Why something should be done

I'll be honest, I never wanted to write up a diary piece like this. A week ago, like many of you, my feelings on "bailing out" Wall Street was equally negative. Why? Why in the name of all that is decent should we clear up the bad judgment of folks who really do not care about the common folk?

For years, folks who would be identified as the type who would get the jobs of running organizations like Goldman Sachs or Lehman Brothers, were considered "Masters of the Universe." For them, we, you and I, were the dirty lowers against their kind. We existed to supplement their income. But now the veil has been lifted, and we see now that they are not masters of anything but their own greed and stupidity.

Many have been warning about this impending doom. Untold warning calls to curtail the activities of rogue mortgage lenders to those creating unregulated derivative instruments went ignored. The signs were all there, articles, books and falling stock prices and increasing spread prices were all screaming "GOD DAMMIT, CAN'T YOU SEE, TROUBLE'S COMING!"

Trouble has indeed arrived, and as my old mentor once prophetically noted to me "What's good for Main Street may not be good for Wall Street. What's good for Wall Street, may not be good for Main Street. But, what's bad for Wall Street, will be made bad for Main Street." I've echoed this warning in a previous post, and many agreed. So, why, why would I in my right mind agree to some sort of plan? Oh God it would be so easier to just go with, as the great orator of the airwaves, Mike Mallow says, "let 'em rot" idea. After all, it's not like Goldman Sachs pays your rent every month, or that folks at Morgan Stanley drive your kids to school. Yet, after long hard thinking and internal debates with myself, I find that something has to be done. Why? Because an opportunity is here for our side the likes that we haven't seen in over 70 years!

Capitalism as we know it is dead

Can we all agree that the idea, the concept, the very notion of Anglo-American style of laissez fair capitalism is a goner? That deregulation has been proved to be the access card to grand larceny? That free trade has proved to be unfair trade? I think so, I really think that rotting corpse called Reaganomics can finally be thrown into that mass grave along those of other conservative ideas.

John Maynard Keynes, John Kenneth Galbraith and Hyman P. Minsky had longed called for a proper management of the market system. Left on it's own, well...you know. The problem lies in the instability in the pursuit of not just normal-sized profits, but massive profits. Of course, there is the question of what constitutes "normal-sized" profits? There have been many industries, when they were heavily regulated in the past, that came to expect a steady but small margin.

Yet conservatives and libertarians and neo-liberals like Phill Gramm, Milton Friedman, and well take your pick from the 1990s, advocated less government. Everyone's familiar with what happened, we got drunk off the supposed "peace dividend" from the end of the Cold War. Oh the hosannas and praises on now the defeat of a rotting Soviet system exemplified how free markets (often equated to liberal democracy) should be made "freer" (thus linking it to even more political freedom). This three card Monty was pushed on us, and for a long time, the average investor saw his 401K plan go up as the S&P 500 went from around 300 in 1991 to around 1550 in 2000.

Still, in that time, despite the many job growths in the 1990s, so much of our industrial economy was hauled off en mass overseas. This didn't start under Clinton, but more like around Nixon's time. Tricky Dick went to China and returned, but our manufacturing jobs decided to start pitching up tents over there; or I should say the factory owners who wanted to begin the game of wage arbitrage. And this arb game has been going on now for over three decades. The final results of such economic rape can bee seen in the hallowed out mills found from Toronto to Pittsburgh to Cleveland to Chicago to Detroit. We stopped making tangible things to sell to the world, and instead started selling financial intangibles.

So to hell with them?

Now, here we are, the system that was hoisted upon us since Nixon is broken, and beyond repair. I say good riddance, but what to do now? As previously mentioned, we could just let the whole thing collapse on itself with the hope of building something else. Yet this too comes at a high price. Oh, how I would love to show those bankers the same pain that the average working folk have been going through. And perhaps we still can, but I also have to realize that the price may also come at the expense of the same folks who have been suffering.

There is the thinking that if folks like Morgan Stanley and Goldman disappeared, hell I've heard even names like Citigroup and JP Morgan Chase included in that, that we would be fine without them. That during the Depression, many banks were vaporized only to be replaced years later by other ones. Here's the difference, though, this time these organizations are interlinked with so many other institutions, that they instead serve as an artery.

(this is from CNBC, pay close attention to the guy from Hong Kong, I think he makes some good points!)

Say we said to Citigroup, screw you, you're on your own. What will Citi do? Ultimately, they would have to wind down operations, not just their trading desks (which I suspect no one would miss), but day-to-day operations in every division. As the company loses it's credit ratings, the company will then have to seek to raise it's capital requirements even further to forestall any more drop in their ratings. Yet, as Citi goes, it is also mimicking something else that many other financial institutions will be doing, the freezing or cutting back in loan operations. Banks loan money to each other every day. One can see what they pay represented in things like the London Interbank Offer Rate, or LIBOR. This ultimately begins to cascade to their customers.

There are millions of smaller businesses, never-mind the larger ones, that need credit to run their operations. Credit could be used for everything from expansion to meeting payrolls until a receivable comes in. As banks like Citi begin to erode, they will cutback in such activities. When one bank sees this, they till will do this. Now one possibility is that instead of curtailment of short-term loan operations, one would see an increase to costs to the borrower. As Citi, for example, finds that the LIBOR rate increasing, it will then pass that cost on to the borrower. That borrower, if it is a going business concern will have two choices, either eat the cost or pass it on to the customer. Ultimately this will have an inflationary effect. Another eventuality as the costs of business goes up, jobs soon become at risk. One last thing, to anyone who owns a credit card, LIBOR is often the basis for the interest rate you get.

So much to do, so little time

I hope you can see that my main interests here lie not with the Wall Street bankers, but in seeing that jobs are saved and inflation curtailed. The average person in this country is either underemployed or not making enough to meet ends meet. Folks either on disability or social security, including those who managed to save some money for retirement, are also hurting. Everyone is afraid and angry.

What Hank Paulson is proposing is in reality incomplete and an insult to those of us who did play by the rules. I say incomplete because no real regulation was asked. Today, watching the hearings, it pleases me that our cries for such are being answered. We can't let them get away with what happened, but at the same time we need to rebuild our economy.

I look at this as the equivalent to rebuilding a city after a major war. Much of the infrastructure is still there, just bombed out and in severe damage, akin to Hiroshima and Nagasaki. Yet, despite having an atomic bomb dropped on them, look at these places now. Back in 1933, when a great man took office, he was given essentially the economic version of this and forged together a binding network of regulation and safety nets that slowly nursed the economy back to health.

Folks, we're at that same position now. This diary has gone on too long to go into details, so perhaps in the near future I will write what I'd like to see. But already, I'm seeing such things on here and from folks like Paul Krugman. We can mold Wall Street, if we force our legislators, to finally work for us. Of course, to be honest, I suspect this God-awful President would hinder us, which is why we need Barack Obama in the White House.

Let's push for the repeal of Gramm and every other bastard Republican-lead derogatory action. Not a blank check, by no means, $700 billion is simply too much at one time. Let us push for audits on every financial company. We should demand a curtailment in all bonuses for financial institutional executives until this mess is cleared up. We should demand part ownership in the banks, and in fact the establishment of a new public-owned neighborhood thrifts whose ONLY goal is to help those get a loan for a home. But that is only the beginning my friends, only the beginning. I suspect that the smart folks on Econ Populist or Daily Kos or MyDD, and don't underestimate yourselves now, could come up with some regulation ideas. In fact, I would encourage in the comments below that you do!

Taxes, my stars, if there EVER was a cover for the Democrats to raise taxes this was it! Say good bye to the Clinton tax cuts for the wealthy. Say good bye to the cut in cap gains for those in the upper stratosphere of society. Inheritance tax, bring it back. I would say, that this crisis even calls for the repeal of the JFK era cuts!

But of course, there is much more to do besides taxes. We have so much reform to enact. Because now, more than ever, if we want to see our children have a better life than we did, we must take action on all fronts. Wall Street wants our money, again, and I say not without our price! Wednesday morning, Warren Buffet went to Goldman Sachs and said he would help them out but on his terms; he ultimately got a sweet deal. I think it's high time we did the same to the rest of the financial industry, don't you?

In our past, there were two separate streets, Main Street and Wall Street. Perhaps, after the latter's disastrous block party that destroyed their neighborhood, it's time we made that separate street a side road for Main Street. Say no to the Paulson Plan, say no to a GOP tax cut, and say yes to progressive actions! There is some sort of planning coming, lets not kid ourselves. I just want to make sure that it's the start of of a new progressive reform front and not just another bailout.


(From this week's New Yorker)



this is great

It's hard sometimes to explain why someone who has a concern for working-class economic interests needs to care about what's bad for wall street, as you put it - particularly since those arguments are frequently mounted in either a panic or disingenuously by B. Clinton acolytes. So this is extremely helpful both to read and as a point of reference.

However, I still believe that the need of the day is not the argument that something should be done, but that something proper should be done, given enough thought, and with enough time. This whole framework of panic is destructive to a proper solution, imo.

Doh, Homer moment

In my head there was no question something had to be done, I guess that's what I'm missing that others are saying nothing should be done. Doh.

Despite what I wrote below

I agree that something has to be done.

I just disagree that saving the dollar and a federal government run by unelected idiots on Wall Street is what needs to be done.

I think what needs to be done is a return to independant banking systems based on the state- right down to the minting of money- and a restriction on trade across state borders to the barter system.

Maximum jobs, not maximum profits.

reads like a Manifesto

One small problem, Obama has Jason Furman, Goolsbee, Robert Rubin, even Paul Volcker! and the very same gang who contributed to this mess...running his show. In other words, he is not a progressive and so far, hasn't put forth clear progressive plans and policies.

I'll skip the list but on the financial crisis, am I missing something because I have yet to see any plan.

There is no doubt something has to be done and done immediately but I hate to say this but the one I've seen with the real plans that look good to immediately work are coming from Hillary Clinton. I posted a few of these and seemingly they are ready to go.

Even the CBO is implying a RFC or a HOLC is the better way to go on this and they must also deal with the liquidity issue on top of it.

Am I missing something here? Last I saw was a few points that read like something Chris Dodd would type up but I have not seen anything about fundamentally scraping the Paulson plan and in it's place doing a bottom up approach like the RFC.

I hate to be a party pooper but really....

I agree

We have yet to see a concret plan from the other side. See and both common folks and the markets hate the unknown.

you had to write this

I had no idea people think that this isn't all real, I guess they do not understand the difference between manipulation of a crisis vs. an actual one.

McCain "plan"

here. It's all about Wall Street. Not a word about any bottom up bail out.

Myself, I'm all about the solutions that are the best for the middle class and bottom up and from what I can tell, Hillary really has a good plan and it looks like she had this all laid out over a year ago, so it's all detailed out.

Bernie Sanders is calling for a surtax, major, on the people who caused this and basically anyone who profited from it.

Of course seemingly anyone with a real solution isn't allowed in the negotiations and assuredly on a finance committee!

McCain is going to lose this election with his corporate insane Reaganomics trickle upon idiocy. That all said, it's not like Obama in terms of policy is the solution and I find him kind of chicken shit and left holding the bag on this one....I mean who did not know this was coming?

Bottom up

In terms of lasting help for main street, a far more effective method of resolving this "crisis" would be to do as Kevin Phillips was suggesting - reinvigorate or manufacturing sector. Manufacturing helped keep a check on the finacial sector when it was king in its heyday. Manufacturing has hard assets of value that would have some worh, unlike the paper and largely worthless assets of failed wall street institutions- equipment, property, patents and so forth. If we took the 700 billion and used it to rebuild and updare infrastructure - rail lines, bridges, roads, power grid, air traffic systems and so on would help facilitate economic growth, as well as helping get US manufacturing back on its feet by scrapping "free" trade, investing domestically in R&D, capital equipment, and more fuel efficinet and alternative energies.

Manufacturing creates wealth and shares prosperity, the finacial sector shifts and concentrates wealth.

Two must reads

I think folks ought to read Hillary's article in today' Wall Street Journal, and George Soros' piece in the Financial Times.



Two must reads

Is it too late to dump Obama and bring Hillary back?


I have an issue with not letting the home prices fall. The reality is people simply cannot afford these prices. A $2000 a month mortgage is obscene and that's still often the type of situation one is in trying to buy a home.

Hillary was pretty tame in her WSJ article for she called a while ago a freeze on foreclosures to stop the entire slide and a redo on the system.

Least we not forget Biden was one of the big pushers of the bankruptcy bill which won't let bankruptcy judges renegotiate mortgages so people can stay in their homes.

Bottom line they have been and are squeezing the middle class, blood from a stone and they sucked the middle class dry a while ago and here we are.

That and their ponzi scheme of derivatives.

Letting the existing banking system fail may be the best choice

What are the odds that any bailout would save the banking system? And at what cost?

That is the ultimate question here, as I see it. Certainly if any bailout is offered, this Lame Duck Administration and nearly-Lame Duck Congress should not be tying the hands of the next Congress and Administration. So any package should be the minimum to get us through until next spring. And since the banks have no leverage besides that of being economic suicide bombers, the representatives of the taxpayers should strike a very tough bargain.

But even if that is done, will it work? If we could say with 90% or even 80% certainty that it would, then maybe we should proceed. But suppose the chances of it's working is 50% or less (which is my best guess right now)? Then we would merely be throwing good money after bad. We would be impeding our ability to pick up the pieces later and ameliorate the hardships on Main Street in the meantime, not to mention other urgent priorities like fixing our infrastructure. All to reward the least deserving actors in the drama.
We may face terrible choices; but the best among them may be to let the existing banking system fail, and start as quickly as possible to build a new and better one atop the ruins.

Letting the existing banking system fail may be the best choice

Not sure how you would allow them to fail in such a way as to pick them up so fast. By failure, are you implying that we wait until all these financial institutions seek bankruptcy protection? Because if that's the plan, then we may be in a far worse situation. I agree that if the plan put forth has a 50-50 chance, then let's do something better.

You know, the heart of the matter comes down to capital requirements because the derivatives contracts are technically in default. And by that, keep in mind what they define as default in regards to CDOs and swaps, is different than what you and I may think of as "default." Similar, but still different. They are in default because of certain mortgages. Why not simply concentrate on those mortgages first? As George Soros explained, we may be better off insuring that essentially "reset" the CDOs from default into good standing. You take care of the troubled homeowner and we're on the starting path to reform.

The FDIC solution

There's an honest argument that I think should be looked at.

The FDIC solution.

The FDIC does not insure all deposits, just those beneath $100,000.

Maybe something similar needs to be used for the purchase of failed financial assets.

How much of the financial wealth tied up in these banks is owned by shareholders who have massive holdings?

It's one thing for the government to act to insure the value of small holdings like grandma and grandpa who've got $100,000 from their 401 K, but it's a whole other thing to give a billion of taxpayer funds to one individual.

So first, let's set a cap. The federal poverty line (A) for a family of four is $21,200. The average American life expectancy (B) is 78.1 years.

So the bottom line is that a family could live their entire lives without working a single day (A x B) if they had $1,655,720. Let's be generous though and set the cap at $2 million.

What this means is that government payouts to the holders of failed financial securities will be capped at $2 million. Everything above that is written off as a personal loss.

Let's have a government financial insurance package, not a bailout. And as with any government insurance means testing must be part of the equation.

The real question is what percentage of the securities that the US government wants to buy are excluded if we include a threshold such as this?

If the issue in the first place is that the securities in question have no value without government intervention, then there is no 4th amendment issue with an insurance plan of this sort.

Letting the existing banking system fail may be the best choice

Hey NDD - off topic slightly - I see Bonddad gave you a plug on his recent Huffington Post article

good show!

that's the issue I have

I read the CBO statements and it's fairly clear (and don't let me just put them on the hook, other analysts are saying this) that this might not work at all and instead backfire.

It appears they must address liquidity somehow but beyond that, why they are not using things like a HOLC or RFC is beyond me. Use systems known to work.

The only thing wrong with this bailout

is that it isn't big enough. The American taxpayer should not just bail out Wall Street past screw-ups, but its future screw-ups as well. Just put it on the national credit card.

Plus, the taxpayer should bail out homeowners who can't possibly afford the houses they "bought". The taxpayer should also bail out people that charged too much to their credit cards, bought those huge SUV's that get no gas mileage, and any businesses in America that might get into trouble because they make shitty products (like the airlines and automakers).

And while we are at it, the American taxpayer should bail out foreigners too. After all, the American taxpayer has an endless amount of capital to draw on, so it would be a crime not to spend it right now.

My message to Congress is: "Go Big or Go Home!"
A few trillion for Wall Street is just not enough. We need to start thinking in the quadrillion!

Good Points

Nice to be where folks actually think through problems rather than attack personalities. I think the idea of letting folks in homes stay there and rework their mortgages to meet the owner circumstances makes a good deal more sense than the current foreclosure process.

$100 or 200 a month paydown of principal with owners maintaining and insuring the property is better than a bank carrying it as defaulted collateral that the bank (or Fannie or Freddie) has to maintain at their cost.

As for marking-to-market the housing already in foreclosure, here's a proposal. Convene grand juries (multiple) in each locale and have the jurors go to the site, walk around, then tell what they'd pay for the house today. Throw out the highest and lowest figures, average the remaining quotes and set the taxable, mortgage and market value of the property to that figure. This eliminates a lot of the potential abuse that is going to occur as "the professionals" try to value the properties.

I think that American ahistoricity has caught up with us: as I recall, the problem that set the '29 depression into motion was too much concentration of capital in too few hands. So why are we letting BofA and other folks snatch up the failing firms? Maybe we ought to think reginally and locally with investments and focus on manufacturing in some parts of the US, irrespective of how "sexy" that does or does not look in DC or NYC.


Why something should be done

We need a banking system, but we should toss out the current hucksters. Make the investment banks eat their losses, clean out the old management, and if need be nationalize the part of the banks that actually loans to real businesses.

The banks should be forced by auditors to acknowledge their junk assets. If they can't take it, they should be forced to declare bankruptcy. If need be the bankruptcy process can be run to nationalize the banks. Steps should be taken to expedite this process.

The housing market should be allowed to fall. Housing prices should be allowed to fall, and if homeowners can't afford existing prices, the lenders should be forced to take their losses, and accept lower mortgage payments based on revaluations of the houses.

Next, we need more investment in manufacturing, and the new businesses. We should have a bank devoted to lending money to create manufacturing jobs. When companies shut down, the government should provide assistance for fired employees to create new companies, possibly competing with their former employers. If employers know outsourcing is likely to lead to their employees starting competitors, it may become less common.

Why something should be done

I'm in complete agreement. The current banks obviously cannot manage themselves and should be allowed to go bankrupt. Other banks with better management will take their place. These same people have been screaming for the free market to work (sending jobs and money over seas), why not let it work for them? My only condition would be that nobody currently involved in any of these banks would be allowed to work in the banking industry or any level of government.

They could still work at Wal-Mart alongside the people they've screwed in the past.

If what is bad for Wall Street is now bad for Main Street

Then I for one suggest that we do not have an economy, just a ponzi scheme con job, and that Wall Street and Credit should be made ENTIRELY illegal. Pump in whatever cash you need to everybody to enable all loans to be paid off, then set the usury rate at 0%, because anybody running a business on credit is being reckless and stupid.

Maximum jobs, not maximum profits.

So What If...

After reading the gloom and doom predictions if Paulson doesn't get his credit card soon, I did some checking and ya know, there are a whole bunch of nifty alternatives out there in economics land that might be more useful for day- to-day Americans and small businesses than Wall Street:


And of course, there's Grandma Flo's general advice on money and banking:

Prime applies to banks and beef and its the best - accept no substitute (no sub-prime loans for anyone ever - prime is the best rate for the best risks)

If I can see it I believe it (do not accept paper assets unless you can reach out and touch the paper's bottomline owners - you can't see the house behind the mortgage, don't buy the MBS)

Bet on a maker not a faker (manufacturers are better investments than market driven speculative issuesover the long run)

If you live above your means you're gonna splat when you hit (live below your means whenever possible)

A conservative banker may not be rich, but he's less likely to wind up poor

Greed is a foundation built on quicksand - it never stops sinking and taking you down with it

Your wealth is not your assets less liabilities - its what you have in the way of friends, family and future-focus



Doubt is an honorable state in the face of unjustified certainty. - Uncle Max


Doubt is an honorable state in the face of unjustified certainty. - Uncle Max

Welcome to EP Doubting Tom 2

Interesting links on some grassroots efforts.

I think you'll find a lot of support on this site to move back to a production economy. There is a series, Manufacturing Mondays, which reviews the latest weeks events in our ailing and ignored manufacturing sector and there are also a lot of Professionals on the site who agree, "making things and selling them" sure seems to work to make the US great and when the focus went away from that...the US is becoming not so great.

We are saved!

Why didn't people think of this before? Just give Wall Street a few trillion dollars in taxpayer money and then everything is made right.

What I don't understand is why should we stop at a few trillion? Why not a quadrillion? Then not only will everything be made right for America, but for the rest of the world too.

And if we gave Wall Street a quintillion then we would make things right for the rest of the universe as well.
It'll make a great movie. The American taxpayer will save the universe through the altruistic Wall Street bankers.

Sign me up for the next bailout!!

Krugman - They are Makin' This Up as They Go Along

He didn't say that but he might as well have.

Check out his latest blog post and my out loud mumblings as I read were no shit!

Also, check out Roubini. (middle column). He literally just wrote a complete policy proposal to solve the situation. I've scanned through it and I believe he is right. check it out (note how close it is to Hillary too).