Friday, October 31, 2008
Today, President George W. Bush plays the role of Hoover, the so-called free market ideologue who is trying anything to avert disaster. He signs a $700 billion bill putting Treasury in charge of buying troubled assets. A week later, the money is used to partially nationalize the banks. Some companies, like Bear Stearns, are bailed out. Others, like Lehman Brothers, are not. Some companies are sold. Some are allowed to fail. There is no plan, no rules, nothing to count on...
A recession is coming (or has already arrived) no matter what happens in Washington. The question is whether the attempt to forestall it is going to make it worse and turn it into another Great Depression...
Unfortunately, there is no consensus about a preferable alternative. The economists are almost as clueless as the politicians. At such a time, inaction may be the wisest course of action.
read the WSJ article
Thursday, October 30, 2008
read the entire essay
The gross domestic product, the broadest measure of the nation's economy, fell at an annual rate of 0.3% in the period. That compared with a 2.8% growth rate in the second quarter, when economic stimulus checks and strong exports spurred by a weak dollar resulted in solid growth that vanished in the latest reading...
This latest reading is yet another warning sign of a recession, and marked only the fifth quarter in more than 17 years in which GDP fell below zero. Much of the impact of the recent crisis in financial and credit markets was not reflected in this reading, which reflects the period ending Sept. 30.
My thoughts: Not quite the gloom and doom that the media would have you believe. The rule of thumb for a recession remains 2 quarter of GDP decline. The offical start of a recession is done by the NBER.
Exxon Mobil Corp. set a quarterly profit record for a U.S. company Thursday, surging past analyst estimates.
Exxon Mobil (XOM, Fortune 500), the leading U.S. oil company, said its third-quarter net profit was $14.83 billion, or $2.86 per share, up from $9.41 billion, or $1.70, a year earlier. That profit included $1.45 billion in special items.
Exxon's prior record was $11.68 billion in the second quarter of 2008.The company said its revenue totaled $137.7 billion in the third quarter.
read the CNN story
My thoughts: Great for Exxon. The profit margin is only 9.74% which consider normal.
Wednesday, October 29, 2008
The Federal Reserve cut a key short-term interest rate by a half-percentage point Wednesday and issued a gloomy outlook for the economy due to continued worries about the ongoing crisis in the financial and credit markets.
The rate cut put the central bank's federal funds rate at 1%. That matched the lowest level for this overnight bank lending rate ever -- the last time it was at 1% was from June 2003 to June 2004.
Tuesday, October 28, 2008
The Dow Jones industrial average (INDU) added 889 points after having risen as much as 906 points earlier in the session. It was the Dow's second-biggest one-day point gain ever, following a 936-point rally two weeks ago. The advance of 10.9% was the sixth-biggest ever.CNN story
Monday, October 27, 2008
“To make a crazy forecast today is not crazy,” said Owen Lamont, a former professor at Yale who has studied economic forecasting. “It’s not crazy to predict the Dow is going to 2,000. That’s in the realm of possibility.”
Indeed, in an era of 1,000-point daily swings in the Dow and 30 percent losses in the stock market, prescience is at a premium — and the dividends of a high-profile correct call can be immense.
from the New York Times
Sunday, October 26, 2008
The Economic Growth and Tax Relief Reconciliation Act of 2001 established the current tax brackets of 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent. This progressive system results in Americans who earn the top 5 percent of income paying about 57 percent of the income taxes...
Unfortunately, tax reform plans usually focus exclusively on simplification of the tax code rather than on making the code less progressive. And, even worse, no major tax reform plan even hints at lowering America’s overall tax burden.
The most radical tax reform plan is a consumption tax in the form of a national retail sales tax called the FairTax. The FairTax has been introduced in the U.S. House of Representatives by John Linder (R-GA), and is promoted heavily by Atlanta radio talk show personality Neal Boortz. The FairTax would replace with a national sales tax not only the personal income tax, but also the corporate income tax, estate tax, gift tax, unemployment tax, Social Security tax and Medicare tax. Additionally, every family in America would receive a monthly rebate to offset the taxes paid on basic necessities...
The tax reform idea that has been around the longest is the flat tax. Under a flat tax, there are no tax brackets—everyone’s income is taxed at the same rate—and generally without deductions..
Although it is certainly true that the current U.S. tax system is too complex, too confusing and too intrusive, what really needs to be flattened is skyrocketing congressional spending, not the procedure used by the government to extract the wealth of its citizens.
read the article
Well, no. According to the NYT, Greenspan declared that the mistake he made was to trust that “free markets could regulate themselves without government oversight.” Greenspan admitted that he was “partially wrong in not having tried to regulate the market for credit-default swaps.” He has found a flaw in the “free market ideology” as the NYT put it, and is now in “a state of shocked disbelief.”
We also are in a state of shocked disbelief. Or perhaps not. Instead of blaming himself for his monetary policy and admitting once and for all that central banking is not the best monetary system available (he actually admitted that the economy is too complex to be forecasted by Fed experts), he blamed it on the free market. Greenspan true mistake is to absolve himself from all responsibility by saying that he had faith in the free market system and that that system abandoned him (i.e. it had a flaw).Source
My Thoughts: Greenspan was a statist Keynesian hack. He could talk free market rhetoric, but the free market actions never followed. ( A central banking system, which he chaired, is inherently anti-free market.) Free market "ideology" is not flawed. Is it perfect? No. Is it the best system ever devised by man for running an economy? Yes. The market system is based on the profit/loss system. The opponents of free markets create straw men arguments. They assume the absence of perpetual prosperity and growth is a failure of the market system. This is the wrong measure. When compared to perfection, the market system will fail to meet expectations. The proper comparison is free markets v. socialism (communism, central planning, etc). Compared to these systems the benefits of the free market system should be obvious to all but the most extreme socialist ideologues. Also the Keynesian interventionist state that greatly contributed and caused the current crisis should never be confused for a true free market.
Rothbard on Greenspan
one of the problems with the Fed's early response may have been Bernanke's fear of potential inflation, as the RELATIVE prices of oil and other commodities headed upward. He therefore tried to do the impossible: simultaneously avoid inflation by holding the line on monetary growth, while warding off a potential deflationary bank panic by injecting liquidity into selected institutions. The market's confusion over these cross purposes seems to have actually prolonged and deepened financial difficulties. In fact, a desire to achieve both goals simultaneously was a primary motive behind the dreadful Treasury Bailout...
It also means that the total bailout is not the $700 billion that Congress appropriated but at least $1.2 trillion. Nor does this count the Fed's recently promised $540 billion bailout of money market funds, which if not covered by the Fed's sale of other assets, will require either further monetary increases or further Treasury borrowing. Thus we now have the worst of both worlds: a massive bailout financed BOTH by Treasury borrowing, in order to avoid inflationary pressures, and a monetary base increase, heralding future inflation anyway...
Future historians may someday refer to this sad episode as the Bernanke-Paulson Recession, concluding that it was the policies of those two individuals, more than any other factors, that turned what was not even a mild recession into a major economic downturn.
read the entire essay
Friday, October 24, 2008
Herbert Hoover, acceptance speech in August 1932
There are rebuttals to these claims and rejoinders to the rebuttals. But to summarize, the libertarian apologetics fall wildly short of providing any convincing explanation for what went wrong. The argument as a whole is reminiscent of wearying dorm-room debates that took place circa 1989 about whether the fall of the Soviet bloc demonstrated the failure of communism. Academic Marxists were never going to be convinced that anything that happened in the real world could invalidate their belief system. Utopians of the right, libertarians are just as convinced that their ideas have yet to be tried, and that they would work beautifully if we could only just have a do-over of human history. Like all true ideologues, they find a way to interpret mounting evidence of error as proof that they were right all along...
There's enough blame to go around, but this wasn't just a collective failure. Three officials, more than any others, have been responsible for preventing effective regulatory action over a period of years: Alan Greenspan, the oracular former Fed chairman; Phil Gramm, the heartless former chairman of the Senate banking committee; and Christopher Cox, the unapologetic chairman of the Securities and Exchange Commission. Blame Greenspan for making the case that the exploding trade in derivatives was a benign way of hedging against risk. Blame Gramm for making sure derivatives weren't covered by the Commodity Futures Modernization Act, a bill he shepherded through Congress in 2000. Blame Cox for championing Bush's policy of "voluntary" regulation of investment banks at the SEC.
read the entire essay
According to Weisberg, editor in chief of Slate, the financial turmoil taking place worldwide is the fault of . . . libertarians. That must mean libertarians have been in a position to repeal generations of deep-seated government intervention in the financial and related industries, including the Federal Reserve system. That would have taken a long time, yet I don't recall reading that a libertarian revolution occurred in the United States. Surely it would have been in the newspapers. Hence, I must conclude that I, like old Rip, was slumbering all those years. I missed the revolution! It's the only possible explanation.
Unless Weisberg is wrong...
But did self-regulating financial markets exist and hence fail? It begs the question to assume this was the case. Weisberg has to prove it. He does not even try...
Weisberg makes the same mistake that superficial free-market advocates make. He believes that markets, to qualify as free in libertarian theory, need only be free of government restrictions (regulation). But that is only half the story. Truly free markets are also free of privilege -- guarantees, bailouts, Fed-provided liquidity, taxpayers as lenders of last resort, and so on. If you have unregulated markets but privileged, too-big-to-fail institutions, you do not have free markets. A market without full market discipline (the threat of losses and bankruptcy) is a contradiction in terms. So much for Cox's "voluntary regulation." No guarantees were withdrawn from the firms that were expected to regulate themselves. That's phony free-market-ism...
Weisberg is not the only writer who has declared the free market and libertarianism dead in the wake of the subprime collapse. One sees a certain desperation in such declarations -- as though those issuing them fear that people might start realizing that today's economic turmoil is not a market failure but a government failure.
read the entire essay
When government distorts incentives, the invisible hand can become a fist. Many observers, including most politicians, have blamed the ongoing financial crisis on the "free-market greed" supposedly unleashed by the "reckless deregulation" of the financial system. Such arguments are rhetorically powerful, but they don't stand up to scrutiny. If they go unchallenged, however, they could hasten a "solution" that's worse than the problem. That's why it's so important to examine the record. What it shows is that government regulations and other interventions – not greed – are the major cause of our current problems...
Firms are profit seekers, but they will seek it where the institutional incentives signal profit is available. In a free market, firms profit by satisfying their customers, investing wisely, and making prudent loans. Regulations, policies, and political rhetoric can change those incentives...
To call the housing and credit crisis a failure of the free market or the product of unregulated greed is to overlook the myriad government regulations, policies, and political pronouncements that have both reduced the freedom of this market and led self-interested actors to produce disastrous consequences, often unintentionally...
Fueling this speculative fire was the Federal Reserve, also a government-sponsored organization. The Fed moved interest rates to extraordinarily low levels beginning in 2001. The additional credit it provided artificially lowered the cost of mortgages and dramatically accelerated the housing boom begun in the 1990s. Did people suddenly get greedy in their pursuit of McMansions, second homes, and flipping homes for easy profit? Yes, but only because abnormally low interest rates made it foolish not to be. This was hardly a failure of free markets or greed. It was the predictable consequence of government distorting the interest rate...
Good intentions are not enough in designing public policy. Regulations designed with the best of intentions are likely to lead to more crises if they distort incentives and thereby cause individual "greed" to undermine economic growth and harm millions. History is full of examples of politicians adopting short-run solutions without seeing the harmful long-run consequences. Today, the calls to "do something" are loud. Yet amid the cacophony, there are a few voices urging not more, but less; not faster, but slower; not short term, but long term; not intent, but outcomes. Those are the voices we should heed, because if we had listened to them 15 or 20 years ago, we might not be where we are today.
Steven Horwitz is a professor of economics at St. Lawrence University.
Is Capitalism Dead? Washington Post Editorial
IS THIS the end of American capitalism? As financial panic spread across the globe and governments scrambled to contain the damage, reality seemed to announce the doom of U.S.-style free markets and President Bush's ideology. But this is wrong in two ways. The deregulation of U.S. financial markets did not reflect only the narrow ideology of a particular party or administration. And the problem with the U.S. economy, more than lack of regulation, has been government's failure to control systemic risks that government itself helped to create. We are not witnessing a crisis of the free market but a crisis of distorted markets.
It's true that the Bush administration has stood for light regulation of capital markets. But it did not invent this approach...
Government must be more selective about manipulating markets; over the long term, business works best when it is subject to market discipline alone. In those cases -- and there will and should be some -- in which government intervenes on behalf of social goals, its support must be counterbalanced with taxpayer protections and regulation. Government-sponsored, upside-only capitalism is the kind that's in crisis today, and we say: Good riddance.
Oil prices fell Friday to their lowest point since May 2007 as investors were unimpressed by a decision from the world's largest oil cartel to slash production targets.
The Organization of Petroleum Exporting Countries, whose member nations control about 40% of the world's oil, said it would cut production by 1.5 million barrels a day starting in November in order to keep oil prices from falling further. But many investors had been looking for something much larger.
U.S. crude for December delivery settled down $3.69 to $64.15 a barrel in New York. It was the lowest close for oil in more than 17 months. Prices hit an intraday low of $62.65 after news of the cut.
The Federal Reserve is widely expected to cut interest rates again next week. But could the Fed soon go where it has never gone before and bring them below 1%?My thoughts: Expect a 0.5% cut to 1%. Easy credit will not solve the economic problem caused by easy credit.
The Fed lowered its federal funds rate, the benchmark overnight lending rate at which banks lend to one another, by a half-percentage point to 1.5% in an emergency announcement Oct. 8.
Many investors believe the central bank will cut rates by at least another half-percentage point following the end of a two-day meeting on Oct. 29.
In fact, the fed funds futures on the Chicago Board of Trade are now pricing in a 26% chance that the Fed will cut rates by three-quarters of a percentage point to 0.75% by that meeting.
Thursday, October 23, 2008
Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.
After scrutinizing Roosevelt's record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years...
"The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes," Cole said. "Ironically, our work shows that the recovery would have been very rapid had the government not intervened."
Monday, October 20, 2008
Sunday, October 19, 2008
Saturday, October 18, 2008
On Aug. 9, 2007, central banks around the world first intervened to stanch what has become a massive credit crunch...
The credit markets remain frozen, the stock market continues to get hammered, and deep recession now seems a certainty -- if not a reality already.
Most people now living have never seen a credit crunch like the one we are currently enduring. Ms. Schwartz, 92 years old, is one of the exceptions. She's not only old enough to remember the period from 1929 to 1933, she may know more about monetary history and banking than anyone alive. She co-authored, with Milton Friedman, "A Monetary History of the United States" (1963). It's the definitive account of how misguided monetary policy turned the stock-market crash of 1929 into the Great Depression...
"The Fed," she argues, "has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible."...This uncertainty, says Ms. Schwartz, is "the basic problem in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue."
Ms. Schwartz says. Today, the banks have a problem on the asset side of their ledgers -- "all these exotic securities that the market does not know how to value."...
Ms. Schwartz won't say so, but this is the dirty little secret that led Secretary Paulson to shift from buying bank assets to recapitalizing them directly, as the Treasury did this week. But in doing so, he's shifted from trying to save the banking system to trying to save banks. These are not, Ms. Schwartz argues, the same thing. In fact, by keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis. "They should not be recapitalizing firms that should be shut down."
Rather, "firms that made wrong decisions should fail," she says bluntly. "You shouldn't rescue them. And once that's established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished and good decisions make you rich." The trouble is, "that's not the way the world has been going in recent years."...
How did we get into this mess in the first place? As in the 1920s, the current "disturbance" started with a "mania." But manias always have a cause. "If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset.
"The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates that induced ordinary people to say, well, it's so cheap to acquire whatever is the object of desire in an asset boom, and go ahead and acquire that object. And then of course if monetary policy tightens, the boom collapses."
The house-price boom began with the very low interest rates in the early years of this decade under former Fed Chairman Alan Greenspan...Today's crisis isn't a replay of the problem in the 1930s, but our central bankers have responded by using the tools they should have used then. They are fighting the last war. The result, she argues, has been failure. "I don't see that they've achieved what they should have been trying to achieve. So my verdict on this present Fed leadership is that they have not really done their job."
read the entire WSJ article
My thoughts: Great analysis from a great economist. It is too bad that the political agenda at the Fed creates economic turmoil.
Friday, October 17, 2008
If we follow a hands-off policy, the majority of experts tell us, the banking industry, the financial markets, and much of the rest of the economy will be wiped away in a bottomless deflationary spiral.
The present essay argues that this is a half-truth. It is true that without further government intervention there would be a deflationary spiral. It is not true that this spiral would be bottomless and wipe out the economy. It would not be a mortal threat to the lives and the welfare of the general population. It destroys essentially those companies and industries that live a parasitical existence at the expense of the rest of the economy, and which owe their existence to our present fiat money system. Even in the short run, therefore, deflation reduces our real incomes only within rather narrow limits. And it will clear the ground for very substantial growth rates in the medium and long run.
We should not be afraid of deflation. We should love it as much as our liberty.
read the entire paper (pdf)
President Bush on Friday defended recent federal intervention in the financial system as necessary to ward off a wider economic crisis and said the actions were not just a Wall Street bailout.
"People look at the crisis and say, 'Oh, it's only Wall Street,' " said Bush, addressing the U.S. Chamber of Commerce. "I don't think so. In fact, I know that if we had not acted, it would have affected the American people directly."
"If the government had not acted, the hole in our financial system would have gotten larger," he added.
Bush said the government would limit its intervention in size and scope, and did not intend to nationalize the banking system. "The government intervention is not a government takeover," he said.
read the CNN story
My thoughts: Look at the actions, ignore the rhetoric.
Bush said that his economic advisors, led by Treasury Secretary Henry Paulson, will provide further details on how this "rescue plan" will take shape:
They will make clear that each of these new programs contains safeguards to protect the taxpayers. They will make clear that the government's role will be limited and temporary. And they will make clear that these measures are not intended to take over the free market, but to preserve it.
Up is Down. Right is Left. Freedom is Slavery. We come not to bury the "free market," but to save it... just the way FDR saved capitalism!
But, to paraphrase another Savior of the Free Market, who enacted wage and price controls to save "capitalism" from itself... "Let us make one thing perfectly clear": There is no free market. And the "capitalism" they are "saving" has nothing to do with "free markets." Call it "state capitalism," or "corporatism," or "neofascism." Call it whatever the hell you want... but don't call it a "free market."
As I argued recently, the state and the banks are virtual extensions of one another, two aspects of the same structure, a "state-banking nexus," if you will. The effective
nationalization of financial institutions in this country is just a continuation of a long history of government intervention.
The current state and the current banking sector require one another; neither can exist without the other. They are so reciprocally intertwined that each is an extension of the other.
Remember this point the next time somebody tells you that "free market madmen" caused the current financial crisis that is threatening to undermine the economy. There is no free market. There is no "laissez-faire capitalism." The government has been deeply involved in setting the parameters for market relations for eons; in fact, genuine "laissez-faire capitalism" has never existed. Yes, trade may have been less regulated in the nineteenth century, but not even the so-called "Gilded Age" featured "unfettered" markets.
One of the reasons I have come to dislike using the term "capitalism" is that it has never, historically, manifested fully its so-called "unknown ideals." Real, actual,
historically specific "capitalism" has always entailed the intervention of the state. And that intervention has always had a class character; that is, the actions of the state have always, and must always, benefit some groups differentially at the expense of others...
It is therefore no surprise that the loudest advocates for the effective nationalization of the finance industry are to be found on Wall Street; at this point, failing financiers welcome any government actions that will socialize their risks. But such actions that socialize "losses while keeping the profits in private hands" are a hallmark of fascist and neofascist economies. They are just another manifestation of "Horwitz's First Law of Political Economy": "no one hates capitalism more than capitalists."
In the end, the proposed Paulson Plan is nothing more than a "heist," as Robert P. Murphy argues, "a grand scheme in which the public will end up owing hundreds of billions of dollars to holders of new debt claims issued by the US Treasury." Such a plan will only compound the problem.
read the entire post
My thoughts: Two outstanding posts for Chris Sciabarra. He clearly makes the case that capitalism does not mean free markets.
Capitalism or Freedom
October 17, 2008
"These measures are not intended to take over the free market, but to preserve it," George W. Bush said in Orwellian tones Tuesday as he announced the partial nationalization of nine major American banks.
He was partly right, though not in the way he meant his words. There is no free financial market to take over. But that means there is no free market to preserve either. The moves he announced, which include government part-ownership of smaller banks too, were just more, albeit big, steps along the corporatist route the country has been following for generations...
There's an unfortunate phenomenon in politics. If a candidate says he favors markets but does little to actually free any markets once he becomes, say, president, lots of people will assume he's done so anyway. Evidence that he didn't won't matter. He will become known for his "laissez-faire, hate-the-government" policies -- even if such policies are nonexistent. Rhetoric gets all the attention.
But there's an asymmetry here. As noted, the most important deregulation of the last 30 years occurred, or at least was set in motion, by Jimmy Carter (trucking, airlines, banking, oil prices, telecommunications, and more) and Bill Clinton (banking). But no one accuses them of devotion to laissez faire. Yet Republicans who initiate little or nothing in this regard -- or worse, sponsor intervention such as protectionism -- are portrayed as Adam Smith reincarnate.
Do you sense that a political agenda overwhelms objectivity?...
The current political economy is a product of the past, and the past was not laissez faire...
The recent nationalization of the mortgage market and of major banks represent leaps in the degree of intervention. Still, they can be seen as a logical continuation of what has gone before. The crises produced by intervention summon forth further, more intense intervention. This is the way historical capitalism has worked.
Fortunately, we have an alternative: freedom and the free market.
read the entire essay
My thoughts: Perhaps it is time to totally abandon the word capitalism (the mixed economy verison) that is rapidly becoming corporatism. Supporters of freedom and free economy should embrace the terms free markets and laissez-faire.
Thursday, October 16, 2008
Critics like Barry Ritholtz said it's about time the U.S. got onboard, even though he warns it could cost up to $3 trillion. ABCNews.com spoke with Ritholtz, the author of "Bailout Nation: How Easy Money Corrupted Wall Street and Shook the World Economy"...
In addition to the capital infusions, which will be made this week, the government said it would temporarily guarantee $1.5 trillion in new senior debt issued by banks, as well as insure $500 billion in deposits in noninterest-bearing accounts, mainly used by businesses.
All told, the potential cost to the government of the latest bailout package comes to $2.25 trillion, triple the size of the original $700 billion rescue package, which centered on buying distressed assets from banks. The latest show of government firepower is an abrupt about-face for Mr. Paulson, who just days earlier was discouraging the idea of capital injections for banks.
from the New York Times
Wednesday, October 15, 2008
Recession talk scared Wall Street Wednesday, sending the Dow Jones industrial average to its second biggest one-day point loss ever...
The Dow Jones industrial average (INDU) fell 733 points, its second biggest one-day point loss ever, second only to Sept. 29 of this year, when the House of Representatives initially rejected the government's $700 billion bank bailout plan.
Wednesday's decline was equal to around 7.9%, the Dow's biggest one-day percentage loss since Oct. 26, 1987.read the CNN story
Cicero , 55 BC
Tuesday, October 14, 2008
Here are the key elements that will be put in place first:
The Treasury will buy up to $250 billion in senior preferred shares in a wide variety of banks...
The Federal Deposit Insurance Corp. will guarantee new, senior unsecured debt issued by banks, thrifts and bank holding companies. The new debt that will be covered must mature within three years, and banks may opt in to this program until the end of June 2009...
The FDIC will temporarily provide unlimited coverage for all non-interest-bearing accounts, which typically are those where businesses park money to cover their near-term expenses such as payroll. The increased coverage will last through the end of 2009...
The Federal Reserve is finalizing plans for a temporary program in which it will buy high-quality three-month debt issued by businesses in the commercial paper market...
Ten days after passage of its $700 billion bailout of the financial sector, the U.S. Treasury has announced that it will implement this program, in part, by giving banks $250 billion in return for shares of their stock.
In other words, the U.S. government will acquire a significant ownership stake in the banking sector...
If banks were fundamentally sound but temporarily in need of cash, they could sell stock on their own to private investors. Few investors now want bank stock, however, because they cannot tell which banks are merely illiquid -- short of cash for new loans because their assets are temporarily sellable only at fire-sale prices -- and which are fundamentally insolvent -- short of cash and holding assets whose fundamental values are less than the bank's liabilities...
Government ownership means that political forces will determine who wins and who loses in the banking sector. The government, for example, will push banks to aid borrowers with poor credit histories, to subsidize politically connected industries, and to lend in the districts of powerful members of Congress. All of this is horrible for economic efficiency.
Government pressure will be difficult for banks to resist, since the government can both threaten to withdraw its ownership stake or promise further injections whenever it wants to modify bank behavior. Banks will respond by accommodating government objectives in exchange for continued financial support. This is crony capitalism, pure and simple.
Government ownership of banks will not be a temporary expedient. Politicians can swear they will unwind the government's position once "economic conditions improve," but no one can enforce this promise. The temptation to use banks as a political tool will be permanent, not temporary, so government ownership will continue for decades, or forever.
Worse yet, government ownership of banks sets a precedent for ownership in every industry that suffers economic hardship. Some might argue that banking is "essential," but many industries -- autos, steel, computers or agriculture -- will make similar claims when it is their turn to demand a bailout. Thus banking will be only the first victim in an enormous expansion of the government's role. This again will have disastrous consequences for economic efficiency.
Last but not least, a government "injection of liquidity" is still a bailout in all but name...It is time for the government to do the one thing it does well: nothing at all. This might mean serious economic pain in the short term, as more banks fail and the economy suffers through a recession. As for a cancer patient who has a tumor removed, however, the long-term benefit will more than compensate.
Jeff Miron's essay
In somber remarks in the Treasury Department's ornate Cash Room, Mr. Paulson said the government's latest moves were necessary given the deep financial crisis.
While he had been reluctant to take such steps, his actions Tuesday, coupled with the administration's moves over the past six months, have injected the government more deeply into the financial sector than at any time since the 1930s. Mr. Paulson and other regulators said the steps were temporary. But, historically, it's often hard to undo new rules in Washington after businesses, consumers and policy makers adjust to changes.
At the core of Tuesday's announcement is a plan to buy $250 billion worth of preferred stock in banks, a step the government sees as crucial to getting banks to make new loans and to lure private capital from the sidelines.
While the program is voluntary, Treasury essentially forced the nine major U.S. banks to agree to take $125 billion from the federal government. Treasury will buy $25 billion in preferred stock from Bank of America -- including Merrill Lynch -- as well as J.P. Morgan and Citigroup; between $20 billion and $25 billion from Wells Fargo & Co.; $10 billion from Goldman Sachs Group Inc. and Morgan Stanley; $3 billion from Bank of New York Mellon; and about $2 billion from State Street. The remainder will be available to small- and medium-size institutions that apply for an investment.
The money will come from the $700 billion that Congress recently approved for Treasury to buy bad loans and other troubled assets from financial institutions. Treasury still intends to proceed with that program within the next few weeks.read the Wall Street Journal article
It was Monday afternoon at 3 p.m. at the Treasury headquarters. Messrs. Paulson and Bernanke had called one of the most important gatherings of bankers in American history. For an hour, the nine executives drank coffee and water and listened to the two men paint a dire portrait of the U.S. economy and the unfolding financial crisis. As the meeting neared a close, each banker was handed a term sheet detailing how the government would take stakes valued at a combined $125 billion in their banks, combined with new restrictions over executive pay and dividend policies.
The participants, among the nation's best deal makers, were in a peculiar position. They weren't allowed to negotiate. Mr. Paulson requested that each of them sign. It was for their own good and the good of the country, he said, according to a person in the room...
It would take years to disentangle banks from the federal government. Some of these temporary steps would be hard to undo...
During the discussion, the most animated response came from Wells Fargo Chairman Richard Kovacevich, say people present. Why was this necessary, he asked. Why did the government need to buy stakes in these banks?...
Toward the end of the meeting, Bank of America's Kenneth Lewis said the debate had lasted long enough, and everyone needed to sign...
Mr. Paulson, in his rapid staccato, said the public had lost confidence in the banking system, despite each banker's view of his institution.
"The system needs more money, and all of you will be better off if there's more capital in the system," Mr. Paulson told the bankers.
Mr. Bernanke said the situation was the worst the country had endured since the Great Depression. He said action was for the collective good, an understated appeal. The room was silent as he described the economy's fragile condition...
The meeting ended at about 4 p.m. By 6:30 p.m., all of the sheets had been turned in and signed by the CEOs. No second meeting was held.read the Wall Street Journal article
My thoughts: We are witnessing the death of capitalism and the birth of financial fascism. Necessity: the plea of tyrants; the creed of slaves.
The federal government ran a deficit of almost $455 billion in fiscal 2008, the White House reported, a record that will likely be far exceeded by the red ink in the current fiscal year.
The widening deficit -- up from $162 billion for fiscal 2007 -- stemmed in large part from lower revenues and higher expenditures due to the troubled economy, as well as higher defense spending in Iraq and Afghanistan.
As bad as 2008 was, the current fiscal year, which began Oct. 1, is widely expected to be far worse. The director of the Congressional Budget Office recently estimated the annual deficit could hit $750 billion given the potential impacts from a possible recession and the financial markets' problems. Some private economists put the 2009 deficit at as much as $1 trillion.read the Wall Street Journal article
Monday, October 13, 2008
My thoughts: A Keynesian hack. "How much you would you bet that Hayek would list his Nobel on eBay now if were alive? The Nobel in economics is now, officially, a bad joke." Anon. blogger
Update: William Anderson on Krugman
Stocks rallied Monday afternoon, with the Dow up 976 points during the session, as investors bet that the worst of the credit crisis is over, following a series of global initiatives announced over the last few days.
The Dow Jones industrial average (INDU) ended 936 points higher, after having risen as much as 976 points during the session. The advance was the largest ever during a session on a point basis. The point gain was equal to 11.1%, the fourth-best day ever on a percentage basis.read the CNN story
Sunday, October 12, 2008
THE Treasury Department is now thinking about using some of the $700 billion it has been given to rescue Wall Street to buy ownership stakes in American banks. The idea is that banking is so central to the American economy that the government is justified in virtually nationalizing much of the industry in order to save us from a potential depression.
There are two faulty assumptions here. First, saving America’s banks won’t save the economy. And second, the economy doesn’t really need saving. It’s stronger than we think...
The stock market crashed in 1987 — in 1929 proportions — but there was no decade-long Depression that followed. Economic research has repeatedly demonstrated that financial-sector gyrations like these are hardly connected to non-financial sector performance. Studies have shown that economic growth cannot be forecast by the expected rates of return on government bonds, stocks or savings deposits...
So, if you are not employed by the financial industry (94 percent of you are not), don’t worry. The current unemployment rate of 6.1 percent is not alarming, and we should reconsider whether it is worth it to spend $700 billion to bring it down to 5.9 percent.
read the essay
My thoughts: Bubbles have been created. Liquidations must be made. The economy (based on GDP) is doing ok. The gloomy and doom is not coming so much from how the economy is currently performing, it is going from fear and uncertainty. Fear of how bad the housing adjustments will be, fear of governmental takeover of the entire financial sector. Uncertainty of how long Congress will try to fix the unfixable by throwing money at it. The move towards socialism and greater government intervention in the economy is deeply disturbing.
The Dow ended its worst week ever Friday and capped a staggering eight-session selloff that has seen the blue-chip index fall 2,400 points...
Much of the Dow's loss occurred over the most recent sessions as the global credit market crisis intensfied. In fact, last week the Dow fell just over 1,874 points, or 18%. The index has lost nearly 22% over the last eight sessions, as panicked investors ditched stocks across the board...
Wall Street lost roughly $2.4 trillion in market value during the week, according to losses in the Dow Jones Wilshire 5000, the broadest measure of the market...
The heightened volatility that has left investors seasick was evident in Friday's market. In the first five minutes of trade Friday the Dow plunged 697 points, falling below 7,900 to the lowest point since March 17, 2003. The Nasdaq and S&P also hit more than five-year lows. But stocks recovered abruptly, with the Dow erasing losses. The afternoon saw the Dow make violent swings back and forth, toppling as much as 600 points and rising as much as 322 points...
Since hitting all-time highs a year ago, the Dow has lost just over 40% and the S&P 500 has lost 43%. The Nasdaq has not come close to reclaiming its tech-bubble record, but it did hit multi-year highs last October. Since then, the Nasdaq has fallen just over 42%.
And investors across the board are pulling money out of equities, with $43.3 billion pulled out of stock mutual funds during the week ended Oct. 8, according to TrimTabs Research.read the CNN story
Friday, October 10, 2008
The details are still in flux, but one aide said the price tag would be "somewhat north of $100 billion" and would include "a heavy emphasis on help to state and local governments." One way to help states would be to fund the mandatory state match for Medicaid programs so that states would not have to slash education and other programs to cover it.
read the CNN story
``The idea of suspending the markets for the time it takes to rewrite the rules is being discussed,'' Berlusconi said today after a Cabinet meeting in Naples, Italy. A solution to the financial crisis ``can't just be for one country, or even just for Europe, but global.''
The Dow Jones Industrial Average fell as much 8.1 percent in early trading and pared most of those losses after Berlusconi's remarks. The Dow was down 0.5 percent to 8540.52 at 10:10 in New York.
Group of Seven finance ministers and central bankers are meeting in Washington today, and will stay in town for the International Monetary Fund and World Bank meetings this weekend. European Union leaders may gather in Paris on Oct. 12, three days before a scheduled summit in Brussels, Berlusconi said today, while Group of Eight leaders may hold a meeting on the crisis in coming days,'' he said.
"We can solve this crisis - and we will," said Bush, in a speech at the White House...
"Here's what the American people need to know: The U.S. government is acting, and we will continue to act, to resolve this crisis and return stability to our markets," he said.
Bush said that the government's "wide range of tools" included the $700 billion bailout of the financial industry, which he said is "big enough to work." This plan will authorize the Treasury to buy bad mortgage-related investments from finance companies, unfreezing the credit markets by freeing up banks and finance firms to lend once again.
Bush also said the government has started to take steps to help homeowners to refinance into more affordable mortgages; cut the target for the federal funds rate; unveiled a plan to support the market for commercial paper; and has offered government insurance for money market mutual funds.
In addition, he said the U.S. government is coordinating its efforts with other counties.
If government wishes to alleviate, rather than aggravate, a depression, its only valid course is laissez-faire – to leave the economy alone. Only if there is no interference, direct or threatened, with prices, wage rates, and business liquidation will the necessary adjustment proceed with smooth dispatch.
Any propping up of shaky positions postpones liquidation and aggravates unsound conditions. Propping up wage rates creates mass unemployment, and bolstering prices perpetuates and creates unsold surpluses.
Moreover, a drastic cut in the government budget – both in taxes and expenditures – will of itself speed adjustment by changing social choice toward more saving and investment relative to consumption. For government spending, whatever the label attached to it, is solely consumption; any cut in the budget therefore raises the investment-consumption ratio in the economy and allows more rapid validation of originally wasteful and loss-yielding projects.
Hence, the proper injunction to government in a depression is cut the budget and leave the economy strictly alone. Currently fashionable economic thought considers such a dictum hopelessly outdated; instead, it has more substantial backing now in economic law than it did during the 19th century.
read the essay
Markets do not trust the governments' plans to keep struggling banks alive and investors will only calm down when the companies with bad assets are allowed to go bankrupt, legendary investor Jim Rogers, CEO of Rogers Holdings, told CNBC on Friday.
"The way to solve this problem is to let people go bankrupt," Rogers said.
"Then you will hit bottom and then you start over. The people who are sound will take over the assets from the people who aren't sound and we will start over. This is the way the world has worked for a few thousand years."
The current rescue plans, which will force governments to issue more debt, print money and flood the markets with liquidity, will flare up inflation after the crisis is over and will create worse problems, Rogers warned.
"We're setting the stage for when we come out of this of a massive inflation holocaust," he said.
read the article
My thoughts: Rogers is correct.
Theory and Crisis
Any bailout plan that is believed to be potentially effective must be based on a theory. Otherwise it would merely be a shot in the dark. If you asked a TARP advocate why the intervention is necessary, he presumably would explain the problem and how the bailout would remedy it. For example, he might say that when the government borrows $700 billion in order to buy banks' bad mortgage-backed securities, it will inject liquidity into the credit markets and improve the economy. But that is a theory. (It's a bad theory, but it is a theory.)...
Free-market theory can explain the cause of the crisis -- government intervention in the mortgage market through promotion of easy home-buying and implicit guarantees to lenders and underwriters, including its privileged creatures, Fannie Mae and Freddie Mac. Given that genesis of the problems and the general theory of markets, the solution is for government to back off -- way off -- and to let the economy adjust to real conditions and recover without subsidy, guarantee, or regulation.
What is the alternative theory used by those who have jettisoned free-market theory in "this time of crisis"? Why should we believe that things will be fine only if the government has the discretionary power to transfer resources from those who haven't screwed up to those who have?
read the entire essay
My thoughts: Markets work, socialism does not.
Two weeks ago Monday, markets traded down 300 points at the open. The sell-off seemed to be in anticipation of what was widely considered to be a poorly thought-out bailout plan. As it became clear that the $700 billion package was not going to be approved by the House, the Dow Jones Industrial Average plummeted another 500 points. Stock jockeys had apparently decided that a bad bailout would have been better than none.
Fast-forward to the end of last week: During Friday’s House vote, the Dow rallied 300 points . . . but once the bill passed, they promptly reversed and sold off. It’s been more or less straight down ever since. Since the highs of October 2007 one year ago, the Dow has lost 39%, or about 5,500 points.
How did this happen? Why are markets reacting so negatively to a near $1 trillion bailout? The short answer is that the Federal Reserve and the Treasury Department have been focusing on the wrong issues. They have been treating falling asset prices—houses, stocks, bonds—as well as the lack of confidence between banks, as the actual issue. This is the wrong approach. Falling asset prices and a lack of confidence are a result of the underlying problem. You don’t cure alcoholism by getting rid of a hangover; you cannot resolve confidence issues by merely cutting rates.
The primary problem is that banks are refusing to extend credit to each other. Why? Because they do not understand the liabilities of their counterparties. Translated into English, that means they don’t know if the other bank whom they are dealing with will still to be standing tomorrow. The thing roiling markets today is not the lack of confidence; It is capital, or more accurately, the lack thereof. Thanks to a series of very poor trades—excessively leveraged and absurdly risky to boot—banks are now dramatically undercapitalized.
As we have seen in just about every historical financial crisis, the shortage of capital is the underlying cause of monetary mayhem. Too much debt, too little equity,makes any financial system cease to function...
from the Big Picture