictated seemingly by them.

    Finance is finance and one does not have to be a banker to unravel this mess. After all, it was the bankers that got us here, so how do they magically now possess the ability to get us out of this when they couldn’t prevent it. There are institutions with financial knowledge and prowess on the scale of Wall Street that have individuals qualified enough to deal with this mess.

    As for no bid contracts, a process actually created by Cheney during 41’s term I think, Haliburton and again Cheney, saying that oversight was all that was lacking kinda misses the point. That’s just me though.

  113. Pingback: Catch 22 Redux | Three Sigma Systems

  114. Okay James, let me see if I’ve got this right.

    Greedy Wall Street actors took pushed their luck by seducing “We the People” with promises of quick riches funded by tricky loans, credit card teasers rates, and a story line in which greed is good and markets always go up.

    As demand turned into a gold-rush like madness, equity markets and housing prices bubbled-up in a scam fueled by “buy-now-pay-later” leveraging that was shilled by realtors, loan brokers, financial advisors and media pundits.

    After pocketing the lending transactions fees, Wall Street repackaged the shaky loans, sold them off as in bundles mislabeled AAA by complicit rating agencies, and packeted more transaction fees.

    Then Wall Street repackaged the repackages, sold them again, then sold insurance on repackaged-repackages, and pocketed more transactions fees.

    As with all Ponzi scams, the gig was up when the ability of the marks to keep playing the game came to an abrupt and inevitable end.

    Wall Street’s loans went south with tumbling real estate prices and they couldn’t cover the insurance payouts for the bad loans they sold, so they cried alligator tears to “We the People” and announced that should they fail, they would take “We the People” down with them into a Great Depression II.

    With some gentle nudging from insiders, “We the People” bought the story and bailed out Wall Street to the tune of trillions of our dollars, thus driving ourselves into unimaginable debt and undercutting our children’s’ future, our standing in the world, on our nation’s security.

    Wall Street, still rich but on the hook for a lot of bad paper, started hiding their money so credit dried up, businesses bellied up, and millions of “We the People” lost our jobs.

    Scared, confused, and addled as to the underlying causes of the financial crisis (namely Wall Street’s con artistry), “We the People” lowered our Fed interest rates and printed more money in order to “free up credit” and stimulate lending by the hoarding financiers on Wall Street.

    Now Wall Street is beginning to reap renewed profits based on transaction fees from “We the People” who are buying bargain-basement real estate whose value has collapsed and “We the People” who are re-mortgaging our lives to take advantage of the lower rates on loans that “We the People”are guaranteeing.
    .
    Flush with bailout money and renewed transaction fees, Wall Street is now claiming that they are once again solvent and “We the People” need take no further action to save our nation. Wall Street says the storm has passed and they’re ready to get back to business as usual.

    “We the People” are finally figuring out what happened and we are trying to re-regulate Wall Street in order to prevent being taken hostage by Wall Street in the future but Wall Street is having none of it. In an orgy of “free market” rhetoric, cooking the books, market manipulation, and political arm twisting, Wall Street is gearing up to forestall any attempts to change their usual business practices.

    The net outcome of Wall Street’s gaming is that they grow richer still, while “We the People become yet poorer and face a future of unimaginable indebtedness.

    BUT, says Wall Street, don’t worry, because “We the People” are invited to join their game again with whatever money we have left. And if “We the People” are out of money, for a small transaction fee we can always borrow some more at remarkably low interest rates guaranteed by…you guessed it…”We the People”.

    Just remember that since “We the People” were unable to change the game, the rule remains “caveat emptor”.

  115. Pingback: Guest Post: Too-Big-To-Fail and Three Other Narratives « The Baseline Scenario

  116. Excellent analysis. And now we are on to the next stage according to the NYT today…”Workers at the largest financial institutions are on track to earn as much money this year as they did before the financial crisis began, because of the strong start of the year for bank profits.”
    Wall Street is already back to “normal” and I am more and more pessimistic about the probabilty of any fundamental changes that would 1-reduce the likelihood of the next crisis and 2- honestly recognize and address the underlying issues

  117. Pingback: ” TOO-BIG-TO-FAIL & THREE NARRATIVES,” by Stats Guy, www. baselinescenario. com. Excellent review of post-Lehman failure six months ago. Worth the time. « Want Less Blog

  118. Pingback: The Importance of Battlefield Nuclear Weapons « The Baseline Scenario

  119. Pingback: Zombie Oligarchs « The Baseline Scenario

  120. The opportunity has already been missed but I read an elegant solution on the BBC.

    Someone wrote in to say that it would cost less than the current British rescue package to simply pay 250,000 pounds to every home in the UK. On the understanding that those who have ‘toxic’ mortgages pay them off and the rest buy cars. That way the whole economy gets a huge boost, the ‘toxic debt is wiped out and the motor industry has customers.

    What do YOU think?

  121. Pingback: Trade Jim News » Happy May Day: How Hedge Fund Greed Drove Chrysler Into Bankruptcy; Senator Durbin: Banks Own The Place; ‘Rahm Wants It’