Nouriel Roubini's Global EconoMonitor

How authorization to recapitalize banks via public capital injections (“partial nationalization”) was introduced – indirectly through the back door – into the TARP legislation

For a number of weeks professional economists and experts of banking crises have been arguing that the proper way to resolve a banking crisis is not to buy toxic assets but rather to recapitalize banks directly via injections of public capital (in the form of preferred shares) into distressed but solvent financial institutions. We criticized the TARP legislation just passed by Congress for not allowing for such a recapitalization of banks via public capital (an approach that has been instead now taken by the UK with its $87 bn bank rescue package and even Belgium/Netherlands in the case of the rescue of Fortis).

So how come that “to inject capital into financial institutions” was the first item that Hank Paulson listed as his priority in his press conference yesterday, thus suggesting that now the US, like the UK, will undertake a partial nationalization of its distressed banks?

The reality is that the TARP legislation passed by Congress (formally the Emergency Economic Stabilization Act) does not in any explicit way allow for such recapitalization of banks via injection of public capital. The US Treasury has initially resisted including explicitly such authority in the Act for several reasons: the banking industry that helped drafting the legislation was against it; there was ideological resistance to the idea of the government taking equity – however preferred – in financial institutions; there was concern that being explicit about public recap of banks would lead to banks’ resistance to participate in the toxic asset purchase program. That is why the Treasury formally resisted putting any explicit wording of public recapitalization of banks into the legislation.

So how come Treasury now says that its first priority is to inject public capital in banks? And where is Paulson getting such authority since there is nothing formally explicit in the Act to allow such recapitalization?

This is a fascinating story that is worth telling in full detail. Here are below those details…

The 180 degree turn in the Treasury position is driven by the disastrous market reaction to the passage of this legislation and to the realization that US banks are in such a deep trouble that, absent a direct partial public takeover of the banks this severe financial crisis will get much worse. After the Senate passed the Act on Wednesday there was no relief rally in the stock market: the next day Thursday the stock market tumbled by 5%; and then on Friday when the House finally reversed itself and passed the Act the Dow fell by about another 400 points between the time the legislation passed and the close of market.

Things got worse this week when on Monday and Tuesday and Wednesday stock prices tumbled even more in spite of new and aggressive actions by the Fed (interest payment on reserves and doubling of TAF on Monday; plan to purchase commercial paper on Tuesday; coordinated policy rates cuts on Wednesday). By yesterday Wednesday it was clear that we are close to a market crash that could – at this point – occur any time. When major policy actions for three days in a row fail to revive the stock market when such market is obviously oversold it is clear that there are no bottom buyers left and the risk of a 1987 like market crash is now at its highest level.

So by yesterday Wednesday it was clear that we were on the verge of a systemic financial meltdown and that that flawed TARP has been effectively Tarp-edoed by the market that realized that this approach to a systemic financial crisis was flawed. Thus Treasury and Paulson had to reverse themselves 180 degree and start supporting a direct partial takeover of US banks by the US government: you may not want to call is partial nationalization of the banks as the term is politically incorrect; but this is effectively what will happen as the US will directly inject capital – in the form of preferred shares (and possibly even common shares and sub debt) into financial institutions.

So where did Paulson get the authority to do such capital injection when there was no such authority in the wording of the legislation? Several of us had been explicitly and feverishly talking to Congress and the Fed and other senior officials (last week before the passage of the legislation) to include such explicit wording in the legislation; such campaign included the October 1st column by George Soros in the FT where he strongly argued – as many of us had recommended – to design legislation that explicitly allowed for public capital injection in banks.

At first, Congressional aides we contacted were confused on whether the wording in the legislation did allow such public recapitalization was permitted or not. They pointed out to us that several sections of the legislation could be interpreted as allowing such public capital injection. Specifically such senior Congressional aides argued that several sections of the bill could be used to argue that the purchased “assets” as used in these provision would include not only securities accounted for as assets on the balance sheet of the financial institution but would also include common and preferred share, warrants on common and preferred shares, as well as secured and unsecured and convertible debt in the financial institution itself, which would be accounted for as assets on the balance sheet of the US Treasury. Specifically, the bill generally permitted TARP to purchase only distressed assets but opened the door wider in Sec 3(9)(B) where it included “any other financial instrument“. Also, Section 111, subsection C of the bill (that stated “the Secretary shall pursue additional measures to ensure that prices paid for assets are reasonable and reflect the underlying value of the asset”) could also be used to argue that the purchased “assets” as used in this provision would include not only securities accounted for as assets on the balance sheet of the financial institution but would also include common and preferred share, warrants on common and preferred shares, as well as secured and unsecured and convertible debt in the financial institution itself, which would be accounted for as assets on the balance sheet of the US Treasury.

But we pointed out that this interpretation of “assets” as including preferred shares, left to itself, was a real stretch of the meaning of the legislation as preferred shares and common shares and sub debt are liabilities – rather than assets – of the bank. Thus, it was important to clarify that “any other financial instrument” was not limited to assets but also included institution’s liabilities such as stock, preferred stock, subordinated debt, senior debt.

In other terms it was necessary to explicitly clarify that the definition of “assets” or “any other financial instrument” in the legislation did allow for such public injection of capital so as to ensure that the regulations following the legislation would allow for such interpretation and actual practice. Since it was too late – by Wednesday last week – to explicitly modify the legislation to allow for explicit wording on this matter and since Treasury was resisting such late explicit changes (that would have jolted the banking industry) the tool that was used (in full agreement with the House and Senate leadership) to allow for such interpretation was to have Representative Jim Moran use the October 3rd House floor debate right before the final vote to put on the legislative record such interpretation. See the following important exchange between Jim Moran and Barney Frank that is now on the legislative record of the House:

Mr. MORAN of Virginia. Thank you, Madam Speaker. I won’t take that much time. I do want to thank the chairman for his masterful leadership on this bill, and I do want to clarify that the intent of this legislation is to authorize the Treasury Department to strengthen credit markets by infusing capital into weak institutions in two ways: By buying their stock, debt, or other capital instruments; and, two, by purchasing bad assets from the institutions, in coordination with existing regulatory agencies and their responsibilities under this legislation, as well as under already existing authorization for prompt, corrective action and leastcost resolution.

Mr. FRANK of Massachusetts. Will the gentleman yield?

Mr. MORAN of Virginia. I’d be happy to yield.

Mr. FRANK of Massachusetts. I can affirm that. As the gentleman knows, the Treasury Department is in agreement with this, and we should be clear, this is one of the things that this House and the Senate added to the bill, the authority to buy equity. It is not simply buying up the assets, it is to buy equity, and to buy equity in a way that the Federal Government will able to benefit if there is an appreciation.

So Moran asks Frank to clarify that the explicit intent of the legislation is to allow the purchase of bank liabilities (stock, debt, or other capital instruments) not just assets; and Frank replies firmly that this is the case and that Treasury agrees with such interpretation. Done!

So, all is well that ends well. A totally flawed and ineffective legislation that did not explicitly allow to do the right thing – recapitalize banks with public capital injections – and was rather aimed to do the wrong thing (wasting $700 bn of taxpayers’ money to buy only toxic assets at an inflated price) was rescued at the last moment right before the House vote via an interpretation of the wording of the legislation in the record of the House that allowed such recapitalization. It is a sorry reflection of the state of the US democracy that hundreds of Senators and Congressfolks did vote for the biggest bailout ever in US history ($700 bn) without even knowing exactly what they were voting for. They effectively and rightly allowed for a partial nationalization of the US financial system (the only solution that will prevent a systemic financial meltdown) without even exactly knowing that they were voting for this. So a huge plan that was sold as spending $700 bn to buy toxic waste of banks – and where the public discussion was all and only about this purchase of toxic assets – was finally and luckily rectified (with the hard and explicit efforts of many of us) to allow for a partial government takeover of such financial institutions.

Paulson should be lucky that his early opposition to such public capital injection in the financial system did not prevent Congress – via the back door – to do what was right. And he is now lucky that the first thing he could mention and did mention in his press conference yesterday was a plan to “inject capital into financial institutions” rather than the half-baked idea of spending most of the $700 bn to buy toxic assets.

Hat tip to Justin Fox who was the first journalist that picked up the importance of what Paulson said yesterday.

Adam Davidson of NPR tells me that he was the first one to scoop this “stock injection plan” story last Friday (even before Justin Fox) having been tipped by someone that had been tipped by me.

273 Responses to “How authorization to recapitalize banks via public capital injections (“partial nationalization”) was introduced – indirectly through the back door – into the TARP legislation”

GuestOctober 9th, 2008 at 1:29 am

LOLZ,are we still on planet earth??have everybody gone cuckoo??front page BBC news warns of further bank failuresThe US treasury secretary warns some banks will still fail despite a $700bn rescue package, as Asian markets “enjoy” calmer trading.

GuestOctober 9th, 2008 at 1:32 am

we are officially in twilight zone:x debt clock runs out of digitsexcerpt;Until last month, the clock had enough digits to measure US debt levelsThe US government’s debts have ballooned so badly the National Debt Clock in New York has run out of digits to record the spiralling figure.The digital counter marks the national debt level, but when that passed the $10 trillion point last month, the sign could not display the full amount.

GuestOctober 9th, 2008 at 1:35 am

hahahahahaThe clock’s owners say two more zeros will be added, allowing the clock to record a quadrillion dollars of debt.imagine Dr Evil reaction upon hearing “quadrillion”

AnonymousOctober 9th, 2008 at 1:50 am

“So, all is well that ends well.”But we are still a long way from the end.Don’t forget Congress annointed Paulson with 700B (to start with) to be King of the Treasury and, as Prof. Roubini readily demonstrates, the power to do damned near anything. No oversight, no review, no recourse, carte blanche.That may very well be “The End”.

shrug2October 9th, 2008 at 1:52 am

So, the fate of nations, and this country’s citizens have come to rest on a last minute “hail Mary’ speech in Congress that allows certain banks to be nationalized. I can’t begin to express what my level of confidence is in the markets, banks, government, and our currency.

GuestOctober 9th, 2008 at 2:24 am

Future’s are up 130 points on IBM’s revenue miss?So let me get this straight. 700 billion for the bailout, 5 trillion for Fannie and Freddie, God knows how much for AIG, and the market still tanked…Now, IBM “has saved the day” and will will rally to the moon. These idiots deserve to lose money in this market.Unbelievable.

GuestOctober 9th, 2008 at 3:08 am

In a sign of the times, the National Debt Clock in New York City has run out of digits to record the growing figure.ADVERTISEMENTAs a short-term fix, the digital dollar sign on the billboard-style clock near Times Square has been switched to a figure — the “1” in $10 trillion. It’s marking the federal government’s current debt at about $10.2 trillion.The Durst Organization says it plans to update the sign next year by adding two digits. That will make it capable of tracking debt up to a quadrillion dollars.The late Manhattan real estate developer Seymour Durst put the sign up in 1989 to call attention to what was then a $2.7 trillion debt.

DanoOctober 9th, 2008 at 3:34 am

The end result of all this is — BUY!Back up the truck and BUY!Yes, we still get the mother of all recessions, but the end point isthat there are some AMAZING bargains to be had now!

PeterJBOctober 9th, 2008 at 3:35 am

Question: What is the Federal Reserve and its Cardinals (Central Bankers) in each Nation trying to do?A: They are trying to keep the old static system alive when it is already dead. That is, they want to retain their status quo.The Three Systems (in Physics): Note that a system consists of organizations based on a singular structure – which is usually complex. The structure provides the dynamics of ideation along context.A. Static OrganizationsFixed practices, fixed size. Like static equations, these organizations have no variables– timedoesn’t change them significantly. They persist until some new organization occupies their niche.B. Dynamic OrganizationsFixed practices, variable size. Like dynamic equations, these organizations vary in size over time, even though their underlying practices don’t change much. They go through a single life cycle, each growing rapidly as it occupies its niche, then declining as its competitors implement betterpractices that steal away its clients.C. Adaptive OrganizationsVariable practices, variable size. Like complex adaptive systems, these organizations varytheir practices, seeking the constant improvement that launches life cycle after life cycle,creating new products, services, and processes that hold on to clients generation after generation.[From THREAD – A Power Point Presentation on life in Physics: The Realities: by PJB]Now: How it works:Strategy Predicatively flows into Change as a Dynamic element and charged filament.What does this mean?It means that it is impossible to bring something back to life that is already dead and that in life, the dead is already being replaced through strategies that are Universal Principles at ALL dimensional Scales. That is what life means and is, for God sakes!I agree with MISH – Pope Benanke is pushing on a wet noodle (string).Ho hum

GuestOctober 9th, 2008 at 4:39 am

By partially as opposed to completely re-capitalizing the banks, the banks losses will be effectively nationalized and their profits privatized. Sound familiar? Bartender, one more round of GSEs and make it on the house.

GuestOctober 9th, 2008 at 4:51 am

I wish this article was published at 3:45pm Tuesday– though I guess if one listened carefully to Paulson the answer was given. I agree buy buy buy – at least for today.

GuestOctober 9th, 2008 at 5:14 am friend of mine sent this to me, the derivatives part is very interesting.Can I please get opinions on what it means. Like the real value and when and how they are due ?It would seem to me that collapse is inevitable to the holder when the contract is due, if that’s the right term.Very confused, someone please put this in very understandable language

AnonymousOctober 9th, 2008 at 5:31 am

This seems to reveal the incompetence / nefarious intentions of Paulson. Shouldn’t he be fired immediately even if the remainder of his tenure is only three months

GuestOctober 9th, 2008 at 5:35 am

Dan Niles is CEO of Neuberger Berman – and over the years I have found him to be exceptionally bright and both a straight talker and reliable in his predictions – he was on CNBC yesterday – it’s worth watching

GuestOctober 9th, 2008 at 5:55 am

I’m not a lawyer, but I have to ask if a statement of this type in a floor debate can be taken as the definitive interpretation of the law.Heaven knows, there are people of all political stripes who vehemently oppose this sort of a “rescue of Wall Street”, and I have to wonder if they have reasonable legal grounds for challenging the recapitalization.I am not against the outcome of the legislation, far from it, but I would have sympathy for anyone who wanted to test the legality of the recap in court.

GuestOctober 9th, 2008 at 5:59 am

Overnight Libor 5.37 to 5.09Three month Libor 4.52 to 4.75Roubini appears to be less bearish (even bullish) as far as systemic risk is concerned. He is also way ahead of the rest of the market. If current market conditions were limited to systemic risk then perhaps the time to get bullish is near. The problem is that as systemic risk diminishes the reality of a severe economic downturn looms.

HOctober 9th, 2008 at 6:41 am

The government will continue to search for the appropriate avenues to solve this crisis and soon steps to avert complete catastrophe will be made. It is just a matter if it is done with enough rapidity to unfreeze the markets before complete meltdown. Yesterday’s action by the Treasury to re-auction treasury bonds that have been failing in repo was another step that will help unlock balance sheet and free up capital. Though these bonds do not settle until October 15th, it is a step in the right direction as well.

GuestOctober 9th, 2008 at 7:04 am

Agreed but at what cost – hyperinflation? deflation? Recession? Severe Recession? Last time I looked the laws of cause and effect were still in place. There is no free ride. Rembember the S&L crisis and Resolution Trust – recession followed. Everyone loves capitalism until it really hurts, so now we embrace socialism and government ownership of the the finanical world. Solvency will be solved but at what cost?

Free TibetOctober 9th, 2008 at 7:16 am

So, the meaning is that Congress can write anything they want into law, without reading it, and any congressman can take the floor to give his opinion as to the interpretation of that writing, without reading it, and that becomes law.We are not well served by our congress. Remember that in a couple of weeks.Stratonovich, Libor is frozen. There is so little activity there that the rate hardly matters.

GuestOctober 9th, 2008 at 7:28 am

What may be needed is some sort of instrument which is intermediate between a bond and shares, such as a bond where the payments are tied to the profits of the firm…something that would be considered a bond for the purposes of TARP but equity for accounting purposes.

GuestOctober 9th, 2008 at 7:34 am

As for the Q&A in the House — that took place after the Senate vote — and does not dispose of the issue of an equity purchase. There was no Conference Committee. There was no Conference Report. The House adopted the Senate version of the bill. The Q&A would be significant if it took place in the Senate. The present shareholders of the banks would be the ones hiring lawyers to oppose Paulson.

lasfinanzasOctober 9th, 2008 at 7:38 am

OK, Let´s face it:It was introduced through the back door (shame on them) but,this is exactly what MOST BE DONE: to capitalize directly via injection of capital into financial institution! So, what is the buzz ?

RichardOctober 9th, 2008 at 8:03 am

I’ve suspected for well over a week that when the dust settled, Treasury would execute a modified-Swedish plan. TARP/EESA was clearly intended to provide a general purpose and highly flexible took kit.True, that is not how Paulson described his conception in his initial testimony, nor was it reflected in the original 3-page version of the legislation that Treasury drafted. But so what? No one in the U.S. has experience with this kind of situation, and the intellectual grip Treasury and the rest of us have on it evolved rapidly into last week’s showdown in Congress.By last week, it really was apparent that the problem was insolvency, government had to play a direct role in recapitalizing the banks, and taxpayers needed to take temporary equity shares. Might occasional Treasury purchases of toxic assets make sense? Maybe. If so, it’s in the tool kit.(The main thing that needs to happen with these assets is getting them marked on the balance sheets at plausible fair values, so investors benefit from transparency and Treasury may decide which banks to save, which to consolidate, and which to close.)

DanOctober 9th, 2008 at 8:14 am

Just the kind of sentiment that got us into this mess. Growth!!! Wealth!!! Money!!!!!! This systemic meltdown—which is far from over—is a repudiation of the Free Market system…which, as we have seen, is only free for the very rich, but costs the rest of us an arm and a leg

PiersOctober 9th, 2008 at 8:17 am

OMG, you left out organizations operating in stochastic environments! Please, PJB! Your stylishly diffident but well-aimed darts are severely compromised by this foam-rubber terminology which can’t support the weight you’re loading on it (I recommend “Cosmopolis” and “Return to Reason” by the eminent philosopher of science, Stephen Toulmin, for the appropriate remedy).But I do enjoy your usually-Voltairean comments nevertheless, but remember: “Common sense is not so common” and (perhaps more to the point) “All styles are good except the tiresome kind.”Trying to get a rise out of you but remain your fellow-blogger, I remain affectionately yourPiers

HostOctober 9th, 2008 at 8:28 am

Heh heh great. I smell balance sheet obfuscation.The TARP legislation also included authority to suspend mark to market rules — no seat of the pants interpretation needed there. The big 2 or 3 trot out a quarter of modest “profit” then we declare victory as the last helicopter takes off from the embassy roof.What are B of A, Citi and Wells going to do with more capital? Buy more parking lots in Mumbai? Start selling commemoratives? Hey Ma! Uncle Clarence found the missing envelope!The Building and Loan is saved and the Depression’s over!

GuestOctober 9th, 2008 at 8:28 am

Thank you Dr. Roubini. I am not an economist but I can read and what you said made sense to me. I faxed and callled and faxed and called asking them to please, please follow your sound advice. Hope you are the next Treasury Secretary. That will restore some faith in our government.

AnonymousOctober 9th, 2008 at 8:32 am

“So, all is well that ends well. “So in a manner of a few days, we showed that this bill could be used to buy items that people didn’t vote for.How soon until an “asset” means building a bridge in Alaska?Lets not pass any judgement on their words, lets comment once the funds flow.

GuestOctober 9th, 2008 at 8:41 am

I totally agree. They had to be dragged kicking and screaming to this point. I’m not sure there’s anything more to this than lip-service.

GuestOctober 9th, 2008 at 8:41 am

Posted on closed thread: reposted@ Anonymous: As long as they are financing all this liquidity injection via issuing more debt, inflation should not be a concern…” 8 – 22:04:13Debt = Inflation.The American dollar has no intrinsic value. It is…fiat money with no limit to the quantity that can be produced. Its primary value lies in the willingness of people to accept it… [Faith is waning.]It is true that our money is created out of nothing. But it is more accurate to say that it is based upon debt…The entire money supply would vanish into bank vaults and computer chips if all debts were repaid. [Or, say, if corruption freezes confidence.]… [T]herefore, our leaders cannot allow a serious reduction in either the national or consumer debt…[T]he Fed converts debt into money and charges interest [usury]….The end product is artificial expansion of the money supply…the root cause of inflation. G. Edward GriffinAnd inflation creates the causes of any existing depression.“For the real causes most of the time, are maladjustments within the wage-cost-price structure: maladjustments between wages and prices, between prices of raw materials and prices of finished goods, or between one price and another or one wage and another.“At some point these maladjustments have removed the incentive to produce, or have made it actually impossible for production to continue; and THROUGH THE ORGANIC INTERDEPENDENCE OF OUR EXCHANGE ECONOMY, depression spreads.” Henry HazlittAdd in massive corruption, $300tn in “derivatives,” displaced workers with no manufacturing base, a constant pool of low-pay border-crossers for corporate hire, Paulson and Bernanke – and you get, IMO, what you’ve got. A depressing mess.

WendellOctober 9th, 2008 at 8:47 am

The problem here is that this is “socialism” (rtm). The solution, in terms of selling this, the proven better solution, is to point out, at the start, that this just follows what Buffet did with Goldman and GE. When it is ‘sold’ that way, it’s amazing how the acceptance goes up.Of course, this solution also looks a lot like what happened with Penn Central and then eventually the Conrail sale.

GuestOctober 9th, 2008 at 8:50 am

Does the Q&A discussion refer to section 113(d)(1)(A) of the ACT? “… the right to the Secretary to receive nonvoting commonstock or preferred stock…” etc.????

GuestOctober 9th, 2008 at 8:58 am

Once again, Wall Street bypasses Main Street:BlackRock, Pimco Submit Bids for Treasury Bailout (Update1)Oct. 9 (Bloomberg) — BlackRock Inc. and Pacific Investment Management Co. submitted proposals to manage troubled mortgage- backed securities in the biggest portion of the Treasury’s $700 billion financial-rescue program, people familiar with the matter said.State Street Corp. and Bank of New York Mellon Corp. bid to handle record-keeping and custody services for the Treasury, said the people, who asked not to be identified because the process is private. The deadline for proposals was yesterday at 5 p.m. New York time.President George W. Bush last week signed into law a measure authorizing the government to buy mortgages and other distressed assets from financial institutions buried by record home foreclosures. The goal is to remove illiquid assets from the books of banks and securities firms, making it easier for them to raise capital and resume lending.Companies must oversee at least $100 billion in U.S. dollar- denominated fixed-income assets for clients to compete for the contracts to buy and sell mortgage-backed securities under the plan, according to criteria released Oct. 6 by the department. Bidders to provide custody services must oversee at least $500 billion in investor assets.

TSchmidtOctober 9th, 2008 at 9:05 am

Apparently my congressman (Higgins of NY) knew what he was voting for; here’s his response to an email I sent him:”This bill was not a good bill but a necessary one, and as frustrating as this has been to the American people, the last two weeks of negotiations produced changes that make this bill better for taxpayers than the “blank-check” initially proposed. We argued that if the government is going to spend billions to get us out of this mess, we ought to have an investor’s chance of getting our money back when times improve. We fought for and won the right to claim an equity stake in the institutions we help, so that when they recover we recoup our investment. We also demanded limits on compensation for the executives of these institutions, and close oversight of the entire program. “

CaponeOctober 9th, 2008 at 9:07 am

Congratulations on all of your efforts related to this mess Professor ! Please remember to push with your added clout in the financial world for transparency in every nook and cranny of the financial system. I thought a while back they were coming up with a behind the scenes private equity market (Goldman?). Transparency is required and should be demanded everywhere !I suppose the early rally could be attributed to IBM news today. If it were only due to this consideration for the government to buy banks, would the headlines be “Equity Markets Rally on Capitalism Transforming to Statism (its direct opposite)”Ha Ha Ha

GuestOctober 9th, 2008 at 9:13 am

There’s just one major problem. Several problems really. First, your congressman has actually NO IDEA what he has authorized Paulson to do. Is the Paulson plan buying bad assets? Or is it re-capitalizing banks? Or both? Depending on the particular variation, the US taxpayer is potentially on the hook for trillions, not hundreds of billions of dollars. And naturally, your congressman (and mine) has NO IDEA how this money will ever be paid back. The US taxpayers certainly can’t afford to do it. We’re all going broke now.PeteCA

chernevikOctober 9th, 2008 at 9:13 am

I don’t think two representatives can change the meaning of a word in a colloguy — precisely because that would leave hundreds of legislators voting for something they can’t possibly understand.TARP probably has enough flexibility for structures that achieve the end without reinventing words. For example, I don’t think says anything about the size of warrants issued, and I think Treasury can “buy” these warrants. So their price and size can become the economic substance of the transaction. And even if those must be on common equity, the warrant itself might carry a repurchase option (if we want to offer the bank a cap on our return) and a provision forbidding common dividends while the warrant was outstanding (to achieve preferred’s seniority to equity).It would be easier to amend the thing, but God only knows what Congress would staple onto it.As an aside, did anyone notice that Paulson yesterday said “Getting it right is as important as getting it done quickly”? Maybe he should have thought of that three weeks ago.

GuestOctober 9th, 2008 at 9:19 am

OK, so the Fed decided to issue commercial paper. First time since the Great Depression. And now major institutions are dropping their holdings of US Treasuries, selling them, and buying US-backed commercial paper instead. Makes sense. If you can get a better yield, and the paper is backed by the Gov’t, then why not?But the problem is … isn’t this a great example of the law of unintended consequences? Did the Fed want to crash treasuries and bonds when they took this step? Or am I missing something here … in terms of how much buying can be done with the new commercial paper outlet from the Fed?PeteCA

GuestOctober 9th, 2008 at 9:21 am

According to Santelli – the best forward looking ‘bell weather’ for the credit markets will be rates on the 2 year and 10 year notes. Directionally as both the two year approaches/exceeds 2% and the ten year approaches/exceeds 4%, that combination will signal before Libor or TED that credit is starting to flow.Bloomberg Bonds

GuestOctober 9th, 2008 at 9:27 am

The crux of the problem right now is that policy responses that act with a lag cannot possibly contend with a ferocious de-leveraging process that is taking place in real time.

Dr. MatrixOctober 9th, 2008 at 9:35 am

So far banks have been hoarding liquidity injections through cash auctions and through the TAF. By providing a detour around the banking system with the direct purchase of commercial paper, the Fed is telegraphing the intention to inflate the US dollar, with the hope of somehow find tuning the rate of inflation below the point of hyperinflation.

GuestOctober 9th, 2008 at 9:36 am

I would STRONGLY temper this with Adorno, Habermas …but it does provide a general overview of these folks are idiots .. Marx’s the “negation of the negation” is beyond stupid – better to read Hume and understand the “searchlight analogy”Make them stand down – it is a stupid pet trick

MedicOctober 9th, 2008 at 9:37 am

I believe they may have just taken a page from the Bush / Cheney / Addington book. The Bush folks call it a “signing statement”.

Dennis GOctober 9th, 2008 at 9:43 am

So where does Congress and Paulson go from here? Can the Senate bill be amended to incorporate the revised wording. Sounds like this has the potential of a legal nightmare.

GuestOctober 9th, 2008 at 9:48 am

Danger: The wipeout is still aheadWe haven’t seen the moment of capitulation that ends a market bust, so the fear and pain will get worse before they get better. Also: Gold’s next run-up. By Bill FleckensteinOctober 8, 2008 — During the seven years that I have been writing this column, I’ve endeavored to keep the staleness factor at bay. (As readers may know, the Contrarian Chronicles is a compilation of the daily Market Rap carried on my Web site, and it is filed days in advance of publication.)But due to the recent extraordinary volatility in the markets, and the near-daily momentous action on the part of various government agencies, I feel compelled to break with tradition and share my Oct. 8 daily column with MSN readers here. Hopefully, this real-time installment will prove useful. The Contrarian will be back to its regular format on Oct. 20.Another drop, but not the dropThe last 24 hours have been so momentous that it’s difficult to do justice to all the developments. I’d like to tackle the task by covering two topics.· First: market action, which is usually noise, not news. However, I believe that today (as well as the last few days), the trading activity in various markets has been a real source of information.· Second: gold versus paper…

GuestOctober 9th, 2008 at 9:56 am

the 1st dollar I earned (babysitting) = candy – lots and lots of candy, and it made me sick.Read Benjamin – even though they always shoot for, denigrate , screw up , fantasize and muddy “epiphenomena” in the end and Goethe himself completly missed it there are some interesting insights.Make them stand down.

MarkarOctober 9th, 2008 at 9:56 am

When Congress voted for this pig all they heard was “401ks disappearing” and “Martial Law” They wouldn’t know the difference between buying assets and recapitalization if it hit them over the head. Now that the latter is part of Paulsen’s strategy, we can be assured of them coming back even sooner for the second $700 bill. More helicopters please.

GuestOctober 9th, 2008 at 10:02 am

Let’s face it. Whatever the taxpayers “buy,” they buy nothing for themselves. They buy more big government ~ 80% graft and 20% bigger giveaways. That’s why taxpayers are called “payers” and not “receivers”. Taxreceivers are a different group.

PreparedOctober 9th, 2008 at 10:06 am

It seems that the time has come where our leaders have decided to preserve the appearance of a nation at the price of our freedom. The fear of failure has always, and will always, lead to the violation of man’s intrinsic rights. We are trading a bowl of porridge for a mouthful of ashes.Blech.

villagerOctober 9th, 2008 at 10:10 am

No, I think he is saying that ‘falling over the cliff’ may have been avoided but there still remains a descent.

MarkarOctober 9th, 2008 at 10:11 am

The professor would certain make an excellent Treasury Sec. Unfortunately, looking at the top financial advisers for these two candidates,it appears to portend more of the same. Bob Rubin on the Obama side, and Phil Gramm on the McCain side–the two primary architects of this mess.

GuestOctober 9th, 2008 at 10:13 am

There no longer is a Senate bill. There is legislation signed by the President. To incorporate the revised wording you need new legislation. Treasury, alternatively, could write regulations that incorporate the revised wording. My lawyers then will challenge the regulations. We have better lawyers than the government and almost as much money as God. My friends and I do not want to give up one iota of our interest in our financial institutions. We got what we wanted. We wanted to stick the taxpayers with our junk. Now if you will excuse me I have another party to plan — on your tab.

2centsOctober 9th, 2008 at 10:15 am

With so much riding on the interpretation of TARP coupled with the fact that it ‘originated’ in the Senate and the now ‘primary’ feature is a concept vetted in a verbal exchange as part of the House record, I think one of two things need to be done.First, vote the House version (verbal record acknowledged) back through the Senate. Second, get an emergency ruling via the Supreme Court.The whole situation may have been orchestrated this way for political reasons. It is a way for politicians to say one thing and do another, or alternately an escape clause in case it failed miserably.Rest assured, no matter which actions are exercised under TARP ther will be actors who are harmed and will come out with their guns ablaze’n all the way to the Supreme Court anyway.We are in to precarious a situation to let these doubts linger.

GuestOctober 9th, 2008 at 10:26 am

Not a technician but we have busted through yesterday’s early lows of 9196 in a convincing manner. I understand from a real technican on CNBC this morning that the next major support level on the Dow is 8500.

2centsOctober 9th, 2008 at 10:29 am

With all due respect, the notion of backing or funding Commercial Paper (CP) is akin to insuring that the chamber is loaded in a game of Russian roulette.The idea is fine if the Central Bank is dealing with a surplus account. However, if the CB needs to raise funds by issuing new bonds, it will soon find out that even the dyed in the wool non-risk takers will jump at the better CP yield vs. a direct note. How in tarnation will the CB issue new bonds to fund the CP?BANG …. Game over!

GuestOctober 9th, 2008 at 10:29 am

Let me say again. These LOWS are really significant. Not only has the Dow broken the bottom of its current trading channel, but these lows are signalling major long-term weakness in the US economy. This is the kind of weakness that takes years to repair.PeteCA

GuestOctober 9th, 2008 at 10:32 am

Poor Ben. He thinks if he can pump more tax-backed inflation down a clogged credit conduit he can instill confidence among thieves without hurting the dollar, and we’ll all be that much richer. The Wizard of Fed thinks people collectively can buy twice as much goods as before without producing twice as much goods.What a market strategyAs Hazlitt said in 1978, “It is impossible to bring inflation to a smooth and gentle stop, and so subvert a subsequent depression!”

GuestOctober 9th, 2008 at 10:33 am

Exactly my point. I dunno if this step means “game over”. But it sure doesn’t look good. Seems like the Fed tried to fix one problem, only to discover they’d opened a Pandora’s box of other problems instead. It’s kinda’ like trying to corner a pool of liquid mercury with the back of a spoon. Every time you press down on the mercury, it just squishes into a bunch of globs that flow in another direction. You never get it under control.PeteCA

AnonymousOctober 9th, 2008 at 10:34 am

Anderson Cooper 360 is doing “10 Most Wanted: Culprits of the Collapse”. Rubin and Gramm should be in the top 5. Plus Clinton,Bush and Greenspan.

GuessOctober 9th, 2008 at 10:35 am

Shorts back in the circus and Morgan Stanley under attack down 15% — Goldman under $110 — (Warren is under water on his options) – So here is the thought, will the Treasury be going in like Buffett and extracting a pound of flesh as they inject captial.

AnonymousOctober 9th, 2008 at 10:37 am

Someone on cnbc last night declared Gold would reach $2000 in next six months. Anyone thinks this is possible?

GuestOctober 9th, 2008 at 10:40 am

And, the Supreme Court is the supreme flaw in “representative” government, i.e., nine political appointments who often hear no evil, see no evil, but speak evil.

2centsOctober 9th, 2008 at 10:45 am

Dang … I think Mercury behaves just like a group of politicians! Did you ever notice how everytime it moves it picks up more crap and soon you have a dirty ole politician (er. ball of Mercury)!

Stratonovich calculusOctober 9th, 2008 at 10:48 am

In this historic crisis, it’s useful to gauge valuation histories. In the not-read-enough parts of Irrational Exuberance, Shiller provide just this. Here’s some plots from Wiki’s P/E article:Real S&P P/E, 1871-2006P/E as a predictor of 20-year returnsReal S&P price, earnings, dividendsA couple observations:1. Based on Shiller’s data, the S&P’s real P/E was around 25 in 2006. Based on this plot of historic data, that suggests zero real returns out until 2026, if the next twenty years are anything like the previous 136.2. If real P/E’s drop to around 10 like they were throughout the 70s and into the early 80s recession, that means that the S&P would drop to 10/25*1300 = 520 (!), and that’s assuming that real earnings hold at 2006 levels, a big if in a nasty recession. Oh, and that would be a DJIA of about 10/25*11500 = 4600.Not a prediction, but just some simple arithmetic from Shiller’s historical data. Does anyone know what these numbers were at the 2007 market peak? Any Dow 7000 bottom callers who’d like to take a whack at this?Shiller’s quotes from Irrational Exuberance (2005):

The stock market has not come down to historical levels: the price-earnings ratio as I define it in this book is still, at this writing [2005], in the mid-20s, far higher than the historical average. … People still place too much confidence in the markets and have too strong a belief that paying attention to the gyrations in their investments will someday make them rich, and so they do not make conservative preparations for possible bad outcomes.Long-term investors—investors who commit their money to an investment for ten full years—did do well when prices were low relative to earnings at the beginning of the ten years. Long-term investors would be well advised, individually, to lower their exposure to the stock market when it is high, as it has been recently, and get into the market when it is low.

AfAOctober 9th, 2008 at 10:54 am

Well, as I said yesterday, it is the new version of implicit-guarantee GSE’s (short for General administrative and Selling Expenses) bonds. As (unsafe) as Treasuries but more rewarding. I bet Gross Bill (to the taxpayers) did not see this one.Fact number 1: both equity indexes and long treasuries are falling.Q: Where is the money going then?Fact number 2: long term credit spreads are coming relatively down.Q: Guess why?

GuestOctober 9th, 2008 at 10:55 am

Whoever thinks that Mr. Paulson is stupid must be a complete moron. Questioning the goals behind his actions is something quite different though.

GuestOctober 9th, 2008 at 10:57 am

But WTF are the *Regulators*? These are the perps that need to be hauled into the dock and questioned about what they knew and why they chose to ignore enforcing the regulations!Someone please call in to Anderson Cooper’s show and ask THAT question!

GuestOctober 9th, 2008 at 11:01 am

PeterJB goes out of the ordinary to drive the point. PeterJB is avant-garde: the front runner of new directions in economic and political thought. He gives the blog flavor.It’s a duller read withut PeterJB!

2centsOctober 9th, 2008 at 11:05 am

Why are Blackrock and Pimco submitting bids to manage TARP assets? Didn’t Hank imply that it was more important to directly inject capital at this point? Does Hank know what he said yesterday? Does Hank know what He is going to do next?Who’s on First.What’s on Second.So what will Tomorrow bring a sinker, a rising fast ball, or maybe a knuckle ball?At least Abbott & Costello’s schtick was funny.Abbott & Costello

AfAOctober 9th, 2008 at 11:07 am

Looks like the avenue of short seller was quite beneficial, especially for Nasdaq. Overall volatility is significantly lower today (well compared to the last few weeks anyway) so far.

GuestOctober 9th, 2008 at 11:08 am

“Negation of the negation” is Hegel, not Marx. Marx wasn’t interested in dissecting the dialectic. He left that to the philosophical idealists and the Philistines.

2centsOctober 9th, 2008 at 11:15 am

That rope (string, noodle, etc.) that the FED has been pushing on has now taken the rough shape of a noose! There’s not much slack and the noose is about to tighten real quick! All it takes now is for a significant Treasury buyer to open the trap door!

GuestOctober 9th, 2008 at 11:18 am

Absolutely. As economist Dr. Michael Hudson said, the Paulson-Bernanke bank-bailout creates a new plutocracy of billionaires. It was weapons-of-mass-destruction-in-Iraq all over again to panic the people and to grab power through emergency legislation — a type of coup usually achieved only at gunpoint and heavy bloodshed.As Congressman Ron Paul said, “It is another PATRIOT ACT.” It takes away property and property rights.As H.L. Mencken said, “The whole aim of practical politics is to keep the populace alarmed and hence clamorous to be led to safety by menacing it with an endless series of hobgoblins, all of them imaginary.”Paulson is a master of psychological warfare and deceit.

MichaelOctober 9th, 2008 at 11:20 am

I’d just like to point out that this is not a socialist solution. The Bail Out Plan is a Fascist solution to this credit crisis. I realize that fascism is a dirtier word than socialism for the rich but this is in fact what fascism is all about. Mussolini explained it as Corporatism and what else demonstrates this better than a fraudulent bail out to a predatory finance.Also, can someone please explain to me how this will not cause major inflation if not a hyper inflation. The guy at shadow stats has shown that inflation is currently at 13% and unemployment is already at 14%. The entire US economic system has been hollowed out. How in the world can we produce our way out of this mess when the US really only produces agricultural products, debt, and weapons.How can this deflation lead to anywhere else than hyper stagflation?Dr. Roubini continues to compare this crisis to Japan’s crisis in the 90s but Japan still produced finished goods and had a working economy outside of the financial meltdown. The US is the opposite. The service industry is even more sensitive to a credit crunch and economic downturn.Am I totally off base here? I’ve yet to read anyone other than shadowstats discuss my ideas. He agrees with me about a hyper stagflation. I wish I knew how to do the math to work out my own thoughts. I’m just a history and international affairs guy.

GuestOctober 9th, 2008 at 11:22 am

BoA, Citi and especially Wells, will use the new capital to offset the losses they have been hiding but will eventually have to come clean about.

GuestOctober 9th, 2008 at 11:25 am

Who was the number one cheerleading doomsayer for the past 12 months? Who has made more money from these bail-outs than anyone else? Here’s a hint – they made $7bn the Monday after with Fannie/Freddie was announced. Here’s another hint – when the announcement that everyone ignored yesterday that an additional $27bn was being injected into AIG to pay off redemptions – who were the beneficiaries.Much like Buffett is starting to be revealed as the killer that he is, so too is everyones pleasant older brother Bill Gross and everyones favorite uncles Larry Fink and Bob Doll. These guys don’t go on CNBC 7 times a month without an agenda.And just wait for the jubilation when their names are announced –

Karl DenningerOctober 9th, 2008 at 11:40 am

You cannot solve this problem until the transparency issues are resolved.Injecting capital will not do it without balance sheet transparency. It doesn’t matter how much you have in capital when the “assets” are of dubious quality.Nouriel, this is where you have consistently missed it. You need to stop drinking the Kool-Aid in believing that capital solves everything. If the market participants are lying, it solves NOTHING.

GuestOctober 9th, 2008 at 11:43 am

One of the problems with that approach is that it doesn’t take into account the problem of supply and demand for Treasuries. Most likely, the people that wanted to buy Treasuries in the flight to quality, already own them. Look what happened to yields yesterday when the surprise auctions were announce – a sharp back up. Once TARP gets under way, we’re likely to see more auctions, with yields backing up further. I think Santelli is a sharp commentator but I think he is mis-interpreting the higher T yields as a sign that risk preferences are improving. I think it’s purely supply-demand factors for the notes and bonds.

GuestOctober 9th, 2008 at 11:54 am

Call it a home run, IMO. Another great possibility is hyper-stagflation bypassing recession and crashing head on into depression. Expect it, if the entire populace and economy continue to be fed to the false god of finance.History and knowledge of international affairs will, IMO, serve one as well as economic theory in deciphering this financial game of fraud, booms, busts, and economic chaos.

AfAOctober 9th, 2008 at 11:55 am

Yupi, look who is here, Welcome!Karl, I totally agree with you and with your 3 points to solve this crisis. Market participants have demonstrated beyond any shadow of doubt they do not trust what they cannot touch with their hands, and see with their eyes (and price with their needs).If Paulson is serious about this, it seems he want to recapitalize banks and (then) force them to sell assets at dubious prices. This will be a double scarecrow; to equity and bondholders and to bottom feeders.Market participants, obviously, will choose to not have anything to do with all this, flying to the safest of all asset classes, worsening the whole situation about both market and credit liquidity.Then, going public will have a perfectly appropriate meaning.

GuestOctober 9th, 2008 at 11:57 am

“Am I totally off base here?”I think your insight into the differences between our economy of today and Japan’s of the 90s is profound, and it made me recall something I’ve long thought about: can the U.S. REALLY make it long-term on a services-only economy? I don’t think so; Japan’s been really smart to preserve the highest-value goods production on its home territory, unlike the U.S. We’ve really hollowed out our production base, and I’m fearful as to what that means now that we’ve had a “services” meltdown.

GuestOctober 9th, 2008 at 11:57 am

Soon everything will be transparent – the political/media spin machine who beat back the shorts has now set their eyes on Mark to Market — that will be the next obstacle to fall and with even worse unintended consequences.

GuestOctober 9th, 2008 at 12:02 pm

Great Post! you’ve identified America’s nasty little secret – it exported all of its manufacturing jobs – it’s a Motel-6 economy

GuestOctober 9th, 2008 at 12:04 pm

Reason to Abolish the Federal Reserve by G. Edward GriffinThe top echelon of the World Bank are brothers under the skin to the socialist dictators with whom they do daily business. Under the right circumstances, they could easily switch roles. What we have seen is merely a preview of what can be expected for the entire world if the envisioned “new world order” becomes operational.The IMF/World Bank is the protégé of the Federal Reserve. It would not exist without the flow of American dollars and the benevolence of American leadership. The Fed has become an accomplice in the support of totalitarian regimes throughout the world…This is one of the reasons it should be abolished: It is an instrument of totalitarianism.

Michael SchubOctober 9th, 2008 at 12:05 pm

It is not surprising that members of Congress made impassioned pleas and voted on a bill they didn’t understand, after all how many of them of read much less understand the tax code? I might add the senior management on Wall Street had also had little understanding of the risk they were taking on.What is astonishing is that the banks were allowed to decide who got the haircut! That is like allowing a convicted criminal to decide who was to be punished.Again not surprisingly management of the banks chose to preserve their stock holdings and pass the pain to all of us in the form of a doomed hail Mary pass aka “the bailout plan”.While I applaud the new pragmatism in Washington, it is about time that we learned that expecting Wall Street to work altruistically in the national interest is like expecting a dog to save half a sausage for its breakfast. A few more economists and a lot fewer masters of the universe please.

WAWAWAOctober 9th, 2008 at 12:08 pm

Speaking of gold, a personal observation.Back in Jan. I bought some Am. Eagle, Krugerand & Canadian maple leaf from a local dealer in San Diego at spotprice + $20 and received them in seven wroking days.Yesterday, I went to the same dealer and they only could put oreder for me for ten Am. Eagle at spotprice + $60 and expect to receive them in four weeks.This says alot about scarcity of gold coins here.

piperOctober 9th, 2008 at 12:23 pm

United States GDP is largely dependent on consumer spending ( 70% ?)Anyone know what the level is in the U.K., the E.U. and Canada ?

JRyskampOctober 9th, 2008 at 12:50 pm

The following is what I mean about the real world of FACTS. We have to ban housing evictions NOW. And this shipping incident is taking place at the BEGINNING of the recession:Brokers stunned by ‘zero dollars per day’ dealMichelle Wiese Bockmann – Thursday 9 October 2008UNCONFIRMED reports that a panamax was fixed for a voyage that covered bunkers and port costs only stunned London brokers today, as bulk carrier charter rates continued their month-long freefall.The fixture, yet to be verified by the Baltic Exchange, was thought to be for a 1981-built panamax coming out of the Middle East Gulf for a journey via the west coast of India, to take a cargo of iron ore to China.Although reports denying the deal had taken place were circulated today, brokers continued to point to the fixture being for the Hong Kong-flagged, 61,393 dwt, 1981-built Dong Sheng Ocean. There were also further rumours that a supramax bulk carrier had fixed out of India on similar terms, although brokers could not verify the details of either fixture.Market sources stressed that in both cases these vessels were ageing ships and that in their current positions were unlikely to find work.This would result in the owners having to cover the costs to ballast to a better position.But following a shortage of cargoes out of India to China over the last few months, another broker said he would not be surprised if the fixtures were real, even joking that the owner was lucky to get the bunkers paid.He added that even modern panamaxes have been forced to sail in ballast away from India to either Indonesia, South Africa or even South America to find a cargo.The deal, if genuine, represents an amazing turnaround for panamax charter rates, which have plunged from over $50,000 per day in late August to languish at just over $16,000 per day.The charter arrangement for the elderly vessel represents an effective rate of “zero dollars per day” and plunges the industry back to its darkest times in the early to mid 1980s.The market for bulk carriers back then was so dire that newbuildings were being delivered into lay-up, a broker told Lloyd’s List.“Back in the mid-1980s, things were desperately bad and zero time charters were done,” said a Baltic Exchange spokesman said.The global financial crisis has triggered a massive collapse in confidence in charter rates for the world’s bulk carriers, amid a dearth of cargoes, falling Chinese demand and plunging steel prices.The Baltic Dry Index today fell a further 261 points to 2,503, its lowest value since June 2, 2006.“What is so stunning is that we have got where we are in such a short period of time,” said one London-based veteran panamax broker.“What’s really interesting is what this means for some of the younger shipbrokers who think shipbroking is a licence to print money. Welcome to the real world!”Panamax average time charter rates hit a high of nearly $95,000 per day on October 30 last year. But the rate was still as high as $91,000 per day in late May, when China’s record-breaking appetite for iron ore from Brazil and Australia saw demand for bulk carriers outstrip supply.Further spooking the shipping market this week was a report that an Australian iron ore producer had received requests from Chinese customers asking for delays in shipments because of slowing demand.Mt Gibson, one of the smaller iron ore producers said it had received requests to delay shipments until the second quarter of the financial year.There are also reports that the financial paralysis gripping banking and commodities markets has stalled grain shipments.

GuestOctober 9th, 2008 at 12:52 pm

Don Luskin made that prediction – therefore it’s time to short gold. (Don was telling people 5 weeks ago to plunge into to the stock market and even agreed that it would be appropriate for retirees and pensioners to move money out of the safety of savings and into “any” equity)Don Luskin and Larry Kudlow and Dennis Kneale super-bullish on banks and the markets Sept 9, 2008 (go to minute nine – but if you want to realilze just how bad the information you get from the likes of CNBC watch the whold thing)Seriously it is an inflation play (other than the recent bounces that are more related to safety) – and that’s a big debate –

JRyskampOctober 9th, 2008 at 12:59 pm

Off topic: civil disobedience – this time by the police. Quite a change from the late 60’s and 70’s., this is very ON topic. It’s the beginning of a ban on all housing evictions, which I suggested two years ago, and which I suggested in this case. You will see more of me now, as I run around the country, enforcing the New Bill of Rights (which includes the right, “No individual shall be involuntarily deprived of housing”).If you want to understand the new “maintenance” regime, which is, in a slow motion Constitutional revolution, replacing the current West Coast Hotel v. Parrish (1937) “scrutiny” regime, just read my book, The Eminent Domain Revolt.Didn’t know anything about the “scrutiny” regime, didya? Didn’t know anything about the “maintenance” regime, didya?Pretty ignorant, aren’tya?

Hank RobertsOctober 9th, 2008 at 1:08 pm

The irony just burns. Catton warned, quoting Liebig:—–a principle of agricultural chemistry formulated in 1863 by a German scientist, Justus von Liebig. [2] That principle set forth with great clarity the concept of the “limiting factor” … Carrying capacity is, as we saw there, limited not just by food supply, but potentially by any substance or circumstance that is indispensable but inadequate. The fundamental principle is this: whatever necessity is least abundantly available (relative to per capita requirements) sets an environment’s carrying capacity.”—–“Collapse of fiscal webs thus confronted millions of people with loss of access to carrying capacity, as truly as if purchasable resources had actually ceased to exist. Nations whose citizens had increasingly become masters of one trade apiece and jacks of few others found themselves suddenly unable to rely on composite carrying capacity drawn from a nonlocal environment. What I have called the “medium of mutualism” was no longer functioning, so the scope of application of Liebig’s law of the minimum was being constricted once again to local (or personal) resources.” grain shipments are stalled, eh?“temporary carrying capacity” is shown actually dipping below the horizontal line for a while, before it recovers and becomes again simply “carrying capacity”. The lesson from Panel D is that crash caused by the exhaustion of phantom carrying capacity by Homo Colossus could preclude a later cycle of regrowth.The boundary between past and future is drawn in Panel D, as in the other three panels, at a time when population appears not yet to have overshot carrying capacity. Whether or not that optimistic feature of the model is justified by current facts makes little difference if current practices have committed us to a trajectory that continues upward so that it is destined soon to cross the descending curve that represents global carrying capacity, a capacity not yet acknowledged to be finite. My own view, of course, is that the curves have already crossed.Either way, the past shown in Panel D more nearly accords with ecological history that do the pasts shown in Panels A, B, or C. The future hypothesized by Herman Kahn’s think-tank group is dangerously optimistic because it is based on the least realistic past. But the pasts shown in Panels B and C are also less realistic than the past shown in Panel D. The futures shown in Panels B and C are therefore also probably somewhat “optimistic” —although it seems necessary to enclose the word in quotation marks, because even the Panel B future seems dismal, and the Panel C future seems disastrous.”—end quotes—–

GuestOctober 9th, 2008 at 1:11 pm

Pretty offensive for somebody who is ignorant aren’t ya?EVIDENCE: review of your book from amazon….Sloppy, July 10, 2008By Peter Calvet (Rhode Island, USA)This review is from: The Eminent Domain Revolt: Changing Perceptions in a New Constitutional Epoch (Paperback)Let me first admit up front that I have not read this book. I have only read the section that pertains to me.I do not know if this book makes a persuasive argument or not, but there are two mistakes in the section in which the agency of which I am the current chairman is cited.First, and foremost, the redevelopment plan in question has nothing to do with housing. This book is an attempt to capitalize on many homeowners’ natural revolt at the thought that municipalities can take over private homes just for the sake of economic development or someone’s idea of “progress.” Nothing could be further from the case in Bristol. Our redevelopment plan had nothing to do with economic development. It had nothing to do with housing, or displacing homeowners. It had nothing to do with “progress.”The Bristol redevelopment plan had to do with the elimination of blight, that is properties who were neglected for decades and were a blot on the downtown. What was asked of the property owners was simply to bring their commercial properties, none of which were inhabited, in compliance with community standards, a common sense standard devoid of gimmickry or legal gobbledygook. Any rational person could look at these properties and determine their inadequacy without the benefit of an advanced engineering diploma or a law degree.Regardless of the merits of the Kelo v. New London Supreme Court decision, our redevelopment plan in Bristol had nothing in common with that situation. As a matter of fact, our public policy in Bristol is precisely that we do NOT condemn homes by invoking eminent domain, even to combat blight, much less for economic development.The second mistake is rather minor but illustrative of sloppy work. The town of Bristol referred to on page 182 is in Rhode Island, not Connecticut, a mistake obviously due to the fact that the Kelo case was in Connecticut. Close, but no cigar.On the positive side, the author spelled my name correctly and quoted me correctly. So give up your ego-self-masturbation you pompous twat

GuestOctober 9th, 2008 at 1:16 pm

why especially wells – because they have yet to do it much? or because of wachovia? or you know something?

AnonymousOctober 9th, 2008 at 1:19 pm

So why is the Fed hiring BlackRock, PIMPCO, Legg Mason or other firm to manage assets that it is not going to buy anyway? Or the Fed being another shareholder of a bank will fire all its Portfolio managers and outsource them to Blackrock and others?

GuestOctober 9th, 2008 at 1:24 pm

“The Data Don’t Justify Financial-Market Panic” by Robert HiggsOctober 9, 2008 — As the hysteria has grown in the discussion of financial markets and related government policies, I have been puzzled by the discrepancy between the best available data and the descriptions quoted in the press… Yet every time I look for data to check these claims, I find nothing solid to back them up.The latest case in point concerns the markets for commercial paper. The Fed has just announced that it will launch an unprecedented program to support this credit market. As MarketWatch describes this initiative, the Fed “will buy unsecured commercial paper in an effort to restart a market that’s ground to a virtual halt in recent weeks.” This report goes on to explain that the Fed’s purpose is “to get lending flowing again.” It quotes John Ryding of RDQ Economics, who foresees dire consequences “if the Fed doesn’t unfreeze the credit markets.” Got the picture? Restart a virtually halted market; get lending flowing again; unfreeze credit markets – all of which suggest that at present nobody is borrowing and lending in these markets.Such comments are extremely common in the press. Bloomberg’s Commercial Paper Primer quotes New York University economist Mark Gertler’s statement that “large corporations are having difficulty obtaining funds via the commercial paper market.” A commentator at “The Bonddad Blog” says: “people are unwilling to buy this paper. . . . [N]o one is buying any commercial paper” (although, inconsistently, this same blogger notes that “lenders . . . are asking for a higher interest rate to pay them for a short-term loan,” which implies that someone is lending).The Federal Reserve System publishes comprehensive data on commercial paper issuance, commercial paper outstanding, and interest rates on commercial paper. I presume that these data give us a clearer picture of what’s going on in the markets than a covey of hyperventilating Wall Street commentators.Consider first the interest rates for commercial paper. For the past several weeks, 30-day nonfinancial paper has been going for about 2 percent; 60-day and 90-day loans in this market have required a slightly greater rate of interest. Financial commercial paper has been going for roughly 3 percent, give or take a few tenths of a point, with little difference among the 30-day, 60-day, and 90-day rates.Given that the rate of inflation at present is greater than 3 percent, and presumably will remain greater than 3 percent for the next three months, these nominal interest rates on commercial paper imply that lenders are actually giving away money to corporations that sell commercial paper – the nominal rates of interest are less than the expected rate of inflation. Is this situation what one expects to see during a “credit crunch”? Hardly.Many commentators claim, however, that virtually no transactions are occurring in this market. These claims are completely false. For the week that ended October 1, which is the most recent week currently reported, total commercial paper outstanding amounted to $1,607 billion. Yes, this amount was down from the $1,702 billion reported for the previous week, but is a 5.6 percent drop a good reason to panic? If we go back to March 2008, when nobody was talking excitedly about the commercial market’s “freezing up,” we find that the total amount outstanding, on average, was $1,822 billion, or only 13 percent more than last week. In March, the market was working fine; now it’s “locked up.” This sort of hyperbole, with which we are being bombarded hourly around the clock, is totally without a basis in the facts…Either someone is deliberately trying to spook us, or these panic-mongers have simply lost their grip on reality. Officials at the Fed and the U.S. Treasury are running around like chickens with their heads cut off. They are dragging the world’s leading central bankers and finance ministers around with them. The news media are raving like lunatics. The big unanswered question is: WHY?Robert Higgs is senior fellow in political economy at the Independent Institute and editor of The Independent Review…

GuestOctober 9th, 2008 at 1:35 pm

Everyones an alchemist including all the brainwashed paid off economist working for universities paid for by the fractional reserve banking system. Of course thier alchemy has always been fraud but now the economists think they can engineer a soft landing through more clever alchemy. hahahaha

GuestOctober 9th, 2008 at 1:35 pm

Has anybody noticed that ABX indices have all bounced significantly out of their lowest levels in the last couple of weeks?Does anybody have any explanation? Could that be a glimmer of hope?

GuestOctober 9th, 2008 at 1:38 pm

Don’t fetishize math Michael. The mathematization of economics is one of the reasons that we’re in this mess. From the historical perspective, this is a very recent development. You’re doing fine just focusing on the political economy and far better than the legions of well-paid “experts” in “higher” math.

AfAOctober 9th, 2008 at 1:38 pm

If Ford or GM go down – what will be the impact on the market. (psychologically speaking)By Guest on 2008-10-09 13:06:31Don’t worry, the fundaMENTALS are still strong.All it takes is Paulson to intervene in the auto industry by recapitalizing F&GM and buying their assets … I mean products.SUVs or SIVs, really what is the difference? Are we sure no congressperson or senator was not thinking about this while s/he was yawning during the bailout discussion? It could be a new law definition/extension of section 3(9)(B)?Another addition to AfApidia:A$$et: Whatever the heck you want it to be.: Widget

AfAOctober 9th, 2008 at 1:44 pm

I am all ears to hear what a non alchemist, non brainwashed, not paid off by fractional reserve system has as a solution.

ManOctober 9th, 2008 at 1:47 pm

This is going to reduce share prices because existing shareholders may lose their share. SELL SELL SELL!!

Alessandro - 9th, 2008 at 1:47 pm

WOW! Genesis!Welcome on this forum, hope you find the place interesting and you’ll come back.

danieldOctober 9th, 2008 at 1:47 pm

“So what will Tomorrow bring a sinker, a rising fast ball, or maybe a knuckle ball?”Or a spitter, or a…No, there is no ball. Its an illusion, so no matter how hard or fast you swing, nothing is gonna happen.3 strikes and you’re out.

PeterJBOctober 9th, 2008 at 1:48 pm

“Trying to get a rise out of you but remain your fellow-blogger, I remain affectionately yourPiers”@ Piers on 2008-10-09 08:17:44Thank you for your kind words: may I ask if you have ever wondered why the frog sits in the water in the frying pan on the fire until dead ; without a whimper?Ever wonder if there is analogy anywhere in life of this attribute?Common sense my friend still needs to be founded in reality, in er, something and there are only two things to consider in reality: 1. the opinions of men and 2. Physics.Me? I’ll take Physics.Now, history tells us in the written records of great extent as to the preferences of men as civilization falls and new order begins to grow out of chaos exhausted, and it ain’t so pretty when even so, chaos has just begun.It is clear that the future is predictable whereas the outcome is not so. But we could make it be by adopting adaptation but we won’t, so, the attempts at cash and power grabs will continue, unabetted, and more will join the frey and like the avalanche, will build until spent.Denial is torsion, and gets you dead; hard fate. It has limitations, then it snaps.Ho hum

danoOctober 9th, 2008 at 1:50 pm

go take a look at some of the MLP’s like OKS, MMLP, or the coal stox like BTU, FDG, PVR or some solid banks like USB. the returns on a lot of these are just plain excellent, and you are getting paid to wait. If you think coal, nat gas, or oil are going out of business anytime soon, you need to put down the Kool Aid and back away from the keyboard. No matter what the recession brings, we will still need to heat our houses, cook, run electric plants, etc…

Alessandro - 9th, 2008 at 1:52 pm

BTW, you are absolutely right, what is needed is to stop pretending and start anew.What banks sell is confidence. If they have no confidence to sell, they can as well close down.

GuestOctober 9th, 2008 at 1:56 pm

Things really must be disastrous as far as finance out there. It has fronted 300M to prevent just this from happening. Its a good thing they are not going to have their way. Passing this by a back door is the best that they probably can do under the circumstances

AnonymousOctober 9th, 2008 at 1:57 pm

Senator Jim Webb’s (VA) response to my letter:Thank you for contacting my office regarding the turmoil in the financial markets that has compromised the solvency of several U.S. financial institutions and has threatened our nation’s economy. I appreciate your taking the time to share your specific views and concerns.For many years, I have said that the current Administration has failed to exercise appropriate oversight of the nation’s banking and corporate sectors, and has promoted policies that reward Wall Street at the expense of Main Street. The Administration’s actions are largely responsible for our current economic crisis, which resulted in President Bush’s September 2008 proposal to help restore soundness to U.S. credit markets.I opposed the original hastily-written and woefully inadequate financial sector bailout bill proposed by President Bush. In the nearly two weeks after the President’s proposal, the U.S. Congress radically changed the original bill to better protect taxpayers and to ensure greater Congressional oversight. I am pleased that the bipartisan compromise legislation to stabilize our nation’s economic system (H.R.1424), which the Senate passed on October 1, 2008 by a bipartisan vote of 74-25, bore no resemblance to the original Bush proposal. I understand the concerns raised by many Virginians about certain provisions of this legislation that may have been beyond the scope of the bill’s intended purpose. However, I was not given the opportunity to offer amendments to the legislation, and as with any bipartisan initiative, compromise is necessary in order to advance our nation’s priorities.After much deliberation, I voted to support the Senate’s economic rescue legislation. I reached my decision based on the reality that this legislation provides the only possible opportunity that will be offered in the U.S. Congress this year to address our nation’s economic crisis. I am also satisfied that the significant recommendations I offered during the legislation’s consideration were incorporated into the admittedly imperfect bill. Moreover, I was persuaded to support the Senate legislation because it provided meaningful tax relief to hardworking Virginia families and small businesses.Throughout the bill’s negotiations, I was outspoken in support of several basic principles that are essential for the future economic well-being of our country. For example, I wrote a letter to Senate Banking Committee Chairman Chris Dodd only one day after U.S. Treasury Secretary Henry Paulson announced the original plan. I spoke twice on the Senate floor about the proposal. Moreover, I led aneffort to convince the Senate Majority Leader to incorporate these principles in any legislation, including them in a letter that was co-signed by eight of my Senate colleagues.The fundamental principles that I raised included:* A grave concern about the transfer of so much financial power and discretion to one individual in the executive branch of government, and the lack of a clear mechanism for the oversight of this unprecedented power;* The need for proper limits on executive compensation, and a guarantee that the executives who mismanaged our financial markets not be unjustly enriched by a taxpayer bailout;* The need for a guarantee that the American taxpayer be able to share directly in any benefits gained by the rescue legislation;* Appropriate limits on the ability of foreign institutions to participate in the program; and* The release of federal funds for the program in installments in order to ensure that Congress can properly fulfill its oversight role, and to give Congress time to enact meaningful new reforms to the regulatory structure.We were able to achieve significant progress in each of these areas. In particular, I am pleased that the Senate included meaningful provisions in the bill to limit executive compensation and to give taxpayers the chance to share in any gains achieved through this legislation. These provisions will help to restore taxpayer confidence in our financial system and ease the credit crunch that threatens economic growth.The President signed the economic rescue legislation into law on October 3, 2008. Going forward, I will work aggressively with members of Congress from both sides of the aisle to ensure that this new law is implemented fairly, and in a way that safeguards the American taxpayer. Equally important, the next Congress must restore to our financial system a regulatory structure that will prevent this terrible chapter in American history from ever happening again.As Congress continues to address issues related to our nation’s economy and the well-being of hardworking Virginians, please be assured that your specific views and suggestions will be very helpful to me and my staff. I hope that you will continue to share your thoughts with us in the years ahead.I would also invite you to visit my website at for regular updates about my activities and positions on matters that are important to Virginia and our nation.Sincerely,Jim WebbUnited States Senator

GuestOctober 9th, 2008 at 2:22 pm

Today I gave my brother 25K – I WILL NOT LET THESE BASTARDS DESTROY HIM – people are naiveI LIKE HIS SMILE and I WILL NOT LET THESE BASTARDS DESTROY HIM turn him into some statistic of idiocy.I am a man. I am not a number.(weel, poor show – that was an advert)

GuestOctober 9th, 2008 at 2:22 pm

As suggested – Watch Dow 9045 – today’s support level – break that and we get the eight ball rollingBy Guest on 2008-10-09 12:08:17_______________________________________

awestOctober 9th, 2008 at 2:23 pm

Can someone who REALLY KNOWS please respond as to why we don’t just Vaporize all CDS’s. Apparently much of the market implosion is driven by fear of these Fin.WMD, for example, Lehmans $400bn auction this Friday. The rules have changed completely, we are no longer looking at the Financial system we had before, since we have changed all of the other rules, why not change this one, IN A BIG WAY!! These things were illegal to begin with, the clever characterization of “Swap” vs. Insurance Policy is what has lead us here (we need to hunt down the parties responsible for that by the way…lobbyists, bankers and politicians.)Seems the throwing more money at trying to stay out in front of $62 trillion dollars of counter party risk is COMPLETE FOLLY. WTF are we doing? Its moronic, just cancel all of the inter party “Insurance Policies”, realize the losses within the institutions who took the risks, DON’T SPREAD IT THROUGH THE ENTIRE SYSTEM.

Dr. MatrixOctober 9th, 2008 at 2:26 pm

It also says two things:1) gold is undervalued: you need to add the market price + the additional charge to get the real value;2) the gold market is being manipulated.

GuestOctober 9th, 2008 at 2:34 pm

no shit sherlock – its application was… um … 50 million deaths .. briliant … it is this type of idiocy (believe me feuerbach).Your nitpicking is a generalized symptom of what is wrong with everything – oh my …oh my, the counting.COUNT IT ALL why the hell don’t youIt is all a failure to digest Goethe.(another flaming moron)

AfAOctober 9th, 2008 at 2:35 pm

Heck! and 10 year notes are down too.This is getting close to a horror movie. The low-budget type of horror movies. Where everything is annoyingly predictable. All victims run from a room to the next, in all darkness. Running into their to-be massacre room. You are saying, no don’t go there, don’t separate, stay together … but, you cannot change the plot of a movie, can you?Or is it like a ship, losing its equilibrium, bouncing from right to left in the midst of a storm. Sailors and passengers run from port to starboard to counterbalance the bouncing force and restabilize the ship. But, alas, people, out of sync, make the ship bouncing even more strong and soon it is the swing of the ship that transports people from starboard to port, before drowning and sinking.

GuestOctober 9th, 2008 at 2:37 pm

As someone who received a Ph.D. in political science, specifically focusing on Congressional procedure I would say this. These type of legislative “colloquies” to establish a legislative history for a bill are not unusual (not necessarily frequent, but not unheard of).But, obviously, they do not have the force of law. The courts interpreting the law may or may not give weight to the legislative history (i.e. debate in the House, Senate, committee hearings, etc…).Another option would include a signing statement by Bush (don’t know if there was one or maybe still could be one). And there is the issue of how the bill is interpreted by the relevant agencies (Treasury, the Fed).I guess for a lot of people this is their first experience with the “sausage factory” which is law-making (and law-executing). It is not the simple textbook process. In a case like this (economy in the balance) it is quite likely the Treasury and Fed can do what they like and the banks will go along politely or be plowed under.

AfAOctober 9th, 2008 at 2:39 pm

Such is the power of the 8, or more specifically, that of the “sleeping” 8.The symbol of infinity.I am saying the support level will be 799 on S&P500 and 7999 on the DOW. Paulson seems to like this number

GuestOctober 9th, 2008 at 2:40 pm

come on down if you want to rumble………don’t you have anything except as Nietzche expressed so well – a mind numbing constipated extrapolation – a static gate keeping guard of the $%& latrines.Create

CaponeOctober 9th, 2008 at 2:44 pm

i think all of the market manipulation mechanisms are getting overwhelmed there are wild prints all over the place…

GuestOctober 9th, 2008 at 2:48 pm

Why do people keep trying to pick bottoms? The catching knives metaphor is so apt. This market will slice any bottom pickers to ribbons.The solution’s simple — we have to be like Japan — save money, and manufacture goods.

CaponeOctober 9th, 2008 at 2:48 pm

the PPT was trying to support overall DOW bull shit prints buy propping MCDs and they are sending buys when the harsh stark truth is lower so constant print back and forth .4 above and below out of order. …or system simply is overwhelmed at publishing prints. limit orders only folks and remember if you want to do market orders do a test first send a small quantity to see what they give you !

awestOctober 9th, 2008 at 2:54 pm

JB…sounds like a 30’s Movie Mogul.I concur, they are trying to keep the old system alive, and it is stone cold dead, and has been buried since August of last year. The market has just not come to grips with it. In reality, we have WASTED the resources thrown at trying to resusciate the old, when we should have quickly come to grips with the problem, and taken truly aggressive action to Vaporize the mechanisms, the Fin. WMD, and get about the business of creating the NEW system. Neutralize the fear associated with the uncertainty of the effect and reconciliation of those things and move forward. Seems simple. Is it?From my perspective, part of the effort must include retribution against those who profited from and are responsible for the “Innovation” that took place. Trust can be rebuilt beginning with this.As I have written here before, a tangible example of the nefarious DNA of the current system is the experience of a friend of mine:This fellow ran a large public employees retirement fund for a few years. He recounts a visit to NY with their IBankers in 1994 at which a lengthy discussion of strategy around “hyrbid” investment products took place. Upon conclusion of the Bankers description, my friend asked “what happens to the last guy holding this paper when the market corrects”……pause……laughter…..”wtf do you care, you’ve gotten your money by then”.There is certainly a better way forward.

GuestOctober 9th, 2008 at 2:59 pm

The volatility seems to be insane. I see jumps of 1 or 2 percent withing seconds on Y!. After the day is over can someone point me to a fine grained graph where I can take a look at the last trading minutes? It might be worth printing out to show it to my grandchildren one day.

MedicOctober 9th, 2008 at 3:17 pm

According to my calculator, today’s close officially makes it a 40% fall from the high last year.For all those perma-bulls who mocked us and the good professor, I would like to just say this: Nitroglycerin is very helpful for chest pain – and it’s cheap. Buy it in bulk.

PeterJBOctober 9th, 2008 at 3:33 pm

Speaking of predictions: I believe that I predicted, here and elsewhere, 1 year ago, or was it two years ago, or both, and more – not so long ago, a DOW drop to 8700 or thereabouts.And, then I added, here again, it would briefly rest here,,, he he he, until its fall into the bowels of hell (I didn’t really say that I just added it here for a bit of the theatrical:).You see folks, albeit on the boring side, you just can’t screw with physics.Oh, thank you for the applause,-)>And, “In a case like this (economy in the balance) it is quite likely the Treasury and Fed can do what they like and the banks will go along politely or be plowed under.”@ Guest on 2008-10-09 14:37:38Of course; it’s called Moral Hazard and this describes the current and soon to be state of the World economies… demographically speaking, mais oui. What else was Paulson’s and Benanke’s Bill for, if not for this very reason?Gold anyone?Ho hum

turchinOctober 9th, 2008 at 3:48 pm

Don”t get enouch gloom today?Start readSTRUCTURE OF THE GLOBAL CATASTROPHERisks of human extinction in the XXI century

AfAOctober 9th, 2008 at 4:01 pm

Shorty and the Chocolate FactoryI picture the shorts in the markets today, as a grounded and disadvantaged boy suddenly finding himself in a candy heaven. He cannot believe his eyes, insanely running between a chocolate tree and a juice river, grabbing more than what he needs or can.The shots today was running frenzy. Have a load of Morgan, grab some of GM.A short haven indeed. Or it could have nothing to do with shorts.

AnonymousOctober 9th, 2008 at 4:01 pm


WebbConstituentOctober 9th, 2008 at 4:13 pm

Sorry, Senator Webb:a. You were not informed enough to voice a reasoned, accurate, and forceful rebuttal to Paulson’s proposal when it was first surfacedb. Your staff was poorly informed; no one on your staff has a clue about economicsc. You gave carte blanche support to the very persons and groups that caused the problemd. You made no appearances in front of a microphone on the steps of the Capitol building to decry this thefte. You were wrong in your judgement. Instead of saving that $700B and putting it where it could do some good, it’s gone – vaporized at the very time we need it the most to re-start our real economy.You made a great show of your “maverick”-ness in your autobiographical book “A Time to Fight” but when the time to fight came, you were MIA.The time to fight is when it’s time to fight. Get it?This is a lame mea culpa. LAME.

lilnevOctober 9th, 2008 at 4:16 pm

It’s the Congressional equivalent of a Presidential signing statement. If a judge finds that regulations clearly violate the language of the law, this statement is not going to save them. If a judge finds the language ambiguous, he might look to this as “clarifying the intent of the law, as understood by the House.”

aleister perduraboOctober 9th, 2008 at 4:33 pm

Can the economy grow fast enough in real terms to redeem the massive increase in debt? In a word, no. As Frederick Soddy (1926 Nobel Laureate chemist and underground economist) pointed out long ago, “you cannot permanently pit an absurd human convention, such as the spontaneous increment of debt [compound interest] against the natural law of the spontaneous decrement of wealth [entropy]”. The population of “negative pigs” (debt) can grow without limit since it is merely a number; the population of “positive pigs” (real wealth) faces severe physical constraints. The dawning realization that Soddy’s common sense was right, even though no one publicly admits it, is what underlies the crisis. The problem is not too little liquidity, but too many negative pigs growing too fast relative to the limited number of positive pigs whose growth is constrained by their digestive tracts, their gestation period, and places to put pigpens. Also there are too many two‐legged Wall Street pigs, but that is another matter.

GuestOctober 9th, 2008 at 4:34 pm

Actually, it’s like trying to catch pianos. Much heavier and flattening. Much bigger than a knife.

GuestOctober 9th, 2008 at 4:35 pm

or your getting ripped off by the coin dealer and his wholesaler who is taking advantage of the situation.

GuestOctober 9th, 2008 at 4:37 pm

Fear not Bush will be speaking – and the financial porn media are floating the idea of Government openly buying equities and index futures. Dennis Gartman supports that idea (me thinks he is long in the market)

GuestOctober 9th, 2008 at 4:38 pm

Sorry posted in wrong location -Fear not Bush will be speaking – and the financial porn media are floating the idea of Government openly buying equities and index futures. Dennis Gartman supports that idea (me thinks he is long in the market)

AnonymousOctober 9th, 2008 at 4:42 pm

Average american here. Looks like manipulation to me. Here is a link from 10/9/08 kitco analyst discussion of gold. Aside from reading Kitco forum’s traders daily activities, the opinions also shed light. Another bubble building, supply will then appear, voila, price drop, wealth “transferred”. CBGA II seems to be a control group. FWIW, read somewhere the USA is stopping production of Eagles (well, I would assume *for now*) (daily commentary changes)Earlier today, below was part of what was posted.Amid this turmoil and uncertainty, one has to ponder what gold’s role might become where it historically has mattered most; in the vaults of the globe’s central banks. Will they sell? Will anyone buy? Has the dishoarding campaign come to a halt, or will a newfound respect for the shiny stuff yield an accumulation trend? Our friends at the London-based VM Fortis Group recently sent out their opinion on the matter, and we relay it here -courtesy of Mineweb:”VM Group – says a shortfall in central bank gold sales expected to continue during the last year of CBGA II, suggests continued slow central bank gold sales regulated under a probable third Central Bank Gold Agreement.The Virtual Metals Research Consulting Group (VM Group) estimates that total central bank gold sales under the second Central Bank Gold Agreement (CBGA II) are likely to reach only 360t – 140t lower than the 500t permitted for the year and the lowest seen during the CBGA’s nine years of operation.This had major implications for the 2008/9 final year of CBGA II, as one of the countries with stated sales plans, Switzerland, will have finished its programme and another, the Netherlands, appeared to have done so. That left France, Germany, Sweden and Austria as potential gold sellers.In this final year, France had about 120t left to sell, Sweden was likely to sell 10-15t, Germany would only sell coins, while Austria might not sell again. The VM Group said that collectively the potential sellers, France, Germany, Sweden and Austria, had about 150t to sell during this period.The European Central Bank remained a wildcard and could again be a seller. This could mean another 60-80t gold sales, but still meant that sales for the year would likely amount to 210-230t – the lowest amount sold in a CBGA year under the various CBGA agreements.The VM Group said there obviously were ways in which more gold could be sold. The International Monetary Fund has said it wanted to sell 403t as part of a financing package, but it was likely to spread out these sales to avoid disturbing the market. The VM Group said the result was that only a small amount of IMF sales could take place in the next CBGA year.Another option was that one of the central banks that have sold gold, but has not said how much they planned to sell and over what period, will start to sell again. However, the VM Group argued that if these countries, including Spain, Portugal and Belgium, did not sell when they had the opportunity to in the 2007/2008 CBGA year, they were unlikely to do so in the 2008/9 year.It said a similar argument could be made against Italy – a large holder of gold – deciding to sell.A change in attitude towards gold?It said its view on central bank gold sales had always been that the banks would continue to sell gold indefinitely and at the current rate of 400-500t. The view was based on the fact that almost every portfolio diversification argument showed that European central banks had too much gold, while the rate of sales was calculated according to a central banks estimate of how much sales the market could bear.However, the VM Group said the recent shortfall in sales suggested it had to refine this view.The big question was whether recent reluctance to sell reflected only a temporary pause in response to higher prices or whether it represented a longer-term change in attitudes towards gold.Although the case for the latter would have been strengthened by recent financial turmoil, it was almost impossible to know with any certainty, said the Group. However, they noted that the vast majority of gold was still held by European central banks and the US Treasury, reflecting the international economic order of the late 1960s.For gold to have a future as a reserve asset it needed those central banks which have little gold and a lot of foreign exchange to want to acquire gold, but these banks outside of Europe have not shown any signs of doing so. If these banks did not acquire gold, then the long-term trend for net official sector sales remained intact, said the VM Group.CBGA III? (WHAT IS CBGA III??)The Group felt that the CBGA agreement would almost certainly be renewed by or before September 2009.Factors that were taken into consideration in this respect was the fact that the gold market had become accustomed to these sales pacts that arose from the need to cope with structural weakness in the market.The report said that removing such a pact with the existence of many more actors on the buy-side and perhaps a smaller volume to sell, would boost gold’s status as a reserve asset, giving holders greater flexibility in how they bought and sold it. But on the other hand, if the gold market sees a major downturn in the years during which a CBGA III might exist (2009-2014) then the absence thereof could exacerbate any bear market.”Ultimately, it all might come down to how many central banks express an interest to sell, in particular the larger holders such as France and Italy. Germany’s Bundesbank reiterated that it will not use any of its allocation during the current final year of CBGA II, so we are quite likely to again see sales far under 500t.The report concluded that unless central banks were really changing their minds about gold’s position within their reserves, this implied a slowdown rather than an ending to official sector reserves sales.”This would ultimately translate into an almost certain renewal of the agreement by or before September 2009,” said the VM Group.”

AnonymousOctober 9th, 2008 at 5:17 pm

Two links: pdf Sept – Fortis on gold

AnonymousOctober 9th, 2008 at 5:37 pm

EXCELLENT – report on CBGA III – central banks 8. 9. 10 etc

MedicOctober 9th, 2008 at 6:42 pm

No worries, mate. I am out. I have been for quite a while now. Just going to wait this out and go back in when I am satisfied that the bleeding is over.

AnonymousOctober 9th, 2008 at 6:46 pm“A contractarian ‘take advantage of the other guy if he lets you [] get away with it’ approach like investor regulation inevitably reduces trust.500 Without legal sanctions, parties often have to resort to ‘constant monitoring and checking [that] can poison the atmosphere.’ 501 Reducing trust can create a downward spiral, for those who trust others less cheat more themselves.502 …”Sound like our bankers nowadays?

Mark in SFOctober 10th, 2008 at 2:31 am

Mr. Denninger, I think you are 100% correct. How can we have confidence without more transparency? I believe Prof. Roubini has discussed this recently when he talked about banking ‘triage’, but I think it bears repeating over and over and over and over and over and over until out leaders start listening. I for one have contacted my reps on several occasions on this.

Dirk KOctober 10th, 2008 at 10:21 am

Why all the fear of bank shareholders? Surely the US Treasury will make “distressed banks” an offer their shareholders can hardly refuse: we’ll buy some of your junk (at inflated prices) provided you issue us some equity in return (to compensate for having to pay more than market value for junk). Additionally, the US Treasury could announce an offer to all “distressed” financial institutions: if you are facing liquidity or solvency crises, contact us – we’ll put in cash provided you issue equity to us in proportion to the value of the new capital injected relative to the total value of the institution after such capital injection. Shareholders of a truly distressed company don’t really have too many options, do they? And if they were to baulk at such an offer and the company ended up going bankrupt, would the shareholders not face liability for further losses incurred by creditors (including depositors) after the date when they refused the offer? That would make them think twice about it – and help them accept the inevitable dilution of their holdings. If they’re smart they’ll try to buy shares back from the US Treasury when they’re on the way up again in a year or so.

GuestOctober 10th, 2008 at 3:10 pm

… Which begs the question, why was legislation necessary to begin with ???Aren’t there extraordinary powers available within the Treasury & FED to do what needs to be done in an Emergency?

TooBigToFailOctober 12th, 2008 at 10:19 pm

I don’t see this happening, in terms of marking this stuff on the balance sheets at plausible fair value. I don’t think it will happen because i think if the government actually knew what was on these balance sheets, or whatever, people would go to jail. I could be wrong. I mean most people in the government should go to jail too. This is just my suspicion. I think this is going to be huge debacle. The government taking over banks that is. I don’t know. Also this is in the TARP:AP. “Addendum to House Bill on the $700 billion Bail OutAdded to the house bill was a clause that amends IRS regulations to retroactively tax officers of the 700 financial companies as follows. Any income derived from salary and sale of company shares at inflated market prices that were based on falsely booked profits from dubious loan activity from 2003 onward, shall be retroactively taxed by the government at a rate of 90%. Those individuals unable to come up with the tax money due to the retroactive nature of the tax shall be given the opportunity of a government loan to cover the tax which shall be paid back at variable rates over 10 a year period.”

AnnSOctober 13th, 2008 at 12:13 am

No it is not.There is a very boring treatise – 20+ volumes in all – called “Sutherland on Statutory Construction” that will fully explain the reasons. (I don’t recommend checking it out from the local law library – I had to actually read it once to because of the subject of a law review article I was writing. It required 6 cups of coffee per hour.)To summarize quickly, when interpeting what the words in a statute are to mean, the courts look to the “legislative history” which is what the legislature said about what they intended the language in the statute to mean and the the purpose it was to accomplish. The legilstive hisotry is what was said in the committee hearings, in the committee reports, in the discussions on the floor and on the record.The exchange between the Moran and Frank was a setup to establish the legislative history and intent.

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amajorpainApril 14th, 2012 at 5:26 pm

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"…the government can't control things. the government can't control the economy without controlling people…" – Mr. Ronald Reagan