Ron Paul has been warning, for years, about just the sort of credit crisis we are seeing now.

Has Warren Buffett, Paul Volcker, or Bill Gross been talking about the risks our fiat money system and loose credit conditions were creating?

Why should I now listen to your so-called "experts" when they weren't smart enough to see this coming?

There is a large group of non-Keynesian economists out there, those from the Austrian School of Economics, who understand exactly what is happening. They saw this coming; they know what the best solutions are.

You can continue to hold to your "mystical-mumbo-jumbo-Keynesian-fiat-money" b*ll *****, or you can get with the program and start thinking rationally about economics.

"Credit" is not "money."

"Wealth" is not created when more money is "printed."

When people ignore those truths and create fictions of "wealth" sustained by nothing more than credit, such delusions cannot be sustained forever.

Reality has arrived; it is time to pay the bill.

Those who ran up the tab, have left the party and have dumped the costs for their party on the rest of us. The defeat of the $700 billion bailout package is just one small (and probably only temporary) victory attempting to force those who ran up the expenses, to actually have to be responsible for their actions.

Credit crisis is limited to the mega banks and any others that were foolish in the first place. I am a senior lending officer of a community bank in Texas and I can assure you we are lending money and it is business as usual. There are thousands of banks across the country that kept to the basics of sound business and today they are in a position gain market share because they avoided the avarice and greed!

Hell, wasn't he the guy who last week sunk $5B into Goldman-Sachs, then vocalized his prayers for a bailout?

I think Buffet's stinging a little right about now.

Will your community bank extend to Hollywood? I'm looking at a lot of studios and studio support who might have their credit line cut off...

But how much can you expand your loan book? Can you grow it +50%? Last figures I saw, credit unions have appx 6% market share nationally. So if all credit unions increase their loan book +50%, that only offsets a -3% contraction in lending by the rest of the banks. One Citigroup going under would reduce US lending by more than all the credit unions in the country put together.

Yes, a few people will benefit from this. Bankruptcy lawyers are very happy too. Doesn't mean the country as a whole won't suffer, a lot.

Just like the advertising campaign; "Spend all you want - we'll print more!"

Dorito conspiracy? We're onto something here...

Gross has been quite vocal. Go read the archives of his monthly investment outlooks, they are very interesting. An example from May 2005 (wherein he rails on "the bare bottomed king".

It isn’t prudent for U.S. citizens to continue to expect to consume 6% more than they produce, nor is it rational for investors to expect foreign central banks – primarily the Chinese and Japanese – to invest that 6% surplus and other direct investment monies into the U.S. Treasury market forever. At some point it comes undone, either through a massive revaluation and dollar decline, a Treasury buyer’s boycott, or a whimpering U.S. consumer beaten down by the cost and/or amount of their burgeoning leverage – much of which is housing related.

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2005/IO+May-June+2005.htm Go to the bottom for a link to archived comments.

Gross is in the business of managing $1 trillion in pension and mutual fund money, so he obviously has to be careful how he says things. He can't scream that the sky is falling - but he knows more about the debt and credit markets than anyone, and he's done his best to warn.

There is no handy archive of Buffett's comments, but he has been warning about the US national debt, the derivatives market, and excessive leverage for years. From a March 2005 article discussing his views:

But the consequences are still dire, Buffett believes. If current trends continue, a decade from now, just at the time when we'll need every dollar to pay for the retirement benefits of baby boomers, the United States will be sending 3% of its current annual output to the rest of the world as interest on the debt run up by its past consumption.

That royalty would run forever, unless we export more and consume less. And given the way global trade policies work, Buffett concludes, massively expanding U.S. exports isn't likely. Hence paying off this royalty would require a huge decline in U.S. consumption, Buffett says, with all sorts of nasty consequences for the global economy and the lives of U.S. workers and retirees. Don't pay it off and the already-projected squeeze on such frills as health care and education spending just gets worse.

Similarly, you have to dig to find Vockler's warnings, but here is an example, also from 2005:

If we can believe the numbers, personal savings in the United States have practically disappeared.

To be sure, businesses have begun to rebuild their financial reserves. But in the space of a few years, the federal deficit has come to offset that source of national savings.

We are buying a lot of housing at rising prices, but home ownership has become a vehicle for borrowing as much as a source of financial security. As a nation we are consuming and investing about 6 percent more than we are producing.

What holds it all together is a massive and growing flow of capital from abroad, running to more than $2 billion every working day, and growing. There is no sense of strain. As a nation we don't consciously borrow or beg. We aren't even offering attractive interest rates, nor do we have to offer our creditors protection against the risk of a declining dollar.

Most of the time, it has been private capital that has freely flowed into our markets from abroad -- where better to invest in an uncertain world, the refrain has gone, than the United States?

More recently, we've become more dependent on foreign central banks, particularly in China and Japan and elsewhere in East Asia.

It's all quite comfortable for us. We fill our shops and our garages with goods from abroad, and the competition has been a powerful restraint on our internal prices. It's surely helped keep interest rates exceptionally low despite our vanishing savings and rapid growth.

And it's comfortable for our trading partners and for those supplying the capital. Some, such as China, depend heavily on our expanding domestic markets. And for the most part, the central banks of the emerging world have been willing to hold more and more dollars, which are, after all, the closest thing the world has to a truly international currency.

The difficulty is that this seemingly comfortable pattern can't go on indefinitely. I don't know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars.

I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change.

http://www.washingtonpost.com/wp-dyn/articles/A38725-2005Apr8.html

So, these guys are not johnny-come-latelies, or some talkative legislator - they are extremely knowledgeable and have been deeply involved in the financial markets for decades.

Seriously...he and JP Morgan were hoping for the bailout. JP Morgan bought 2 institutions which held lots of assets but also lots of these 'problem securities.'

Had the government taken those securities off their hands, those purchases would likely look quite a bit nicer.

Yes, there is. Those trillions are too risk-averse to buy illiquid securities and hold them for an uncertain long run return. Their job is to make the maximum profit with minimum risk, which means they would be happy to let the financial system fall apart and buy assets out of bankruptcy for 10 cents on the dollar. They have no interest in helping the country avoid a financial or economic crisis, no matter how much harm people will suffer.

Sorry to offend you. My information and views come from working in the markets. I have a pretty fair understanding of what is happening and the range of likely outcomes, though I can not predict the specific outcome.

As distasteful as it is to admit...Jyl is right. A bailout in some form will...and must happen. Give it until the end of the week.

John:

You do not offend me. I have been an active participant as an investor in the public equity markets for quite a while, but probably do have less experience than you as an "insider".

I just spent about an hour on the phone with my Dad, who is absolutely wiser and more experienced than I regarding this current crisis; his views are more closely aligned with yours.

He explained things in a way that convinced me that even today's failed proposal is better than a laissez faire approach. FWIW, I was not against any bailout, just the one proposed in bill up for vote today. But, you may call me a "flip flopper" on my initial thoughts.

He basically said that mark to market requirements would continue to force banks to take hits on bad mortgages and squeeze them (banks) to failure. He said the FDIC will continue to be forced to cover deposits by law and will end up paying out billions upon billions of dollars after the banks are dead; he predicts that if nothing is done, over half of the top 50 US banks will probably fail.

As I think you stated earlier, the bank failures take out the good borrowers with the bad. Good businesses (via credit lines of which the failed bank could walk away from) and projects relying on debt would be stopped in their tracks.

His point is that it is better to pay those billions up front while the banking system is still functioning instead of after, via depositor insurance, when the banks are out of business. The Fed is going to have to provide the money either way.

This makes perfect sense to me and I generally concede the debate to you.

I would like to see systemic issues addressed, but it sure looks like almost any type of bailout that saves banks is preferable to a collapse of the financial system and the subsequent huge back-side costs via FDIC.

I do have philosophical problems with the large role of the Fed in this instance, but cannot think of any superior alternatives.

Best,

Your argument for this bailout is not surprising, it sounds like you have a vested interest in seeing the "house of cards" being kept propped up.

For those who are looking to understand why any bailout is wrong -- and a bad thing for the economy -- consider:

Imagine a small town with a bank.

Imagine if the banker began making irresponsible loans to people in that town, with no regard to protecting the depositors' money in that bank.

People with little to no ability to repay their loans would receive credit, go out into the town and spend those dollars they had received.

Such a town would experience an economic "boom" from the easy (irresponsible) credit. A lot of people in that town would begin feeling quite wealthy due to all the economic activity. Many of those who sold goods would keep the money they received for those goods as deposits in the bank -- and would feel wealthy when they looked at their bank balances.

Eventually the banker's irresponsibility would catch up with him and his bank would become insolvent since many of those who borrowed money would not be paying it back.

Now imagine that this banker, not wanting to be exposed for the "fraud" that he was (in making all the irresponsible loans), going to the Town Council and telling them, "If you don't buy all these bad loans, there are going to be dire consequences for our town's economy."

The banker's warning about dire consequences is 100% accurate, but do you think the best course of action for the Town Council is to buy the bad loans and effectively "bail out" the banker from the situation he -- and his irresponsible borrowers -- created?

Isn't it better to let the failures take place and let the banker be exposed for his irresponsible (or corrupt) actions? Isn't it better to let those who profited from the boom suffer losses rather than attempt to spread the losses to everyone in the town?

Why should it be any different in our economy overall?

The bankers, including the Federal Reserve -- and especially those in the area of "investment banking" -- have been engaging in irresponsible and corrupt lending. The "house of cards" they have created is now collapsing.

There is no way around it: There will be dire consequences through out the economy.

No "bailout" is going to stop the consequences from the irresponsible lending (and gambling) the banking industry has engaged in.

All that any bailout will do -- especially when it is a bailout proposed by those who created the mess -- is to provide cover for the precise people who are responsible for creating the problems.

A government bailout will not erase any of the damage our economy will experience. All that a government bailout will do is spread the damage to everyone rather than keeping it more closely tied to the people who created the mess.

Let the collapse occur. It will be painful for all of us, but if the collapse is allowed to take place without any "banker-created, government-mandated intervention," those who are most responsible for creating the mess will suffer the worst.

Let those who are most responsible, suffer the most!

My interest, personal and professional, is that the US economy does not fall into a very severe, prolonged recession, or worse.

95% of people in this country probably have the same vested interest.

Then there's people like you.

Right. Kind-of late for that, after all the damage has been done. (My first writing, arguing for sound money policies, was in the 1980s. How long have you been making arguments for a sound U.S. economy? What sort of arguments were they other than your recent calls to bail out those responsible for this mess?)

People have been robbed (with the fiat currency fraud); they cannot be "unrobbed" and be made whole with more robbery!

http://www.suburbanhousehunters.com/about/mortgage-crisis/

"...we have convinced them that it is vitally important to the health of the U.S. financial system that investors not know about these complex transactions and what is behind them."

"Crap is crap." Putting it in a pretty package and calling it something else, doesn't change what it is.

Here is the durn forner´s humble view:

America REALLY need that rescue plan. Now. Every invention has its advantages and disadvantages, but this was your least bad bet.

Markus

we in Europe are in deep trouble as well. In fact I would argue it is going to be worse. At least in the US there good(ish) transparency.

Fortis Bank folded at the weekend and nobody even thought they were in trouble.

Also in Europe the Pan-European banking legislation was going to be implemented in 2012, so now we'll have different approaches to the same problem by the variety of govt.

It is all rather foolish...

Absolutely, Matteo. I believe there are factors within EU that could make it even more difficult to handle this than in the US. For example, with many banks working in several countries - what country should pic up the bill from its tax payers once it go belly up? At least in US there is one central government making the rules. Here we have, what, 27?

jyl, , I intend this in the best way, but please take some time off. I got away from the 'puter for a little while. The financial mess will be fixed without my rants. Let us save energy for the aftermath, when we must find ways to prevent the next meltdown.

I now acknowledge this will cost us a lot regardless of action. My concern turns to the ever growing debt loads. How do we contain its growth and prepare for the flood of retirees?
jurgen

I don't panic on days like yesterday, and just wait them out. However, I just decided to check my investments this morning (using Fidelity's "full view" which consolidates all of them for me), and can't get them to update...maybe that's a good thing :). I predict the "ground will rise" today (to offset the sky falling yesterday), but time will tell. Either way, let the chips fall where they may, and keep the taxpayer $ (socialism) out of it. On a side note...does anyone think the "banks" will intentionally perform a "credit squeeze" in order to facilitate the "sky is falling" bailout? Nah...they would never do that :(

There is no money out there right now. Period. There is no conspiracy. The banks are not these evil caracters that wanna screw the average Joe.

Let me put things in perspective...

If you leave the US market for a second and come to Europe you'll find that:
- Nobody wants to buy bonds issues by countries that are not UK or Germany.
- yesterday Belgium and Italy issued some bonds but they were perceived very risky by investors and the auction went poorly.
- Ireland and the Irish govt had to step in today and give a blanket guarantee for all deposits, covered bonds, senior debt and dated subordinated debt of selected Irish Financial inst.
- CDS (credit default swaps) on Greece and Spain are at their historical highs

And I can go on.

I do not think JPM, Goldman have teamed up with the Belgian/Italia/Greek etc govt to get the US congress to pass a plan that is actually very restrictive for the banks themsleves...

This is not a matter of saving the careers of a couple of greedy bastards.....

I hear you when you say "let the chips fall where they may" but I don't think this would be the ideal solution for the whole system.

I don't care to be honest. Personally I sold all my real estate and stock holdings in 2007. I am sitting on a pile of cash (Treasury bills actually as I don't trust the local banks) and I am just waiting to pick up cheap assets at nothing....

But this is not a good thing. My dad, brother, my close friends, my in laws... they would all get hurt. And nobody works in the financial markets.

My dad has a 1-man-band servicing company and his turnover would go to zero. My brother is a barman and the last 3 restaurants he worked for have closed. My father in law has retired and is finishing paying his house....

Just when you thought you'd heard the worst of it, you find out about the shaky $55 TRILLION CDS situation:

http://tinyurl.com/4j9q7o

Have been doing some research today. The money market guarantee is now in effect, but there are strings and such. If you are currently assuming you are covered, don't. Check with your brokerage to see if they are participating in the guarantee program, and if your specific fund is going to be eligible/covered. Note that coverage is only available for the shares you had as of 9.19.08. Of note: if you had money in there on 9.19, but pulled out, you can reinvest in the same fund (up to your 9.19 level) and still be eligible for the guarantee.

There's an extremely attractive fund I track on a daily basis. They had $54B in holdings in mid-September. They are down to $22.2B today, but their yield is now over 3%. Everyone is flocking into government security funds and taking the hit on yield. Treasury bill money markets are below 1% yield, but people are buying all they can get. The brokerage I'm working with is turning down buy requests as small as $11M (that's a really small amount for an institutional customer, which I am).

One thing you may find interesting - Paulson's MM guarantee requires a not-insignificant payment for participation. That the program involves some 'sting' for banks is a good thing, IMHO. My brokerage will be paying tens of millions for coverage. They sent in their paperwork (and presumably, a big fat check) today.

That's interesting. If a new investor buys into that particular fund today, he/it would not be covered by the govt guarantee, correct? So I suppose the investor would have to weigh the reward of the additional 200bp yield for the next few months, versus the risk of not having the govt backstop.

Correct. So the situation I find myself in, is having a large portion of excess cash in the high-yield fund. I haven't made any more purchases since 9.19, and I haven't redeemed anything either. However, we've also got a lot of excess cash in disbursement accounts, which have overnight sweeps into - natch - FNMA/FHLMC MB bonds. We had an emergency conference call today, and the first reaction was to move everything into T-bills. Ultimately, this evening I recommended keeping the existing funds in the high-yield money market. The excess cash in the sweep accounts, I recommended be moved into the T-bill money market fund. They've got an ultra-conservative fund that invests ONLY in Treasury securities - NO repurchase agreements. The yield is something like 67 bp, but get this, that's about what I'm getting on my overnight funds. So it seems like a no-brainer to me...I've been pushing to consolidate cash anyway - we've got accounts all over the place. When you get into a mode like this, where you need to know where you stand, and fast, it is a pain in the ass to have to check stacks of CUSIPs. But I digress...



Bill, I read that article start to finish. Hmmm, looks like the ghost of Enron is going to continue to spook markets for years to come. While Dubai is now the Wild Wild West of banking, it is perversely comforting to see ingenuity like this still at work in the USA. After the sensational intro to the article, which impresses with big numbers, it goes on to say that the big numbers being thrown around are on the notional amounts of the derivatives. Reality is, a very small fraction of that number would actually come due, even in the absolute worst melt-down scenario. Hedge funds would likely represent the majority of the parties left holding the bag. That makes sense, conceptually. Bed made, lie in it. The unregulated nature of the derivatives are a little scary, should that volume of CDS get triggered. Some common-sense legislation would seem to apply -

-Only parties with skin in the game can purchase instruments (this is similar to what many are currently saying about petroleum futures trading - you wanna buy futures, you gotta take delivery. While this is not practicable, the message is clear - stop diddling in the market if you don't have skin in the game - go to Vegas if you want to play games).
-Total notional positions in a given derivative should not exceed the underlying (can't have $2.5B in hedged notional on $250M of at-risk instruments). This would follow naturally from the first point.

Good to see you back on the board, Bill.

Hey, Dave, thanks.

Wrapping up 2-1/2 years of getting a new company off the ground. It's pretty consuming. And of course, we're trying to ramp up revenue while people are sketchy about their financial futures... I figure if you can launch a business in a recession, you have a winner.

So, there are a ton of moving parts to this financial mess and I read today that the Fed has authorized printing an additional $630 billion bucks. Now, correct me if I'm wrong, but isn't that an inflationary action? I mean the amount isn't overwhelming, but if the $700 billion goes through, it starts to add up to a chunk of change.

The $630 billion dilutes the currency now issued, right? The $700 billion is all borrowed, since we're running at a $438 billion deficit in this fiscal year. So that means about $1.1 trillion borrowed, not including the costs of the war(s) which are "off budget."

The debt load is staggering right now (http://mwhodges.home.att.net/) so what's another trillion or so?

As Business Week recently noted: the US' biggest export is debt.

At some point, we have to let the marketplace "reset." At some point, we have to re-regulate the financial folks in a way that keeps up with evolving financial instruments. Maybe now is the time

I agree with everything you said. Especially the last sentence. Right now it is not the time.

I am pretty sure nobody wants a depression. So the argument here is that some folks do not believe the financial crisis will lead us into a depression if left alone.

I think the risks of not intervening outweigh any possible argument about wanting free markes, "socialism", spending 0.5 of GDP.

I just want to remind everybody the consequences of the severe depression the world suffered at the beginning of the 20th century.

This is a great article you can find on today's Financial Times

http://www.ft.com/cms/s/0/0fa9d526-8eec-11dd-946c-0000779fd18c.html?nclick_check=1

It is just over three score years and ten since the Great Depression. Judged by its rejection of the plan put forward by Hank Paulson, US Treasury secretary, Congress believes it is time to risk another one. That slump was, arguably, the greatest catastrophe of the 20th century: it was, among other things, responsible for the events that led to the second world war – not least Hitler’s rise. One can only imagine what horrors a depression might bring now?

Such forebodings must seem exaggerated. So, I expect, they will be. But that dire outcome is no longer impossible, not because a slump is inevitable, far from it, but because action is needed to prevent one.

We are watching the disintegration of the financial system. Finance is the web of intermediation binding economic agents to one another, across both space and time. Without it, no modern economy can survive. Yet that is now threatened, with the ongoing collapse in trust and flight to safety. We can indeed run this experiment. But why should we?

Even before Congress rejected the plan, the spread in dollars between the London interbank offered rate and expected official rates (as shown in overnight indexed swaps) had reached more than 200 basis points, for a period as short as three months. Prior to the start of the crisis in August 2007, the spread was negligible. (See chart.) Nor is this all: on Monday short-term yields on Treasury bills were below 1 per cent; credit default swap spreads on financial institutions reached exceptional levels and credit spreads on riskier bonds were widening rapidly. In the aftermath of the plan’s rejection, all this was likely to worsen. The S&P 500 also fell by 8.8 per cent on Monday, its worst day since October 19 1987. Nothing can better demonstrate how absurd it is to believe one can punish Wall Street without hurting Main Street. The two streets meet. That is what streets do.

If the financial system ceases to function properly and a range of financial institutions collapses, everybody will be hurt, as businesses and households are starved of credit. What is occurring now is a downward spiral of panic in which liquidity-starved financial institutions dump assets, weakening themselves and others, particularly now that their balance sheets are marked to market. This reduces their ability to lend and so undermines asset prices and the economy still more, thereby further damaging asset quality.

This, then, is “revulsion” – the final stage of a bubble when, as the late Hyman Minsky argued, investors are so scarred that they can no longer bring themselves to participate in the market. Unfortunately, among today’s panic-stricken investors are banks. These even wish to avoid lending to one another. As I noted last week (“Paulson’s plan was not a true solution to the crisis”, September 23), the gross liabilities of the US financial sector have soared from just 21 per cent of gross domestic product in 1980 to 116 per cent in 2007. A huge part of these massive liabilities must be from one financial firm to another. If credit is not extended, collapse will follow. This is why the investment-banking industry disappeared within weeks.

Against this dire background, what is one to make of the failure of Congress to ratify the plan? It is both understandable and a gross error.

It is understandable because the use of taxpayer money to buy so-called “toxic” mortgage-backed securities from the greedy fools who created the crisis is hard to tolerate. It is also understandable – even creditable – that those Republicans hostile to “socialism” do not want to bail out the undeserving rich, at least before an election. It is understandable, too, because, for reasons I put forward last week, the plan is not convincing. It is designed to deal with a problem of illiquidity in what seems certain to be a growing crisis of insolvency, particularly as house prices fall and the economy continues to weaken.

Yet the rejection is grossly mistaken because the resulting ruin will hurt the weak and destroy the legitimacy of the market economy. The plan is indeed flawed. But failure to ratify it is unlikely to convince anybody that something better will be forthcoming. It will convince them, instead, that the US is choosing to be impotent. At a time of such fragility, when the insurance offered by government is most indispensable, this is the worst possible message. It is a pity Mr Paulson did not choose another plan. It is a pity, too, that a former titan of high finance was charged with bailing out Wall Street. Yet it was still a mistake to reject the plan. It was necessary, instead, to build upon it.

What now? The first effort must be to find a plan that Congress can pass. It is quite possible to find one that protects the taxpayers’ interest better, by insisting on full reimbursement, after assisted companies return to health. Buying preference shares, as Warren Buffett did in Goldman Sachs, would be a good way to do this.

Second, it seems likely that a number of significant financial institutions will find it hard to fund themselves in coming days, as their share prices weaken and interbank lending is frozen. Central banks must make every imaginable effort – and a few unimaginable ones – to make sure liquidity needs are fully met during this period. The Federal Reserve may find itself having to rescue additional institutions. So, alas, be it.

Third, Europeans (among whom I include the British) must recognise they are in the same boat. In times of such peril, even a small cut in interest rates by the European Central Bank and the Bank of England would send a helpful signal. It is now most unlikely to prove inflationary.

None of what is happening is easily palatable. The need for a rescue is hard to swallow. The emergence of bigger and even more complex financial behemoths – all too big to fail – is a harbinger of crises to come. Yet, while one must consider the long-run implications of how a crisis is resolved, one must resolve it first.

Franklin Delano Roosevelt famously said that “the only thing we have to fear is fear itself”. In truth, the economic processes unleashed by the bursting of the housing and credit bubbles are real. But fear is also a danger. When confidence collapses, a market economy cannot function. It must now be restored.

The problem is not lack of knowledge of how to do this: we know how to recapitalise and restructure damaged financial systems. The problem is lack of will. Government must start to show it is in control of events. In the twilight of a failed US administration, that may seem far too much to ask. Winston Churchill, Roosevelt’s partner, said: “The United States invariably does the right thing, after having exhausted every other alternative.” The alternatives are now exhausted. It is time for politicians to do the right thing.

martin.wolf@ft.com

Matteo, you (and others) know far more about these things than I do, but that last part hits home. I simply do NOT trust our "leaders" to do the right thing anymore. Are we at that point where they are/will? I truly don't know :(. BTW, did you work for Wachovia or BOA? Just curious... I personally don't think Wachovia (First Union) went down in one afternoon...imo it was a "house of cards" that was 20 years in the making and was simply unsustainable. That's why I maintain that all of this mess can be traced back to the banking deregulation of the 80s that allowed the mega-banks to emerge.

Keith

I never worked for either Wachovia or BoA. I manage a fixed income hedge fund.

Me saying that Wachovia went down in an afternoon was a bit tongue in cheeck. But it was just a question of solvency. They were strapped for cash and nobody would lend it to them. And when I said it happened in one afternoon it was because the day before other banks were willing to lend to them, but the next day they closed the tap.

Certainly this plan is flawed. But we need to avoid a meltdown at all costs. And if there is even a little probability of getting back to the 20s I say take the plunge.

We'll deal with the consequences later.

We'll reform the banking/financial industry, we'll make sure banks will never be able to hold everybody at ransom like this time around.

We'll make sure they are extracapitalized and we'll force them to keep a llow profile.

We'll tax them so much so that they will repay every single penny.

Sorry about that Matteo. Knowing you lived in Charlotte, I just made an assumption, and I'm now an a$$(ume) :)

Not at all ;). I would have done the same!

Matteo, I really appreciate the thoughtful dialog. We agree the plan is not perfect.

I think the stumbling point for me is that we are potentially giving more money to the people who got to this point through a series of poor decisions.

And who's to say that they will do any better with this debt off their books?

Nobody.

But today it seems GE is feeling the pain. The credit default swaps on GE have widened dramatically and the stock was down around 8% at 9:30.

You see what I am trying to say that random corporations will be hit next. Whover shows weakness in getting their financing done will face a shut down.

Now GE may have taken part to the sub-prime frenzy. But I would not classify them as the evil bankers responsible for this mess.

In another thread Competent One points to the 1st muni bonds going bust. Again this could have been avoided if we had restored confidence in the markets.

I hear your points about the banks being to leveraged and counties being too much in debt etc. I agree there is need for a reform, so that we can avoid a bunch of greedy people jeopardize the entire economy.

But to me right now the balance of risk is pending in favor of using $700bn to buy some bad assets vs seeing the economy implode.

This morning the ISM (an index that gives an idea of how well/bad the economy is going) printed a level not seen since 2001...

ISM showed only 6 of 18 industries growing vs 5 of 18 last.
ISM showed 12 of 18 industries CONTRACTING vs 7 of 18 last.


New orders fell to 38.8 from 48.3
Export orders fell to 52.0 vs 57.0
Production at 40.8 vs 52.1
Employment at 41.8 vs 49.7

GDP growth in 3Q-2008 is tracking closer to +0.4%, but FALLING to -1.35% in 4Q-2008.

On Friday we'll have the Non Farm payroll which will give us another clue on wether Wall Street is hitting Main Street. The forecast is for a LOSS of 105k jobs in the month of August.

The problem is that they are holding the rest of the economy at ransom.

Is this right? NO and we certainly need to do something when this is over.

But right now I am afraid this is the only solution.

I worked for GE's subprime branch. Believe me, they were the most conservative subprime lender around. We were always losing deals to places that took lower FICO's, didn't care about legal resident status or had lower rates. The deals we got were the ones the brokers really, really had to get done, since they knew we'd get them done as long as their folks fit into our guidelines.

Your analogy has been bothering me.

The situation is more like one where a person (the economy) has swallowed poison (the economy's bad debt).

The body's natural reaction is to vomit and get the poison out of the system as quickly as possible.

If you stop the patient from vomiting, you allow the poison to be absorbed into the patient's body, creating severe damage -- perhaps irreversible -- throughout the body.

It is best to let the markets and economy "vomit" when they need to -- it's ugly, messy and painful, but if you don't get the "poison" out as quickly as possible, you create long term damage that will take decades to recover from.

When I was a kid with the stomach flu, my dad was apparently bored with having a sick kid. He started telling dirty jokes until I blew chunks (I made sure he paid though, he didn't quite escape the trajectory of the spew). Felt fantastic afterward, went back to school the next day.

Errrr anyway, that being said, I'm still on the fence about a bailout or lack thereof. What is this purge you speak of - depression? What kind of joblessness?

It is difficult to predict exactly how things will happen, but the credit expansion (actually created by the Federal Reserve) has "bloated" the financial sector in our economy.

There are too many people, who get up every day and go to work at their "job" of "looking for new places to borrow millions of dollars." There are too many people "pushing paper" and "making deals" using credit rather than being involved in the actual production of goods and services. The economy has become "top heavy" with "financial services."

No bailout, and the resulting contraction in credit would mean that the most jobs will be lost in the financial sector -- which is why people employed in that sector have been most vocal in calling for the bailout. Billions of newly created dollars pumped into the financial sector will keep it afloat, but keeping "bankrupt" firms running adds little to the economy.

The new dollars of the bailout will decimate savings (through the inflation it will cause); those who have tried to be conservative, live within their means and save for the future will end up paying for the excesses of those who have been living beyond their means.

No bailout, will mean that those who have been consuming more than they have been producing -- making up the difference with credit -- will be faced with the reality that their way of living cannot be sustained indefinitely. Businesses that operated in the same way, over-extending themselves with credit, will fail, but the businesses that have been operating without a heavy reliance on credit, will actually benefit as the irresponsible competition leaves the marketplace.

The biggest difference that no bailout will create, is in the speed of the recovery. The bailout will keep in place the inefficient, incompetent and corrupt financial companies that are most responsible for this mess (think Treasury Secretary Paulson's old firm, Goldman Sachs); not allowing them to go under -- and actually using taxpayer dollars to prop them up -- will create stagnation, possibly for decades.

Allowing the weak firms to fail, even allowing "huge" portions of our current "financial services" sectors of our economy to fall with it; will create a severe recession; perhaps lasting 12-18 months, but with the "poison" (bad debt and loose credit) out of the system, the recovery can be strong and fast.

I'm not a financial analyst, but I think your view is too concentrated at the top. Credit affects all sectors of the economy. Your salary might be funded by a short term line of credit until payments for goods are received by your employer. If you don't get paid, it trickles down from there. For example; your mortgage payment? How does your company continue producing? How do cars and goods get sold without providing credit to consumers?

Sherwood

No, he's smack on, in very tangible sense. Everything is fundamentally denominated not in units of production or widgets, or whatever anymore - it's denominated in hundreds of facets of financial dances. The real work - the real making of something of value increasingly takes place somewhere else in the world.

An oil company used to employ thousands of people from well hands to secretaries. Now they're well on their way to becoming simply a lump of capital, a corporate finance department and a tax department - everything else is spun to someone else, who spins to someone else until most of that spinning lands somewhere else on the planet. When I was a financial guy in oil and gas we used to take risk on oil prices, gas prices, electricity prices, customers going broke, all as being a part of our business model. No more - oil companies don't even take risk with their own customers and counter-parties without swapping, hedging or levering such exposures. It's all financial helter-skelter.

Same kinda nonsense applies to every avenue of the corporate western world. You can run an oil company you can run an auto manufacturer - every business just boils down to financial games and gambits these days.

The US has backed itself into a corner where all it has that's worth anything is it's currency and it's consumers ability to finance endless consumption. You decide how sustainable either of those are.

We once danced that soviet-style communism was dead. Now Karl Marx must be chuckling in his grave. Capitalism is pretty sick too. Seems you can't get around that stubborn human greed problem no how....