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The Deadly Dirty D-Words: “Deflation”, “Debt Deflation” and “Defaults”. And How Central Banks Will Have to Resort to “Crazy” Policies as We Have Reached Such Bermuda Triangle of a “Liquidity Trap”

Author: Nouriel Roubini  ·   ·   › Share This Print

I have been warning since January 2008 that the biggest risk ahead for the US and the global economy is one of a stag-deflation, the deadly combination of an economic stagnation/recession and deflation.

Let me discuss the details of this toxic mixture of deflation, liquidity trap, debt deflation and rising household and corporate defaults:

We Are Close to Deflation and Stag-Deflation

First of all, signs of stag-deflation now are clear: we are in a severe recession and now the recent readings of both the PPI and the CPI are showing the beginning of deflation. Slack in goods markets with demand falling and supply being excessive (because of years of excessive overinvestment in new capacity in China, Asia and emerging market economies) means lower pricing power of firms and need to cut prices to sell the burgeoning inventory of unsold goods; slack in labor markets with sharp fall in employment and sharp rise in the unemployment rate means lower wage pressures and lower labor cost pressures; and slack in commodity markets – that have already fallen by 30% from their summer peaks and will fall another 20-30% in a global recession – means lower inflation and actual deflationary forces. Given a severe US and global recession deflation will soon be a reality in the US, Japan, Switzerland, UK and, down the line, even in the Eurozone and other economies.

The Risk of a Liquidity Trap

When deflation sets in central banks need to worry about it and worry about a liquidity trap. Take the example of the 2001 recession: that was a mild 8 months recession in the US and over by end of 2001. But by 2002 the US inflation rate had fallen towards 1% (effectively 0% or negative given imperfect measurement of hedonic prices) that the Fed was forced to cut the Fed Funds rate to 1% and Ben Bernanke – then a Fed Governor – was writing speeches titled “Deflation: Making Sure “It” Does Not Happen Here” meaning it would not happen in the US as Japan was already in a deflation at that time. So if a mild recession – that was not even global – led to deflation worries how severe deflation could be in a recession that even the IMF is now forecasting to be global in 2009?

When economies get close to deflation central banks aggressively cut policy rate but they are threatened by the liquidity trap that the zero bound on nominal policy rates implies. The Fed is now effectively already in a liquidity trap: the target Fed Funds rate is still 1% but expected to be cut to 0.5% in December and down to 0% by early 2009. Also, while the target rate is still 1% the effective Fed Funds rate has been trading close to 0.3% for several weeks now as the Fed has flooded money markets with massive liquidity injections; so we are effectively already close to the 0% constraint for the nominal policy rate.

Why should we worry about a liquidity trap? When policy rates are close to zero money and interest bearing short term government bonds become effectively perfectly substitutable (what is a zero interest rate bond? It is effectively like cash). Then further open market operations to increase the monetary base cannot reduce further the nominal interest rate and therefore monetary policy becomes ineffective in stimulating consumption, housing investment and capex spending by the corporate sector: you get stuck into a liquidity trap and more unorthodox monetary policy actions (to be discussed below) need to be undertaken.

The Costs and Dangers of Price Deflation

Before we discuss the monetary policy options in a deflation and liquidity trap let us consider the costs and dangers of deflation.

First, if aggregate demand falls sharply below aggregate supply then price deflation sets in (and indeed there is already massive price deflation in the US in the sectors – housing, autos/motor vehicles and consumer durables – where the excess inventory of unsold goods is huge). The fall in prices and the excess inventory of unsold goods forces firms to cut back production and employment; the ensuing fall in incomes leads to further fall in demand and induce another vicious cycle of falling prices and falling production/employment/income and demand.

Second, when there is deflation there is no incentive to consume/spend today as prices will be lower tomorrow: buying goods today is like catching a falling knife and there is an incentive to postpone spending (consumption and investment spending) until the future: why to buy a home or a car today if its price will fall another 15% and purchasing today would imply having one’s equity in a home or a car fully wiped out in a matter of months? Better to postpone spending. But this postponing of spending exacerbates the vicious cycle of falling demand and supply/employment/income and prices.

Third, when there is deflation real interest rate are high and rising in spite of the fact that nominal policy rates are zero. If the policy rate is zero and there is a 2% deflation the real short term policy rate is actually a positive 2% that further depresses consumption and investment; and real long-term market rates are even higher with deflation – as discussed in detail below – as market rates at which firms and households borrow are much higher than short term policy rates.

The Deadly Deeds of Debt Deflation

Fourth, deflation also leads to the nightmare of debt deflation, a situation well analyzed by Fisher during the Great Depression. If debt liabilities are in nominal terms (D) and at a fixed long term interest rate (i) a reduction in the price level (P) increases the real value of such nominal liabilities (D/P goes up); so debtors that are already distressed in a recession and deflation become even more distressed as the real burden of their liabilities (D/P) sharply rises.

Another complementary way to see the perverse effects of debt deflation is to notice that the ex-post – as opposed to the ex-ante –real interest rate faced by borrowers sharply rise. Suppose you are a firm or household that had borrowed – say a 10 year mortgage or a 10 year corporate bond – at an interest rate (i) of 5% at the time when inflation (dP/P) was expected to remain at 3%; then the real ex-ante real cost of borrowing (r= i – dP/P) was only 2% (the difference between 5% and the expected inflation of 3%). Now suppose that, ex-post, the economy falls into a deflation trap and prices are now falling at 2% annual rate and expected to fall as much for a number of years. Now the ex-post real interest rate (r= i – dP/P) on that borrowing rises from 2% ex-ante to an actual ex-post 7% (5% – (-2%)). Thus, ex-post unexpected deflation sharply increases the real interest rate faced by borrowers or, equivalently, sharply increases the real ex-post value of their real liabilities (D/P).

Things are even worse if the debtor had borrowed to finance the leverage purchase of assets whose prices is now falling. Suppose you are a household who borrowed at a 5% mortgage rate to purchase a home whose price is now falling at an annual rate of 15%. Then the effective real interest rate that you are facing on your debt is not 5% but a whopping 20% (the sum of the 5% mortgage rate plus the 15% fall in the price of the underlying asset) that soon leads you into the depth of negative equity into your home. Thus, leveraged purchase of assets whose price is falling is an even more deadly form of debt deflation.

In all of its forms and manifestations debt deflation sharply increases the risk that borrowers will be forced to default on real obligations that they cannot service. Thus, debt deflation is associated with a sharp rise in corporate defaults and household defaults that creates a spiral of deflation, debt deflation and defaults.

High Market Real Interest Rates and Costs of Borrowing in a Deflation/Liquidity Trap

In situations of deflation and liquidity trap traditional monetary policy becomes pathetically ineffective. Consider now why monetary policy is ineffective. The real long-term interest rate faced by borrowers (say a mortgage holders who has a 10 year fixed rate mortgage or a corporate who issues a 10 year nominal rate bond) is given by the following expression:

Real Long Term Market Rate = (Nominal Long Term Market Yield – Inflation Rate) = (Nominal Long Term Market Yield – Long Term Government Bond Yield) + (Long Term Government Bond Yield – Fed Funds Rate) + Fed Funds Rate – Inflation Rate

Similarly the real short-term interest rate faced by borrowers (say a mortgage holder who has a variable rate mortgage or a consumer with credit card debt or a corporate who issues short term commercial paper) is given by the following expression:

Real Short Term Market Rate = (Nominal Short Term Market Yield – Inflation Rate) = (Nominal Short Term Market Yield – 3 month Libor rate) + (3 month Libor rate – Fed Funds Rate) + Fed Funds Rate – Inflation Rate

The first expression above shows clearly that even if the policy rate (the Fed Fund rate) is 0% the long term real interest rate faced by market borrowers can be very high for three reasons:

1. For any given nominal market rate there is deflation that increases real rates

2. The spread between the nominal market rate and the long term nominal yield on safe government bonds (representing the credit spread) can be high and rising

3. The spread between the nominal government bond yield and the policy rate (the yield curve spread) can be high and rising

A similar three-part decomposition holds for the short term real market rate that depends on deflation, on the spread between market rates and the short –term Libor rate and the spread between short term Libor and the policy rate.

Now, in a situation of a liquidity trap all three factors described above keep real long term market rates high and rising in spite of falling policy rates (that end up with the Fed Funds rate down to zero). First, the credit spread has widened for high yield corporates from 250bps in June of last year to a whopping 1600bps in recent days; even the credit spread for high grade corporate has gone from 50bps to 400-500bps. Second the spread between long term government bonds and the Fed Funds rate has sharply increased as the Fed Funds rate has been reduced from 5.25% to 1% (soon 0%) while long bond yields have fallen very little (about 100bps). Third, inflation is sharply falling and deflation is over the horizon.

The same holds for the sharp increase in real short term market rates since the beginning of the liquidity crunch in money markets and short term debt markets: a rise in the spread between market rates (say credit cards or commercial paper) and 3 month Libor; a rise in the spread between 2 month Libor and the policy rate (or variants of the same such as the TED spread or the Libor-OIS spread); a fall in inflation and the onset of deflation.

“Crazy” Monetary Policy to Address the Liquidity Trap and a Severe Liquidity and Credit Crunch

To address the increase in real short term market rates the Fed and other central banks have already undertaken quite unorthodox monetary policy moves. To address the even more severe increase in real long term market rates the Fed and other central banks will have to undertake even more radical and unorthodox policy actions.

The widening of the real short term market rates has been addressed by creating a whole series of new liquidity facilities (the TAF, the TSLF, the PDCF, the swap lines with foreign central banks, the new commercial paper facility). Some of these facilities have been aimed at reducing the sharply rising TED spread, Libor-OIS spread, Libor-Fed Funds spread. While other of these facilities – such as the new commercial paper facility (that has the acronym of ABCPMMMFLF) have had the aim of reducing the sharply rising spread between short-term market rates (such as commercial paper rates) and the policy rate (or the 3 month T-bill rate). Flooding money markets with massive amounts of liquidity and with a massive swap of illiquid assets sitting on the balance sheet of banks and broker dealers (MBS, etc.) for safe Treasuries has finally started – after 12 months of rising spreads – to reduce such Libor versus safe assets spread.

Indeed, the Fed and other central banks that used to be the “lenders of last resort” have become the “lenders of first and only resort” as banks don’t lend to each other, banks don’t lend to non-bank financial institutions and financial institutions don’t lend to the corporate and household sectors.

However, in spite of the Fed becoming the lender of first and only resort (even the corporate CP market is now being propped by the new Fed facility) there are still major problems that remain seriously unresolved in short term money markets and short term credit markets:

- Such Libor spreads are rising again in recent days; and they are still very high – at the 3 month maturity – compared to what they were before this liquidity crunch;

- banks and other financial institutions are still not lending to each other in spite of lower spreads as they need the liquidity received by the Fed and they worry about the solvency of their counterparties;

- only banks and major broker dealers have access to these facilities and thus most of the shadow banking system does not have access to this Fed liquidity;

- market spreads as still rising and the availability of short term credit is becoming tighter as banks increase interest rates on credit cards, student loans and auto loans and make such loans in scarcer supply;

- only rated investment grade corporate have access to the commercial paper facility leaving millions of speculative grade or non-rated firms in an even bigger liquidity and credit squeeze;

- securitization of credit cards, auto loans, student loans is currently dead.

This is why now a desperate Treasury is starting to think about using the remaining TARP funds to directly unclog the unsecured consumer debt (credit cards, student loans, auto loans) market and the securitization of such debt. Desperate times required desperate and extreme actions.

Even “Crazier” Policy Actions Are Required to Reduce Long Term Market Interest Rates

But even more desperate or “crazier” monetary actions are needed to address the increase in real long term market rates. These actions are needed to prevent deflation from setting in, to reduce the credit spread (the difference between long term market rates and long term government bond yields) and to reduce the yield curve spread (the difference between long term government bond yields and the policy rate).

There are a number of tools that the Fed could use to reduce the yield curve spread when the Fed Funds rate is already done to zero. First, the Fed could commit to maintain the Fed Funds rate down to zero for a long period of time: since long term government bond yields are – based on the expectation hypothesis – equal to a weighted average of current short term government bond yields and current expectations of what those short term bond yields will be for the foreseeable future a commitment to keep the Fed Funds rate down to zero for a long time will affect expectations of future expected short rates and could reduce long term government bond yields. Even this action may not be sufficient to reduce long yields on safe assets as such long yields also depend on liquidity premia and risk premia that will not be affected by expectation of future short rates. Greenspan discovered the “bond market conundrum” when raising the Fed Funds rate from 1% to 5.25% did not change much long rates and Bernanke rediscovered this conundrum when reducing the Fed Funds rate down to 1% failed to significantly reduce long rates. Such long rates depend in part on the global supply of savings relative to the demand for investment; thus they are not likely to be strongly affected by current and future expected policy rates.

Second, the Fed could do what it last did in the 1950s: directly purchase long term government bonds as a way of pushing downward their yield and thus reduce the yield curve spread. But even such action may not be very successful in world where such long rates depend as much as anything else on the global supply of savings relative to investment. Thus, even radical action such as outright Fed purchases of 10 or 30 year US Treasury bonds may not work as much as desired.

Next, the Fed could try to directly affect the credit spread (the spread between long term market rates and long term government bond yields). Radical actions could take the form of: outright purchases of corporate bonds (high yield and high grade); outright purchases of mortgages and private and agency MBS as well as agency debt; forcing Fannie and Freddie to vastly expand their portfolios by buying and/or guaranteeing more mortgages and bundles of mortgages; one could decide to directly subsidize mortgages with fiscal resources; the Fed (or Treasury) could even go as far as directly intervening in the stock market via direct purchases of equities as a way to boost falling equity prices. Some of such policy actions seem extreme but they were in the playbook that Governor Bernanke described in his 2002 speech on how to avoid deflation. They all imply serious risks for the Fed and concerns about market manipulation. Such risks include the losses that the Fed could incur in purchasing long term private securities, especially high yield junk bonds of distressed corporations. In the commercial paper fund the Fed refused to purchase non-investment grade securities. Even high grade corporate bonds are not without risk as their spread have massively widened in recent months from 50bps over Treasuries to levels in the 500bps plus range. Also pushing the insolvent Fannie and Freddie to take even more credit risk may be a reckless policy choice. And having a government trying to manipulate stock prices would create another whole can of worms of conflicts and distortions.

Finally, the Fed could try to follow aggressive policies to attempt to prevent deflation from setting in: massive quantitative easing; flooding markets with unlimited unsterilized liquidity; talking down the value of the dollar; direct and massive intervention in the forex to weaken the dollar; vast increase of the swap lines with foreign central banks (an indirect and disguised form of forex intervention) aimed to prevent a strengthening of the dollar; attempts to target the price level or the inflation rate via aggressive preemptive monetization; or even a money-financed budget deficit (an idea suggested by Bernanke in 2002 that he termed to be the equivalent of an “helicopter drop” of money in the economy). The problem with many of these “extreme” policy actions – as well as some of the ones described above to affect the relevant spreads – is that they were tried in Japan in the 1990s and the last few years and they miserably failed: once you are in a liquidity trap and there are fundamental deflationary forces in the economy as the excess aggregate supply of goods is facing a falling aggregate demand it is very hard even with extreme policy actions to prevent deflations from emerging.

Some very aggressive policy actions – such as letting the dollar weaken sharply – may do the job but they may also be beggar-thy-neighbor policies that would export even more deflation to other countries: a much weaker dollar would mean a much stronger value of other currencies that would reduce aggregate demand abroad and exacerbate their deflationary pressures as their import prices would sharply fall.

And indeed with global – rather than U.S. alone – deflationary forces setting in the global economy dealing with global deflation becomes much harder. The world economy has been massively imbalanced for the last decade with the U.S. being the consumer of first and last resort, spending more than its income and running ever larger current account deficits while creating a massive excess productive capacity via overinvestment; while China and other emerging markets have been the producers of first and last resort, spending less than their income and running ever larger current account surpluses. With U.S. spending (consumption, residential investment, capex spending) now faltering and structural rigidities to a rapid growth of domestic consumption demand in China and emerging market economies, a global glut of unsold goods may lead to persistent and perverse deflationary forces that may last for a longer time unless proper policy actions – mostly non-necessarily monetary – are undertaken.

Thus, dealing with this deadly combination of deflation, liquidity traps, debt deflation and defaults that I termed as global stag-deflation may be the biggest challenge that U.S. and global policy makers may have to face in 2009. It will not be easy to prevent this toxic vicious circle unless the process of recapitalizing financial institutions via temporary partial nationalization of them is accelerated and performed in a consistent and credible way; unless such actions are combined with massive fiscal stimulus to prop up aggregate demand while private demand is in free fall; unless the debt burden of insolvent households is sharply reduced via outright large debt reduction (not cosmetic and ineffective “loan modifications”); and unless even more unorthodox and radical monetary policy actions are undertaken to prevent pervasive deflation from setting in.

Thus, while the Fed may pursue radical, “crazy” and “crazier” monetary policy actions the true policy responses to the risk of deflation may lie elsewhere: when monetary policy is in a liquidity trap a properly-targeted fiscal stimulus is more appropriate and effective; cleaning up the financial system and properly recapitalize it is necessary; and debt deflation and debt overhang problems are more directly and properly resolved through debt restructuring and debt reduction than by trying to reduce the real value of such liabilities via higher inflation.

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956 Responses to “The Deadly Dirty D-Words: “Deflation”, “Debt Deflation” and “Defaults”. And How Central Banks Will Have to Resort to “Crazy” Policies as We Have Reached Such Bermuda Triangle of a “Liquidity Trap””

David in Seattle • November 21st, 2008 at 3:13 am

Futures are on fire, up 300 points (as if all is fine and dandy today). I smell a rat (PPT). I think they are squeezing the shorts again.

David in Seattle • November 21st, 2008 at 3:47 am

Excellent article by Jim Willie, which mirrors Nouriel’s point on Deflation.A major challenge looms large on the immediate horizon. The US Economy must be reflated in order to avoid collapse. Debts have become a crippling factor. Liquidation of speculative trades coincides with economic retreat, and hedge funds are under attack by their creditors (largely Wall Street firms) while major companies shed workers by the tens of thousands. When asked about economic prospects, a standard answer lately of mine has been to observe important signals not of recession but of potential disintegration. Almost all of the economic data, almost all of the Fed regional reports, almost all of the consumer sentiment indexes, almost all of the jobs data, almost all of the housing foreclosure data, is negative. The most dangerous and disgusting aspect of the current rescue initiatives is that almost all Dept Treasury and USFed actions are not revealed via any disclosure at all, nothing. Despite demands for transparency, nothing is shared on detail. Corruption and fraud usually thrive in such an environment.Many clownish elite economists seem to miss the point, when they overlook how bank insolvency is much more the issue than liquidity. Big banks not only have doubts as to their own solvency, but they dislike the credit standing of many of their borrowers. So the challenge will be to reflate the economy even as desired, to proceed with money flowing into its credit centers, and to exploit how current loans can be paid back with cheaper future money. Gold will thrive in this environment, since a climax of a disaster, or a climax of produced price inflation will benefit gold enormously. Both scenarios are very favorable to gold and silver prices. Besides, a default at the COMEX for both gold and silver seem highly likely, with cracks forming in December, and outright highly publicized defaults suffered in 1Q2008.Full article:http://www.financialsense.com/fsu/editorials/willie/2008/1119.html

Alessandro - http://castellidicarte.blogspot.com/ • November 21st, 2008 at 4:47 am

Professor, I completely disagree with your proposed solutions. Or more precisely I’m in shock.I have really hard times seeing you proposing delusional Keynesian solutions for the current crisis. You could see so clearly what the problem was and still is: too much debt, too much credit, too low risk price, too obscure financial instruments. How is it possible that your solution is just plain more of the same: more debt, more credit, lower risk price and more obscure financial instruments (people lend to Treasury, that lends to the FED, that lends to AmEx, that lend to a consumer to buy his last mean on credit, WOW!)?What it is needed is transparency, just that and the consequent massive debt default. Yes, this means that a huge part of the pension balances will disappear in puff of smoke. But your delusional Keynesian “solutions” practiced to the bitter end would reach the exact same effect via the collapse of the fiat monetary regime, taking the real economy with it.I just can’t understand.

Guest • November 21st, 2008 at 4:48 am

Interesting that many Asian markets kicked up into positive territory from mid-afternoon today. Check out Australia, China, India, Indonesia and Japan.Orchestrated action or just coincidence. Or a case of “directly intervening in the stock market via direct purchases of equities as a way to boost falling equity prices”? Desperate and dangerous.

Alessandro - http://castellidicarte.blogspot.com/ • November 21st, 2008 at 4:55 am

Ooops, in your last sentence (that I, to my shame, had not read before posting) you get closer my plea, but still fiscal stimulus and recapitalization is just another way to say: let the ones that produce work for the ones in debt. This is not how free markets and sound financial systems work.

dherkes • November 21st, 2008 at 4:58 am

As usual, a succinct, cogent, and depressing summary. Good job. When the truth comes from CBS, I’ll be surprised.

Alessandro - http://castellidicarte.blogspot.com/ • November 21st, 2008 at 5:01 am

Today is the Option Expiration day, anything you see in the market has nothing to do with sentiment, fundamentals or even reality.

Guest • November 21st, 2008 at 5:11 am

Exactly – allow/encourage the deflation to occur faster – not slower. (Alessandro: Need some help on how transparency alone accomplishes that goal.) Short term more pain. Long term faster recovery. Even longer term question, recovery to what? A recreaton of a US economy based on 70% consumer consumption? The current focus of Fed/Treasury is trying to sustain an economic model rooted in a questionalbe premise of sustainability with a dash of protecting their buddies. Of course, with someone else’s money.

Stratonovich calculus • November 21st, 2008 at 5:25 am

Tales from the ApocalypseOne deflation-fighting attempt: Provide unexpected customer service rather than lower prices.My wife was browsing for winter clothing at Patagonia’s website, and all of a sudden someone at Patagonia initiates “Live Chat” with her! “Hello, is there anything you’d like to ask about?”I have never, ever, ever heard (or imagined) a retailer paying someone to approach me as I enter their website.My wife was too surprised and polite to answer with the reason she was there in the first place: investigating the timing of significant Christmas price drops: Before or after Thanksgiving? Before or After Christmas?

INDUSTRIALISM = SLAVERY • November 21st, 2008 at 5:38 am

Turning to consumption, as the grand end which justifies the evil of modern labor, we find that we have been deceived. We have more time in which to consume, and many more products to be consumed. But the tempo of our labors communicates itself to our satisfactions, and these also become brutal and hurried. The constitution of the natural man probably does not permit him to shorten his labor-time and enlarge his consuming-time indefinitely. He has to pay the penalty in satiety and aimlessness. The modern man has lost his sense of vocation….The tempo of the industrial life is fast, but that is not the worst of it; it is accelerating. The ideal is not merely some set form of industrialism, with so many stable industries, but industrial progress, or an incessant extension of industrialization. It never proposes a specific goal; it initiates the infinite series. We have not merely capitalized certain industries; we have capitalized the laboratories and inventors, and undertaken to employ all the labor-saving devices that come out of them. But a fresh labor-saving device introduced into an industry does not emancipate the laborers in that industry so much as it evicts them. Applied at the expense of agriculture, for example, the new processes have reduced the part of the population supporting itself upon the soil to a smaller and smaller fraction. Of course no single labor-saving process is fatal; it brings on a period of unemployed labor and unemployed capital, but soon a new industry is devised which will put them both to work again, and a new commodity is thrown upon the market. The laborers were sufficiently embarrassed in the meantime, but, according to the theory, they will eventually be taken care of. It is now the public which is embarrassed; it feels obligated to purchase a commodity for which it had expressed no desire, but it is invited to make its budget equal to the strain. All might yet be well, and stability and comfort might again obtain, but for this: partly because of industrial ambitions and partly because the repressed creative impulse must break out somewhere, there will be a stream of further labor-saving devices in all industries, and the cycle will have to be repeated over and over. The result is an increasing disadjustment and instability.It is an inevitable consequence of industrial progress that production greatly outruns the rate of natural consumption. To overcome the disparity, the producers, disguised as the pure idealists of progress, must coerce and wheedle the public into being loyal and steady consumers, in order to keep the machines running. So the rise of modern advertising-along with its twin, personal salesmanship-is the most significant development of our industrialism. Advertising means to persuade the consumers to want exactly what the applied sciences are able to furnish them. It consults the happiness of the consumer no more than it consulted the happiness of the laborer. It is the great effort of a false economy of life to approve itself. But its task grows more difficult even day.- http://xroads.virginia.edu/~MA01/White/anthology/agrarian.html

Alessandro - http://castellidicarte.blogspot.com/ • November 21st, 2008 at 5:50 am

Guest, we are on a similar wave length. Forcing transparency means that people will know to whom is really safe to lend to. This might very well bankrupt half of the world companies forcing a massive debt default. Doing it overnight is crazy, but the question to me is how do you organize the orderly liquidation of a sizable part of the financial and economic system? Either someone will answer that question or the liquidation will be disorderly, whatever the FED and the Treasury do.

Guest • November 21st, 2008 at 6:16 am

How about seriously doing something about foreclosures? All efforts have been window dressing thus far, like a person owes $350,000 on a house but home is only worth $200,000 bank will only get $150,000 if they foreclose so they call the borrower up and say we’ll knock off $20,000 and reduce your interest rate by 2 points, this saves the buyer say $300 dollars per month the home owner laughs in the banks face and walks away from the house. Believe it or not this is the kind of effort being put forth so far by the banks, they’re slitting their own wrists and taking the entire economy down with it. Memo to banks: stop playing a game of chicken you’re loosing we’re all loosing.

crgordon • November 21st, 2008 at 6:18 am

The banking cartel, a/k/a Federal Reserve, actually prints money and printing money is one of many possible solutions. It has its own set of worrisome issues as it relates to currency “value” and diminished likelihood of future foreign financing of the US deficits.

Guest • November 21st, 2008 at 6:23 am

interesting analysis will be to compare various solution alternatives of current situation from 2 viewpoints:a) who benefit most from particular solutionb} who bears most costs of particular solutionas each solution must be “sold” ..e.g.- “inflate us from this shit” solution – clear beneficiaries are indebted parties; cost are beared by creditors and savers + finassets investors ..- accelerate deflation this or other way to “clean up” the system – beneficiaries – savers, productive asset owners strong enough to survive; costs beared by dubious financial asset owners + indebted parties/consumers + weak productive asset owners- financial liabilities restructuring, fin system recapitalization and fiscal stimulus: beneficiaries – in some proportion share of practically everybody; costs – spread mainly to taxpayers and to some extent investors. Benefit – maybe providing some time line optimization of managed/orderly process- real economy crash/disintegration (with fin system crash either before and necessarily immediately after ???Can somebody formulate and evaluate basic scenarios this way?

Guest • November 21st, 2008 at 6:29 am

be very careful today volatility will likely continue at record levels – e.g. buy and hold will need to be measured in minutes if not seconds.

Octavio Richetta • November 21st, 2008 at 6:45 am

The Professor’s deflation post in terms that are easy for all to understand (and shorter)Professor, to put in in simple terms, what we are seeing is the failure of capitalism. The top capitalists grabbed to much of the pie, they own the commodity providers, they own the manufacturers, they own the land where houses are build, they own the services (including banks, hospitals etc.), they own the banks that lend the money so that consumers can consume and they can even make more money.The system created a huge production apparatus that needs affluent consumers buying all the junk capitalists produce, from ipods, to blackberries, to the latest laptop, car, McMansion etc. But the problem is that as they were expanding instead of letting their employees share on the bonanza capitalists cornered them. Your workers are my consumers and even the consumer of the stuff you make and vice-versa. So consumers are not just people living on savings like me; consumers are people who work for a capitalist. These workers have been cornered more and more in terms of salary reductions, layoff, that result from moving jobs overseas, technological improvements,etc.So the net result is that consumers don’t have enough income to buy all the junk they watch on TV. So what do the smart capitalists banksters did? They lent they money at high interest so that the little guy could spend future consumption upfront and they could make even more money on top of that (think the profit on a GM car plus the profit from the financing).For a while Diz worked like a charm. AG provided the cheap source of funds so that consumers got reasonably low rates and banks made a killing on the spread. But eventually debt levels got too high, conscious people stopped leveraging to the extreme so they started targeting the bottom of the heap: sub-prime folk. SO most folk, sub-prime and most others, reached a point in which they mortgaged their lives since their debt surpassed the present value of their lifetime earnings (i.e., they became insolvent and now they cannot neither consume nor pay all their debts – but they can and should pay some).The recession cycle is making matters worse since people who were living close to the edge but doing well in good times also start becoming insolvent.An economy in which a huge chunk of the population is insolvent cannot consume. In order to consume you have to produce. You can only consume what you can produce. You can consume a portion of your future income up-front but that has got to have a limit.People cannot go on mortgaging their lives to banks like they have in the past. Situations in which the paycheck is gone by the time you service your debt are unacceptable, is this a way to live?, there has to be money left even for rainy day savings. This is the way people who have been through hardship (WWI &II, holocaust for Jews and Armenians) learn to live; they are smart, they have learned the lesson.People have to learn not to be tricked by the TV lady with the cute face and nice bare ass that tells them: “buy this car” “drink this beer”, “wear this hat” and “this watch” “go to this place”; “and only them you will be cool”. You can be who you are even if you only own two pairs of jeans, a set of snickers, four T shirts, a salvation army coat, and some underwear. It is what is inside your brain that REALLY matters.Let me give you an example, the Great Houbini: He became cool just using the gray stuff is his brain. He doesn’t wear extravagant outfits, till recently his hair was a mess, he probably doesn’t even drive a fancy car, and look at all the CNBC and Bloomberg babes chasing him!:-) SO you see a boring, absentminded, unfashionable (until recently) economics professor has now become a good candidate to be a trophy husband or for him to get a trophy wife!The little guy overseas cannot pickup the slack for the until recently “rich” McMansion-Hummer-gold-chain amerikan consumer. He makes very little money and even though the banks are starting to lend to him to play the same game they did in the US they cannot make up the US decline in consumption.SO here they are capitalists with their huge factories, car, houses, electronics, etc. which people cannot afford to buy. Diz is the deflation the Prof. is talking about. Just basic supply and demand stuff they probably even teach in HS economics.The solution to the problem is to train the workers in industries that have a future and more or less equalize workers salaries and rights across the world so that they make enough money to buy a decent house, (car if possible and really needed), health insurance, and eventually a 1-2 vacation somewhere without having to jump on debt except for a conservative mortgage. Banning CCs would not be all that bad. Business will slow initially but then it will stabilize.I don’t like it but the idea of some king of “system reset” like when your computer freezes is need. I hate it as it will involve debt forgiveness for irresponsible people who, if uncontrolled, will do it again. It will involve debt forgiveness to banks owned by vary rich people who took lots of money out and are now wealthy even at the billonare level, and where the ones that created this mess. Their fortunes should be confiscated.Drastic changes and lots of hand, even face slaps, will be needed. I hope Obi will be up to the task in a way that minimizes the free rides for the sinners because guess what? When you throw so much money on the streets. You know what happens? the 10% of the people who already own 90% of the assets are the ones that are smart enough, and have the resources to corner 90% of the money the government puts in. This is the way life is folks; the rich get richer.The cornering of the US consumer by capitalists-bankster complex and the eventual demise of the pyramid scheme is something I saw around the irrational exuberance AG speech and thus pulled out of the market in the fall of 1997

Octavio Richetta • November 21st, 2008 at 6:55 am

1. 4th paragraph, second line ” guy could spend future consumption” should be:”guy could spend future INCOME”2. 9th paragraph the underwear is optional. It helps wear you jeans longer before they become smelly. You just need to wash the underwear which is easy to wash and dries overnight:-)3. third paragraph from the bottom vary rich should be very rich

Anonymous • November 21st, 2008 at 7:00 am

Thankyou for repeating the truth so that the American public understands that what the lenders say to Congress under oath is simply a pack of lies: I own multiple properties and am experiencing exactly what you describe above and I, unlike the auto execs, don’t fly around the country in a private jet while asking for a bailout!!!

Guest • November 21st, 2008 at 7:10 am

Many good points! I would add the following:Recognition by the public of these inequities followed by transparency, new regulation, new enforcement and new penalties all centered around the core question of “what is the best system in terms of fairness for all hard working Americans, present and future that will also benefit the rest of the world”! We must rethink the present capitalistic system before it’s too late!

Jason B • November 21st, 2008 at 7:16 am

I would expect that this is an automated chat greeting. If she were to respond, there would be a long wait while the question was relayed to a chat representative in a center in Hyderabad.

Jason B • November 21st, 2008 at 7:33 am

It is too late. Expect the ‘crazy monetary policies’ listed above to be tried.The compounding problem will be lack of foreign purchasers for treasuries. It is clear that the US has no way to pay off its debts or meet future obligations. Foreigners are pulling the wool off thier eyes. China is in terrible shape already as far as unemployment goes. We stopped purchasing from them. Now they are investing in domestic infrastructure. Their money will not be going to Treasuries.The value of oil has fallen by $100/ bbl. That money is not going from the US, the largest consumer of oil, to the Saudis. In addition, auto miles travelled is decreasing rapidly. On top of that, the US DoD, the largest single consumer of oil in the world, will soon be pulling out of Iraq. The saudis have and will continue to have much less money to invest in treasuries.Japan is being hammered by the ‘toyota crash’. As an exporting nation, they are getting killed by the retrenchment of the US consumer. They will be investing much less in treasuries.We will not be able to sell enough treasuries to fund the US deficit in 2009. Period.

John M.K. • November 21st, 2008 at 7:53 am

One question is what they should do and the other is what they will do.What should they do: I agree with the Professor that fiscal stimulus is the way to go. Demand is out of line with supply and the capitalist system is unable to correct for that. That is why government should intervene (even if you don’t like Keynes or think his ideas were desilusional, there is some truth in his theories, now even more than ever).What will they do: they will try to protect the perks of the elite and the military until they run out of ‘solutions’. Thsi means: try to keep up the value of the dollar, try to shove the bill to the taxpayers or abroad, and if this leads to bankruptancies and massive unemployment: the people in power do not care! The proof is that if they would care, we never would have gotten this far, there would be universal healthcare in the US, there would be more regulation and transparancy in the first place.

G Meli • November 21st, 2008 at 8:03 am

I think now is the best time to print and monetize.Inflation expectations are their lowest ever since the 30′s and the dollar is up.Why wait until expected inflation kicks up and the dollar drops to start printing money?And I’m not even an economist.

Guest • November 21st, 2008 at 8:08 am

If there is a lesson about how this crisis has evolved – things are happening at a much faster speed than any of the experts including NR have predicted. Deflation / inflation – dollar collapse – whatever it will be count on it coming sooner and sharper rather than later and gradual.

Anonymous • November 21st, 2008 at 8:15 am

This is a strange word, stag-deflation. In the olden times, they had a much simpler word for it: depression. Why don’t you use that one?

oller • November 21st, 2008 at 8:23 am

If you syncretize the professor’s comments with the prior postings, we have an inherent problem in the structure of present capitalism. The labor wages are not enough to sustain global consumption without debt. Debt is no longer easily available. The elite are not dealing with the debt overhang of the american consumer and will probably target the fiscal stimulus to profit them and not the general public. Octavio is right. The flaws of the economic software are coming to light. The elite will persist in running this software until the whole thing cracks from lack of global total aggregate demand as John M.K. stated. The professor stresses at the end of the piece the importance of Fiscal Stimulus and reduction of debt overhang. The banks will refuseto modify loans to fair market value to reduce debt overhang and the crony lobbyists will squander the efficiency of the fiscal stimulus. Either we vociforously participate in the democratic process to bring to fore the great defects of our present situation, or we are in for a very serious situation.

Michelle • November 21st, 2008 at 8:24 am

Monetary and fiscal stimulus is necessary to produce inflation to offset the devastating effects of the continuing deflationary spiral that has already taken hold. The current administration has already resigned and the incoming administration will be faced with determining fiscal policy, but by that time it may be too late to do anything to end this vicious cycle.The Fed has been too conservative with its liquidity injections and worries about future inflation and foreign financing. I think this is not a real threat and the Fed needs to understand that the world depends on our endless supply of dollars to maintain the global economic engine.In my opinion, I think too little has been done and it’s too late to save us from the demoralizing effects of deflation. Each day seems to get worse, not better, with the deteriorating psyche of the public and the destructive wealth effect each of us is currently facing.

Ron • November 21st, 2008 at 8:36 am

Will the powers that be do the “right” thing? I suspect not as any fix or deal will be slanted to those who win the negotiation of “what to do about this mess.”Human nature changes at a snail’s pace over the eons. I wonder if any fix can be crafted to fix the problem vs. benefiting those who are crafting it.

Guest • November 21st, 2008 at 8:36 am

The useless money creators and spread makers will prevail in destroying the economy and aggregate demand. However they’re not worried like you might think because the American people politically have no back bone and are literally walking zombies who don’t have the courage to stand up to their masters and they know it. Also the elite are simply waiting for the deflation to run its course so they can buy everything up in sight including you and I. Unless millions of protestors march in the streets the bankers will be our masters.

Guest • November 21st, 2008 at 8:54 am

The answer from our predecessors:”The budget should be balanced, the Treasury should berefilled, public debt should be reduced, the arrogance of officialdom should betempered and controlled, and the assistance to foreign lands should be curtailedlest Rome become bankrupt. People must again learn to work, instead of living onpublic assistance.”Marcus Tullius Cicero – 55 BC

Seneca • November 21st, 2008 at 9:06 am

Free Markets are a fallacy. A quick pain ¨solution¨would lead the world close to or to a large scale wars. Just look at the rising tide of ultra right wing in Europe, Iran, and even the Taliban. Economics, politics and societies are all part of a single body, seemingly independents but interconnected and dependent on each other. Pragmatism, and a holistic view of the system,gentlemen , of the sort proposed by Mr. Roubini, is what is needed to stear the ship around this tsunami.

Jeremy Goodridge • November 21st, 2008 at 9:15 am

Japan tried massive fiscal stimulus too and it failed. So, maybe fiscal policy is also ‘pathetically ineffective’.Jeremy

Dan • November 21st, 2008 at 9:21 am

Outlaw CDSs?Maybe it’s naive of me, maybe I don’t really understand what these are, but why are CDSs still legal? Why can’t we outlaw these Ponzi schemes, make them null-and-void as of Dec 1. The fees can be amortized to a null-and-void date, then, the AIGs and the like won’t have to put in reserves for future claims on these devices. An alternative would be for whomever makes a claim on a CDS to also surrender the bonds to the CDS issuer, much like when an insurance company totals a car (there is value in the wreck, as there is value in a defaulted bond — may have to wait in line at bankruptcy court)Specific to the deflation issues mentioned in this blog post, wouldn’t it make sense to move the interest rates on underwater houses temporarily to zero, or negative numbers? Economically speaking if one were to discount the principle instead, there’s every reason to sell the house and recoup that discount, likewise, foreclosures are equally as bad since the house is unwelcome on the real estate market. A negative mortgage rate gives the owner every incentive to stay in his house — a very good thing with this market.

Guest • November 21st, 2008 at 9:23 am

London Banker asks the million dollar question. When is the deleveraging going to stop? The initial paragraphs of his post is very intriguing!!! Did theprime brokers find a profit opportunity in the deleveraging hedge funds? Was the deleveraging a convenient way to create a dollar surge to counterbalance the liquidity infusions? I got thisintuitive feeling when I read it, that maybe theprime brokers may have seen a profit opportunity in the Lehman BK and that would be the only way that this was allowed to happen! London Banker always makes us think, even though sometimes I personally go off the deep end. If the Masters of the Universe thought it would be fun to profit from a downdraft and pick up fire sale assets atthe end, they deserve french haircuts for Christmas!! Have there been unintended consequences to what they saw as profit opportunities, and now they can’t control thedowndraft as they thought they might? Whoevermay have played this high stakes game withoutconsidering the consequences to the expandablemasses, would be responsible for much pain tothe people that don’t live in the Financial Clouds.

Anonymous • November 21st, 2008 at 9:28 am

The economy should be reflated by giving highly subsidized mortgages and consumer loans: borrow USD 100,000 between now and January 31; repay USD 90,000 with the usual terms and zero interest rate, as a courtesy of the FED.

nyu grad student • November 21st, 2008 at 9:29 am

WHY NO ROUBENI comment on Citi?—(The Gov’t is scared of N.R. and he has been silenced?)biggest story of credit crisis so far…FED or FDIC must take it over immediately.

Dan • November 21st, 2008 at 9:30 am

The negative interest rates can be pegged to how much the house is “under-water” and what the prevailing interest rates are at the time. As soon as the house is no longer underwater, the mortgage payments can resume as before (which is likely 18 months as Nouriel has predicted)I see this as a pretty effective feedback loop (I’m an engineer, not an economist).

Phalanges • November 21st, 2008 at 9:31 am

I would check out Mr. Kirby at kirbyanalytics.com who reckons its tied into JP Morgan’s Medium Term Interest Rates Swap Book and the manipulation that has been ongoing since the mid 90′s.

Central Alabama • November 21st, 2008 at 9:38 am

Central Alabama, Neighborhood in which my son lives. A house behind his with 2000sq ft. went into foreclosure in Jan. 08 the price to purchase was 150,000 June 08 the price was 90,000 he called me yesterday and told me the house could be purchased at 50,000. His house is 2200 sq ft. was purchased for 154,000 in 07 with this house and others in the area in the same situation he as well as the rest of the home owners are in negative equity of 104,000 on average.This price decline is in everything I see from used cars to ATV’s. Do not buy anything today, is very true.

Phalanges • November 21st, 2008 at 9:46 am

I ROFL at CITI’s request for the reinstatement of the uptick rule and the banning of short selling. That would be the naked shorting that is trashing their share price. I wonder how many FTD’s there are on CITI stock right now?

Seneca • November 21st, 2008 at 9:53 am

Agree. Question, why should your son and all ¨”home-loaners” in similar situation bear all of the risk, while the ones partially guilty for his situation, the banks, made already money with his loan via derivatives. got bonuses and got a loan from your son´s tax money (TARP1 and now 2)be left without holding any risk. Write down the loan mr. banker and re-structure the loan.

Anti-Federalist • November 21st, 2008 at 9:56 am

@NR:”It will not be easy to prevent this toxic vicious circle unless the process of recapitalizing financial institutions via temporary partial nationalization of them is accelerated and performed in a consistent and credible way”BWAHAHAHA! Seriously, when was the last time anything got temporarily, partially nationalized. Your recommendation is delusional (in the literal sense of the word; not as a derogatory one) – if (and probably when) this happens, it will be the death knell for democracy and capitalism. Temporary partial nationalization, indeed. ROTFLWCU (Rolling on the floor laughing while crying uncontrollably).

New Guy In town • November 21st, 2008 at 10:06 am

Hey Folks,Thanks for your insight. I’m not an economist, but this whole thing confuses me.People seem to be making the inference that the appropriate policy here is to dump money (Krugman is saying that for example) and that this was a lesson learned from the depression. But this inference assumes the cause of the current situation is the same as the cause of the depression. Is that the case? The sense I get is that this isn’t just a liquidity crisis – it’s a debt/solvency crisis. Thus, I don’t know why the lesson learned from the depression is necessarily the approach taken here.It seems a lot of people have studied the depression, and made all sorts of inferencees. But with the depression, N=1.Now, since I am not an economist, it may be in fact the case that the underlying cause of the depression and this situation are in fact the same. If that were true, it would be reasonable to take that Keynesian strategy. But is this the case?

Guest • November 21st, 2008 at 10:06 am

The talking heads on CNBC are already writing the obituary for C … Also was Paulson’s speech yesterday a throwing in of the towel as in “this is your problem now Mr. Obama”

Guest • November 21st, 2008 at 10:18 am

Biggest inflation rate fall since 1959 raises deflation concerns The Canadian Press – 1 hour agoOTTAWA – Consumer prices in Canada tumbled last month in their steepest one-month drop in nearly half a century, as falling energy prices chopped the annual inflation rate by almost a full point to 2.6 per cent from 3.4 per cent in September.link

Anonymous • November 21st, 2008 at 10:23 am

Marc Faber expects a strong rebound within 3 months:http://www.cnbc.com/id/27834889Statistically a rebound should happen, but if it doesn’t “the air is out” and the world faces an economy “worse than the depression of ’29 to ’32,” he said.What does he mean ‘should happen’ but doesn’t happen?

Guest • November 21st, 2008 at 10:31 am

I’m not an economic person and had never paid any attention until this happen, especially listened Professor Nouriel Roubini on TV.So now the whole economy is being sold on force closure price. So the good people with cash can buy it cheaply and come out of this many many times filthy richer. Damn I could be one of them had I sold my condo few years ago and sitting on my $400,000 and retired soundly by now.

Guest • November 21st, 2008 at 10:32 am

I have noticed that he often wraps his predictions in contradictions – that way your are never wrong or always wrong.

Anonymous • November 21st, 2008 at 10:39 am

Historically the answer would be to devalue the dollar — byincreasing the number of dollars required to purchase thecurrency reference (in the past gold).But there is no longer a reference … the dollar is thereference … not only in the US but worldwide.This would seem to indicate that a better solution is to’invent’ a new world currency reference — and returning togold is out of the question — just not enough of it nor isit distributed properly to be called ‘money’.There are other possible world currency references … thisneeds to be under active consideration.

Guest • November 21st, 2008 at 10:39 am

@ Michelle: “The Fed has been too conservative with its liquidity injections and worries about future inflation and foreign financing. I think this is not a real threat and the Fed needs to understand that the world depends on our endless supply of dollars to maintain the global economic engine. … In my opinion, I think too little has been done and it’s too late to save us from the demoralizing effects of deflation.”The policies you advocate actually will destroy the modern “global economic engine.” America’s fiat currency system is dead – from abuse. Bernanke can print paper and create credit, stimulate and monetize, blow bubbles and bail out, expand and contract, spend and tax…But it’s too late. The resultant crack-up boom has thundered its final explosion: The breakdown of the whole monetary system has begun.“Keynes is Dead,” killed by stubborn economic facts. The last rites were pronounced by the once-arch Keynesian London “Economist” in 1969. He’s dead and all the resuscitation efforts by President-elect Obama and some of the policies being advanced by Professor Roubini won’t bring the economy back again. The only way for sound economic recovery to ensue is for the government to keep absolute hands off the economy, confine itself to stopping inflation, and cutting its own budget.Ron Paul on the End of the Fiat-Dollar System ~http://www.lewrockwell.com/blog/lewrw/archives/024086.html

Guest • November 21st, 2008 at 10:46 am

there is enough gold to back a new global monetary system. It would just have to be valued as it should at $3000/oz.

economicminor • November 21st, 2008 at 10:46 am

As I said yesterday, we need to beef up the Bankruptcy Courts and liberalize the rules so that the debts can be written off as fast as possible and the assets resold at a value that provides economic value rather than trying to create more debts that can’t be serviced.More debt is dumb, even if it was used for fiscal stimulus. It may provide a small window of relief but in the end, we have to produce value, not just paper assets supported by ever increasing, never ending debts. Especially now that we have run squarely up against the wall of peak oil, peak in most all energy and peak in just about all commodities. We may at some point with proper planning be able to produce more but it is limited at this point or finite however you want to look at it and the population of the world and the demand can grow much faster than the resources available or expandable as we have seen.These issues are much more complex and intertwined than monetary policy or even capitalism. This is about human nature and human frailties and our ability to exist in these large numbers on this earth.Now that deflation has been recognized by the officials, can they actually do anything about it? I don’t think so. I think the market place, harsh as it can be, will take care of this. But that means lots of suffering and lots of dislocation and a huge change in fortunes. Some will gain tremendously and other will fail miserably. (I think many existing pensioners will be left on the side of the road when assets are fairly valued and real income to support them is calculated along with many who were thought they were wealthy find out that their wealth is gone in the debt bust cyclone.)The times they are a changin! and it is quite a spectacle to watch. I just hope I’m not one of those who get run over.

Guest • November 21st, 2008 at 10:58 am

There seems to be a disconnect between the state of the economy between what is currently being discussed (in the news and blogs like these) and activity on mainstreet.In the discussions, it’s past recession, strongly on depression with a good chance to be the biggest depression ever.On mainstreet, even looking hard and being biased, it seems kinda mellow. Yes there are a couple of homes in foreclosure, but consumer activity appears to be somewhat normal. People eating out, malls busy as normal. Maybe some people have less credit, but they seem to be pretty much as consuming as usual. Maybe a habit? Maybe just lagging indicators? But as a bargain hunter, other than a few more coupons here or there, there doesn’t seem to be all that great of deals. Sure houses are down, but still not that much, unless you want to move to inner detroit. Cars have the usuall end of year incentives plus maybe 0% financing for 3 years for toyota or nissan, but it doesn’t seem represent the 25%+ drop in demand.What do you thing?

economicminor • November 21st, 2008 at 10:59 am

Yes, under the Constitution they have that right. They still have to get it into circulation.But the preferred method has been using the fractional reserve banking system to create money out of thin air by lowering the reserve requirements and loaning the banks money thru the federal reserve at cheap rates. This way the fed makes money and the banks make money.Yet, where that money goes makes all the difference. If it goes to consumption vs. value added production, then there is just more debt and less ability to service it.

AfA • November 21st, 2008 at 11:02 am

Professor,If I am reading your suggestions correctly, you are in fact just copy&pasting Bernanke’s suggestions in his “Deflation: Making Sure “It” Does Not Happen Here”, and endorsing them.I have a question though; whatever happened to the idea that this is a solvency problem rather than a liquidity problem and no amount of easing would really solve the problem? Well the problem can be solved by the Fed and Treasury becoming the first, last and only lenders, market makers, investors, buyers, sellers … markets.But then, why even bother to have a market?

Guest • November 21st, 2008 at 11:03 am

Professor,Deflation is not primarily a monetary problem, it is primarily demand/supply problem. As such it will not have a monetary solution, which is why Mr. Keynes said simply put people to work.It’s amazing how the idiocy of monetarism has infected all thought, not for much longer however.

Guest • November 21st, 2008 at 11:05 am

Thanks for the comment. It seems to me that it would be faster and much more convenient if, instead of worldwide fiat money, we would come up with a single three-member controlling committee to allocate all resources and labor in the world – operating completely out in the open so that all countries would know where they stand.We can keep all of our currencies and all of our own laws, as long as the three-member committee gives us its daily instructions. Instead of worrying about the currency, we would just need to recognize the authority.

YFC • November 21st, 2008 at 11:08 am

Have the Fed send unsterilized, freshly printed $1000 to each taxpayer. If the trick doen’t work, try $10,000 two months later. Monetize the federal deficit till you drop, have the Treasury spend like there is no tomorrow… just looking at Latin America’s experience since the eighties, keeping deflation at bay is a much easier task than taming inflation. The problem here is that ‘printing money’ that ‘monetization ‘and ‘unsterilization’ are dirty words in the orthodox central banker lexicon. The term ‘quantitative easing’ is typical of such misplaced pudity and scruples. Maybe it’s time to realize we are on board the Titanic, and unorthodox measures are perfectly appropriate in desperate times.

Anonymous • November 21st, 2008 at 11:08 am

Yes, but the current distribution of gold does not matchup very well with the current economic activity.Trying to use gold in the long run cause wars.

Life goes on • November 21st, 2008 at 11:09 am

Oh what a day to witness, All is coming to an end in front of our eyes and everyone has a solution that might work but in reality it will not. The economic collapse of the USA is being written in front of us. Blow by blow accounts are being recorded into the history books. The parts that made up this great engine are coming off and the metal is being bent in ways it cannot be repaired, the victims are being crushed and killed in ways thought impossible a year ago.From the information I find available by NR and others the fat lady is singing on top of an ice berg in hail.Economic experimentation is underway; using a toe for a thumb and an arm for a foot, what kind of economic creature will we have when they complete this experiment? I say pull the plug and conceive another. Life goes on.

Anonymous • November 21st, 2008 at 11:10 am

The world only needs so many ‘ditches’.Put people to work doing what? The ‘what’ is determinedby the way money is allocated in the economy.Hence it is a monetary problem.

Guest • November 21st, 2008 at 11:12 am

So if you get rid of the Federal Reserve and Fiat Currency and back currency solely by precious metals now, wouldn’t that be extremely deflationary by contracting the money supply?

economicminor • November 21st, 2008 at 11:12 am

Very complicated with the sliced and diced mortgages. But also the banks are not making money doing this as they often don’t own the mortgage they service and have cut way down on staff due to their financial situations. So we have no incentive, big problems with who actually owns the right to negotiate, who takes the loss but also some of the people really can’t afford the home under any circumstance, have no real penalty to use jingle mail. Then you have the job losses, uncovered and unexpected medical expenses and just plain greed and stupidity by borrowers and mortgage brokers alike.It just isn’t all that simple and I do not think it could possibly accelerate fast enough to get ahead of the curve of other debts defaulting. I think most of this would be best done with a bankruptcy judge so that all the debts could be renegotiated at one time. Piece meal seems inadequate at best. What’s the plan, make some mortgage underwriter have the authority and responsibility of a bankruptcy judge? I sure don’t want one of those jobs.

YFC • November 21st, 2008 at 11:15 am

I have more to say: quantitative easing didn’t work in Japan for a simple reason; it was done too timidly, as if they were commiting a deadly sin.Anyone agrees?

randy • November 21st, 2008 at 11:15 am

unfortunately, history shows that governments NEVER do this. They always meddle with the markets and usually cause more problems as we;ve seen so far. Can Obama turn the corner on this stupidity??? As the CIA guy says in the movie “Charlie Wilson’s War”…….we’ll see.

randy • November 21st, 2008 at 11:17 am

I heard on another site that Citi was preparing to merge with Goldman Sachs. The new entity will be called……”Sachs and the Citi”………..Sorry. this is the best one I’ve heard in a while.

randy • November 21st, 2008 at 11:17 am

I heard on another site that Citi was preparing to merge with Goldman Sachs. The new entity will be called……”Sachs and the Citi”………..Sorry. this is the best one I’ve heard in a while.

AfA • November 21st, 2008 at 11:17 am

In my highly uneducated wishful thinking, the only instance where a government intervention would be welcome and counterproductive is ensuring that the delveraging, deflation and the unwinding of debt is done the most smoothly, rapidly and less painfully possible. Other than that, we, they are just making things worse.Based on the expectation hypothesis you stated, and after all the unorthodox measures taken by the Fed and Treasury so far and that have failed miserably, how could anyone expect other unorthodox measures would succeed. As you clearly stated, the Fed can manipulate the FFR and Level 1 liquidity (liquidity pumping to BD and banks), but the liquidity and risk premia are miles away from the reach of anyone’s manipulation. According to your formula, the contribution of a deflation rate to the overall real rate, compared to risk premia in high risk aversion environment, is very minimal – well I guess so. How much impact does a -100 bps or -200 bps of deflation has on a real long rate of 1600bps. If anything, we are now seeing that the correlation (not necessarily relationship) between FFR and various market rates is negative = the lower the FFR, the higher the risk premia. Monetary policies are uneffective as long as the market participants perceive and demand higher risk compensation. Whenever that effect abates, real market rates will fall down irrelevant of where the FFR is or how much liquidity was swapped. If anything, the low FFR would just exacerbate and delay recovery whenever it has to occur.

Patrick • November 21st, 2008 at 11:18 am

The current administration has obviously decided to flip us the bird on the way out the door. They better watch it, because if this gets any worse, they will be the ones the lynch mobs come looking for. If Citi and GM go …. well. I think it will be bad.FWIW, I think fiscal stimulus directed at productivity enhancing, energy efficient infrastructure must be tried. Things like water systems, sewage treatment, pollution clean-up projects are never really a waste.The energy crisis is only on hiatus due to demand destruction, and we are obvious all a lot poorer than we thought. So, I wouldn’t want to see much extra money spent on roads; the ascendancy of the car is coming to an end. To ease the transition it would be smart to rebuild the US rail system, and re-activate the inland waterways for commerce. Also start rebuilding livable mixed income urban areas where people can live without cars. The suburbs are not sustainable. It’s a waste to pay for all those roads, sewers, and other services in abandoned subdivisions. And people will not have money for cars anyway. The economic refugees from the suburbs are going to need somewhere to live, or we risk massive social dislocations. It’s going to happen anyway, so we might as well be deliberate about it and end-up with something worth having, rather than a hodge-podge of shanty towns.To encourage hiring, the gov’t could extend at least basic health coverage to *all* American’s regardless of income (yes, everyone – that way you don’t deny the benefit to those who pay for it!). Reducing payroll taxes, and maybe possibly eliminating them on a temporary basis might be worth thinking about.I also think transparency is key for restoring confidence. Until we know for sure who is insolvent and who is not, nobody is going to extend credit or buy debt. Ultimately, that may mean radical action to unscramble the CDO/CMO/etc egg and reconstitute the original, understandable, priceable, plain old boring mortgages.Similarly, CDS’s desperately need an exchange, sellers need to be regulated like insurance companies (e.g. capital requirements), and some though needs to be given to limiting CDS buyers to parties with economic interest in the underlying asset/financial instrument to limit ‘contagion’ and the possibility of massive blow-outs caused by a large failure.

Guest • November 21st, 2008 at 11:22 am

No its not a primarily a monetary problem, it does not have a monetary solution.Anyway, monetarism is theology and y’ll wont see reality until its on top of you.Its also not the 1930s, its a new world, with very little new thinking, but that will change.

Guest • November 21st, 2008 at 11:24 am

He simply follows trends and can not think and use common sense. If it rebounded after so big a drop in 87 then that’s what it will do this time. People like him do no actual analyzation of the root problems. Thank God for NR who does exactly that, he’s getting to the root.

Guest • November 21st, 2008 at 11:25 am

2 weeks ago EE said that the feds action was sufficient and the skies were clearing. -10 later, he has decided that the “crisis has morphed”EE is a bright guy, but let’s face it…anyone calling a bottom needs to get a clue!

Guest • November 21st, 2008 at 11:25 am

“We will not be able to sell enough treasuries to fund the US deficit in 2009. Period.”Ok, lets take this view a step further. So if the US can’t borrow enough to operate and make payments on it’s debt, then it will both default and stop some government operations. So the government would contract, cutting off all unnecessary spending first. Maybe this is not such a bad thing?

Guest • November 21st, 2008 at 11:30 am

I agree the only way out of this deflationary cycle is to print and give it directly to taxpayers. Nothing else has worked, nor will it until the assets are written down to market and regulation and transparency are restored. Citi is proof the current banking/IB model of debt,leverage,and cheap money is dead. Let them all fail. It’s time to save what’s left of the real economy.

Flanders • November 21st, 2008 at 11:32 am

SHOULD WE WORRY ABOUT DEFLATION?http://mises.org/story/3219IS DELEVERAGING BAD FOR THE ECONOMY?http://mises.org/story/3064

Guest • November 21st, 2008 at 11:34 am

The concepts of stimulus, rescue, bridge loan, and “troubled asset relief” are really weasel words for government intervention. We are miles past a free market economy already, and the problems of the economy are landing on the desks of legislators. The hearings about the automakers’ problems not only give us a clue as to where we’re headed but they are proof of the money- and power-polluted route that we have taken to arrive at this point.Oh, yes, Pelosi and her little friends need a business plan before they will part with…our money. Not being a carmaker herself, at least she’ll know how to make money when the plan arrives. That financial whiz will know it when she sees it!As P.J.O’Rourke observed: “When buying and selling are controlled by legislation, the first things to be bought and sold are legislators.

statsdoc • November 21st, 2008 at 11:36 am

I agree. Thank you Professor for the detailed explanation on what could happen. As a fellow professor, I would add that your presentation was clear and very understandable, even for some one like me with limited knowledge of economics.Bravo!

Anonymous • November 21st, 2008 at 11:38 am

The economic system is the result of how we value ‘things’ — both material and non-material.The monetary system is how we ‘rate’ or arrange inimportance the various ‘things’. Assigning valueto each. The value of money should reflect sometypical aggregate collection of typical ‘things’.Trade and profit result from different views of thevalue of the aggregates that people or groups have.Trying to artificially separate this components –or ignoring some in favor of others is impractical.

Guest • November 21st, 2008 at 11:49 am

Deflation in continental Europe=> is it really possible? People in continental Europe have significant savings and credit card debt is not as in USA. There are no student loans because university is almost free. People still go to restaurant, buy gifts, go shopping etc. In addition, when people are fired they receive 75% salary during 1 year and then a decrease up to 500 EUR indefinitely so you can still spend without taping in the savings…house loans are based on the people capacity to pay loans. In Belgium you only get a house loan with a down payment + no more than 35% of your income to pay the loan and average duration is 20 years…not like UK where loans were like 50 years…. People don’t generate equity on their house. Basically people don’t like debt…The problem in Europe is limited to banks not underlining consumption or economy.So in my view, continental Europe will stabilize faster and recover slowly with low inflation but not deflation. There is not a collapse of consumption like in UK or USA or at least not in the long term.

crgordon • November 21st, 2008 at 11:53 am

You neglected to mention the liberals hatred of apple pie, baseball and the bible. Now is not the time to pull punches.

Guest • November 21st, 2008 at 11:56 am

Strike up the band! It’s time for “THE SOCIALIST’S PICNIC” victory song.If you go out in the woods todayYou’re sure of a big surprise.If you go out in the woods todayYou’d better go in disguise.For every socialist that ever there wasWill gather there for certain, becauseToday’s the day the socialists have their picnic.Chorus:Picnic time for socialists,The little socialists are having a lovely time today.Watch them, catch them unawares,And see them picnic on their holiday.See them gaily dance about.They love to play and shout.And never have any cares.At six o’clock their mommies and daddiesWill take them home to bedBecause they’re tired little socialists.If you go out in the woods todayYou’d better not go alone.It’s lovely out in the woods todayBut safer to stay at home.For every socialist that ever there wasWill gather there for certain, becauseToday’s the day the socialists have their picnic.TO CHORUSEvery socialist, that’s been goodIs sure of a treat today.There’s lots of wonderful things to eatAnd wonderful games to play.Beneath the trees, where nobody seesThey’ll hide and seek as long as they please,Today’s the day the socialists have their picnic.Sing to the tune of “The Teddy Bear’s Picnic”http://12121.hostinguk.com/teddybear.htm

Guest • November 21st, 2008 at 12:01 pm

Strangely, yes, at least from the parking lot view point. Maybe they are just browsing or buy much less? But so are restuarants, they aren’t jam packed, but still decent lines.

Guest • November 21st, 2008 at 12:12 pm

A dose of socialism for the taxpayers in the US is in order. After all, the elite have enjoyed it for how long now? If we’re going to print money anyway, we can start with Medicare for all. The insurance companies are going down–how much worse can a little push from taxpayers make it?

subgenius • November 21st, 2008 at 12:12 pm

Will you idiots give it a ****ing rest.LOOK UP THE MEANING OF SOCIALISMHOW DOES IT COVER THE CURRENT SITUATION?NOW LOOK UP FASCISM AND/OR CORPORATISMSEE THE SIMILARITIES WITH OUR CURRENT SITUATION?Do us all a favor and get an education before posting.

MR • November 21st, 2008 at 12:13 pm

Hi all, i was reading the LB post and found this at the end.I’m not going to make any recommendations, but I predict we haven’t seen the end of volatility. The rapid rise of the dollar, the massive demand for Treasuries, are hugely convenient for the US Treasury as it finances the expansion of the Fed balance sheet and the giveaways to the corporate welfare queens on Wall Street and elsewhere in the last days of the Bush administration. It seems unlikely, however, that the conditions can be long sustained.When they reverse, we may see a fair sized bounce in global equity markets, a loosening of credit conditions in global debt markets, a revaluation of commodities, and a revaluation of the mighty dollar. Many will call the bottom and pile back in.Should we, with deleveraging , expect the dollar to fail ? And not revaluate ?

subgenius • November 21st, 2008 at 12:14 pm

above directed at Guest on 2008-11-21 11:56:56, subsequent post by Guest on 2008-11-21 12:12:19 shows understanding…

Guest • November 21st, 2008 at 12:18 pm

No as there is a massive flight to the “safety” of treasuries. Also, forced liquidations by foreign investors often require settlement in dollars. The dollar will devalue when the deleveraging ends.

Colin Laney • November 21st, 2008 at 12:26 pm

> The concepts of stimulus, rescue, bridge loan, and “troubled asset relief” are really weasel words for government intervention.The era of free market worship is over. These days, you might as well be a Zoroastrian.

David • November 21st, 2008 at 12:33 pm

What is needed is a global standard (not a currency as we know it) tied to a basket of commodities – grains metals energy etc. All international trade should be denominated this way and settled in these standard units . Real honest and beyond the corruption of central banks. The current system is past its use by date.Cheers,David.

MR • November 21st, 2008 at 12:36 pm

Sorry, i mean when we have the reverse the leverage come back, why LB says “and a revaluation of the mighty dollar.” , we may expect it to fail ?

tutterfrut • November 21st, 2008 at 12:38 pm

You mean the same Belgium that carries a national debt of over 300 billion euros(around 100% of GDP) for 10 million rapidly aging people (40,000$ per living head) and that besides that, has to secure that 8% (official) unemployment and all those existing and coming pensions and pre-pensions? I’m sure they’ve been living in a bubble for some time now and have also been very creative in lending towards its active generations. And it’s true that there is still lots of savings although someof it has recently evaporated in nicely packaged ‘safe’ investments, secondary homes and other mutual funds.With what’s left of industrial production cutting hard in jobs and a far too big banking business maybe up for the same, I think Belgium will not be one to lead any recovery.

g Anton • November 21st, 2008 at 12:43 pm

Yes, David, I think that the dollar is beyond redemption. Vast quantities of dollars are held by China and other countries, most of whom are resentful of US conduct in the past. The concept of these foreign held dollars suddenly becoming precious is, to me, mind-boggling. I could buy a short period of US deprecion followed by a long period of severe US inflation and/or a currency crash.When Latin American countries get in a pinch, they print currency, and this in turn generates inflation. The US is in much better shape. It has already “printed” the currency–it’s out there, and has only, like pigeons, to come home to roost.

Guest • November 21st, 2008 at 12:43 pm

um, you just printed “Teddy Bear’s Picnic” and substituted “socialists” for “Teddy Bears”. Was that supposed to be creative or something? Keep your day job.

Guest • November 21st, 2008 at 12:45 pm

Hah, yes indeed it is “impractical” yet monetarism has insisted you could define the whole process with money, and you can’t not even close.We’re witnessing right now the complete failure of monetarism. For four decades Milton Friedman was able to peddle his wrong-headed notion that the Depression was caused by the Fed, and all you had to do was throw money at the problem. We’re watching this whole thesis fail spectacularly.The real lesson from the Depression and the guys in the 30s understood, was to not let bubbles form, once they have they will eventually deflate and cause economic havoc.That’s now baked in the cake and the only thing we can do is try and establish a floor, by first and foremost keeping people working, not by trying to pump up the money supply, but that’s still not going to stop the economy from contracting further.

Guest • November 21st, 2008 at 12:46 pm

Well, honey. Rather than scream and call names using expletives, why don’t you simply look it up and explain it to us?

JGU • November 21st, 2008 at 12:57 pm

Maybe we should change to a planned economy, my dear professor? Once the government is the clearing house for everything, problems are all solved? You are on the wrong track. There is no way to stop from returning to normal from excess, everything reverts to mean, and the mean is a much lower living standard.

Guest • November 21st, 2008 at 1:05 pm

@ Nice Guy: “People seem to be making the inference that the appropriate policy here is to dump money (Krugman is saying that for example) and that this was a lesson learned from the depression. But this inference assumes the cause of the current situation is the same as the cause of the depression. Is that the case?”Here is the view of an expert on the Depression:During the nine years before the crash of 1929, the Federal Reserve was responsible for a massive expansion of the money supply. A primary motive for that policy was to assist the government of Great Britain to pay for its socialist programs which, by then, had drained its treasury. By devaluing the dollar and depressing interest rates in America, investors would move their money to England where rates and values were higher. That strategy succeeded in helping Great Britain for a while, but it set in motion the forces that made the stock-market crash inevitable.The money supply expanded throughout this period, but the trend was interspersed with short spasms of contraction which were the result of attempts to halt the expansion. Each resolve to use restraint was broken by the higher political agenda of helping the governments of Europe. In the long view, the result of plentiful money and easy credit was a wave of speculation in the stock market and urban real estate that intensified with each passing monthOn August 9, the Federal Reserve applied the pin to the bubble. It increased the bank-loan rate and began to sell securities in the open market. Both actions have the effect of reducing the money supply. Rates on brokers’ loans jumped to 20%. On October 29, the stock market crashed. Thousands of investors were wiped out in a single day. The insiders [Warburg and other financiers had issued an advisory in February to preferred customers –wealthy industrialists, prominent politicians, and high officials in foreign governments-- to get out of the stock market] who were forewarned had converted their stocks into cash while prices were still high. They now became the buyers. Some of the greatest fortunes in America were made in that fashion. J. Edward GriffinIMO, rather than the Fed pricking the bubble with a pin this time around, the economy itself — beaten down and over burdened by the biggest and longest financial heist in world history, and abetted by lack of congressional financial law enforcement–has collapsed from shear dislocation exhaustion brought on by repeated creep strain.

LWG • November 21st, 2008 at 1:06 pm

Since we have a glut of unsold houses, cars and other high ticket items, it appears to me that the consumers have most likely come to the conclusion that they are very willing to “make due” with what they currently own. Their retirement accounts have lost a large portion of their value. Their jobs may well be at risk. Unless they are sitting on a substantial pile of cash, they could well be dominated by “fear approaching panic”.Unless “consumers are willing and ready to consume” it is very questionable that any government rescue program or policy will be effective.I predict that by 2012, after a sobbering fall, the world economy will have learned a final lesson.”EXTREMES OF WEALTH AND POVERTY DO NOT WORK.”Those with wealth will learn to succor those in need; or we will be doomed to suffer the lesson over and over.

Guest • November 21st, 2008 at 1:06 pm

When speaking about the Great Depression of the 30s, FDR’s Fed Chairman, Marriner Eccles said: ” As in a poker game where the chips are concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When the credit ran out, the game stopped.”Is there any difference today? This is capitalism, where the capitalists make the rules and write the tax, labor and consumer laws. This wealth concentration is inevitable, just like a monopoly game.There is only one way out of this, without dismantling the economic system. A wealth tax, funneled into higher wages, as well as state and local governments. Make them give back some of their ill-gotten gains. Give the wage slaves a fairer share of the pie.But I’ve been around long enough to know that this is not an option. They stole the money fair and square.

Guest • November 21st, 2008 at 1:15 pm

From Wikipedia, the free encyclopedia- Socialism refers to a broad set of economic theories of social organization advocating state or collective ownership and administration of the means of production and distribution of goods, and the creation of an egalitarian society. Modern socialism originated in the late nineteenth-century working class political movement. Karl Marx posited that socialism would be achieved via class struggle and a proletarian revolution which represents the transitional stage between capitalism and communism Socialists mainly share the belief that capitalism unfairly concentrates power and wealth among a small segment of society that controls capital and creates an unequal society. All socialists advocate the creation of an egalitarian society, in which wealth and power are distributed more evenly, although there is considerable disagreement among socialists over how, and to what extent this could be achieved.

Anonymous • November 21st, 2008 at 1:26 pm

The last paragraph referring to CDS’s points to the next massive bomb that will be ravaging the financial system. As bond defaults begin to surface, the effects of CDS’s will be like a nuclear bomb going off over NYC.

PeteCA • November 21st, 2008 at 1:42 pm

Looks like my call on gold is proving right so far.So, no need almost to say this … with gold now diverging from the US dollar and moving upwards, gold stocks are a very good buy at present. These stocks have been dragged down by general pressure of selling and short positions. There is a very big extreme pricing difference between gold and gold stocks. This has to resolve soon.PeteCA

PeteCA • November 21st, 2008 at 1:47 pm

Taking a look at some new data and charts …Chart-of-the-Day has this interesting plot showing how the current downtrend in the US market compares historically …http://www.chartoftheday.com:80/20081121.htm?TNote that the chart does back up comments I’ve made earlier that the current market seems to be plunging much faster than most previous recessions. However, it’s also fair to comment that John Hussman’s counterpoint has not yet been proven wrong. It could still be argued from the data that we are historically in a band of data that is consistent with previous US recessions. The current market sits on the bottom of that band, but it is not yet distinctly different.So, the conclusion is that the next 200 trading days should show more conclusively whether the US market is merely in a very strong recession, or something quite different (and much more serious). A further bear market rally at this point would not be proof of a bottom … it’s where we lie in another 200-300 trading days that will tell the picture. Ups and downs could occur before that time.PeteCA

PeteCA • November 21st, 2008 at 1:57 pm

Another set of interesting charts from Chris Puplava …http://www.financialsense.com/Market/daily/wednesday.htmBefore commenting, I must say that Mr Puplava has got to be drinking a lot of coffee these days. This man is clearly working very hard! These comprehensive charts that he is turning out take a lot of work to prepare. Quite frankly, readers who don’t subscribe (incl. myself) are getting spoiled by getting free access to quality data like this. I kid you not. So you shouldn’t take his articles for granted. A lot of people paying good moneyt for subscriber services are not seeing the analysis quality that is coming from Chris Puplava (exception to that comment would be Contrary Investor – which has excellent charts and is well worth the subscription).But moving on …the most noticeable thing about the new Puplava charts is that we are starting to see some economic indicators that are going to extreme negative positions. Meaning that over the wide range of data plotted (from 1970-to-current or 1990-to-current) the indicator is now at an all-time low. This does set the stage for the argument that the current downturn is not necessarily a standard recession. But it is not yet a conclusive argument.I would add, from reviewing the data from Contrary Investor, that their plots are also starting to show some economic indicators taking extreme negative (downwards) positions. And they look at different trends and charts from Mr Puplava. So we’ve got a wider range of economic variables that are pointing to warning signs are present. The message is certainly one of clear caution, given the current market conditions.PerteCA

Bart • November 21st, 2008 at 2:13 pm

I live in Belgium and by all means, deflations is possible (of course our government – a patchwork of talent – could raise taxes on all and everything).Many people , not “people” an sich, have a lot of savings just because they did not spend it. And the money-wiser they are, the more they wait for opportunities now. And yes it could take long, some think further than the latest flatscreen, opportunities could be houses or appartments for the next generation, so they too don’t have to rent/pay into their pension.Furthermore, you can’t just compare US and Europe (Belgium).With 500€ (where did you get that number?)I tell you, you won’t “spend”, at least not in Belgium.I personally invest in my kids as far as possible and if it must be I’ll kick em out of the country to escape the national debt, that’s another Belgian thing, low on chauvinism ;-) And if indeed demographics don’t improve fast, slowdown/collapse in the long term is inevitable. Just look at regions with long gone industries/wealth and an impoverished population, it could happen on a larger scale as well.continental Eu is not immune. No place is.

Guest • November 21st, 2008 at 2:18 pm

Belgium has reduced his debt from 130% if GDP begin of 90′s to 80% GDP in two decades of an unprecedented (in Europe) move to reduce the debt. Target is to reach 60 or 50% (average in Europe). One important point is… who owns the Belgium debt => Belgians=> huge numbers of Belgians have BEL bonds as savings. With that context, in Belgium and most Ouest European countries there is no “recession” shock but a steady state of anemic growth and moderate consumption since many many years. In Europe, people are used to be squeezed by a mountain of tax in everything. However these taxes are somewhat well used for health, education, sports, unemployment compensations etc. Instead, countries like US and UK in which GDP was at +4% +5% / year based on consumer lead debt, home equity (2% of GDP in US in the last decade) the current consumer crash (2/3 US economy) is a big shock for US people. The old Europe is used to slow growth, savings and low debt ratio of household and one not very new car with low gas consumption every 10 years.Regarding pensions, there are three pensions “pillars”, public pension which is a misery, company financed pension and finally life insurances (excluding the fact that 80% of Belgians have home which is passed from generation to generations and the savings). Recently the age for entitlement for pensions has been pushed to 60 years and it is going to go forward. Government is putting money aside since begin of 2000 for covering the baby boomers which are reaching the age of retirement in 2010. This has not been without pain but at least there is already a long term view on this which seems to be missing in US.Regarding recent bank failures, Fortis has been absorbed by Paribas (one of the most healthy banks in the world), Dexia is nationalized and nobody lost money with the exception of the Iceland bank which has been bought recently.For sure, Belgium is not the one leading the “recovery” but one should ask what the «recovery» definition is? Is it the excess of US last decades? Is the perpetual consumption of goods and services beyond earth resources and people means? Is it the perpetual dislocation of health from south to north with the huge human suffering? Maybe, just maybe the old Europe with its Socialist / liberal ways is not so bad after all and an imperfect balance between salvage capitalism and communism.

Forensic economist • November 21st, 2008 at 2:18 pm

The 1929 crash was not caused by “massive expansion of the money supply” followed by the Fed pricking the bubble.From my college economic history, still on my shelf at work -1920 M1 $23,700,000,0001929 M1 $26,200,000,000That is an increase of about 1% per year – hardly a “massive expansion of the money supply”. CPI actually fell over the same period.The depression was not caused by the stock market crash; the stock market boom and bust was not caused by the fed; and the roaring ’20s were not roaring in much of the country.Britain in the ’20s was running deflationary policies to attempt to pay back its debts in gold. The Conservatives ran the UK for most of the ’20s. They were not socialist.There is apparently a meme going around that the fed is evil and all the dislocations of the past are due to it. Stupid, yes; evil, no; all powerfull, certainly not.

Guest • November 21st, 2008 at 2:19 pm

@Guest: “So if you get rid of the Federal Reserve and Fiat Currency and back currency solely by precious metals now, wouldn’t that be extremely deflationary by contracting the money supply?”Unchecked, opaque power such as the Federal Reserve System enjoys in America corrupts, whether in fiat money creation or in commodity-backed money creation. A commodity-backed currency can be deflated or inflated.Any survey or study of a depression that failed to list such factors as gold movements and pressures on foreign exchange would be useless.For instance, the League of Nations achieved its goal of getting the nations of Europe back on the gold standard by 1928, but three-fourths of the world’s gold was in France and the United States. The problem at the time was how to get that gold to countries that needed it as a basis for money and credit. The answer was action by the Federal Reserve System.In 1927, the Fed doubled its holdings of Government securities and acceptances, which resulted in the exportation of $500,000,000 in gold that year. The System’s market activities forced the rates of call money down on the Stock Exchange, and forced gold out of the country. After the Governor of the Bank of England, Montagu Norman, visited Washington on February 6, 1929, with Andrew Mellon, Secretary of the Treasury, the Fed abruptly changed its policy and pursued a high discount rate policy. The stock market crash and the deflation of the American people’s financial structure took place in March, 1929 – ringing down the curtain on the greatest speculative boom in American history.Nobody knew what was going on except Wall Street bankers who were running the show. Gold movements were completely unreliable.“The Quarterly Journal of Economics” stated:The question has been raised, not only in this country, but in several European countries, as to whether customs statistics record with accuracy the movements of the precious metals, and, when investigation has been made, confidence in such figures has been weakened rather than strengthened… [C]omparison [of movements] shows an average yearly discrepancy of fifty million francs for France and eighty-five million francs for England. Those enormous discrepancies are not accounted for.”The Right Honorable Reginald McKenna stated that:“Some of the relations between changes in gold stock and movement in price levels show what should be very obvious, but is by no means recognized, that the gold standard is in no sense automatic in operation. The gold standard can be, and is, usefully managed and controlled for the benefit of a small group of international bankers.”The New York Federal Reserve Bank rate, which dictated the national interest rate, went to 6% on November 1, 1929, and after investors had been bankrupted, dropped it to 1.5% on May 8, 1931. Congressman Wright Patman in “A Primer on Money”, says that the money supply decreased by $8,000,000,000 from 1929 to 1933, causing 11,630 banks of the total 26,401 in the United States to go bankrupt and close their doors.

Guest • November 21st, 2008 at 2:23 pm

On the heels of the Geitner announcement just now, Obama to name the rest of his economic team on Monday. Question why the pre announcement of Geitner? Santelli suggests action this weekend regarding CITI.

Man with a tape recoder up his brother's nose • November 21st, 2008 at 2:25 pm

Now watch the battle at the stock markets in the final minutes. Gloves are off, anything can happen (and with that volatility most things will happen).

JimmyTheBanker • November 21st, 2008 at 2:28 pm

LOLOL Looks like Obama has already been instructed WHEN and WITH WHAT to hit the markets with for a key reversal! Ya think his last hour of the day Guitner announcment was planned????

PeteCA • November 21st, 2008 at 2:34 pm

Not exactly a move to restore transparency, accountability and responsibility to the USA markets. What were they thinking?PeteCA

Guest • November 21st, 2008 at 2:36 pm

Change YOU can believe in – a guy that gets high marks from Wall Street who learned his trade from Citibank’s and Clinton’s very own Robert Rubin.

Guest • November 21st, 2008 at 2:36 pm

maybe a stupid idea, but let me any way expose it.what if rates became actually negative.if a bank deposit 100 with fed they get back 99;banks will be obliged to lend to each others and to clients?the only thing is that money will then flow to banks/clients perceived solvent;the others may collapse

Massimo GIANNINI • November 21st, 2008 at 2:37 pm

Economy in 3D?How can we watch a movie in more than 3Ds ? Too many dimensions: Debt, Deleveraging, Default and Deflation. Will we fly on “helicopter to drop money”? Shall we start to print it?”The boom brought about by the banks’ policy of extending credit must necessarily end sooner or later. Unless they are willing to let their policy completely destroy the monetary and credit system, the banks themselves must cut it short before the catastrophe occurs. The longer the period of credit expansion and the longer the banks delay in changing their policy, the worse will be the consequences of the malinvestments and of the inordinate speculation characterizing the boom; and as a result the longer will be the period of depression and the more uncertain the date of recovery and return to normal economic activity.( Ludwig von Mises, The ‘Austrian’ Theory of the Trade Cycle. The Ludwig von Mises Institute 1936.)

randy • November 21st, 2008 at 2:38 pm

This is it. The Obama reign has been bought and paid for! The banksters on WS have continuity of leadership with the US government with Tim Geithner. I knows he’s smart. He wouldn’t be where he is if he wasn’t. I just question his loyalties. The US or the WS banksters? A sad day.

Guest • November 21st, 2008 at 2:41 pm

What a joke… Obama has no clue…he is doomed with all the hangerson advising him…. same old politics…. the only change will be my toilet paper to the kirkland brand

Guest • November 21st, 2008 at 2:42 pm

Call this the Obama rally — as the dim wit from CNBC asks a trader “with this news it the rally here to stay?” The problem now is that the media (who by their own admission were in the tank for Obama) will likely continue that style of “reporting” on everything Obama including economics. Bad reporting on the financials is about to get a whole lot worse.

Guest • November 21st, 2008 at 2:54 pm

My sentiments to this appointment are expressed in this Letter to the Editor in today’s San Francisco Chronicle:A new face, please.Editor — After reading Robert Scheer’s column, “Change we can bank on” (Nov. 19), I was moved to contact my representative in Congress, something I don’t think I’ve ever done before, I’m embarrassed to admit.I voted for Barack Obama and am thrilled he’ll be our next president. However, if he chooses Larry Summers, Tim Geithner or Robert Rubin for his secretary of the Treasury, he will be rewarding the very villains who helped engineer our present economic meltdown.With all the Clinton-era characters popping up and clamoring for favors and seemingly receiving a welcoming response by the Obama team, the change we were hoping for is receding from view.We’ve been beaten up enough by this descent into a financial nightmare; I hope President-elect Obama won’t abuse us further by abandoning his promise of change…Gayle MauldinPleasant Hill, CA

Guest • November 21st, 2008 at 2:54 pm

Pete,A salient point is that the price of gold is on the rise while the main cost of mining (energy) is falling. Gold miners will be reporting huge earnings.PKB

devils advocate • November 21st, 2008 at 2:57 pm

Nourielok – reduce the mortgages via lower rate refinancesnot just for “deadbeats” but for every homeowner with a mortgageGovt pays all of the closing costs to the banksthus recapitalizing the banks30 million mortgages refinance$3,000 per refinance3,000 x 30,000,000 = 90,000,000,000 = $90 billion————everybody gets on board because all benefitand it would help to reduce debt, consumption and stablize the housing market

Guest • November 21st, 2008 at 3:02 pm

yeah three big names and thats all it was worth… How Geithner can distance himself from the current mess is beyond me… He was an intrical part of this collapse we are in

Devils advocate • November 21st, 2008 at 3:06 pm

re-read Nourielthe USA’s “desperate Treasury” will buy its own debt+ here is a new New Deal idea:the Govt will set up a “Guaranteed Pension Fund” which all of the private pensions channeltheir monies to and it will buy USA Debt (just like the Social Security Trust)———nourielhow soon do you expect the US to quickly weaken the dollar?this would presumably be to:strenthen our export industryraise prices (prevent deflation) by making import more expensive

PeterJB • November 21st, 2008 at 3:13 pm

I must admit that I never expected that the banker, finance and slick community would ever dare to blatantly declare openly their outright ownership of World politics, and governmen, as they have just in these past few minutes have done – but here you have it for all to see; finally; Thank God, it is now all but over as the final collapse is now guaranteed, and it will be bigger an mightier than imagined – even by me.It is fitting and yea, poetic, that this done group of incompetent and arrogant irresponsible fools and wasters’ of the World’s resources, rule over their own demise. The days of Big Banks are now over.Good riddance,Ho diddly hum

Struggling to Survive • November 21st, 2008 at 3:16 pm

A Country of the Biggest Morons in the WorldI utterly, utterly hate myself to say this, but after a long period of time and thought I have concluded that the USA is a country of the biggest morons in the world. Look at how these morons have lived with: Bush, Wall Street, Greenspan, the Helicopter, toxic paper, Ninja loans, Hank the Hammer, a Congress full of corrupt people (Barney/Dodd, et al.); and now the 44th Messiah. The market knows no bounds of joy after hearing of a another “Messiah the Geithner.” The latter messiah has been a part and parcel of a lot of our current troubles. I think Zimbabwians are a lot better people than a good chunk of the people of USA. Help me Oh God to be able to survive in this country of morons.

devils advocate • November 21st, 2008 at 3:20 pm

you put the spotlight on something really importantevents are accelerating at the speed of lightinflation to deflation in 3 months!by next month deflation will be the buzz word as food prices finally dropand as Xmas goods are slashed 70%-?-as the dollar is “sharply” reduced

Guest • November 21st, 2008 at 3:39 pm

@ Forensic economist: “The 1929 crash was not caused by “massive expansion of the money supply” followed by the Fed pricking the bubble. … From my college economic history, still on my shelf at work -1920 M1 $23,700,000,0001929 M1 $26,200,000,000”M1 is “a measure of the money supply reported by the Federal Reserve System that includes currency, traveler’s checks, and checkable deposits.”In his book, “Money and Man,” Elgin Groseclose says, “By 1929 the United States was overwhelmed by a flood of credit. It had covered the land. It was pouring into every nook and cranny of the national economy.”From 1921 through June of 1929, the quantity of dollars increased by 61.8%, substantially more than the increase in national product. During that same time, the amount of CURRENCY in circulation remained virtually unchanged. That means the expansion was comprised entirely of money substitutes, such as bonds and loan contracts.THE ROLLER COASTER“Between 1920 and 1929, there were three distinct business cycles with several minor ones within them. For the average American, it was confusing and destructive. For the investor, it was a roller-coaster ride to oblivion.” Says Edward Griffin:UP! The Fed had inflated the money supply to pay for World War I. The resulting boom caused prices to rise.DOWN! In 1920, the Fed raised interest rates to cool off the inflations. That caused a recession, and prices tumbled. Farmers were hit the hardest, and hundreds of country banks were closed.UP! In 1921, the Fed lowered interest rates to stop the recession and to help the governments of Europe. Inflation and expanding debt resulted.DOWN! In1923, the Fed tightened credit to put the brakes on inflation.UP! But that was offset by its simultaneous policy of lowering the rate at the discount window, thus encouraging banks to borrow new reserves to expand the money supply.DOWN! In 1924,, the Fed suddenly created $500 million dollars in new money. Within one year the commercial banks parlayed that into more than $4 billion, an expansion of eight-to-one. The boom that followed took on the character of speculation rather than investment. Prices in the stock market rose drastically.DOWN! In1926, the Florida land boom collapsed, and the economy began to contract once again.UP! In 1927, Montagu Norman of the Bank of England visited the United States to visit with Benjamin Strong. Shortly after his visit, the Fed pumped new money into the system, and the boom returned. [Strong controlled the New York Reserve Bank: his name was synonymous with the Wall Street money trust.]DOWN! In the spring of 1928, the Fed contracted credit to halt the boom.UP! But the banks shifted their reserves into time deposits (where customers agree to wait before withdrawing their money). Since time deposits require a smaller reserve ratio than demand deposits, the banks were ale to issue more loans than before. That offset the Fed’s contraction of credit.UP! By that time, the British government had consumed its previous subsidy which was used to maintain its welfare state. In the spring of 1928, the pound sterling was again sagging on the international market, and gold began to flow back into the United States…The Fed bought a huge volume of banker’s acceptances to depress interest rates and halt the flow of gold. The money supply suddenly increased by almost $2 billion.DOWN! In August, the Fed reversed its expansionist policy by selling Treasury Bonds in the open market and raising interest rates. The money supply began to contract.It was the final bubble…

Guest • November 21st, 2008 at 4:03 pm

Some voices from “Right Wing Talk Radio” have been saying that the recent bear market began in earnest as the likelihood of an Obama presidency became more likely.Shawn Hannity even said that the current economic tightening could then be labeled “the Obama Recession.”With the selection of T. Geithner for treasury, however, it’s obviously grossly unfair to blame the young man from Illinois. He has as little to do with economic decisions as the man from Crawford, Texas. Senator Barack Obama may bring all the Clinton people back to the dance, but it’s Goldman Sachs that picks the music for the band.

Obama Kool-Aid is good. • November 21st, 2008 at 4:12 pm

He is not, as you say, “the young man from Illinois,” He is “The One,” as has long been predicted in The Ten Commandments. Thank God, at long last, the sayings in the holy books are coming true.

PeteCA • November 21st, 2008 at 4:29 pm

“but it’s Goldman Sachs that picks the music for the band.”What does it take to stop this from happening? How do we get our country and our economy back into the hands of real Americans???PeteCA

Guest • November 21st, 2008 at 4:30 pm

With selecting Geithner, and all his Fed and Wall Street cronies to his cabinet, is Obama showing his true colors? Will he be remembered as the Black Bush?

Guest • November 21st, 2008 at 4:44 pm

Is it time to revolt? Should we be hitting the streets? we voted for change and got who the illuminati allowed us to have, it may be time to revolt. Don’t pay your mortgage or your credit cards or your taxes and the empire will crumble. It’s time for it to crumble

Guest • November 21st, 2008 at 4:53 pm

It’s not an option now, but 18 months hence with no end in sight, the pitch fork crowd might win the day.I doubt it, but it could happen if things got bad enough.

Wild Bill • November 21st, 2008 at 5:10 pm

We’ve had the worst. Almost anyone appointed would be better than those we’ve had. One man, be he Obama or Geithner, is not going to undue all the damage of the last two decades. All this criticism of a man who was just elected and has not taken office yet, and another just appointed who hasn’t even had time to put his family pictures on his desk,is a bit premature. If Obama made every right decision and Geithner faithfully carried out all policies designed to correct the current crisis, they still would not be judged objectively by frightened, newly poor former middle class people or fat cats who can only afford a Lexus instead of a Rolls.We have to face facts. We’re in deep doo doo. Deifying our leaders or even Prof. Roubini for that matter, gets us no where. We have to make sure our new government is responsive to its people, not to corporations. This will take concerted activism and diligence. Once we’ve made our position clear, we must give our chosen leaders our full support once they show they deserve it. We must cease infantile whining and stand up for ourselves.

ex VRWC • November 21st, 2008 at 5:11 pm

Sean Hannity is an ass clown. He is part of the right wing conservative media that used to be serious and to seriously consider the key issues of the day. They are now reduced to name calling, racism, and whatever other means further their agenda. All intelligent thought has disappeared from that sphere.

Guest • November 21st, 2008 at 5:21 pm

Polls before the election showed that 80% of Americans thought the country was going in the wrong direction. Obama ran on “change” But Obama turned out to be no change. He’s changing the names, but his appointments are continuing the continuity of past failure.There’s an old saying in the South, “If Momma ain’t happy, ain’t nobody happy!” There’s usually always some truth in the world’s maxims and prejudices. Well, Momma ain’t happy.” And if Momma ain’t happy, Obama ain’t gonna be happy.In my family, when Momma ain’t happy, big changes are on the way no matter who professes to be in charge.Perhaps it’s just Momma’s broom, but I feel movement in the air and anybody in the way-—even Goldman Sachs–better look out and…move!Look for a gathering storm and the beginnings of a resistance movement, perhaps a middle-class coalition or third party,

PeterJB • November 21st, 2008 at 5:23 pm

And, the last time American’s did that was – the Boston Tea Party?… and you weren’t Americans then… so, the first time is good.But to give credit… the American public acted in the instance of the recent Paulson Bailout – and your Congress almost totally ignored you.And… ?Ho hum

Guest • November 21st, 2008 at 5:27 pm

If this gathers supporters, you’re right, it would work like magic. The “government” can’t put 500,000 American protesters in prison. If it tried, the backlash would be even bigger than the revolt.

Guest • November 21st, 2008 at 5:30 pm

Follow the money and it all leads to the New York Fed – even worse we have Fed Chair Ben and now Treasury Sec/NY Fed Tim running the whole show, while Citibank’s Rubin lurks in the background. Nice…

Guest • November 21st, 2008 at 5:35 pm

I look forward to Krugman’s blessing of Geithner in his next column and I suspect all of this “change” might goose the markets a couple or three thousand points.

Guest • November 21st, 2008 at 5:37 pm

“All intelligent thought has disappeared from that sphere.”If you mean the MSM I completely agree, they are bought and paid for left right and center.

Bourning_Markets • November 21st, 2008 at 5:38 pm

Fiscal Stimulus, even if big enough, would be deduced/distorted by spillovers because of globalization (see IMF working paper, nov-16-2007 an others, links below). However, most analysis and measures keep on considering Fiscal Stimulus from a national unilateral point of view. Spillovers can substantially reduce i.e. the US output from the US fiscal stimulus, through positive spillovers on economies other than theirs (->see simulation study, IMF paper). The same for other countries. Instead, let’s have political leaders standing for 90% GDP commiting in public to spend at least a 5% a year of their GDP until improvements on criterions xyz are met, and supervised. Now, THAT perhaps would make a difference.REFERENCESGlobalization, Financial Markets and Fiscal Policy (IMF 2007) (See Ch.V “Spillovers and Cooperation”).The Global Public Spending Initiative”SpanishGlobal Public Spending: Global, Big enough, Efficiently designed, Supervised or… don’t make it at all”

Guest • November 21st, 2008 at 5:44 pm

Unfortunately, Geithner, as president of the powerful New York Federal Reserve Bank under the chairmanship of Goldman’s Stephen Friedman and where most all Fed decisions are made, is a hired principal architect of the ongoing financial mess with all its corruption.IMHO, Goldman Sachs had to put someone into the treasury who could be trusted, an insider, else the investment bankers could lose everything. This appointment proves without a doubt that Obama has no power: he probably didn’t know Geithner from Adam, he probably had never met him before.

PeteCA • November 21st, 2008 at 5:50 pm

News that the Perth Mint in Australia has dropped new orders for gold – due to rapid increase in orders …”FEARS of the unknown long-term effects from the global financial crisis have sparked a new gold rush.With retail and wholesale clients around the world stocking up on the precious metal, the Perth Mint has been forced to suspend orders.As the World Gold Council reported that the dollar demand for gold reached a quarterly record of $US32 billion ($50.73 billion) in the third quarter, industry insiders said the race to secure physical gold had reached an intensity that had never been witnessed before. “I have 2 comments.First, I find it sickening that ordinary people around the world cannot go out and buy gold or silver coins, to protect themselves from crisis or the risk of long-term monetary inflation. While I do understand that mints cannot always cope with surges in demand, I still find the current situation with precious metals INEXPLICABLE according to any kind of normal demand-supply economics. It sure looks like someone did a very good job of trying to depress gold prices for a while, and keeping gold coins out of circulation. Why? Because if investors buy gold, it takes money out of the US banking system. It’s that simple. Everything about this is sickening.Second … I’ve said it before. Other financial commentators have said it too. We are just around the corner from some kind of major hiccup in the futures markets for precious metals. When we reach the stage where the gold supply in Australia can’t meet new orders – guess what? Sooner or later COMEX is not going to have those gold bars to deliver to customers with LONG positions. At that point, the gold price leaps upwards, or we kiss goodbye to the credibility of a sector of the US futures markets.PeteCA

Guest • November 21st, 2008 at 5:52 pm

Obama, a Manchurian candidate – how tragic but as we see the appointments it is clear that is exactly what he is.

Guest • November 21st, 2008 at 5:56 pm

a., i think you are too right. notice the title of the piece. The Deadly Dirty D-Words: “Deflation”, “Debt Deflation” and “Defaults”. And How Central Banks Will Have to Resort to “Crazy” Policies as We Have Reached Such Bermuda Triangle of a “Liquidity Trap”lots of d’s in there but not the one you suggest. hmmm? i see trap, b. triangle, deadly, but not depr…., not before christmas.no way.

GSM • November 21st, 2008 at 5:57 pm

Gietner is at the very heart of the NY dominated Fed. The same Fed that has been showering hard earned tax dollars, (and many dollars yet to be earned!!)on the Wall St Banksters, subjecting the US Treasury finances to ruination.Obama has been told and cowed.He caved in.This is telling. This confirms my belief that Obama is a media sham, a slick scam artist. You, America, are now in very very deep s**t. Unless you can make your Govt act responsibly, expect Obama to enable policies that keep the NY banksters exactly where they are now at the top of the heap calling all shots. If next Obama makes a visit to KSA then all the confirmation I need will be present that no change can come to the US.The text of the Profs post above and others I follow clearly outline to me a dark and dangerous period ahead.The very fabric of US society will be put to the test.Enorous hardships are in future for many worldwide and when it becomes apparent that the US cannot save itself, the world will attempt to decouple from the US illness. This will first show up in the currency. It may be showing up already as gold refuses further declines as the dollar rallies.Like Pete CA i’m starting now to increase my stakes in gold mining shares, The storm is now over the horizon and headed directly our way. This freinds, IS the Big One.

Anonymous • November 21st, 2008 at 5:57 pm

Onion, turn in your voter registration card and try and leave the house as little as possible. This way you can do the least harm to society as you live out your fruitless, pointless, anti-intellectual years. Is this the sum total of what you know? Parroting back Sarah Palinesque right-wing mindless ideological diatribes? Scared of someone who can write sentences like that? Good — you should be — shows you have some semblance of intelligence rumbling around that big empty attic of a skull of yours. Roubini is so right on the mark, it’s amazing. He’s our modern-day Keynes. Bow down and pay homage you unholy cretin. And yes, I have a Ph.D. in economics and practice what I preach, professionally and lucratively. Class dismissed, Onion.

Anonymous • November 21st, 2008 at 6:00 pm

Timothy F. Geithner:Smart he maybe but many of us saw all this coming and he obviously did not. We need to go back to all his old speeches and see what he was saying. This is too important of an event in our economy to turn him in to a false IDOL or our hero. It’s not a hollywood movie from CNBC. Please Mr. Roubini would you study his speeches and tell us if he is a champion of the derivatives illness and bailout illness and the plunder of our economies by a few special interests. Who is he going to support a stable system for the middle class or friends in at Harvard and Goldman Sachs. We need some honest answers before our savings self destruct. Thanks you for your advise.November 17, 2004 Timothy F. Geithner Our overall judgement is that the U.S. financial system today is significantly stronger than it was in 1998. It has proven to be quite strong in the face of a number of fairly substantial recent adverse events. And there is some evidence that hedge funds have helped contribute to this resilience, not just in the general contribution they provide by taking on risk, but as a source of liquidity in periods of increased stress and risk aversion in the rest of the financial system.Speech September 15, 2006 Timothy F. Geithner, President and Chief Executive Officer The resiliency we have observed over the past decade or so is not just good luck. It is the consequence of efforts by regulatory, supervisory and private financial institutions to address previous sources of systemic instability. Risk management has improved significantly, and the major firms have made substantial progress toward more sophisticated measurement and control of concentration to specific risk factors. What seems to have been most critical in preventing financial market turmoil from translating into a significant reduction in credit provision by banks and other financial institutions were the steps taken by regulatory authorities and financial institutions alike to strengthen capital in the core of the financial system, and to measure and manage risk. These efforts have most notably manifested themselves in increased levels of risk-adjusted capital in the core of the system relative to what prevailed in the early 1990s. In the United States, for example, tier-one risk-based capital ratios have stabilized near 8.5 percent, considerably higher than the estimated levels around 6.5 percent for the early 1990s. This is based on a relatively crude measure of risk, but the direction of the improvement is right and the magnitude of the change is significant. Relative to the conditions that prevailed in the early 1990s, the higher levels of capital in the core now provide a larger buffer against shocks and enhance the ability of the banking industry to act as a critical stabilizer in times of stress by providing liquidity to the corporate sector. When financial markets dry up, firms turn to banks and their unused loan commitments and lines of credit. Banks are in a position to fund this liquidity because transaction deposits tend to flow into the banking sector. In times of crisis, it appears that U.S. investors now run to banks, not away from them.

blindman • November 21st, 2008 at 6:08 pm

f, lol. however, i think that the perception is that the system of rules and laws, written by the government and the financial industry itself, are so criminal that to be prosecuted for stealing someones money on wall street you pretty much have to also make a lewd sexual advance and have a loaded weapon of some kind and then, confess.

Guest • November 21st, 2008 at 6:23 pm

In the waning days of the Clinton administration, Eric Holder, Barack Obama’s appointment to attorney general, was a key participant in awarding clemency to fugitive billionaire financier Marc Rich and 139 other people.Writes Dan K. Thomasson, a former editor of “Scripps Howard News Service” today in “Obama choice reflects same old D.C. politics”: It was “a process that short-circuited the Justice Department clearance process and looked, in Rich’s case, very much like a quid pro quo for financial support from the convicted felon’s wife for Clinton’s presidential library. The highly controversial pardons took place just two hours before Clinton left the White House for the last time.A congressional report noted that Holder worked closely with a White House aide to make certain that neither concerned parties in the Justice Department nor federal prosecutors in New York responsible for the Rich case would have a chance to protest the clemency. They weren’t notified that it was pending. The report said that Holder also did not present any credible evidence supporting the presidential action on Rich, who for some time had managed first to elude authorities and then to avoid extradition on a federal fugitive warrant.A former FBI official close to the case at the time called Holder’s participation “a disgrace.” He said the bureau had spent time, money and effort unsuccessfully to arrest Rich.”If the new president is serious about clearing the air of a foul smell in Washington, how can he nominate someone who lent himself to clemency for a convicted felon who fled the country to avoid prison and used his money to stay out and ultimately buy a pardon?” …[Holder] is a former U.S. Attorney and superior court judge for the District of Columbia and is a member of a top Washington law firm…There is another question here that goes to Obama’s pledges of a new, improved regime. How many former FOBs (Friends of Bill) does he plan to name? He is considering Sen. Hillary Clinton for the State Department and already has placed several others from her husband’s White House in key spots, including Rep. Rahm Emanuel, who will be the incoming chief of staff. This is change?Sen. Clinton may have moved one step closer to the Secretary of State nomination with her husband’s agreement to reveal his list of donors. He probably would also have to pledge to curtail overseas activities that might pose a serious conflict of interest for her. Certainly, Sen. Clinton would be the chief diplomat with far more experience abroad than her boss and it seems inevitable there would be a test of wills at some point…http://www.montereyherald.com/opinion/ci_11040250

blindman • November 21st, 2008 at 6:40 pm

g, i like it but … i think it might lead to the destruction of all government, law, contracts and money. it might be good? i truely do not know and that is the sad part.

Guest • November 21st, 2008 at 6:42 pm

If the climate doesn’t get better soon, I’m quietly going to tip toe away while no one’s paying any attention, and move bag and baggage to Ireland or Scotland, if they’ll have me. There may come a day in the new USA when it will be too late to leave.

Guest • November 21st, 2008 at 7:01 pm

This is a brilliant post – a pearl of wisdom. You have hit upon the select gem of good news — the Achilles’ heel of the current regime — its fatal weakness in spite of its overall strength. Unwittingly, it has orchestrated its own demise.

Nedhead • November 21st, 2008 at 7:01 pm

I just read in Yahoo news the US is asking 4 Arab Gulf states for 300 billion dlrs. Does that mean we are so broke that we need to get more broke?

PeteCA • November 21st, 2008 at 7:12 pm

We’re still right on track for a scenario where all normal Americans wind up hating equities and the banks. People’s 401K’s ar egetting decimated at this stage (esp. if they followed advice of mainstream advisors). And retirement miney is in jeopardy if companies go bankrupt.PeteCA

KJ Foehr • November 21st, 2008 at 7:15 pm

Geithner was born in Brooklyn, New York City, to Mr. and Mrs. Peter F. Geithner of Larchmont, New York. He completed high school at International School Bangkok, Thailand,[1] and then attended Dartmouth College, graduating with a B.A. in government and Asian studies in 1983. After, he obtained an M.A. in International Economics and East Asian Studies from Johns Hopkins University’s School of Advanced International Studies in 1985. He has studied Japanese and Chinese and has lived in East Africa, India, Thailand, China, and Japan.He is married to Carole M. Sonnenfeld, a Dartmouth classmate, and with her has two children, Elise and Benjamin.[2] In spare time he fly-fishes, plays tennis and surfs.[3] Geithner is Jewish.[4]After completing his studies, Geithner worked for Kissinger and Associates in Washington, D.C., for three years and then joined the International Affairs division of the U.S. Treasury Department in 1988.In 1999 he was promoted to Under Secretary of the Treasury for International Affairs and served under Treasury Secretaries Robert Rubin and Lawrence Summers.In 2002 he left the Treasury to join the Council on Foreign Relations as a Senior Fellow in the International Economics department. He then worked for the International Monetary Fund as the director of the Policy Development and Review Department until moving to the Federal Reserve in October 2003.[5] In 2006 he became a member of the influential Washington-based financial advisory body, the Group of Thirty.http://en.wikipedia.org/wiki/Timothy_F._GeithnerI suppose you guys would prefer another former CEO from GS?I think Geithner is smart, very smart and is an excellent choice. And in case you haven’t heard, Obama is considering Summers to replace Ben in 2010. Summers is another very smart guy and, IMO, we will be better off with him and Tim running the show instead of Hank and Ben.

Guest • November 21st, 2008 at 7:25 pm

They are one and the same – What kind of spell has Obama cast over the American people that they cannot see? Your post I am sure completely sincere and is stated with best of intentions. But I tell you from the outside looking in, such a statement is frightening.

OuterBeltway • November 21st, 2008 at 7:35 pm

I’m in agreement with the sentiment on Geithner and Obama. Much as I want Obama to do well, I am seeing “more of the same”. Nothing fundamental has changed yet, and most of the key appointments have been made.Repeat: nothing significant has changed yet. When is the “change” we were promised going to be delivered?

Guest • November 21st, 2008 at 7:53 pm

Looks like Clinton won the presidency after all. All recycled Clinton deregulators or their cohorts in key posts so far. Don’t quite get Napolitano for Homeland Security tho. Obama’s just the front man. How could someone so green(not the environmental kind) be otherwise?And as far as Citi goes, something brewing this weekend, I suspect. “Hell hath no wrath like Goldman scorned.”

Kerk • November 21st, 2008 at 8:01 pm

The people granted certain enumerated powers to the US. They also enumerated specific prohibitions to the States. Those not granted to the US, or prohibited to the States, were specifically reserved to the States or the people, respectively.The US was granted the power to coin money, nothing more or less.

Anonymous • November 21st, 2008 at 8:22 pm

g, are you implying that the bankers have not mastered money and u.s. long ago? 1913. they will tell you that they have, to your face, if you ask them. and then smile and say it is horrible, give me more money. “demand” is the word they use for crap you don’t need, doesn’t work and should collapse. don’t buy crap.

Guest • November 21st, 2008 at 8:31 pm

k, this is the deal. but then there are the side deals. the inside deals and the off book deals and the other deals. and then the illegal deals and the shadow deals. and others i never could even think of or understand. call me lost.

Guest • November 21st, 2008 at 8:37 pm

Why, why, why — after all …The elections are over. A certain messiah has been elected at the hands of a certain unenlightened populace … the MSM asked and worked for it and got it. End the story now. Even now, my local paper, the Washington Post, carries his pictures and his name “Obama” all over the newspaper. I have stopped looking at my paper now. I look at the headsheet only for weather of the day. Wherever I go — be it CNN or CBSMoney, I have to encounter with the picture of this messiah which I don’t wan’t to look it. I just close my eyes and do what I want to do. Why is the MSM is forcing the 46% of the the people to drink the Obama kool-aid and accept it and live with it. Yes, I will have to live with it. But, for God sake, print his pictures on pages other than on the headsheet. Given the choice, I don’t want to have a president of my country who refuses to produce evidence that he is DULY AND WELL QUALIFIED TO BE A PRESIDENT OF MY COUNTRY. People — wake up. I was in a very highly conservative portfolio, even then I am deeply down … raning from 17 to 50%, depending upon the size of the piece of the pie. If we get a couple of countertrend bounces, like the one we got today, I am out of this market. Obama is NO-N0-BAMA. I’ll keep my money in the bank than to give to NoBama’s Chicago machine. Good luck on my behalf to all O’Bama kool-aid drinkers.PS: Dear Prof. Roubini — thank you very much. I discovered you some three years ago through a bearish website “Fallstreet.com.” You are great. Thank you.

blindman • November 21st, 2008 at 8:47 pm

g, i think you have a real good point and live in a good place. i also like the rhythm of your writing. relaxing. i have the same questions. the problem is the deficits are real at the same time throughout the different sectors of the economy. the federal government, the states, the municipalities, the cities, the companies, the banks, the transportation authorities are all in decline or deficit or debt. where is the future earning to pay the deficits off.? the liquidity? where is the stone you can squeeze for blood? it used to be labor and it’s reward that was squeezed. then they stopped rewarding labor with money and gave them credit or debt. and now they are desperately seeking another bloodstone. the debate about whether fiat or precious metals currencies comes in every time reserve requirements are viciously violated by speculators. this time it’s global.i wish i could relax again, but not too much.there are other ways to violate reserve requirements and make money. fraud works as does usury. if you distribute the mess around enough it looks like systemic failure in the financial papers.ps. i wrote this mostly in response to a different entry but thought you might appreciate it? i’ve been wrong before.

Andrew Held • November 21st, 2008 at 8:48 pm

I greatly appreciate your posts. I used to hear a very knowledgeable Pete from California on the Roger Arnold show. Could there be two great Peters in California?Linearly extrapolating the 2008 data point leads to the l929 data point. Ouch!

Guest • November 21st, 2008 at 8:49 pm

If only CR would provide a reason why Hank Geithner is such “great choice”. I am almost positive CR is non-partisan but perhaps I am incorrect afterall the NY Times article that is cited quotes Robert Rubin.

blindman • November 21st, 2008 at 9:01 pm

g, i think you have a real good point and live in a good place. i also like the rhythm of your writing. relaxing. i have the same questions. the problem is the deficits are real at the same time throughout the different sectors of the economy. the federal government, the states, the municipalities, the cities, the companies, the banks, the transportation authorities are all in decline or deficit or debt. where is the future earning to pay the deficits off.? the liquidity? where is the stone you can squeeze for blood? it used to be labor and it’s reward that was squeezed. then they stopped rewarding labor with money and gave them credit or debt. and now they are desperately seeking another bloodstone. the debate about whether fiat or precious metals currencies comes in every time reserve requirements are viciously violated by speculators. this time it’s global.i wish i could relax again, but not too much.there are other ways to violate reserve requirements and make money. fraud works as does usury. if you distribute the mess around enough it looks like systemic failure in the financial papers.ps. i wrote this mostly in response to a different entry but thought you might appreciate it? i’ve been wrong before.

Guest • November 21st, 2008 at 9:03 pm

As somone posted above, Obama is the Manchurian candidate, a creation of special interests and elected by the media.

OR • November 21st, 2008 at 9:18 pm

Do your own leg work:-) e.g., all the nonsense in this tread about his ties to GS are pure horsesh%t. NC said he would have liked Volcker. Come on, I am getting there myself, but people over 70 should be taking life easy. Even Volcker knows he is too old for the job.http://online.wsj.com/article/SB122729804822648663.htmlWASHINGTON — President-elect Barack Obama is expected to nominate as Treasury Secretary Timothy Geithner, the president of the Federal Reserve Bank of New York and a figure who has been deeply involved in tackling the financial crisis.Mr. Geithner, 47 years old, would be one of the youngest-ever U.S. Treasury secretaries. His nomination would come as Wall Street is being challenged by the financial crisis and a Washington power vacuum, and as the world’s debt markets show fresh signs of falling into deeper problems.ReutersMr. Obama is expected to introduce his entire economic team on Monday, according to people familiar with the matter. The president-elect has been under pressure to speed up his transition as stock markets this past week fell to lows not seen since the late 1990s.On Friday, the Dow Jones Industrial Average jumped on the Geithner news, ending the day 6.5% higher at 8046.42, recouping more than half the week’s losses. Even some financial firms, which had been battered all week, took back some ground, although Citigroup fell another 20% to a 16-year low.Mr. Geithner served as a Treasury attaché in Japan in the 1990s and later at the International Monetary Fund. He was a protégé of former Treasury Secretaries Lawrence Summers and Robert Rubin. Mr. Summers, who was also a potential candidate, instead is expected to take a position within the White House as an economic adviser.Mr. Geithner has spent most of his career managing government responses to financial crises, from the 1990s bailouts of Mexico, Indonesia and Korea, to the debt-market meltdown that has brought Wall Street to its knees this year.Mr. Geithner (pronounced GYTE-ner) pushed for earlier intervention in the financial markets to stem the financial crisis, and looks likely to continue that activist approach in his new job. Among his first priorities could be a large fiscal-stimulus package.But the likely choice appears to have been driven largely by the financial crisis, and Mr. Geithner’s public record on many of the other matters he will be required to grapple with is limited. Unlike previous picks for Treasury secretary, who hailed from Wall Street, industry or the Senate, Mr. Geithner has been a technocrat most of his career.Mr. Geithner isn’t considered close to Mr. Obama, either, an anomaly for one of the most critical positions in the cabinet.No Political ContributionsMr. Geithner has never made a political contribution to any candidate for federal office, according to the Center for Responsive Politics, and has worked for both Republican and Democratic administrations.Economist Douglas Holtz-Eakin, a senior policy adviser for Sen. John McCain’s presidential bid, said that the Republican, had he won, would also have considered Mr. Geithner for the Treasury post. “I don’t want this to sound demeaning, but he’s an excellent mechanic,” Mr. Holtz-Eakin said. “He knows the nuts and bolts.”Mr. Geithner gained respect among Wall Street chiefs over the past year for his hands-on role in the credit crisis. For instance, he was instrumental in engineering the government-assisted rescue of Bear Stearns.The market “was screaming for some semblance of leadership from the new administration,” said New York money manager Michael Holland. “The market is an online voting machine, and it just voted that this was the right choice.”Potential HeadwindAt the same time, Mr. Holland said, Mr. Geithner’s involvement in battling the market meltdowns might also be a problem, given that he’s been prominent in the effort to fix things already, and “and it still isn’t completely cured.”Mr. Geithner has worked closely with Federal Reserve Chairman Ben Bernanke throughout the crisis, in many cases to implement the complicated new lending programs the Fed has conceived. The two would be expected to continue to have a close partnership as the credit crunch unfolds.The current Treasury secretary, Mr. Paulson, has a solid working relationship with the Fed Chairman, but the two often differed by temperament and policy convictions.Lawmakers, many of whom are disgruntled with the current administration’s handling of the crisis, could present Mr. Geithner with the hard task of proving he’s not going to follow the existing playbook. Other constituencies to be smoothed could include the labor movement, which has expressed unease at a candidate it doesn’t know.Investors had been unnerved by the reality of a months-long presidential transition amid a financial crisis, raising the specter that months of inaction would worsen an already strained economy.Mr. Paulson shifted gears last week when he said Treasury would no longer buy distressed assets that are clogging the books of financial institutions. He also indicated he wouldn’t embark on any new programs. Congress, meanwhile, failed to agree on a stimulus package of any kind, or on aid to Detroit’s struggling auto makers.Another contender for the Treasury job was former Federal Reserve Chairman Paul Volcker.Mr. Summers had a reputation for being abrasive, cemented by his tumultuous tenure as president of Harvard University. Women’s organizations were lobbying against him, still angry at comments he made in early 2005 suggesting women were innately unsuited for the sciences. Liberal economists were angry over Mr. Summers’s role negotiating the 1999 deregulation of banking and financial services.In the end, it was Mr. Geithner’s reputation for diplomacy, his familiarity with Wall Street and the respect he commands with Democrats and Republicans alike that tipped the scales, congressional aides suggested.Foundation LaidAlready, the backbone of an Obama economic team has emerged. Congressional Budget Office director Peter Orszag will be Mr. Obama’s budget director. Jacob Lew, a former Clinton budget director, will head the White House’s National Economic Council. Jason Furman, the economic policy director of the Obama campaign, is likely to be Mr. Lew’s deputy. And Austan Goolsbee, a University of Chicago economist and long-time policy confidante, is expected to chair the Council of Economic Advisers.The team represents a re-emergence of more academic economists and technocrats after a Bush administration that elevated aluminum-company and railroad executives to be Treasury secretary.If confirmed, Mr. Geithner will face a barrage of critical decisions on such things as where to aim the $700 billion rescue fund, whether to ask Congress for more money and how best to structure an economic stimulus package that some CEOs are saying should top $300 billion. His mentors, Messrs. Summers and Rubin, have both said a big stimulus is needed.Most pressing will be the fate of the Troubled Asset Relief Program, or TARP With Mr. Paulson indicating he doesn’t plan tap the second half of the promised $700 billion, Mr. Geithner will have to determine how quickly he wants to access that money and where he wants to direct the funds.One Obama adviser said the Treasury nominee will likely back using some of that money for its original purpose, the buying of toxic assets from ailing financial firms, and give more detail on how the incoming administration plans to tackle the falling home prices and rising home foreclosures that are at the root of the crisis.To access that money, however, he’ll need to soothe ruffled feathers on Capitol Hill. Among other things, lawmakers want to impose conditions on banks that receive government money. They also want to see funds directed toward helping homeowners in danger of foreclosure.Heated DebateMr. Geithner will also be wading into a debate over the future of financial regulation. In March, before the financial crisis had even claimed its first major victim, Mr. Geithner attributed the market turmoil to a combination of market forces and incentives created by policy and regulatory decisions. He said the U.S. government needed to make broad changes to its supervisory structure “to address the vulnerabilities in our financial system revealed by this crisis.”Mr. Geithner was one of the first officials to warn about a financial instrument, known as a credit-default swap, which investors buy to protect against defaults on corporate and other types of debt.

OR • November 21st, 2008 at 9:24 pm

One thing is clear, you guys don’t like Obi but why aren’t you giving him a chance? Bet you gave GWB more than one, voting for him twice and followed up voting for senile Mcky.

Brett • November 21st, 2008 at 9:28 pm

The root of this crisis is that, because of easy money, millions of homeowners bought houses that were one or more income levels above what they actually could afford. Keeping these people in their homes will just extend the inevitable and give us that Japan L-shaped recession.

Anonymous • November 21st, 2008 at 9:40 pm

Great post! Picked up some junior mining shares this last 2 weeks; one in particular among a few others, I think will live up to its name and really go Nova during this next year. Anyway, one thing I had read was to take delivery of all stock certificates to avoid any future counterparty risk from your broker.

David in Seattle • November 21st, 2008 at 10:00 pm

The encouragement of mere consumption is no benefit to commerce because the difficulty lies in supplying the means, not in stimulating the desire for consumption; and production alone furnishes those means. Thus, it is the aim of good government to stimulate production, of bad government to encourage consumption.- Jean-Baptiste Say, A Treatise on Political Economy, 1803

blindman • November 21st, 2008 at 10:07 pm

so, derivatives have brought us to this place where the debt created by them, both legal financial and intellectual, are a black hole where no hope can shine out. wow. a ditch where we will bury our money like dogs. i have heard too much. shame on the banks.

Spartacus • November 21st, 2008 at 10:21 pm

Ohhh-good one! “Consumers of the World Unite! You have nothing to lose but your credit cards!” Good god, how I wish it would all end!

Pathagoras • November 21st, 2008 at 10:24 pm

Yes, we’re really in a pickle now! I have no optimism either. I don’t think anyone really knows what to do about this mess. Its all a crapshoot. Oh well, I have shelter and food and money…at least for now!

GSM • November 21st, 2008 at 10:26 pm

Giethner is obviously smart but an awful choice. He will ensure entrenched special interests remain sated, at the expense of most Americans. That he is an alumnis of CFR makes certain that the status quo is well and truly maintained from Washington. The Banksters now have THEIR man deeply entrenched in the Obama Administration. If you read TG’s cv you can easily spot he has not even held a banking job before joining the Fed. He’s not even been a banker ffs, now he is expected find deliverance from this mess for Obama’s Administration?? Of course not. So what is his purpose then? His job will be to ensure vested interests fare well from Obama’s Administration in these tumultuous times.Summers has never had a real job in his life. He has marketed himself excellently since being booted from Clinton’s team.No KJF, I would prefer someone of stature and credibility- he should have chosen Volcher. Obama is a hired gun, nothing more.

Dr. Crow • November 21st, 2008 at 10:31 pm

And what value do you see for us all in massive foreclosures? We’re already in an L-shaped recession. If you read Dr. Roubini a little closer, you’ll notice the problem is not with the puppets but in the souls of the puppeteers.

blindman • November 21st, 2008 at 10:32 pm

p.jb, are you referring to the 400 whatever rise in the dow that replaced the death throw that was anticipated at 3 pm 11-21-08 or are you referring to the new treasury secretary appointment? or both? i suffer from incomplete information and reduced capacity to process the same due to multiple and varied factors. or is there another root, stem, spectacle i’m not aware of?

Uncle Billy, Exasperated • November 21st, 2008 at 10:35 pm

I’m still holding out hope that our meltdown was engineered, not by evil people who want to horde and enslave, but by a secret society that knew we needed to level the playing field on a global scale. We talk about taxing the wealthy here in the states as part of a long term solution, but everyone knows they will just move their business and assets elsewhere. Well, what if there was no elsewhere? What if we seize this opportunity (however neo-con that might sound) and actually create a true global economy? No more parasites manipulating prices of stocks, bonds, and commodities. No more opportunity to make money arbitraging money and interest rates. Forget G-20. Forget the group of 30. Bypass the moribund UN and World Bank and get the nations of the world together to agree on a common currency and standards. Idiot nations who chose to opt out can do whatever they want, but they will not be permitted to trade with everyone else. If the majority of the population wants in, but psychotic rulers won’t let them, plan for their absorption in participating countries and liberate them by force if necessary.

Guest-o-Rama • November 21st, 2008 at 11:06 pm

I was in Roanoke this summer and 50% of the mall storefronts were empty. It was a shock coming from Metro DC. Even in Bethesda malls are very unbusy. Also more college educated (seeming) white store clerks actually offering customer service as opposed to immigrants reluctant to practice limited english skills by speak to customers. Also, restaurants out in the country not doing so well. And the Honda Dealer seemed full to the brim of cars. 4 Green CRVs on the lot in a row. That’s last year’s best ranked or 2nd best ranked mini-suv. A year ago when I bought my element at the same dealer you had to special order to get certain colors.

Guest • November 21st, 2008 at 11:13 pm

y. maybe, if i knew more. but i have to say timidity doesn’t sound like something a people known for the kamikaze innovation should be accused of. i end on a preposition, as many of their pilot have.

PeterJB • November 21st, 2008 at 11:17 pm

The DOW dramatic rise is in response to bankers getting influence in the new administration; in fact it appears that while Citibank was going to where it belongs, there is a desperate push to reach quickly to the buttons and to ensure they get pushed no matter what…Geithner’s appointment epitomizes this with Summers and Rubin being now mainstream and front line policy makers with the FedRes and SEC.The DOW rise celebrates the moment that the Bankers now take the global controls from the puppets; it will be short lived as really, bankers not really being evil, but they do certainly excel at incompetence when they need to act independently. And they excel in cowardice and arrogance.These bankers will make the “neocons” look like schoolgirls when it comes to creating global chaos and destruction.And, this is the first real move where I have seen the Bankers take the leading political role on so openly and brazenly: thank Citibank for that. This move is a declaration of war!SO Citibank’s plan is to milk the works; their way; make new rules for the big banks collective interests, have Pope Ben take the institutional capacity and for the SEC to enforce that which is necessary. As I have said before, Congress is irrelevant as they voted themselves so during the Paulson Bailout Program. They are done! but the Bankers are taking no more chances now!Central power has been transferred to the FedRes Temple!Problem: Too late and the Bankers are in panic mode; a state of desperation; “extremis”. The whole economic, financial, monetary system is widely vibrating as the imbalances throughout the whole system are shaking and shuddering in disparate terms; out of of synchronicity to the whole dynamic and at differing velocities, pitch and frequencies.IOW “The free-market-cow is kicking the s%$t out of the bankers milking shed.Chaos is like that. And, the investors cheer!Ho hum

Mark • November 21st, 2008 at 11:56 pm

You/they signed a contract. You/they were happy when they signed the contract. You/they have a roof over their heads.There’s a possibility of reduced property taxes (depending on whether they exist to begin with): I doubt that municipalities are going to be able to raise property taxes (sure fire way to start a massive revolt).Unless you/they become unemployed (unable to make payments), then it should really matter little about values- a home is to live in, it’s NOT an investment.Were people taken advantage of, lied to? You bet! That’s what class action suits are for: government need not be involved (except in enforcing the decisions of the courts).

Mark • November 21st, 2008 at 11:59 pm

It’s not good OR bad. Without growth it’s inevitable… (one could say that inflating our way out would be growth too).

AfA • November 22nd, 2008 at 12:10 am

Geithner + Summers + Clinton = ???If Geithner is a good choice why that Paulson isn’t?If Summers is a good choice why is it that Bernanke isn’t?Just trying to understand.

Mark • November 22nd, 2008 at 12:11 am

What uncorked all of this was the fact that we couldn’t sustain the levels of growth that we were experiencing. Energy is the bottle neck, and will only be more increasingly so as time marches forward.

AfA • November 22nd, 2008 at 12:15 am

J-B Say? He is old school. Besides, he is a French.What would all those Marketing, PR and BS people do instead?Great quote BTW.

Mark • November 22nd, 2008 at 12:16 am

Pretty much right on!I’d been advocating for some time that transportation expansion be curtailed and that the bulk of this money (that would have otherwise been appropriate for expansion) would be returned as tax credits to local businesses hiring local people: incentive to keep commmutes short. This would be investing in local economies, which is where we will end up one way or another anyway.

Mark • November 22nd, 2008 at 12:23 am

Leave off the labels and debate the facts. True democratic functions don’t sustainably work for any group of people over 120 something.

Brett • November 22nd, 2008 at 12:43 am

Housing will revert back to the mean and will become more affordable. Do you think it’s fair to new homebuyers to have to pay artifically inflated prices?

Dr. George Oprisko • November 22nd, 2008 at 12:45 am

Again, household income is the essential factor.Fiscal policy must be used to stabilize householdincome, via an income redistribution scheme, orreverse income tax scheme.A single payer health care system is required toprevent a public health crisis.INDY

Uncle Billy, Period. • November 22nd, 2008 at 1:10 am

Sorry pal, but the most you can say is that I wrote an idiotic comment. But I don’t think I did. The most I can say about your comment is that you are a sociopath. Oh lookathat… the very type of person that caused our meltdown.

Al Havermann • November 22nd, 2008 at 2:12 am

Mr. Roubini,What would be the effect of a Jubilee year? Not unprecendented and used occasionally since the Roman empire.Thanks.Al

Al Havermann • November 22nd, 2008 at 2:24 am

Pete,I’m afraid of a fake-out in a gold rally before another plunge to $630. A CitiCorp and/or a GM failure with their massive derivatives could lead to sale of gold assets.Al

Bart • November 22nd, 2008 at 3:29 am

@ Uncle BillyRe 13:15 And it was given to it to give spirit to the image of the wild beast, that the image of the wild beast should be speaking also, and should be docausing that whosoever should not be worshiping the image of the wild beast may be killed.13:16 And it is causing all, the small and the great, and the rich and the poor, and the free and the slaves, that they may be giving them an emblem on their right hand, or on their forehead,Re 13:17 and that no anyone may be able to buy or sell except the one having the emblem of the wild beast, or its name, or the number of its name.Re 13:18 Here is wisdom. Let him who has a mind calculate the number of the wild beast, for it is the number of mankind, and its number is six hundred sixty-six.(King Salomon received 666 talents of gold)I rest my case

Guest • November 22nd, 2008 at 4:45 am

Glen Beck was frequently starting to criticize the federal reserve and its reason for existence was frequently having Ron Paul and Peter Schiff on his show and low and behold he disappears from television. Now they say he’s coming back on FOX news in a couple of months but is that after his illuminist masters give him strong warnings and new levels of guidance?

Pecos Banker • November 22nd, 2008 at 6:24 am

This is the kind of comment we need on this blog–thanks AfA.By the way, I try to read this blog so I can figure out what to do for my own situation. Should I buy gold? Should I pay off my credit cards as soon as possible or wait for a general debt forgiveness? I know inflation is supposed to be terrible for retirees, so perhaps I should be happy that we now have deflation? Should I get my savings out of US$? These questions are the most relevant for me and I scan blog entries hoping to gain the insight I need to solve them. I am less interested in discussing policy and how can we fix things. I believe in pessimism. The pessimistic Jews were the ones who left Nazi Germany before it was too late.Wow! In posting, I see that the code to enter is TheDe. Does Nouriel pick these?

Guest • November 22nd, 2008 at 6:34 am

Well that too but his shows were starting to become pretty radical with the criticism for the federal reserve to the point of suggesting conspiracy talking about Jekyll Island having radical guest on etc., plus he was doing it every night and sure enough he goes off the air. I’ll bet if he gets back on the air he tones it down. Criticism of the corrupt system is only tolerated to the point of making it appear as if we have choices.

Octavio Richetta • November 22nd, 2008 at 6:40 am

http://www.businessweek.com/bwdaily/dnflash/content/nov2008/db20081121_876842.htmCitigroup Shares Keep SinkingThe bank’s board meets as Wall Street wonders whether CEO Pandit can withstand the pressure, or if he’ll be forced into a deal or U.S. rescueBy Mara Der HovanesianCitigroup’s shares continued their breathtaking decline on Friday, Nov. 21, despite a broader market rally, indicating that time is quickly running out for Chief Executive Officer Vikram Pandit.Pandit continues to fight mightily to restore confidence in the market. He pronounced that he has no intention to break up the global bank and that he has enough capital to withstand a tough consumer recession. But with the stock finishing down another 20%, to 3.77, from its 4.71 close on Nov. 20, speculation continued to mount that he will have little choice but to cede the bank to government control.A dwindling market cap means Citi (C) faces extreme difficulty in either its ability to raise capital or to market itself in a sale. “When you have a decline in the share prices of this magnitude and depth, it is a signal that the company is going under,” says Martin Weiss, founder of Weiss Research. “The share price is providing the clearest canary in the coal mine.”Weiss says it is now up to the Treasury Dept. and the Federal Reserve to figure out if they want to nationalize Citigroup, à la Fannie Mae and Freddie Mac. “Someone is going to have to step up and say ‘enough.’”If Citi were to require a government rescue, it would be by far the largest bank failure in history. Citi has $2 trillion in assets, or approximately six times more than Washington Mutual’s and three times more than Wachovia’s.Derivatives DramaMoreover, the prospect of a failure by Citi poses far greater challenges to regulators, due to its massive derivatives holdings. Those derivatives are essentially side bets on interest rates, currencies, and other markets, as well as bets on the probability of defaults by other large corporations (credit default swaps). At midyear—June 30, 2008—the Office of the Comptroller of the Currency says, Citi’s primary banking unit, Citibank NA, held $37.1 trillion in total notional value derivatives, including $3.6 trillion in credit default swaps. Those swaps in recent months have proven to be the most dangerous category. In contrast, Wachovia bank, bought out by JPMorgan Chase (JPM) in a deal brokered by the regulators, had only $4.4 trillion in total notional value derivatives, among which $404 billion were in credit default swaps. Although the notional value overstates the true market risk of derivatives, another oft-underestimated risk is a bank’s exposure to the possibility that some of its trading partners might default on their side of the transaction. For each dollar of risk-based capital, Citibank was exposed to $2.58 in such credit risk on June 30, according to the OCC. In contrast, Wachovia’s exposure was 52.7¢ on the dollar, or only about one-fifth of Citi’s in proportion to capital.Not everyone has given up hope. Mike Mayo, bank analyst at Deutsche Bank (DB), issued a note early on Nov. 21 saying there is still fundamental value at Citigroup that justifies a $9 price target. He estimates that Citi has $100 billion of cushion to cover an estimated $50 billion on losses.In a town hall meeting on Nov. 17, Pandit warned the market that losses in the bank’s consumer loan portfolio could rise between $1 billion and $2 billion each quarter from now through the first half of next year—far less than Mayo’s figure. But the market was struck more by what Pandit did not say: The bank classified some $80 billion of distressed assets into “held for investment,” a subjective accounting category that allows the bank to set aside risky and hard-to-value assets in hopes for a recovery.Eleventh-Hour Partner?Many doubt those assets will recover and assume they will eventually be another hit to the bank’s balance sheet. Stuart Plesser, an equity analyst with Standard & Poor’s, says investors “looked suspiciously at those assets [and figured] they were not priced sufficiently.”Some Wall Street analysts are still floating the idea that Citi may find an 11th-hour business partner. Goldman Sachs (GS), Morgan Stanley (MS), and even American Express (AXP)—Citi founder Sanford Weill’s dream acquisition in the old days—have been raised as potential suitors. Still others are circumspect about the timing: “I don’t believe there is any other financial institution in the world today that has the capital or is crazy enough to take on Citigroup,” says Weiss.Pandit, the board, and other Citi executives were huddled in meetings since early Friday morning. But with the headwinds of the market, their choices are dwindling.”This is a different ball game we’re in; this is moving into a lack-of-confidence game,” says Plesser. “We’re talking about the fear of institutional trading partners taking deposits and wealth management clients fleeing, which would remove the value of that business. If that is occurring, we have to have a plan to sell before it loses its value. At these levels, it’s out of their hands.”Der Hovanesian is Banking editor for BusinessWeek in New York. Take a look at the bold paragraph above, The new treasurer is gonna have to solve a tough problem this weekend! Perhaps, I can help as I just figured out a two-tier solution to the financial crisis:1. a JRKP original: “BAN HOUSING EVICTIONS”2. And now mine: “BAN CDS CONTRACTS”I hold several thousand shares of citi with an average cost basis of $4.53/share bought over last Th and Friday, which I must admit I bought mainly to have an acting role, a piece of the action, even if only as an extra, in the soap-opera that will unfold starting Monday:Will the FED and treasury do the right thing, bail citi out but wipe me out?There is no question citi will be bailed out. But there is no easy answer to the question of whether stockholders will be wiped-out. This is because so far, the US has resisted nationalizing banks. citi as a hybrid that resulted from Clinton’s repeal of the Glass-Steagall Act.Why do you think WFC, JPM, BAC shares came down hard with citi last week?If citi equity holders are wiped out, the daisy chain of falling dominoes may be such that the US stock market will crater along with citi.This is why:Citi is not the only bank with gazillions of dollars in CDSs. If citi is nationalized, the WHOLE US banking system will have to be nationalized. This meaning that most of the equity in the S&P500 financials will be wiped out. Even though financials are no longer 25% of the index, they are still a good chunk of the pie (15.86% as of 9/30/08 http://www2.standardandpoors.com/spf/pdf/index/SP_500_Factsheet.pdf). Start getting the picture?So what do I think will happen? Hanky will defrost TARP and give citi a big wad of cash in exchange for preferred stock. Will the dilution be so huge that I will never make money on my investment? Highly likely…Want to read an couple of interesting memos?http://www.federalreserve.gov/pubs/bulletin/2008/legal/q407/order5.htmhttp://www.federalreserve.gov/boarddocs/legalint/federalreserveact/2005/20051025/default.pdfLet’s see how I fare Monday morning:-)

Guest • November 22nd, 2008 at 6:40 am

Obama Targets 2.5 Million New Jobs in 2-Year Economic StimulusBy Jason GaleNov. 22 (Bloomberg) — President-elect Barack Obama said he aims to create 2.5 million new U.S. jobs in a two-year plan to simulate an economy facing a “crisis of historic proportions.”Obama, in his weekly radio address, today said that “financial markets faced more turmoil,” potentially leading to a “deflationary spiral” that may plunge the nation further into debt and cost millions more jobs. New home purchases in October were the lowest in half a century and 540,000 more jobless claims were filed last week, the highest in 18 years, he said today.Job losses in the U.S. have totaled 1.2 million this year as the economy entered a slowdown exacerbated by the worst credit crisis in seven decades. More firings will weigh on the economy and consumer spending, putting pressure on Obama and Congress to agree on legislation that will stimulate growth.“I have already directed my economic team to come up with an economic recovery plan that will mean 2.5 million more jobs by January of 2011 — a plan big enough to meet the challenges we face that I intend to sign soon after taking office” on Jan. 20, Obama said. “We have now lost 1.2 million jobs this year, and if we don’t act swiftly and boldly, most experts now believe that we could lose millions of jobs next year.”Details of the plan will be worked out in coming weeks, and will include jobs rebuilding roads and bridges, upgrading schools and building wind farms and alternative energy technologies, he said.To contact the reporter on this story: Jason Gale in Singapore at

OR • November 22nd, 2008 at 6:44 am

Ups! Lets re-post my writing without italics:Take a look at the bold paragraph above, The new treasurer is gonna have to solve a tough problem this weekend! Perhaps, I can help as I just figured out a two-tier solution to the financial crisis:1. a JRKP original: “BAN HOUSING EVICTIONS”2. And now mine: “BAN CDS CONTRACTS”I hold several thousand shares of citi with an average cost basis of $4.53/share bought over last Th and Friday, which I must admit I bought mainly to have an acting role, a piece of the action, even if only as an extra, in the soap-opera that will unfold starting Monday:Will the FED and treasury do the right thing, bail citi out but wipe me out?There is no question citi will be bailed out. But there is no easy answer to the question of whether stockholders will be wiped-out. This is because so far, the US has resisted nationalizing banks. citi as a hybrid that resulted from Clinton’s repeal of the Glass-Steagall Act.Why do you think WFC, JPM, BAC shares came down hard with citi last week?If citi equity holders are wiped out, the daisy chain of falling dominoes may be such that the US stock market will crater along with citi.This is why:Citi is not the only bank with gazillions of dollars in CDSs. If citi is nationalized, the WHOLE US banking system will have to be nationalized. This meaning that most of the equity in the S&P500 financials will be wiped out. Even though financials are no longer 25% of the index, they are still a good chunk of the pie (15.86% as of 9/30/08 http://www2.standardandpoors.com/spf/pdf/index/SP_500_Factsheet.pdf). Start getting the picture?So what do I think will happen? Hanky will defrost TARP and give citi a big wad of cash in exchange for preferred stock. Will the dilution be so huge that I will never make money on my investment? Highly likely…Want to read an couple of interesting memos?http://www.federalreserve.gov/pubs/bulletin/2008/legal/q407/order5.htmhttp://www.federalreserve.gov/boarddocs/legalint/federalreserveact/2005/20051025/default.pdfLet’s see how I fare Monday morning:-)

Dan • November 22nd, 2008 at 6:46 am

I would like one person to give me any good reason not to outlaw the CDS (and synthetic CDO). I believe that, by definition, CDSs are bought by people who don’t have financial interests in the referenced bond, otherwise, it’d be defined as “insurance”.Like those selling the CDS, I’m willing to sell Megamillions lottery tickets at a discount for 50 cents, all day long — I’ll make a lot of money. If a number I sell hits, I’ll just declare bankruptcy. I also suppose some of you financial types might undercut me and sell for 45 cents, and you’d be smart to do that.Anybody see any difference between my scheme and the CDS?

Guest • November 22nd, 2008 at 6:48 am

and that no anyone may be able to buy or sell except the one having the emblem of the wild beast, or its name, or the number of its name

I must say that I do believe in Revelation. It was of course represented in signs (symbols) as is stated in the first chapter of the book. So just as the fiery lake mentioned in it is not a real fiery lake (but symbolises something), so do the wild beast and other stuff. But I do think we will see something like above happening soon. In that UN (or some other worldwide body) will end up controlling commerce more than they do currently. All in the name of economical security.People should just note that Revelation also mentions the wild beast attacking and destroying something called Babylon the Great. And that an angel warns that people should “get out of her”. So it would be good for people to know who Babylon the Great is, ’cause they could find themselves as being ‘inside’ her.On another hand I do not think there is that much in that number of the wild beast. I mean, even if one would know what it exactly means, it would not provide particularly much information.

devils advocate • November 22nd, 2008 at 6:55 am

and also send more $$$ to our friends overseas so they will buy US debtJason B: excellent focus in your posting

Guest • November 22nd, 2008 at 7:15 am

Credit Markets Innovations and Their ImplicationsMarch 23, 2007 (the eve of the credit crisis)Timothy Geithner, President and Chief Executive Officer

The past few years have seen remarkable changes in credit markets, and this is a good time to take stock of what we know about those developments and their implications.The latest wave of credit market innovations has elicited some concerns about their implications for the stability of the financial system, concerns similar to those associated with earlier periods of rapid change in financial markets. Will the most recent credit market innovations amplify credit cycles, contributing to “excessive” lending in times of relative stability, and then magnify the contraction in credit that follows? Will they introduce greater volatility in financial markets? Will they create greater risk of systemic financial crisis?These concerns have been heightened in some quarters by the problems currently being experienced in the subprime mortgage sector. It will take some time before the full implications are understood and the full impact can be assessed. As of now, though, there are few signs that the disruptions in this one sector of the credit markets will have a lasting impact on credit markets as a whole.Indeed, economic theory and recent practical experience offer some reassurance against both these specific concerns and more general worries about the implications of credit market innovations for the performance of the financial system.The rapid growth in these new types of credit instruments is, of course, a sign of their value to market participants. For borrowers, credit market innovation offers the prospect of increased credit supply; better pricing; and a relaxation of financial constraints. For investors, new credit instruments bring the prospect of broader risk and return opportunities; the ability to diversify portfolios; and increased flexibility. And for lenders, innovations can help free up funding and capital for other uses; they can help improve credit risk and asset/liability management; and they can improve the return on capital and provide new and cheaper funding sources…

Full Text of Guithner’s speech in March of 2007

Guest • November 22nd, 2008 at 7:22 am

Timothy F. Geithner became the ninth president and chief executive officer of the Federal Reserve Bank of New York on November 17, 2003. In that capacity, he serves as the vice chairman and a permanent member of the Federal Open Market Committee, the group responsible for formulating the nation’s monetary policy.”Mr. Geithner joined the Department of Treasury in 1988 and worked in three administrations for five Secretaries of the Treasury in a variety of positions. He served as Under Secretary of the Treasury for International Affairs from 1999 to 2001 under Secretaries Robert Rubin and Lawrence Summers.”http://www.newyorkfed.org/aboutthefed/orgchart/geithner.htmlSeems to me he would have a great understanding of this credit crisis and how we got to this point, given his tenure with the Treasury and the Fed. It may be that he even contributed to some of the policy decisions. Given his concentration on East Asian studies maybe there is something to this Manchurian thing.

devils advocate • November 22nd, 2008 at 7:24 am

OR: Great Post!confidence is the key + short selling accerlerates the Humpty Dumpties Falldeja vu: lehman…bear stearns…etcciti…band of america…etc.

Guest • November 22nd, 2008 at 7:48 am

The perception is well entrenched that this crisis is 100% the result of GWB and his policies; by association any connected with the Bush administration including Paulson and Bernanke are culpable.The facts do not matter, this is an emotional response centered on the idea of change regardless of who or what. After two weeks of virtual silence the leaked announcement of Guithner with the markets at the depth of despair was a calcuated move designed to reinforce Obama’s choice. This mornings address is similar; it would appear he and his handlers have tried to time the market allowing him to enter at the darkest hour to save the day.Make no mistake Friday at 3pm was the beginning of the Obama rally that will see the Dow go to 11,000 in the next few days and weeks.

Guest • November 22nd, 2008 at 8:57 am

Subprime woes not impacting credit market: GeithnerBy Greg Robb, MarketWatchLast update: 12:22 p.m. EDT March 23, 2007 WASHINGTON (MarketWatch) — There is no evidence that problems being experienced in the subprime mortgage sector are spilling over into other credit markets, said Timothy Geithner, the president of the New York Federal Reserve on Friday.(that’s a relief and just when I was starting to get worried)

randy • November 22nd, 2008 at 8:58 am

I agree with you. I don’t know if Beck is off the air. However, I’ve read the Jekyll book and it is very compelling. go to freedom-force.org for more info.I recommend everyone here read Jekyll. It will give you a much better perspective on the fed. This is the 4th attempt at central banking in the US, btw.

OnlyTheParanoidSurvive • November 22nd, 2008 at 9:11 am

My favorite part”The rapid growth in these new types of credit instruments is, of course, a sign of their value to market participants”huh!

Guest • November 22nd, 2008 at 9:12 am

I knew those words sounded familiar:Ben Bernanke March 28, 2007″ At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.”linkandTimothy Guithner March 23, 2007″As of now, though, there are few signs that the disruptions in this one sector of the credit markets will have a lasting impact on credit markets as a whole.”If you like Ben we now have Ben squared with the appointment of Guithner.

JLC • November 22nd, 2008 at 9:19 am

Professor, your proposed solutions are straight out of Bernanke’s 2002 policy speech on deflation that you mention in your article.I have no doubt that everything on your list will be tried, and I also have no doubt that none of it will work.There is a reason why they call it a liquidity trap – there is no way out. Why waste resources in a futile and losing battle? Why not focus instead on debt relief, and triage and repair of insolvent banks and corporations?The problems in the credit markets are symptoms of a much larger disease: The level of debt in the system is unsustainable. Until we admit that and take active steps toward massive default and debt forgiveness, we are only delaying the inevitable.We should be attacking the underlying disease, not putting bandaids on the symptoms. Deflation is a necessary process to correct the imbalances that have built up in the system.Debt is the root cause. DEBT NEEDS TO BE DESTROYED ON A MASSIVE SCALE. Until that process is complete, deflation is here to stay. By trying to slow or prevent the correction, aren’t we merely prolonging it?Deflation: Why fight it?

PeteCA • November 22nd, 2008 at 9:31 am

Guest. The Friday rally was due to the close of short positions. It was profit taking by people who hold a lot of positions with inverse ETF’s. Nothing more. The political landscape did not factor in.PeteCA

OR • November 22nd, 2008 at 9:31 am

I wrote the post above beofre reading this:http://www.reuters.com/article/innovationNewsFinancialServicesAndRealEstate/idUSTRE4AK4XS20081121By Dan WilchinsNEW YORK (Reuters) – As Citigroup Inc’s share price sinks, investors are wondering if the U.S. government will have to help the bank. How is an open question. Four investors that spoke to Reuters proposed some scenarios.MORE PREFERREDSThe U.S. Treasury Department bought $25 billion of preferred shares and warrants from Citigroup in October when it injected capital into banks under the $700 billion Troubled Assets Relief Program.It could buy more, boosting Citigroup’s capital and a renewed government willingness to support the bank, which could soothe investors. Citigroup bonds, which have been sinking because of concern that a bailout would harm bondholders, would rally. That could lift prices for other bank bonds, reducing borrowing costs for lenders that rely on bond markets to fund themselves.Preferred shares do not have voting rights, so a preferred stock investment would not provide new U.S. oversight over Citigroup’s management or board, which some taxpayers and government officials may want. But the government could require the bank to add new management or directors as part of a deal.A LOAN, OWNERSHIP STAKEAnother possibility is a bailout similar to the original $85 billion package for American International Group Inc. The government made a loan that would be first to be repaid if the insurer went bankrupt, and took an 80 percent ownership stake.The loan’s terms were so onerous that AIG trading partners demanded even more collateral, making the insurer’s position more precarious. But a more lenient loan for Citigroup plus shares would ensure ample say for the government in how the bank is run, and would leave taxpayers with minimal risk compared to other investors.But such an arrangement would erase much of Treasury’s earlier $25 billion investment in Citigroup preferred shares. Plus, it would hurt investors in Citigroup’s bonds, and bank bonds in general, making it harder for some banks to fund themselves.LIQUIDATIONThe Federal Deposit Insurance Corp has considerable leeway in how it sells a bank it seizes. It can, as with Washington Mutual Inc, protect deposits and leave bondholders and stockholders in the cold.This could shelter the financial system from some of Citigroup’s toxic assets, but at tremendous cost. No longer would any bank, or perhaps any company, be deemed “too big to fail.” Investors could dump stocks of and corporate credits of all stripes, turning what could already be a deep recession into a punishing one.”The too big to fail doctrine is being tested. Maybe the solution is to break these companies up like Ma Bell,” said James Ellman, president of hedge fund Seacliff Capital in San Francisco. “Ma Bell” was a nickname for AT&T, which was broken up into smaller regional telephone companies in the 1980s.GUARANTEESThe government could guarantee all of Citigroup’s debt and derivative obligations. This could be a low-cost solution if investor confidence in Citigroup returns. But even a government guarantee does not necessarily ensure restoration of investor confidence, as Fannie Mae and Freddie Mac learned earlier this year.A government guarantee of Citigroup derivatives could create significant questions about how to manage them. Would they wind the derivatives books down, reducing the capacity of trillions of dollars of over-the-counter derivatives markets globally? Making markets in derivatives typically involves taking some risk. Would the government be willing to expose taxpayers to such risk?BUYING THE WORST ASSETSThe government could buy Citigroup’s worst assets, perhaps at a discount, and allow an asset manager such as BlackRock Inc to manage them for taxpayers. The government’s $700 billion rescue package was supposed to do that, but deciding on fair prices for the government to buy assets proved difficult. If the price is too high, taxpayers risk big losses. If the price is too low, the bank could be hobbled, and the asset values implied by the transactions could hurt other banks.REGULATORY CHANGESInstituting a new short-selling ban, loosening mark-to-market accounting rules for bank assets, or halting trading in credit default swaps could provide a temporary boost to banks in general, and Citigroup in particular.”If you banned all short selling, not just new short selling, but all short selling on every company, stocks would really rally. It would force the mother of all short-covering rallies,” said Seacliff’s Ellman, referring to rallies where investors buy shares to cover short positions.But such moves could fail. A recent short-selling ban did not halt declines in bank shares, and created market distortions that may have forced hedge funds to liquidate more assets. Loosening mark-to-market rules could reduce transparency in the banking system, making investors even more reluctant to sink capital into it. And halting credit default swap trading would eliminate an important source of revenue for banks, and make it harder for investors to hedge.(Reporting by Dan Wilchins)

OR • November 22nd, 2008 at 9:37 am

This one is fresh:http://www.bloomberg.com/apps/news?pid=20601087&sid=acxKsnU5HOAI&refer=homeCitigroup May End Up With U.S. Government Rescue (Update1)By Christine Harper and Bradley KeounNov. 22 (Bloomberg) — The U.S. government may step in to rescue Citigroup Inc. after a crisis in confidence erased half the bank’s stock-market value in three days, according to investors and analysts.Citigroup’s $2 trillion of assets dwarfs companies such as American International Group Inc. that got support from the U.S. government this year. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke may favor a rescue to avoid the chaotic aftermath of Lehman Brothers Holdings Inc.’s bankruptcy in September.“Citi is in the category of ‘too big to fail,’” said Michael Holland, chairman and founder of Holland & Co. in New York, which oversees $4 billion. “There is a commitment from this administration and the next to do what it takes to save Citi.”One option is for the Federal Reserve and U.S. Treasury to create a special vehicle to purchase bad assets from Citi. The Fed has already erected several such funds, such as the Commercial Paper Funding Facility, to provide liquidity to the financial system. Typically, the Treasury would provide some first-loss equity or insurance fee, such as $50 billion provided to the CPFF, to protect the central bank and give the fiscal authority a stake.The arrangement allows the Fed to leverage the money provided by the Treasury with loans, enabling the purchase of assets worth a multiple of the money. Funding the purchases with loans makes them less onerous to the U.S. budget.Working Relationship“That is the working relationship they have settled into with the Fed providing $1 trillion of the funding and the Treasury providing the equity tranche,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.Citigroup management and some board members discussed “several options” for the company in a series of phone conversations with Paulson and New York Federal Reserve Bank President Timothy Geithner yesterday, the New York Times reported today, citing unidentified people involved in the talks.Among those options were the possible replacement of Chief Executive Officer Vikram Pandit, a public endorsement of Citigroup by the government or a new financial lifeline, the Times said. No decisions had been taken as of late yesterday, it said.‘Regulatory Intervention’While Citigroup executives say the company has adequate capital and liquidity to ride out the crisis, its tumbling share price may shake the confidence of creditors, clients and rating companies. A similar scenario played out at Lehman, when Chief Executive Officer Richard Fuld declared the firm was “on the right track” five days before the firm went bankrupt.“The market may be implying some sort of regulatory intervention,” Jason Goldberg, a former Lehman analyst who now works at Barclays Capital in New York, wrote in a note to clients yesterday. “In situations where the government has stepped in, the equity holders have not fared well.”Pandit told employees yesterday that he doesn’t plan to break up the company, aiming to reassure workers as the stock resumed its skid. Citigroup shares dropped 94 cents, or 20 percent, to $3.77 in New York trading, giving the company a market value of about $21 billion. The stock pared its loss after the close of official trading, fetching $4.07 as of 4:35 p.m.Pandit, CrittendenPandit and Chief Financial Officer Gary Crittenden, speaking on a worldwide conference call yesterday, also said they don’t expect to sell the Smith Barney brokerage unit, according to two people who listened to the call and declined to be identified because it wasn’t open to the public.The call came as Citigroup’s board, led by Chairman Win Bischoff and independent director Richard Parsons, prepared to meet yesterday at the bank’s headquarters in New York, said a person familiar with the company’s plans who declined to be identified because the deliberations are private. Bischoff, interviewed at a conference in Portugal yesterday, declined to comment on any potential changes to the board.“Providing stability” and “securing the future” are the themes of a new print advertisement that Citigroup plans to start running tomorrow in major markets in the U.S. and overseas. “Now, more than ever, you can feel confident that Citi never sleeps,” the ad reads.No. 5 By ValueOnce the biggest U.S. bank, with a market value of $274 billion at the end of 2006, Citigroup has now slipped to No. 5 behind Minneapolis-based U.S. Bancorp. A plan by 51-year-old Pandit this week to cut costs by shedding 52,000 jobs and an endorsement by billionaire Saudi investor Prince Alwaleed bin Talal didn’t assuage shareholders’ concern that bad loans and securities writedowns may extend a yearlong run of net losses totaling $20 billion.“To be consistent with the last few government interventions, I don’t think Citigroup’s going to be allowed to fail,” said William Fitzpatrick, an analyst at Optique Capital Management Inc. in Milwaukee, which oversees about $1 billion and doesn’t own Citigroup shares. “This company’s too intertwined with the rest of the financial system to allow any further deterioration.”Citigroup spokesman Michael Hanretta declined to comment. On the call yesterday with employees, Pandit said the company’s capital and liquidity are strong.Including a $25 billion capital injection from the U.S. Treasury under the $700 billion Troubled Asset Relief Program, the company has at least $50 billion of capital above the amount required by regulators to qualify as “well capitalized.” Capital is the cushion banks must keep to absorb losses and protect depositors.‘Special Case’Deutsche Bank AG analyst Mike Mayo wrote in a report yesterday that the bank’s $25 billion of reserves, when combined with other resources, “should be enough to cover estimated cumulative losses of $50 billion on loans.’” Mayo rates the stock “hold” and has a $9 price target.“With Citi being as big as they are, the government will make a special case and step in and find another reason to dispose of more TARP funds,” said Matt McCormick, a portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel in Cincinnati, which manages about $2.9 billion and doesn’t own Citigroup stock or debt.Pandit was appointed last December to succeed Charles O. “Chuck” Prince, who was ousted as mortgage-bond writedowns saddled the bank with a record fourth-quarter loss of almost $10 billion. Prince was the handpicked successor of former Chairman and CEO Sanford “Sandy” Weill, who built the company through a series of acquisitions over 17 years before stepping down in 2003.Deposits Said SafeBischoff, 67, was Citigroup’s top executive in Europe until he was named chairman when Pandit became CEO.Bank employees have been telling customers their deposits are safe, and so far corporate clients haven’t moved their money elsewhere, said three people familiar with the matter who declined to be identified because they weren’t authorized to speak publicly about the accounts.Crittenden, 50, has told colleagues it would be unwise to make hasty decisions to dispose of good businesses to satisfy investor demands for a show of action, one person familiar with the matter said.

PeteCA • November 22nd, 2008 at 9:39 am

This from the New York Times. When the NYT is implying we’re headed for a depression, you know things are getting pretty pessimistic out there.————”THIS is shaping up as the year when almost nothing went up.Will 2008 Be the Worst Year? Even after Friday’s large stock market rally, only 10 of the stocks in the Standard & Poor’s 500, the premier American stock index, are higher than they were at the end of 2007, and the index itself is down almost as far as it was in the worst year it ever experienced, at the height of the Great Depression.Although the accompanying charts focus on the United States, similar things can be said in most markets. Only a handful of European stocks are up this year, and within the once buoyant Chinese and Indian stock markets, there are almost no stocks showing gains.There has, in other words, been nowhere to hide from the collapse of 2008.”—————–PeteCA

Guest • November 22nd, 2008 at 9:42 am

No, just like the election rally took place the day of the eleciton (markets went down the next day), so too we rally now and begin the long decline after the inauguration. The euphoria of change and the pre-announcements of spending and stimulus over the next few weeks will propel the markets higher and on or about January 20 the cruel reality and irony that nothing has really changed (e.g. gotten worse) will set in. SSO will be the place to be for the next few weeks and then get ready to short the dollar and the market.

PeteCA • November 22nd, 2008 at 9:47 am

Let me first post an article (Nov 21′st) from Minyanville. Then I’ll add a following comment next post.————————Minyanville Article:Gold to Break Upside, Dollar to Break DownLance Lewis Nov 21, 2008 9:30 amYellow metal will spike after going into backwardation.Just to update everyone on gold. Last week, I noted that the 3M GOFO was about to go negative, indicating that gold was moving into backwardation.Unlike other commodities, gold very rarely goes into backwardation: This only occurs when 1) The market fears a collapse in the currency, and/or 2) The market is worried about counterparties making good on their promise to deliver gold (which was briefly the case in 1999, when the Washington Agreement was announced and shorts were squeezed).This morning, gold officially went into backwardation for the first time since the announcement of the Washington Agreement in 1999, which sent gold shorts scrambling to find physical metal after the world’s major central banks agreed to limit sales of gold going forward and ending the one-way trade to the downside in gold that had been in place in the late 1990s.We know gold is now in backwardation because the gold forward offerred rate (GOFO) has now gone negative. The 3M GOFO has fallen 12 basis points to -0.07%, and the 1M GOFO has fallen 20 basis points to -0.1167% (see the chart of 3M GOFO below).”—————–PeteCA

kdp59 • November 22nd, 2008 at 9:48 am

Just a small business owner here, not schooled in econimics except main street ones.but a couple questions for those that are:1) who is having problems getitng financing today?I ask this because all the local/ regional banks in this area are happily giving out local loans. In my business we just doubled our line or credit (and got a lower floating rate!) and personally my wife and I both bought new american autos with 0% financing with absoultety NO problems.Seems like the only people having problems are people/ companies that are in trouble already. But should they be adding additional debt then?2) I don’t understand why our politico’s can’t allow insolvent companies to go under/ re-structure AND approve an infrastructure rebuilding plan to put people to work in the coming year or two (to offset some of the job losses).Rebuilding our road/ bridges/ water plants/ sewer plants will give us citizens 10-20 years of use (it’s constructive), there are engineered plans waiting for funding in every country/state in the US and it keeps poeple working and paying taxes on that money.I can’t understand why so many people seem to un-willing to use BOTH approaches to help keep our nation from falling down a shithole of ruin. Are we THAT tied to our political ideals of right and left?The conservatives are CORRECT when they say, companies need to be able to FAIL.The Liberals are CORRECT when they say, we need to put people to work re-building our nation, even if it means defecit spending.Am I simply too stupid to see the “big picture” here?

Guest • November 22nd, 2008 at 9:50 am

“Obama: by his friends you shall know him” by Dr. Sahib Mustaqim BleherNovember 7, 2008 — With the initial euphoria of the election of the first “black” president of the United States of America slowly subsiding, it is time to take a good look at the colour of Obama’s politics rather than skin. It quickly becomes apparent then that there won’t be much change after all. Early on in his campaign, Barack Obama gave a speech to the American Israel Public Affairs Committee (AIPAC) indicating his unwavering support for Israel. His selection of staff and advisers confirms that he is not going back on his word.Obama’s campaign manager was David Axelrod, an American Jew from Manhattan, who will be rewarded with the post of Chief White House advisor. As Chief of Staff, Obama selected Rahm Israel Emanuel, who also holds Israeli citizenship and served as a volunteer in the Israeli Defense Force (IDF). John Podesta, also Jewish, heads the new president’s transition team. Likely candidates for treasury secretary are Lawrence (Larry) Summers, Timothy Franz Geithner, and Paul Volcker, all Jewish. John Kerry, whose parents converted from Judaism to Roman Catholicism, might become Secretary of State. An exception with regard to kosher credentials might be former CIA director Robert Gates, who could be invited to stay on as defence secretary – not much change in Iraq or Afghanistan then. James (Jim) Steinberg, likely to become National Security Advisor, is part of the tribe again, as is another contender for this post, Dennis Ross, who was Clinton’s Middle East Envoy. The few expected black appointments will be safe choices, such as Susan Rice, potential Ambassador to the UN, a former protege of the infamous Madeleine Albright.So colour really doesn’t matter all that much. Those who hope that the Bush administration’s unconditional support for Israeli aggression might change with Obama will be in for a nasty surprise. Of course, McCain wouldn’t have been any different. And just for the record: Given that only about three percent of the American population are Jewish, their heavy concentration in the corridors of power is, of course, purely coincidental!– Mathaba Author Dr. Sahib Mustaqim Bleher is a German living in England, a Muslim and a pilot

PeteCA • November 22nd, 2008 at 9:54 am

OK … following comment from me.I have beaten the “gold” thing to death already. So I don’t intend to continue on that subject. But please note the comments from the above article …”Unlike other commodities, gold very rarely goes into backwardation: This only occurs when 1) The market fears a collapse in the currency, and/or 2) The market is worried about counterparties making good on their promise to deliver gold (which was briefly the case in 1999, when the Washington Agreement was announced and shorts were squeezed). “I have already spoken several times about the risk to the COMEX market if they cannot deliver physical gold.But let me repeat again about a warning on the US dollar.First, what happens if hedge funds reverse trades. They have been LONG on the dollar and short on commosities. What happens if they reverse and now go LONG on gold, and short on the dollar? No need to infer that the dollar will start dropping.Is this significant? Well, only mildly.I’m joking, of course.There are millions of foreign investors who have pourted into US T-Bills. If the dollar threatens to drop quickly, these people stand to lose a LOT of money. Guess what? You will see a mad rush for the exits.You see the risk here???A rapid drop in the US dollar, and a shock wave in the currency markets. The G20 should have been thinking about this – instead of crying in their own beer.These are not predictions, and I take no responsibility for anyone who makes transactions in currencies. Do your own diligence.PeteCA

Guest • November 22nd, 2008 at 9:55 am

I have a question: Is OR a.k.a. Octavio Richetti? I believe it is, but I just wanted to be certain. Octavio?

Guest • November 22nd, 2008 at 9:59 am

I just posted above and I don’t disagree – but at 2:59 S&P was in decline (I think -7 or -8 and the instant CNBC announced, it reversed – I agree the added momentum that we have seen in the final hour relates to volatility and the double witch of Friday – but the announcment was clearly a major influence. It was a calculated move designed to endorse his selection and distract from the fact that he is more of the same, if not worse. At least with Hank there was some contrasting opinion. Now with Guithner we have the embodiment of Ben’s idealogy and Paulson’s morality.

blindman • November 22nd, 2008 at 10:17 am

p., now that was poetic. well done! but i’m not in total agreement as not all the threads connect. bankers have factions and not all bankers are of the same school. and dizzying heights tend to make people more rather than less cautious after all falling is relative.another related thread…afa, “why even bother to have a market”? great question at this point. what is a market and what does it need to exist, that’s where the government comes in. the government sets the stage, the market then acts on the stage. i think that is the ideal. if the government makes a crappy set on the stage the markets play will be a flop, likewise if the set looks great and the market actors are all drunk in the rehearsal area watching t.v. no one is entertained or enlightened. what i mean is, in this situation, the market has moved on in the program and the set was not changed and the audience is totally confused. the market actors have taken liberties with a money supply mechanism. too much credit, creating a money supply problem or solvency problem and since much of that solvency problem is their own they are creating a liquidity problem when their purpose is to solve liquidity problems (bad show), they are on to the next act way too soon so they have to stop briefly to let the hands change the set. curtain down, intermission, go have a smoke. insolvency always means illiquidity but with deflation liquidity and solvency are irrelevant because you are losing your currency.no one on the set, no actors, no script. why even bother to have a market? back stage some people better be coordinating the set and the script or the answer to your question will be a big no response. curtain doesn’t come up and the audience leaves the auditorium for the bar room. i’m not sure what that means but it sounds both interesting and scary at the same time.another analogy that comes to mind is professional baseball. it is like the money managers became so enamored with their own stardom that they fired the umpires and the bottom of the lineup players and decided to stand at the center field wall with buckets of balls signing autographs, every once in a while tossing a ball over the fence and declaring, “home run”. but who will pay to see that? plenty of people i guess?

Guest • November 22nd, 2008 at 10:29 am

Like with Krugman there may be an agenda to oversell the gloom and doom, much like a newly elected politician who informs his constituents that things were even worse than he thought, thereby making him/her look better when things improve.Having said that the irony is that what they are predicting for political purposes (and likely don’t believe) is in fact reality. It’s a no lose for the Times or Obama to go super negative on the economy. A crisis is a politicians best friend as it allows them to forward their agenda without challenge.In an earlier post someone suggested that Summers would replace Bernanake when his term is up. Krugman will be the choice – now that’s depress(ing)(ion).

Guest • November 22nd, 2008 at 10:34 am

similar to what LB and others are saying – I think your various posts on Gold are good advice if there is a currency collapse – but in a deflationary setting gold and the miners would not be a great place to be. The trick is it looks like we will end up with both deflation and currency collapse. Timing this will be the trick and based on how things have been moving it will be sooner and deeper.

Hal • November 22nd, 2008 at 10:56 am

Most of the solutions mentioned at ‘one shot’ activities. Theymight help for a short while but are not a ‘fix’.The root of the problem is that this imbalance has taken a long time to be ‘built-in’ and it will take some action thathas a recurring effect to counter it.The US dollar needs to be devalued. But at the world default currency and being a ‘fiat currency’, there is no simple wayof doing this very quickly.So we either suffer through a very long protracted re-balancing(which is unlikely to be acceptable by most of the world) orthe US dollar is removed as the world’s default currency.Its rather obvious what is going to happen.The questions left are:How is it going to happen?What will the basis of the new default currency?I doubt the world will want to accept a new ‘fiat’ currencyin this role — so that means it will be set relative tosomething (not gold).What that something is and how its distributed relative tothe economies of the world will have profound effects onnot only recovery but geopolitics. Its likely to lead toseveral wars.Hopefully if evenly done only a few minor ones. Historically,these situations have been used to maximum geopoliticaladvantage — meaning large global wars.

Guest • November 22nd, 2008 at 11:06 am

Currency is the next shoe to drop – and it will be sudden and sharp – Question- other than gold what wins in a USD collapse – an article from a while back goes into this (before the credit crisis). At the time of its writing the dollar collapse scenario they described was not expected to occur, but of course things have changed:An Inflection Point in the Dept Super Cycle”

“If the US suffered true capital flight, then the markets would melt down and it is doubtful that reflation would work. Indeed it may make matters worse by highlighting that that there was no will to deal with the underlying problems of excessive leverage and impaired balance sheets. The result would be a cataclysmic global recession/depression as markets acted to force an unwinding of U.S. excesses. The problem is that a self-feeding vicious cycle could then take hold…”

Guest • November 22nd, 2008 at 11:14 am

d, problem. incomes don’t justify, support, prices in real estate in many locations. dot com economy speculation (regionally identified sand states) fed into credit bubble and both went pop. high price neighborhoods in low price economy. devaluation required which will further feedback into financial equities, deflation. negative mortgage rate causes more financial deflation to the “investor” or holder of the debt. back to govt. buying troubled assets (many trillions)or banks going belly up. reduced these communities need market based productivity stuffed under their foundations and the only possible candidate for that job is the people themselves via their collective power which is government. is anyone up to the challenge? stay in the house if the house is near or has access to income that will sustain it.

Anonymous • November 22nd, 2008 at 11:15 am

@ Guest: “Seems to me he [Geithner] would have a great understanding of this credit crisis and how we got to this point, given his tenure with the Treasury and the Fed. It may be that he even contributed to some of the policy decisions. Given his concentration on East Asian studies maybe there is something to this Manchurian thing.”Since 1933 when Eugene Meyer resigned from the Federal Reserve Board of Governors, no member of the international banking families has personally served on the Board of Governors. They have chosen to work from behind the scenes through carefully selected presidents of the Federal Reserve Bank of New York and other employees. We can assume the same for the treasury.There is no doubt Tim Geithner as president of the powerful Federal Reserve Bank of New York, has had considerable hands-on experience in the creation of the present credit crisis. Further, there probably now can be little doubt that he has been on the path from the Fed to the U.S. Treasury for a long time, just as was, say, Paul Volcker, also a past president of the Federal Reserve Bank of New York from 1975-79, on his way to chairman of the Federal Reserve Board, first under Carter and then Reagan. Volcker started at the NY Fed as an economist He was succeeded as president of the New York Federal Reserve Bank by Anthony Solomon, a Harvard Ph.D. who had a similar background to Volcker’s. There are many similarities between Geithner’s appointment for the treasury and Volcker’s for the Fed chairmanship:The New York Times, on the appointment of Volcker as Carter’s chairman of the Federal Reserve Board, wrote on July 26, 1979, that Volcker learned “the business” from Robert Roosa, a partner in Brown Brothers Harriman, and that Volcker has been part of the Roosa Brain Trust at the Federal Reserve Bank of New York, and, later, at the treasury in the Kennedy administration. “David Rockefeller, the chairman of Chase (now JPMorgan Chase), and Mr. Roosa were strong influences in the Mr. Carter decision to name Mr. Volcker for the Reserve Board chairmanship.” Robert Roosa was Carter’s secretary of the Treasury, and represented not only Brown Brothers Harriman of the London Connection, but the Trilateral Commission, the Council on Foreign Relations, the Bilderbergers, and the Royal Economic Institute. He also was a trustee of the Rockefeller Foundation and a director of Texaco and American Express companies.The Times further noted that the Dow market rose on Volcker’s nomination, registering the best gains in three weeks for a rise of 9.73 points and that the dollar rose sharply on foreign exchange at home and abroad.On December 2, 1981, the Times mentioned that when Open Market Committee meetings are held, Solomon, as NY Fed president, and Volcker, as chairman of the Board of Governors, sit together at the head of the table and relay instructions which they have received from abroad.Rockefeller and Roosa also were highly influential in Carter’s nomination as the presidential candidate of the Democrat Party.

Guest • November 22nd, 2008 at 11:18 am

This is what I’m observing in the housing market, frankly banks are not really writting down principle and their work out terms are a joke. Frankly the powers that be are telling us one thing to appease the masses but planning something entirely different. They know that deflation should and must occur but in order to keep the borrowers and consumers honest the only way the banks feel they can or should discount houses is to new buyers through short sales and foreclosure sales. Giving homeowners a break is a slippery slope they are resisting going down at all cost so they’ve battened down the hatches gotten as much free tax payers money as possible and are trying to ride out this deflationary storm but on their terms with our tax dollars. As much as I dislike the approach they’re taking as it wreaks of elitism and is also condescending it is probably the best approach if we’re to continue the status quo capitalistic system we’re all used to. Whether it works is yet to be seen.

Guest • November 22nd, 2008 at 11:21 am

Shades of Ben Bernanke, whose comment that the explosion in gas prices was having little effect on the national economy. Certainly eased my mind.

blindman • November 22nd, 2008 at 11:28 am

afa, “why even bother to have a market”? great question at this point. what is a market and what does it need to exist, that’s where the government comes in. the government sets the stage, the market then acts on the stage. i think that is the ideal. if the government makes a crappy set on the stage the markets play will be a flop, likewise if the set looks great and the market actors are all drunk in the rehearsal area watching t.v. no one is entertained or enlightened. what i mean is, in this situation, the market has moved on in the program and the set was not changed and the audience is totally confused. the market actors have taken liberties with a money supply mechanism, chewed up the scenery. too much credit, creating a money supply problem or solvency problem and since much of that solvency problem is their own they are creating a liquidity problem when their purpose is to solve liquidity problems (bad show), they are on to the next act way too soon so they have to stop briefly to let the hands change the set. curtain down, intermission, go have a smoke. insolvency always means illiquidity but with deflation liquidity and solvency are irrelevant because you are losing your currency.no one on the set, no actors, no script. why even bother to have a market? back stage some people better be coordinating the set and the script or the answer to your question will be a big no response. curtain doesn’t come up and the audience leaves the auditorium for the bar room. i’m not sure what that means but it sounds both interesting and scary at the same time.another analogy that comes to mind is professional baseball. it is like the money managers became so enamored with their own stardom that they fired the umpires and the bottom of the lineup players and decided to stand at the center field wall with buckets of balls signing autographs, every once in a while tossing a ball over the fence and declaring, “home run”. but who will pay to see that? plenty of people i guess?

Guest • November 22nd, 2008 at 11:49 am

An opposing view on currency:Greenback likely to continue to rallyLess spending, more saving, will fuel rise”With nowhere to turn for funding, the average American has stopped spending and the savings rate has risen, to a modest 2%. Reality has finally sunk its claws into the average indebted American and he or she has stopped spending, irrespective of whether prices fall over the next year. Deflation isn’t going to cause a deferral of spending; insolvency is. In fact, the savings rate could rise as high as 10% over the next year or two, according to Charles Dumas of Lombard Street Research.The dollar could well go higher, and gold lower, over the next year as this trend continues to play out.”http://www.financialpost.com/story.html?id=983230

Mark • November 22nd, 2008 at 12:07 pm

If not for the “Obama refuses to show his ORIGINAL birth certificate” headline caption I would have spent some time looking at this site, but it appears to be no more than a channel for right-wing propaganda.

Mark • November 22nd, 2008 at 12:11 pm

It still presents the dilemma of the real physical world, you know, environmental degradation and resource shortages. I say that this is why we’re seeing the market turmoil that we’re seeing. I believe that the recent bubbles were attempts to cover this all up; but now reality is staring us in the face (rather, the majority of the world’s population is staring us in the face with eyes suffering from hunger and disease).

Mark • November 22nd, 2008 at 12:18 pm

It’s all a bunch of parables warning of power and greed, don’t make it anything more than that.The same bodies, the UN etc., that are being blasted as looking to control us all happen to also be looking to provide help/solutions for all. That stated, it is my belief that no matter what the intent is, biblical, secret society or based on other, that the centralized control CANNOT happen. All centers of power collapse. Period! People need to learn to maintain their own power, not give it over to others.

Guest • November 22nd, 2008 at 12:20 pm

g, i don’t know. but i think.. collapse time frames. reduce expectations, speculations. you can’t capture your own money and call it making money and promises don’t pay the bills. who will drive the market up and with who’s money, knowing it will be lost. is this the government recapitalizing the banks by other means? whatever, i wouldn’t waste the term “obama rally” just yet. i suggest you call it the “guithner grab” or something like that.

Anonymous • November 22nd, 2008 at 12:21 pm

I haven’t heard ANYBODY mention anything about the REVERSE MORTGAGE market. One has to wonder how these firms are GOING TO PAY all these people that hold these contracts when the value of their homes has taken a decidely worse turn much less changed the risk algorithm entirely.Comments?

Mark • November 22nd, 2008 at 12:21 pm

Hi Pete. Could you explain how the closing of short positions increases the market numbers? I’m just not quite catching on to how this all materializes :-(

bytheway • November 22nd, 2008 at 12:25 pm

Maybe Gates will soon call for his money which he gave Buffett to play with.This article implies that he obviously is not so smart like the most thought.Playing with weapons of mass destruction is NOT smart ecpect you are God(or think you are)

Octavio Richetta • November 22nd, 2008 at 12:31 pm

You will love this one! F-? I was in the academic business all my life and never heard that one! Watch the video on the left too!http://finance.yahoo.com/tech-ticker/article/133469/All-the-Wrong-Policies-Paulson-Gets-'F-Minus'-from-Former-Regulator?tickers=GS,XLF,JPM,BAC,C,WFCAll the Wrong Policies: Paulson Gets ‘F-Minus’ from Former RegulatorPosted Nov 21, 2008 02:52pm EST by Aaron Task in Newsmakers, BankingRelated: GS, XLF, JPM, BAC, C, WFCAs bad a year as the stock market is having, Treasury Secretary Paulson is having an even worse one, according to William Black, Associate Professor of Economics and Law at the University of Missouri.The professor, who was counsel to the Federal Home Loan Bank Board during the S&L Crisis and blew the whistle on the “Keating Five” in 1989, says Paulson deserves an “F-minus” for his role in the financial crisis.”All of his policies made [the crisis] worse,” says Black, citing Paulson’s:Pushing for more deregulation of the securities and mortgage businesses.Failure to recognize the liquidity crisis in credit markets sooner.Failure to act to stop foreclosures sooner.Opposition to the government taking equity stakes in financial institutions, until very late in the crisis.”And he gets the worst grade because as head of Treasury he’s also in charge of banking and thrift regulation,” Black continues, noting he “destroyed” rather than beefed up supervision. “I hope you like the consequences.”Black, author of “The Best Way to Rob a Bank Is to Own One,” says there’s ample reasons why the financial markets have lost confidence in the Secretary.He also notes Paulson steered Goldman Sachs into subprime and alt-A mortgage securities before becoming Treasury Secretary in 2006. Goldman began shorting those instruments shortly after Paulson’s departure, he notes.The current crisis is “not a hundred-year flood, that suggests it’s an act of God caused by random forces,” Black says. “This was one cause by bad policies, the same policies that have caused prior crises.”

Guest • November 22nd, 2008 at 12:40 pm

Rubin says the minute you meet Tim Geithner you forget how young he is, because he’s so smart.I get it, that’s why Rubin wasn’t picked, he’s too old.

Mark • November 22nd, 2008 at 12:42 pm

A crisis is a politicians best friend as it allows them to forward their agenda without challenge.Not necessarily. If you’re unable to finance then you’re a stinking skunk (which will soon become a dead skunk).Here’s where it’s headed folks:Finance…the American Way

OuterBeltway • November 22nd, 2008 at 12:45 pm

Mark: resource shortages have not really bitten in yet in terms of input costs – not even oil is all that expensive yet given its impact on productivity.The main issue is that consumption has outpaced production in some economies, created an overhang of debt. Consumption has to change. The other key problem is that we are so productive that a few of us working can provide for the basic needs of the whole society…and we haven’t figured out what to do with the “rest of us”. Naturally, the foregoing applies to the “rich” societies only.The immediate problem is coping with the dislocation and harmonics as the economy re-calibrates at a suddenly lower consumption level … but this phenomena is global, and the epicenter is the U.S..Someday, you and I need to get into a debate on this whole “growth” thing. What does “growth” mean to you, BTW? Do you have a working definition?

Mark • November 22nd, 2008 at 12:47 pm

Well, we ARE in a deflationary situation AND, gold IS going up. I’m up in my positions, how many can say that? (a few here)But… everything is temporary. It’s wise to look for another pasture when the big herd comes rambling into the one that you’re grazing on…

Mark • November 22nd, 2008 at 1:03 pm

Less spending, more saving, will fuel riseThat’s an equation that needs further examination.Yes, “less spending” will happen. But, does this necessarily imply that “more saving” will happen?Who is doing the saving? Clearly not the average US citizen who is in (near) negative savings balance with huge debts.Either we’ve got the dumbest people on the planet writing these things or we are failing to pick up on the hidden meaning.Just as the Fed chairman likes to speak in hidden meaning, could it also be that the media does as well? Heck, I don’t know, but I’m asking the question and I think that it’s worth at least a couple of minutes of time.Could it be that those who are “saving” are actually the banks? And if so, what are THEY saving for? Are their savings in order to pay off THEIR debts? Who do THEY owe?I really don’t think that any saving is (or ever really has been) taking place. It’s all money sloshing around. So, I can only surmise that there’s a build up to a big event happening, that money is being collected up as a transition, much like the formation of a rogue wave.The clearest piece/explanation that I’ve yet to encounter is this:Finance…the American Way

Octavio Richetta • November 22nd, 2008 at 1:18 pm

Wow! I got this one right here at RGE! I wanted to get a balanced view on Geithner and I did. I highly respect and admire Kuttner. This one is a must read. Notice the piece was written two months ago!Meet the Next Treasury SecretaryThe most difficult economic challenge of the next administration will be to overhaul America’s collapsing financial system. Who will lead that effort?Robert Kuttner | September 22, 2008http://www.prospect.org/cs/articles?article=meet_the_next_treasury_secretaryThis is next in my reading list:http://reps.chelseagreen.com/files/pdf/ObamasChallengePR.pdf

Guest • November 22nd, 2008 at 1:30 pm

So with a CITI bailout looming – consider the politics vis a vis the auto bailout – While Hank already has the authority and $$ the optics may prevent him from acting and or ensure an auto bailout.

Guest • November 22nd, 2008 at 1:33 pm

About Prospect.org”The American Prospect was founded in 1990 as an authoritative magazine of liberal ideas, committed to a just society, an enriched democracy, and effective liberal politics. Robert Kuttner, Robert Reich, and Paul Starr launched the magazine initially as a quarterly.”

Uncle Billy, StuporSleuth • November 22nd, 2008 at 1:33 pm

Yesterday I post this peace on earth good will to all comment, suggesting that we can improve on Groups of 20 and 30. Today, Laureate without Portfolio Krugman links to the Group of 30 site and tells us that these are the adults who should be in charge, and now, they are. But they’ve been around since the late 70′s. If they were so smart and benevolent, they should have engineered a better society and world economy by now. A little disturbing (or perhaps telling?) is the following: “That doesn’t mean they’ll succeed — this might be a good time to reread The Best and the Brightest. But what an improvement!” Notice he says they. Does he want us to think that he is not inlcuded in the “they”? Or does he really think that? I mean, he still does appear on their webpage. And what about Tharman Shanmugaratnam? How come Tharman lacks a photo and bio? Everyone else has one. Off to the library.http://krugman.blogs.nytimes.com/2008/11/22/the-grownups-are-coming/http://www.group30.org/members.htm

Guest • November 22nd, 2008 at 1:35 pm

A Task Force on Rebuilding a Secure Financial SystemRawi Abdelal, Harvard Business School, author, Capital RulesPhil Angelides, former California state treasurerSheila Bair, chair, FDICRichard Blumenthal, attorney general of ConnecticutJack Bogle, founder of Vanguard Mutual fundsRichard Bookstaber, former risk manager, author of A Demon of Our Own DesignWarren Buffett, super-investorJon Corzine, governor of New Jersey, former CEO of Goldman SachsJames D Cox, Duke University law professor, expert on securities regulationEric Dinallo, New York State Insurance commissionerWilliam Donaldson, former chair, SECBarney Frank, chair, House Banking CommitteeTimothy Geithner, president, Federal Reserve Bank of New YorkHarvey Goldschmid, Columbia Law School, former commissioner, SECBill Gross, chief executive of PIMCOMartin Gruenberg, vice-chair, FDIC, former chief of staff, Senate Banking CommitteeRobert Johnson, investment banker, former staff, Senate Banking CommitteeLance Lindblom, president, Nathan Cummings Foundation, former financial executiveDavid Moss, Harvard Business School, author, When All Else Fails, and convenor of the Tobin Project on RegulationNouriel Roubini, professor, NYU Stern Business SchoolPaul Sarbanes, former chair, Senate Banking CommitteeJoel Seligman, president, University of Rochester, securities law scholar and historian, author, The Transformation of Wall StreetDavid Smith, chief economist, House Financial Services CommitteeJim Stone, former chair, Commodity Futures Trading CommissionDaniel Tarullo, Obama senior adviser on financial markets

Uncle Billy, StuporSleuth • November 22nd, 2008 at 1:36 pm

This might be they minimize Tharman:”Arrest and ConvictionWhile serving as economics director in Monetary Authority of Singapore in 1994, Tharman was charged under the Official Secrets Act for inadvertently releasing Singapore’s 1992 second-quarter flash projections to a research director Mr Raymond Foo, and economist Manu Bhaskaran, of Crosby Securities and journalists, Kenneth James and Patrick Daniel from the Business Times.Tharmam was convicted by Senior District Judge Richard Magnus”Courtesy Uncle Wiki

PeteCA • November 22nd, 2008 at 1:38 pm

The G20 has various ways that they could define a new currency system. It is possible for them to use gold as a reference for currency re-valuation. It’s also possible that they could define some sort of theoretical or “reference currency” based on some fractional combination of the major existing currencies. But the main point is that they really need to make substantive progress, and give people the sense that a solution is imminent. Right now there’s a complete void. They are asking for trouble in the currency markets, in my opinion.Meanwhile, think about Bretton Woods. What did the old currency arrangement do? Basically, it used gold as a reference and established the US dollar as the global currency. But later (under Nixon) the USA pulled the plug on this agreement by dropping the gold standard on the dollar. Whether intentional or not, when the USA took this step in the early 1970′s it set in motion a long-term process that would undermine the old Bretton Woods agreement.We are there now. The old currency regime is ineffective and open to serious risks. America is bankrupt and the value of the US dollar is at serious risk. Many central banks are injecting huge amounts of liquidity into the global markets, potentially causing a “race to the bottom” as currencies become devalued. A new currency regime is badly needed – or we face instability and turmoil.PeteCA

Guest • November 22nd, 2008 at 1:39 pm

And from the author of ObamasChallenge (the second link)ADVANCE PRAISE FOR OBAMA’S CHALLENGE“Robert Kuttner has incisively captured the political moment, underscoredby the deepening economic crisis. Lucidly and passionately, he lays outthe hurdles facing an Obama presidency and challenges him to seize themoment and achieve greatness by redeeming the promise of America.”

Guest • November 22nd, 2008 at 1:39 pm

Hopefully he pulls a JFK and turns on them. Obama is a real smart guy he knows just because he’s president he can’t snap his fingers and be a president for the people he’s got to at least create an image of towing the elite’s line and hopefully he gains some compromise with the oligarchy and gives the common man a bone. We have all witnessed that most of congress is in the hands of money printers and spread earners. I hope Obama realizes this and out smarts them which he seems to have a knack of doing. We live in an ruling class of economic dictators with the illusion of political democracy, it’s all about placating the masses with religious ideology or with placating loans while starving the people of their economic freedom.

Guest • November 22nd, 2008 at 1:42 pm

and this endorsement of Knutter from the DailyKos“As Kuttner convincingly argues, a President Barack Obama will have anhistoric opportunity to radically transform America’s direction—but only ifhe rejects the tired centrist policies of the past and inspires his fellowcitizens to forge new progressive paths. Kuttner systematically lays out thecase for why Obama should give full voice to a robust progressivemessage at a time when the American people are suffering from years ofconservative policy. Obama’s Challenge is an enlightening road map for allAmericans who hunger for a change in direction and priorities in America,and who hope Obama can be our leading agent of change.”—Markos Moulitsas, founder of DailyKos.com,

Guest • November 22nd, 2008 at 1:45 pm

A Task Force on Rebuilding a Secure Financial SystemBy coincidence a roster of liberals including NR which is no surprise

Guest • November 22nd, 2008 at 1:48 pm

and this endorsement of Knutter from John Sweeney“Bob Kuttner hits the high notes with artful precision, lifting expectations and articulating the steps that can make Barack Obama a great president—while setting forth a strong and highly readable call for comprehensive and essential economic change.”—John Sweeney, President of AFL-CIOYes indeed a balanced view

blindman • November 22nd, 2008 at 1:57 pm

pjb, at great heights the eye may look down into the abyss and in that instant the mind has a realization. this sends a spastic flutter through the physical system starting at the port of excrement, that fibrillates through the entrails, the circulatory system to the brain. at this point the occupier of heights and the school girl are equally powerless but one is in much greater danger. just like michael mukasey on thursday. i suspect that some in the audience, the federalist society, also silently cheered, like the curious investors you mentioned. law and order fainted again. chaos is like that too. either way, heads will roll and it is freightening.as you say ……”Problem: Too late and the Bankers are in panic mode; a state of desperation; “extremis”. The whole economic, financial, monetary system is widely vibrating as the imbalances throughout the whole system are shaking and shuddering in disparate terms; out of of synchronicity to the whole dynamic and at differing velocities, pitch and frequencies.”

KJ Foehr • November 22nd, 2008 at 2:18 pm

To those who criticize Obama’s appointment selections thus far, who are cynical of his intentions and/or ability to make change in this country, who believe he has “sold out” and who ask, “Where is the change we were promised”, I offer this evidence to the contrary:An excerpt from a recent email to Obama’s 3 million or so campaign contributors,“The Obama-Biden Transition Project is a nonpartisan entity whose purpose is to facilitate the transition to a new government and prepare for the next administration.In the past, efforts like these have often been very secretive and funded by the D.C. lobbying and corporate community.But, like in the campaign, we’ve decided to do things differently.For the first time, transition efforts won’t be financed with donations from Washington lobbyists and PACs — which means we’ll need to keep asking for your help. Your generosity during the campaign helped get us here, but building a more transparent and open government means continuing to rely on a broader group of people to do this the right way.…”David PlouffeCampaign ManagerObama for AmericaIf you can’t see significant differences between Obama’s statements and actions, including his cabinet and other selections, and those of George W. Bush, then I feel you must be in the same category of people who see no difference between the two major parties. But just because you cannot discriminate the differences does not mean they do not exist. And, IMO, if you can’t see the differences, then you will never be satisfied; you will remain carpers and cynics.When will we see the changes we were promised? Well I don’t know what changes you believe you were promised, but I think we are seeing evidence of real change already. And if you need more concrete results, then waiting until the new president assumes power on Jan. 20 is a prerequisite: to expect to see real change before he even takes office is illogical.But in assessing his performance, keep in mind he is taking over the presidency at the worst possible time since FDR during the GD and Lincoln at the brink of the Civil War. IMO, if we are rational and reasonably intelligent people, we must temper our expectations for change with the realities of the demands placed upon Obama and the entire government in this economic crisis.What he will need to do is certainly not what he would choose to do if he were inheriting a balanced budget, a nation at peace, and a much stronger economy as George W. Bush did in 2001. I.e, IMO, much of the change he really believes in, will not be possible to implement because of our bad economy. However, even with the financial constraints, I believe the changes will still be profound compared to the government policies we have seen evolving over the past 25 years. Many of these changes will be difficult to see as they will not be widely covered in the MSM, and many may seem subtle, but the cumulative effect will be profound nonetheless.“In the end, that’s what this election is about. Do we participate in a politics of cynicism or a politics of hope?”Barack Obama“We have been told we cannot do this by a chorus of cynics who will only grow louder and more dissonant in the weeks to come. We’ve been asked to pause for a reality check. We’ve been warned against offering the people of this nation false hope. But in the unlikely story that is America, there has never been anything false about hope. For when we have faced down impossible odds; when we’ve been told that we’re not ready, or that we shouldn’t try, or that we can’t, generations of Americans have responded with a simple creed that sums up the spirit of a people. Yes we can.”Barack ObamaAnd not only did our forefathers believe “yes we can”, they actually did it. They made America the greatest country, with freedom, opportunity, and equality for all; they made America the most powerful nation; they defeated communism and Fascism. Thus, to Barack Obama “Yes We Can”, is not just an empty slogan, it is the essential spirit of Americans that gives us the confidence to turn our hopes into reality; and it is because we believe that we can transform our country once again to its former glory.This is our country; he is our president, please give him a chance. And let’s all do what we can to support him, not give up and criticize him before he evens starts. He is just one man. We must all pitch in to help save ourselves. We can’t expect him to rescue our country alone, even he has said so himself – the change we seek must come from all of us not just from him.

Guest • November 22nd, 2008 at 2:25 pm

g,yea, so the point is these people are paid to say anything to get people to be stupid with their money. i get it. they don’t work for me and they don’t work for the country. they work for the international financial system, the banks. we have gone from debt to debt squared and looking at debt cubed.

Guest • November 22nd, 2008 at 2:26 pm

Good points but our mindless leaders always follow the same foolhardy approach to everything: first, deny there is a problem, deny it is a large problem, deny it is a huge problem, deny it is an out of control problem, deny they have no clue how to fix it and finally, blame others for the catastrophe! Add to this the continous lying about what’s really happening every step of the way in order to not induce panic and you have a recipe for disaster!

Octavio Richetta • November 22nd, 2008 at 2:43 pm

Ok, OK, OK; I should have said a non-extremist, well-documented, rationale in support of Geithner.I do know, Kutnner is a Democrat, and that if you are one of those persons who likes to place labels on people’s foreheads, then you can call him a liberal. But I have read his work, e.g., his book “The Squandering of America” and what he says there regarding the mess America is in makes a lot of sense. Have you read it?Certainly Kutnner’s rationale for supporting Geithner is a lot more robust than the fearmongering “here he comes again, Obama cannot do anything right” he is picking a GS soldier for the treasury position, where is the change?; when he has not even started as a President:-)

onion • November 22nd, 2008 at 2:44 pm

If there were a simple (or even complicated) painless solution to the problems we face, it would have been implemented with little political fuss. But there no painless solution to the consequences of the mother of all credit booms.Once we meditate on this, the truth can set us free. There is no point looking for a painless solution, so stop looking for one. The problem is too much debt. Faced with this, what normally happens? The person/ company declares bankruptcy, his business dealings are exposed and his assets are distributed to the people he owes money too.This is what needs to happen here. Citibank by some accounts has a $1.6tn SIV that is off-balance sheet. AIG apparently wrote many CDS contracts it couldn’t honour in event of default. These are criminal actions by executives of bankrupt organisations. They need to be exposed by forensic investigators. Debts anywhere where bankruptcy looms need to be exposed. And then purged with creditors being given what’s left through a fair transparent process.This, more than ‘crazy’ monetary or fiscal policy, is what is required. Going into detail on quantitative easing, money traps and ZIRP etc shows a sort of blindness. Before all this and the kitchen sink is thrown at this problem, everything needs to be exposed. Ignoring the web of opaque possibly fraudulent financial transactions of which insolvent institutions are counterparties, while wittering on about interest rates is akin to treating a heart attack patient with an aspirin. Why have there not been more demands for Citi’s $1.6tn SIV to be subject to independent scrutiny?

Guest • November 22nd, 2008 at 2:47 pm

m, i seems to me the credit bubble expanded the territory for finance. the thing fed on the entire economy as monsters competed for space on the bubble with other peoples money, leverage. as it collapses there is no room, banks closing and laying off thousands, consolidating etc. their money making business, securities of questionable value, disappearing. the thing is the big shoe hasn’t dropped. citi . maybe more big shoes. no net? maybe the net breaks? but what will the landscape look like when the big shoe or shoes drop? will the pants fall off? and if they do what size trousers need to be ordered? and can they be made in china?

RedCreek • November 22nd, 2008 at 2:49 pm

Prof. Roubini:You argue that deflation sets in when aggregate supply exceeds aggregate demand.I have the impression that all monetary and fiscal actions discussed are meant to prop up aggregate demand.What about decreasing aggregate supply? Reducing rates and helicoptering money, aimed at increasing aggregate demand, might actually result in an increase of aggregate supply that exceeds the increase in aggregate demand?Apologies in advance if my question is naive…

Guest • November 22nd, 2008 at 2:50 pm

“Hopefully he pulls a JFK and turns on them. Obama is a real smart guy he knows just because he’s president he can’t snap his fingers and be a president for the people he’s got to at least create an image of towing the elite’s line and hopefully he gains some compromise with the oligarchy and gives the common man a bone.”And that worked out so well for JFK. Isn’t what you are hoping for here essentially a Clinton third term–towing the elite’s party line while throwing the common man a bone?

Anonymous • November 22nd, 2008 at 2:54 pm

You know, I look great in a black hood – don’t ask why I know that, but do keep it in mind if the job of guilotine operator becomes available. Oh, and I am of French descent. Vive le Bastille!!!

Guest • November 22nd, 2008 at 2:57 pm

Watch what he does not what he says. Indeed he is more astute, articulate, intelligent, and hands on than Bush. But who wouldn’t be? Obama voted for TARP, continuation of illegal govt spying, and is now appointing recycled Clinton/DNC deregulators in key posts. Not encouraging so far.Let’s see how quickly he is willing to give up the Presidential authorities Bush illegally grabbed and restores the Constitution.

Guest • November 22nd, 2008 at 3:08 pm

NR and others: Please give my daughter an answer!I’m in a bit of a predicament right now, you see, my daughter is 17 and applying to college and interested in finance. She has been asking me quite a few questions lately and I don’t seem to be able to answer them completely: well, here they are and tell me what you think:1. If I want to work for a top financial institution some day and make lots of money, do I have to get into one of the top business schools?A. Well, it is always a good idea to try your very best…2. Aren’t those graduates from the top schools much smarter though and that’s why they get the highest paying jobs?A. Well, that’s the theory but not always the fact.3. But how come the U.S. and world economy are doing so badly now?A. Well, many bad decisions were made by financial institutions in order to make alot of money.4. But were’nt these decisions made by the best and the brightest in our country and how could they all be wrong?A. Perhaps the pressure for extreme profits overided good judgement and final consequences.5. That kind of sounds like the “I’ll do anything for success mentality!”A. Yeah, I guess that’s it.6. So, what’s wrong with cheating for good grades or making up a resume to get the best job?A. Well, cheating is wrong and dishonest and only leads to worse things!7. But didn’t all those smart financial people do dishonest things or cheat when they created those financial instruments that were AAA rated but really shouldn’t have been?A. Yes, that was one of the big contributors to the present financial crisis.8. So did they learn to cheat when they were in those top business schools or when they were working for the financial institutions? I mean, who is teaching them to be so dishonest? Don’t they care about hurting others?A. That may be the $50 trillion dollar question!

Guest • November 22nd, 2008 at 3:12 pm

If he wants to reduce cynics, then he can do less cynicism provoking things. That or ‘The Fairness Doctrine’.

RedCreek • November 22nd, 2008 at 3:17 pm

So if we focus on rebalancing aggregate supply and demand, should we not revert to:(1) nationalize all major financial institutions (safeguard the backbone of the economy) – determine which bank needs mandatory nationalization by applying a fixed %estimated default rate to the bank’s credit books and compare that to its tier 1 equity; then move to a forced nationalization of the bank by injecting highest ranked preferred equity (effectively wiping out all current common and preferred equity holders) and give a state guarantee to all credit issued by that bank.(2) reduce aggregate supply by NOT bailing out corporates, i.e. let the auto industry restructure in Chapter 11 and come out of it healthier.

PKB • November 22nd, 2008 at 3:18 pm

Guest,Those are great questions and also very good responses to your daughters. As a business school professor, I often field similar questions. My reply is usually something as follows: Attending school, is best viewed as a quest for knowledge not a quest for wealth. Your knowledge is most important because you carry it with you everywhere that you go, and no one can ever take it from you. You cannot say that about wealth. My best advice is to figure out what you enjoy doing with your time and energy, because if you enjoy it and want to spend your time doing it, you’ll end up being very good at it – whatever IT is. When your good at something (meaning much better than others), then the money usually follows. If it doesn’t, then the downside is that at least you were happy with what you were doing with your time and energy.

Guest • November 22nd, 2008 at 3:21 pm

Somethings are worth dying for like freedom I think of great figures like MLK or JFK or John Lenon, and they became martyrs after death. It’s hard to summarize the affect that has on a society but they live in my mind as role models, freedom fighters etc. They helped form and transform my ideals and probably a lot of other peoples as well and that’s got to count for something?

RedCreek • November 22nd, 2008 at 3:22 pm

By the way, much of the US automotive supply industry has been dipping in and out of Chapter 11 for years now. But I have read nothing about this in any of the financial media recently.Isn’t it only normal that this eventually be “stepped up” one level and that the automotives themselves restructure in Ch11???

Guest • November 22nd, 2008 at 3:29 pm

KJ Foehr “For the first time, transition efforts won’t be financed with donations from Washington lobbyists and PACs — which means we’ll need to keep asking for your help.”Hehe, so instead of lobbyists funding the rehashed same o’ same, individuals are financing it. Changed from ripping you off indirectly, to ripping you off directly and your welcoming it with hope and open arms. Brilliant.

Guest • November 22nd, 2008 at 3:31 pm

They’ve done studies in 3rd world countries and you’d be surprised at how much of people’s plight has to do with a lack of education, underdeveloped and underutilized brains. For example people in India we’re dying of dehydration from droughts simply because most of them weren’t clever enough to figure out ways of collecting water during typhoon season. This probably has more to do with a certain dependency on foreign aide in conjunction with an industrialized double agenda of serfdom. Provided the people with just barely enough to survive for a long enough period but not enough to thrive and you dumb down the culture, the way of life, the ability to survive in times of trouble. This is why a lot of people in this country would be in big trouble if there is a major collapse the ones lacking the knowledge who are too dependent on the system would suffer the most during times of upheaval. People coming to this board for example probably have a better chance of surviving this economic crisis than someone who drops out in the 9th grade.

Guest • November 22nd, 2008 at 3:32 pm

I only responded because of you preface suggesting that the two links you provided were “balanced”; they are not, they are partisan. Krugman also endorses Guithner and it would not surprise me if NR himself writes a commentary also in support of Guithner. Guithner has been on the inside since 1988 and did not see the credit crisis even when directly in front of him. (NR did see it) Guithner and Ben have been behind this crisis from the get go, why should we expect that to change? And no, I have not read his book but let me ask you this; who would you rather see as Treasury Sec – Guithner of Roubini?

Guest • November 22nd, 2008 at 3:38 pm

“In the end, that’s what this election is about. Do we participate in a politics of cynicism or a politics of hope?”Barack ObamaOr put another way:“In the end, that’s what this election is about. Trust me and don’t ask questions or you will be labeled a cynic.”

RedCreek • November 22nd, 2008 at 3:42 pm

Reducing aggregate supply could be encouraged with tax credits for companies that temporarily shut down capacity without laying off workers.(I just read that Honda plans to shut down production for two months (I believe in the UK).)

Gloomy • November 22nd, 2008 at 3:42 pm

BLACKTake a drive through your community for a couple of hours. Look at row after row of homes and ask yourself about the financial status of those inside . In front of you is a vista, stretching as far as you can see- households that cannot afford their homes and who soon will be bankrupt.Think of all who have retired in the last 20 years, who depend on their projected 10% annual stock market returns, and who are now mesmerized by the economic cobra, who have done nothing and will do nothing to protect themselves, as they fall prey to its venom.Think of all the young people who were going to replace a retiring workforce, a workforce which will greatly delay retirement, and will find themselves unemployed.All I see in front of me is black.

randy • November 22nd, 2008 at 3:48 pm

anybody here think it’s possible to have a rally to year’s end because of thr “Obama effect”? I’ve been reading a lot about it lately and want more opinions……..

Mark • November 22nd, 2008 at 3:48 pm

That’s precious! I wish that we had the money to do that! (unfortunately we’d have to borrow it, which, as we know, is counter to self-sufficiency)For folks’ convenience:After The Bailout

Guest • November 22nd, 2008 at 3:53 pm

Obama’s talk, PR, and supporters makes one feel good, but take a look at his personal donations, look at his voting record, his actual accomplishments while in office. There is a significant negative contradiction. But hey just ignore the facts, they are boring and may make you feel uneasy.

Guest • November 22nd, 2008 at 3:58 pm

HUH!?!? GE is not a utility. Their failure will not cause the light bulbs or generators they produce to fail….PUHHLEASSSSE

Guest • November 22nd, 2008 at 4:02 pm

In any other time such a statement would be dimissed as the rant of a person gone mad. There is more to this market decline than sentiment and lack of confidence, even the most bearish of pundits appear surprised by the depth, speed and form of this crisis.

Mark • November 22nd, 2008 at 4:08 pm

And our “intelligence” has gotten us the ability to destroy our environment. The “dummies” just manage to not keep THEMSELVES around (longer).Moral of the story: no one should think that they are so damned smart that their ideas or ways should be forced upon others.

Guest • November 22nd, 2008 at 4:13 pm

Lobbyists in the Transition | The Washington PostNovember 19, 2008 — More than a dozen members of President-elect Barack Obama’s transition team have worked as registered lobbyists within the past four years, The Washington Post’s Matthew Mosk reported this weekend.The list includes former lobbyists for the nation’s trial lawyers association, mortgage giant Fannie Mae, drug companies such as Amgen, high-tech firms such as Microsoft, labor unions and the Center for American Progress, a liberal think tank.Here are some of Obama’s key transition team members, along with their lobbyist credentials:JOHN PODESTAPodesta, 59, is a former White House chief of staff under President Bill Clinton and the founder of the Center for American Progress.As director of Obama’s presidential transition team, Podesta pledged to institute the “strictest” ethics policies regarding lobbying of any presidential transition in history.In 1998, Podesta and his brother, Tony Podesta, founded the lobbying group Podesta Associates. Podesta has also lobbied heavily for the think tank he helped found.The Podesta firm (then named Podesta Mattoon) received $980,000 from the anti-nuclear energy public affairs firm Brown and Partners in 2002 to lobby against a bill that would have allowed the creation of a nuclear waste repository in Nevada’s Yucca Mountain, Public Citizen reports. John Podesta was one of 10 lobbyists on the account.Podesta clients included the Greenspun Corp., eBay, the Nevada Resort Association and the American Insurance Association.RON KLAINKlain, the newly minted chief of staff to Vice President-elect Joe Biden who also served as chief of staff to former vice president Al Gore, did lobbying work during his stint as a lawyer in the Washington office of O’Melveny & Myers LLP. The firm was paid nearly $700,000 for lobbying projects undertaken by Klain with others at the firm.The clients included ImClone Systems Inc., Fannie Mae and the Coalition for Asbestos Resolution, which was identified by the nonpartisan government watchdog group Public Citizen as a “front group for GAF Materials Corporation, a roofing company facing huge liabilities related to asbestos-exposure lawsuits.” Klain left the law firm in 2005.Klain’s lobbying duties were just a “small part” of his job, Politico’s Kenneth P. Vogel notes. Obama transition spokesman Tommy Vietor told Vogel that lobbying amounted to “approximately 10 percent” of Klain’s work at the law firm in any given year.But Vogel also noted that Klain’s lobbying past “in some ways epitomizes the side of the influence industry that Obama decried during his campaign: big companies paying Beltway insiders lots of money to craft laws and rules that help them.”SALLY KATZENKatzen, 66, is the former deputy director for management in President Bill Clinton’s Office of Management and Budget and a well-known Washington attorney and law professor.She is also on the 12 member supervisory group for Obama’s transition team, as well as the office of the president and government operations teams. Attention has been drawn to her lobbying work last year for the pharmaceutical company Amgen on Medicare reimbursements.Senate lobbying disclosure reports show Katzen billed $10,500 worth of work for Amgen in 2007.MARK GITENSTEINGitenstein, a law partner at the firm Mayer Brown LLP and a former chief counsel to the U.S. Senate Judiciary Committee, is on the advisory board for Biden’s transition into office.House records show Gitenstein was a registered lobbyist as of June, and his client list is a virtual who’s who of major industry, many of whom are seeking help amid the Wall Street financial crisis: Arthur Andersen, AT&T, Boeing Co., the Chicago Stock Exchange, General Dynamics, General Electric Co., Lockheed Martin Corp., Merrill Lynch, PriceWaterhouseCoopers LLP and the U.S. Chamber of Commerce.As recently as this year, Gitenstein received $160,000 from Merrill Lynch, the New York firm that sold itself to Bank of America to avoid bankruptcy, Senate lobbying disclosure forms show.http://voices.washingtonpost.com/washingtonpostinvestigations/2008/11/six_degrees_of_lobbyist_connec.html?nav=rss_blog

Guest • November 22nd, 2008 at 4:26 pm

Prior to reading Gloomy’s posting yes, I thought it may have started Friday with the TG announcment. But the more I think about it this is morphing at such a speed that it may be beyond control – El Erian’s comments made Friday should be cause for concern.

Average Jane • November 22nd, 2008 at 4:31 pm

kdp59, if I may add my anecdotal evidence here. And you may be right that some folks don’t have any problem getting financing. I’ve heard on this board and others that people’s credit card limits have been downgraded. As for me, I have one credit card, and every year in September my limit has been raised (without my asking for it). This past September–no limit raise. But no downgrade, either. Curious, don’t you think?

Wild Bill • November 22nd, 2008 at 4:34 pm

I won’t insult you by telling you everything will be O.K. in the end. It won’t! There will be much suffering to come. I will say that this particular “Black Swan”, may in fact be a white stork in disguise, bearing an infant named innovation. Dwelling on all the negativity around us produces nothing but cynicism. Look to young minds for new ideas. Use the evolutionary mechanism of neotony as a model for the way forward. We may need to take a step back to free ourselves from the restrictions caused by overspecialization and over centrralization, and then go forward on a new path that is free of constraints. Massive decentralization of food and energy production will provide untold benefits environmentally and ultimately, economically. We have the resources to insure the well being of every human being on this planet. We are reaching the critical mass of brain power, just now. When existing technology is harnessed appropriately, all of the brains on earth can focus to provide solutions to seemingly intractable global problems, whether they be economic, environmental or societal. What technology can not do is give us the courage and vision that is a prerequisite. We have to come together and help each other to reach deep inside our collective souls and bring up our “A” game. Timothy Leary stated it very well when he noted that we come from ancestry that jumped in little leaky boats and crossed oceans; that farmed in fertile flood plains that were periodically ravaged by wall of water and ancestors who risked life at the base of volcanoes in order to take advantage of the fertile soils to be found there. Do you really think we can go forward free of risk? The pioneers amongst us will come to the fore. Watch for them for they will lead the way. They may not be Harvard or Wharton graduates, but they will have the “right stuff”.The perpetual growth model we have been lulled into following was doomed from the onset. Ordinary common sense told us this clearly but we found it easier to deceive ourselves. The current crisis makes this self-deception no longer possible. Our faces are being rubbed in the truth. Trust your reason now. It will serve you well in the end. If you must proceed on faith, make sure it is faith in competence and good sense on your part and on the part of our political leaders.

Gloomy • November 22nd, 2008 at 4:35 pm

Take a look at GE stock price chart.It’s the top of the ninth. Here is the batting order:At the plate: CitiOn deck: Bank of AmericaClean up: GEThe side will be retired in order and the game will be over.

Average Jane • November 22nd, 2008 at 4:35 pm

Because they’re in this up to their necks. PBS ran a piece last evening on “NOW” with comments from Joseph Stiglitz and featuring a former employee at Standard & Poor’s. I highly recommend it. It was all a racket and everybody, all the ratings agencies, were rating without investigating. Just astonishing.

Guest • November 22nd, 2008 at 4:35 pm

@ Octavio Richetta: I do know, Kutnner is a Democrat, and that if you are one of those persons who likes to place labels on people’s foreheads, then you can call him a liberal… Certainly Kutnner’s rationale for supporting Geithner is a lot more robust than the fearmongering “here he comes again, Obama cannot do anything right” he is picking a GS soldier for the treasury position, where is the change?; when he has not even started as a President.”@ KJ Foehr: “To those who criticize Obama’s appointment selections thus far, who are cynical of his intentions and/or ability to make change in this country, who believe he has “sold out” and who ask, “Where is the change we were promised”, I offer this evidence to the contrary: … An excerpt from a recent email to Obama’s 3 million or so campaign contributors… For the first time, transition efforts won’t be financed with donations from Washington lobbyists and PACs…”The problem so far with the Obama transition IS the transparency. Normally, one with the best interests of the nation at heart would like to wait and see what a new president will be like; and what his policies would be. But this time, it’s obvious that we don’t have to wait, because the policies are the twin policies of the Clinton administration — where most of the appointments are coming—and from the international bankers who created the mess that we’re in and who are benefiting from the mess. The bankers have obviously selected the policy that will continue the financial system in the same vein in which they have benefited.As far as categorizing people as conservatives or liberals, this nomenclature is no longer necessary when you have elites using government for their own benefit. One of the country’s major problems has been oppressive, corrupting, gargantuan government. Yes, Obama did not promise to reduce the size of government but I’m sure a large percentage of his supporters did not realize just how little appointment change there would be from the Clinton years.A question: There are those on this blog who say Geithner is a new face. Can you tell me if he is now going to open up the operations of the treasury with the kind of transparency to which Obama has alluded? I’ll be waiting for Geithner’s first day in office when he reveals how much money is really needed to bail out his friends with the investment banks

Anonymous • November 22nd, 2008 at 4:38 pm

I did not get a single dime of the last economic stimulus package. I do not own a home, hence no mortgage, I do not have credit card debt. I work hard each day to earn my living and I pay my rent and grocery bills with whatever money I earn. Why should my tax dollars go towards bailing out consumers or companies that have and will in future continue spending more than they earn? Why?If the root of the problem was excess leverage that begot more leverage as loans were securitized and sold off to unsuspecting investors, isnt the solution simple – reduce extension of credit to people who dont deserve it? How is doling out money to people to make them spend on things they do not need a solution? America needs to move away from consumption led growth to things that are more basic – engineering, medicines and such. The basic idea is to work hard, earn real money (not funny money) and spend that money wisely so that you have some left when you cant work anymore. And stop making car loans to the guy that makes $3000 a month but wishes to drive a BMW. He doesnt deserve it. He didnt get beyond high school which is why he earns what he earns. Dont fuel his fantacies and give him an unsustainable lifestyle. Youre killing him and the nation.

Average Jane • November 22nd, 2008 at 4:41 pm

You are absolutely right, Guest. It’s the PRINCIPAL (stupid banks) that needs to come down. Reformatting these mortgages to simply longer fixed terms (40 years vs. 30 years) or slightly discounting interest rate does NOT get at the root: homes are STILL overvalued and I am sorry, but a prudent mortgage holder needs a reduction in principal. These b**tard banks want their money, come hell or high water, doesn’t matter how many years, but they still want their principal plus interest plus fees for 40 years now instead of 30. And of course the property taxes are based on the home value so if it goes down then the city/county/state are screwed.Honestly, it’s just disgusting.

Guest • November 22nd, 2008 at 4:43 pm

SOROS-FUNDED DEMOCRATIC IDEA FACTORY BECOMES OBAMA POLICYNovember 18 Bloomberg (excerpts):Thanks in part to funding from benefactors such as billionaire George Soros, the Center for American Progress has become in just five years an intellectual wellspring for Democratic policy proposals, including many that are shaping the agenda of the new Obama administration.CAP has been an incubator for liberal thought and helped build the platform that triumphed in the 2008 campaign.CAP’s president and founder, John Podesta, 59, former chief of staff to President Bill Clinton, is one of three people running the transition team for president-elect Barack Obama, 47. A squadron of CAP experts is working with them.Some of the group’s recommendations already have been adopted by the president-elect.To help promote its ideas, CAP employs 11 full-time bloggers who contribute to two Web sites, ThinkProgress and the Wonk Room; others prepare daily feeds for radio stations. The center’s policy briefings are standing-room only, packed with lobbyists, advocacy-group representatives and reporters looking for insights on where the Obama administration is headed.“The center is the premier progressive think tank in Washington,” said Mark Green, head of the New Democracy Project, an urban-affairs institute in New York.Just eight days after the Nov. 4 election, CAP released a 300,000-word volume called “Change for America: A Progressive Blueprint for the 44th President” that offers advice on issues such as economic revival and fixing the Federal Emergency Management Agency. Work on the book began almost a year ago.CAP, which has 180 staffers and a $27 million budget, devotes as much as half of its resources to promoting its ideas through blogs, events, publications and media outreach.The center’s future was far from certain in 2003, when wealthy donors such as Soros and film producer Stephen Bing gave $10 million or more to fill what they believed was an intellectual void in the Democratic Party and create a vehicle to produce an agenda for the party’s eventual return to power.“Others strive to be objective, we don’t,” said Jennifer Palmieri, CAP’s vice president for communications.Podesta likes to say, “we’re not a think tank, we’re an action tank,” said Dan Weiss, who joined CAP last year…In addition to Podesta, at least 10 other CAP experts are advising the incoming administration…http://www.bloomberg.com/news/index.html

OR • November 22nd, 2008 at 4:47 pm

I would stick with Geithner. BTW, I also admire Bill Buckley who was Republican. Your points are well taken but I hope you also agree that none of the your posts above address the content of the article. You limit yourself to attacking the messenger.

blindman • November 22nd, 2008 at 4:47 pm

g, you are ready to open your eyes. the veil of our world view is decaying.it was never reality in the first place, just a silk screen. you are free to construct a better filter, a cleaner lens and now you see what life is really all about. your own creativity, compassion, intelligence. relax. the only thing that’s going away is the world view that says money is god and we have it in the vault. the rest is up to us. thanks for the gloomy post. love.

Average Jane • November 22nd, 2008 at 4:48 pm

KJ, you are refreshingly optimistic. Keep the faith. You are right: “we must all pitch in to help save ourselves.” Well said.

Guest • November 22nd, 2008 at 4:56 pm

Why are the city/country/state screwed with property values?Their should be the same government cost associated with one family if their house is $150k or $50 trillion, unless of course they miss spent the tax revenue when the houses were over valued.

Guest • November 22nd, 2008 at 4:57 pm

Home sales having been picking up big time in Southern California! Multiple offers again.San DiegoSingle Family ResidenceTime Period Number of Sales Median Sale PriceSep 2008 2,023 $370,000Sep 2007 1,128 $541,000CondominiumTime Period Number of Sales Median Sale PriceSep 2008 1,047 $245,000Sep 2007 788 $370,000———————ORANGE County CASingle Family ResidenceTime Period Number of Sales Median Sale PriceSep 2008 1,644 $485,000Sep 2007 877 $670,000CondominiumTime Period Number of Sales Median Sale PriceSep 2008 784 $330,000Sep 2007 569 $435,000————————–RIVERSIDE County CASingle Family ResidenceTime Period Number of Sales Median Sale PriceSep 2008 3,763 $248,500Sep 2007 1,841 $383,000CondominiumTime Period Number of Sales Median Sale PriceSep 2008 314 $219,500Sep 2007 259 $310,000hlowe

OR • November 22nd, 2008 at 5:00 pm

Well said! I would guess that most rational people, even economists, agree 100% with you view. However, the minute they start thinking/talking about saving the economy, for some reason they trow common sense overboard!

Guest • November 22nd, 2008 at 5:02 pm

You must not have gotten the memo.Our duty is to work and add value.The governments duty is to choose how to allocate our surplus.Now must get back to work.

Guest • November 22nd, 2008 at 5:03 pm

…”Oh, somewhere in this favored land the sun is shining bright;The band is playing somewhere, and somewhere hearts are light,And somewhere men are laughing, and somewhere children shout;But there is no joy in Mudville – mighty Casey has struck out”Casey at the Bat by Ernest Lawrence Thayer ©

painter • November 22nd, 2008 at 5:07 pm

you can not die for freedom. you can only live for freedom. John Lennon lived free and was killed by those who hate freedom

PeterJB • November 22nd, 2008 at 5:07 pm

“Problem: Too late and the Bankers are in panic mode; a state of desperation; “extremis”. The whole economic, financial, monetary system is widely vibrating as the imbalances throughout the whole system are shaking and shuddering in disparate terms; out of of synchronicity to the whole dynamic and at differing velocities, pitch and frequencies.”@ PeterJB et @ Blindman – from aboveCITIBANK: Now IF Citibank goes where it deserves – it gets ‘bankruptcy’ action and as assets are up for grabs through the administrators so appointed, this means that ***Majority control of the Federal Reserve can be purchased for a few cents on the dollar by the highest bidder…*** LOLNow it is clear why Geithner’s appointment which came from CITIBANK’s delicate moment itself and Rubbin and Benanke and Summers et al have come to this point through total desperation and incompetence.This is why the Bankers now must take full control of the situation; for the preservation and continuation of the beloved sleeper itself, the Federal Reserve (FedRes).I suggest that the 400+point rise on the DOW was merely relief reacting – that is to say, the deal sounded good, nay great er, the Gods have come to kiss it all better while we will find it to be fully superficial at best when the sober up period of the coming week falls on the shaking hands of Wall Streets’ drunks.There is a simple reason for all this and I renew here my disclaimer that in all my posts I speak generally. All bankers are not fools, incompetent and stupid; there are exceptions I admit but what my point is; is the fact that none on the horizon particularly those in the offering, have any of the necessary qualification and or attributes of the necessary leadership demanded at this point in time.Orwell said it well: ‘Evil can be defined as one thousand efficient but thoughtless clerks’ (or words to that effect) and I add that in these times, today, those persons acting out the roles of “clerks” in this day, are not even of a fraction of the integrity of those “clerks” of Orwell’s days. Scary eh?So, CitiBank is in line to get the Trillion Dollar bailout via the SEC and FedRes and no other description so precisely defines this moment as “incest” – the game ONLY the family can play.The Incest Moment – has arrived.Ho hum

Guest • November 22nd, 2008 at 5:34 pm

Canada avoided banking pitfalls, central bank gov. says

LONDON (Reuters) – The global financial crisis could have been avoided if every country had had a banking system like Canada’s, the governor of the Bank of Canada said on Saturday.Asked in a BBC interview if the world could have been spared the crisis if everyone had had a banking system “as sober and sensible” as Canada’s, Mark Carney said: “Yes, I think, is the short answer.”"What we did was that we had an absolute restriction on how much leverage, how much borrowing our banks could do,” he said.”They didn’t like that and they would come in and complain about it regularly because it was stopping them from doing some of the sexier things that their international competitors were doing…

Guest • November 22nd, 2008 at 5:58 pm

i am no economist, but why can’t gov. print money to cause 20% inflation across to wipe out all this deflation stuff roubini talks about ???

JLC • November 22nd, 2008 at 7:03 pm

We can see the differences. And they are not insignificant. Sure, things will change. But some things never change.

g Anton • November 22nd, 2008 at 7:41 pm

Helicopter Ben–Ben Bernanke, president of the US Fed and inventor of the virtual helicopter, which he and his co-pilot Hank Paulson use to dump trillions of virtual dollars on deserving billonaires in the banking industry. He is adept at using big words to bamboozle gullible congress persons.

Guest • November 22nd, 2008 at 8:20 pm

An interesting article from RGE USecomonitorUnderstanding the Fed’s swap line (RGE USecomonitor Nov 22)“Why is the Fed booking the currency swap in this way, rather than more transparently? Perhaps it is a matter of appearances.The Treasury is involved because of the exchange rate risk-even though in this case the Fed is long the Euro and so gains when the dollar falls, and loses when the dollar rises-but also because it might be unseemly for the Fed to carry on its books a $558bn debt to European central banks. So it creates money to the credit of the Treasury, and the Treasury lends the money on to the ECB, which lends it to European banks.For lack of a world central bank, this is the form that international lender of last resort intervention is taking. The world money market is moving onto the balance sheets of the world central banks.”

Guest • November 22nd, 2008 at 8:36 pm

Courtesy of NCSummers to Be Top White House Economic Adviser at NEChttp://blogs.abcnews.com/politicalpunch/2008/11/summers-to-be-c.html

Anonymous • November 22nd, 2008 at 8:37 pm

Your fantasies are pathetic. Technology has concentrated military force as well as riches. The slaughter of the liberals is only moments away.

Guest • November 22nd, 2008 at 8:39 pm

Gold’s safe appeal attracts record interestBy Chris FloodPublished: November 19 2008 17:40 | Last updated: November 19 2008 17:40Sales of gold coins and bars reached their highest levels for more than a decade in the third quarter while gold exchange traded funds saw record inflows as investors sought a safe haven from the crisis in financial markets following the collapse of Lehman Brothers, the US investment bank.The enormity of that rush into the gold market in the third quarter was revealed by the World Gold Council in its latest Gold Demand Trends report, published on Wednesday.EDITOR’S CHOICEIn depth: Gold – Jan-03Crude sinks below $54 on weak demand – Nov-19The industry sponsored WGC said consumers spent more than $6.5bn in buying 232.1 tonnes of gold coins and bars in the third quarter of 2008, an increase of 121 per cent in volume terms over the same period a year ago, and the strongest three-month period since the mid 1990s.The WGC’s report provides confirmation of previously anecdotal evidence of record investor interest.The third quarter saw media reports that mints around the world had run out of gold coins as Lehman’s collapse sparked concerns among investors about the health of the world’s financial system.However, the WGC’s data indicates that retail investment interest in gold has been increasing steadily over the past year.In the first three-quarters of this year, net retail investment in coins and bars reached 443.6 tonnes, 10 per cent more than all of 2007.Germany and Switzerland experienced a surge in demand for coins and bars in the third quarter with net retail investment of 19 tonnes and 21 tonnes respectively, up 533 per cent and 500 per cent compared with the same period a year ago.In Europe, coins and bar sales in the third quarter alone reached 51 tonnes, exceeding each annual total for retail investment demand during the entire 18½ years of available data.Meanwhile, gold Exchange Traded Funds also saw record buying interest with inflows of 150 tonnes in the third quarter, up 8 per cent over the same period last year, with investors spending more than $4.2bn accumulating holdings in ETFs.Lehman’s implosion in September led to a jump in ETF inflows, which surged by an unprecedented 100 tonnes in just five consecutive trading days.Strong growth was also seen in the jewellery sector where demand reached 647.6 tonnes in the third quarter, up 8 per cent compared with the same period last year, and taking spending to $18.2bn.India, the world’s largest jewellery market saw demand reach 178.5 tonnes up 29 per cent compared with the same period last year as consumers rushed to take advantage of lower prices ahead of the Diwali festival in October.Total identifiable gold demand (investment, jewellery, industrial and dental) reached 1,133.4 tonnes in the third quarter, up 18 per cent compared with the same period last year. in value terms, this represented spending of $31.8bn, a record, and an increase of 51 per cent compared with the third quarter of last year.The WGC said strong demand for gold coins, bars and ETFs had continued into the fourth quarter but cautioned that this was being offset by ongoing weakness in jewellery markets in the US and UK.http://www.ft.com/cms/s/0/7177d3c6-b65f-11dd-89dd-0000779fd18c.html?nclick_check=1

Guest • November 22nd, 2008 at 8:47 pm

A couple of reasons #1 inflation undermines a fiat currency and inflation is very difficult to control if not impossible however deflation can be controlled by inflating the money supply so central banks fear inflation more than they do deflation. Secondly if your a rich person and have a lot of cash or treasuries at this point then you love deflation because you can buy up the whole world with your money but inflation wipes you out it wipes out the governments/elites ability to control the world via treasuries. Notice how the FED wants to re-inflate but only through extending more credit well that should tell you how terrified they are of inflation they feel if its done through credit then deflation can always wipe that credit out without them losing power. It’s all about maintaining the power structure their entire monetary system revolves around that single theme but they call it maintaining stability.

Guest • November 22nd, 2008 at 9:04 pm

I know someone in Bakersfield who has just purchased a foreclosed house with only 3% down. It looks to me as if the mortgage lenders are continuing to take on what I would call risk.When you say sales are picking up “big time,” what percentage would you say they have jumped? I have been waiting for houses in California to drop more: it was anticipated they would drop another, I think, 14% by next summer. But, if there’s anything consistent about finance, I guess it’s change.

Guest • November 22nd, 2008 at 10:05 pm

The only change were going to see is who is the apologist for whom. Blind Bush backer, blind Obama backer. Same thing. Weak.

Guest • November 22nd, 2008 at 10:18 pm

The same banks that receive a “toll” on all money borrowed by the Government of the United States are the same banks that planned the Federal Reserve Act of 1913. Tim Geithner works for them, not you.Warren Brookes wrote on the editorial page of “The Washington Post”, June 6, 1983:“Citicorp (National City Bank and First National Bank of New York, merged in 1955) just recorded an 18.6% return on equity, J.P. Morgan, 17%, Chemical Bank and Bankers Trust, nearly 16%, an exceptional rate of return.”There are the same banks that bought the first issue of Federal Reserve Bank stock in 1914, and which owned the controlling interest in the Federal Reserve Bank of New York, which sets the interest rate and is the bank for all open market operations.Here’s a current look at JPMorgan Chase, from Wikipeidia:JPMorgan Chase, as it exists in 2008, is the result of the combination of several large U.S. banking companies over the last decade including Chase Manhattan Bank, J.P. Morgan & Co., Bank One, Bear Stearns and Washington Mutual. Going back further, its predecessors include major banking firms among which are Chemical Bank, Manufacturers Hanover, First Chicago Bank, National Bank of Detroit and Texas Commerce Bank.At many points throughout this history, Chemical Bank was the largest bank in the United States (either in terms of assets or deposit market share).In 1996, Chemical acquired the Chase Manhattan Corporation taking the more prominent Chase name. In 2000, the combined company acquired J.P. Morgan & Co. and combined the two names to form what is today JPMorgan Chase & Co. JPMorgan Chase retains Chemical Bank’s headquarters at 277 Park Avenue and stock price history.

OnlyTheParanoidSurvive • November 22nd, 2008 at 10:20 pm

I don’t think linking it to commodities is a good idea. There is really no good reason to do so – why settle for these goods and not others?On the hand the CPI is not really practical because it varies too much within part of large countries and between countries.What’s left? Just increase the global currency to match estimated growth of population.What about effect on prices? Let them fluctuate. Right now we try to keep them stable but at the cost of wildly fluctuating and impredictable interest rate. But because as I said prices are impractical to assess (especially on a world basis), let them fluctuate so that they can be used as signal to orient usage of resources.What if this result in deflation because of improve production with relatively stable money? No problem:1) it can still be profitable to invest even when price declines and when something declines too much as to be unprofitable, that’s exactly what is wanted –> we stop to produce it and produce something else;2) the idea that people will delay purchase to get a better price later is nonsense: put to the extreme you would die in 2 days because you won’t be eating or you will die in 50 years without never owning a car or a house in both case because you’d be “waiting” forever for a better price.That price deflation is a problem is nonsense, yet this idea is extremely entrenched but does not hold to scrutiny. We need independant thinkers and independant investors. We have insufficiency in both. THAT is a problem.(I consider Roubine as a highly independant thinker)

OnlyTheParanoidSurvive • November 22nd, 2008 at 10:30 pm

I live in Canada and I can confirm this too.Indeed if someone would not read the newspaper and just be walking around he would say this: this is tranquile and happy prosperity.Customers are smiling. Store clerks are cheerful. Small business owners don’t even ask the interest rate you would give them when you suggest you could offer them a much better deal that their bank for their business loan.This is surreal.In the 1980 recession this was the opposite: tension everywhere, not much happiness, strikes, everybody seemed disastified.I spoke to many people about this and everybody noticed the same thing.

Guest • November 22nd, 2008 at 10:39 pm

In that Geithner is a protégé of Rubin and Summers, and in that an above post says “Summers to Be Top White House Economic Adviser at NEC,” Scheer’s November 19 article remains subject matter of great import.Change We Can Bank On | Robert ScheerThis is not change we can believe in. Not if Robert Rubin or his protégé, Lawrence Summers, get to call the shots on the economy in President-elect Barack Obama’s incoming administration. Both Clinton-era treasury secretaries deserve a great deal of the blame for the radical deregulation of the financial industry that has derailed the world economy. They both should, along with former Federal Reserve chief Alan Greenspan, perform rites of contrition and be kept at a safe distance from the leadership of our nation.Yet Rubin and Summers are highly visible in the Obama transition team, with Summers widely touted as Obama’s pick for secretary of the treasury. New York Federal Reserve President Timothy Geithner, who also worked in the treasury department under Rubin and Summers, is the other leading candidate. But it was Summers who most vehemently pushed for congressional passage of that drastic deregulation measure, the Financial Services Modernization Act, which eliminated the New Deal barriers against mergers of commercial and investment banks as well as insurance companies and stock brokers. Standing at his side as President Bill Clinton signed the legislation, Summers heralded it as “a major step forward to the 21st century” — and what a wonderful century it’s proving to be.It was also Summers who worked in cahoots with Enron and banking lobbyists, and who backed Republican Sen. Phil Gramm’s Commodity Futures Modernization Act, which banned any effective government regulation of the newly unleashed derivatives market. The result was not only a temporary boon to Enron, which soon collapsed under its unbridled greed, but also to the entire Wall Street financial community.The only opposition from within the Clinton administration came from Brooksley E. Born who, as head of the Commodity Futures Trading Commission, dared defy Summers and Rubin, as well as Greenspan. In frequent appearances before Congress, she warned that the burgeoning derivatives trading “threatens our economy without any federal agency knowing about it.” In reward for her prescience, Born, a highly regarded legal expert on derivatives, was treated to scornful attacks from the old boys’ network, led (again) by Rubin, Greenspan and Summers, who questioned her competency and insisted it was she who threatened the stability of the market…Whatever the motives, Born was painfully right in her warnings and Summers was totally wrong in overseeing the passage of legislation that summarily prevented any government regulation of the debt instruments that have proved so disastrous…On Tuesday, House Democrats led by Rep. Barney Frank, D-Mass, accused Paulson of betraying congressional language authorizing the $700 billion bailout that specifically called for “mortgage foreclosure diminution.” Rep. Carolyn Maloney, D-N.Y., charged, “We’re basically funding mergers and acquisitions, not lending.” …Because Geithner and Summers support Paulson’s approach, Obama should reject them…http://www.huffingtonpost.com/robert-scheer/change-we-can-bank-on_b_144804.html

Guest • November 22nd, 2008 at 10:40 pm

ok! .. thanks .. it just Roubini makes it like there is no hope and there is Bermuda triangle , blah blah blah .. deflation can be controlled .. it is just no such a big deal as inflation (i think) .. let people buy houses from their IRA penalty free and tax break .. so much can be done .. the way Roubini write, as world is coming to end ..

Anonymous • November 22nd, 2008 at 11:01 pm

The American banking system at the core is horribly corrupt. It was responsible for the current credit crisis and is now taking advantage of the crisis to line its pockets.Tim Geithner is coming from the core of the financial system. He’s been at the center; he is not an outsider. And since he is young, he’s a water carrier for the powerful investment banking establishment. What else do you need to know?Geithner isn’t coming from Minneapolis, from Detroit, from Miami: he is coming from the Federal Reserve Bank of New York. He’s walking straight from that private cartel of bankers with all its financial control, straight into the Treasury of the United States of America. He was presented the keys to the treasury by the man who promised change, Barrack Obama.Friday’s 500 pt rally in the Dow underscores that though some people here may not know where Tim Geithner is coming from, the market knew. The torch will be passed from Paulson to Geithner without skipping a beat: they work for the same people.

Mark • November 22nd, 2008 at 11:08 pm

A couple of key things that need to be clarified here…Dwelling on all the negativity around us produces nothing but cynicism.“Negativity” and “cynicism” aren’t valueless. That is, they can provide valuable feedback.On cynic (from dictionary.com):In 1596 we find the first instance of cynic meaning “faultfinder,” a sense that was to develop into our modern sense. The meaning “faultfinder” came naturally from the behavior of countless Cynics who in their pursuit of virtue pointed out the flaws in others. Such faultfinding could lead quite naturally to the belief associated with cynics of today that selfishness determines human behavior.As for “negative,” it depends on one’s perspective. Cutting off one’s arm might be considered a negative, but cutting it off to save someone’s life (due to say gangrene) isn’t negative. It’s a matter of the end result.When existing technology is harnessed appropriately, all of the brains on earth can focus to provide solutions to seemingly intractable global problems, whether they be economic, environmental or societal.Technology is a process. It is applied. It cannot substitute for the physical. Technology is neither good or bad; I’d state that far too often people confuse technology with the “good” without seeing the impact on the total. At the micro level it’s easy to identify something as being “good,” but at the macro level not so (I don’t believe that a total “good” is really possible). NOTE: I equate “good” with “gain” (if there’s a gain somewhere it means a “loss” somewhere else).

Eye • November 22nd, 2008 at 11:23 pm

Why have a market? I hope you are in jest. Before there was a currency there was a market of traded goods. Before loans and current account deficits markets existed to do what they were always suppose to do. Markets are the prime determinants of relative value. Once relative values are known in an open market participants can make decisions, innovate, take risks, and increase the productive capacity of their community. Makes you long for the simpler times doesn’t it?

Guest • November 22nd, 2008 at 11:34 pm

Roads: 10 year design life for pavementBridges: usually 50 year design lifeWater and Wastewater Treatment facilities: 50-75 year design life (many still in service were built courtesy the WPA)Infrastructure is the foundation upon which an economy is built, and here in the US, even maintenance has been neglected for the last few decades.ASCE infrastructure report card.

Guest • November 22nd, 2008 at 11:46 pm

lol Roubini has been calling for a 2 year recession for the past 4 years. Last year he said it will last 2 years, and yesterday he said it will last 2 years. What is this ground hogs day?There’s tons of cash on the sidelines, earning nothing. Treasuries yield nothing. Eventually that money will be put to work.

redleg • November 22nd, 2008 at 11:55 pm

Property taxes are generally based on appraised value of the property.Based on my most recent property tax statement, the assessed value of my property has gone down, but is still 12% above the price at which I couldn’t sell it (sell it? nobody even LOOKED at it) a year ago.Cities and school districts are getting decimated by property deflation (at least in my region), and to top it off the Cities have had to assume the cost of maintaining abandoned properties.

Guest • November 23rd, 2008 at 12:27 am

everyone talks about destroying the environment. please mother nature has survived more atrocities than we can dream of, we are however destroying ourselves which to me is even scarier.

Cahill • November 23rd, 2008 at 12:42 am

I try to stay non partison on this forum, it’s not about politics, but I absolutely can not resist this one. It’s amazing that 53% of this population is so weak minded, like the village idiots almost. Had someone else figured out the magic formula, to promise everything and deliver nothing (and that will be the case, his designs are preposterous and unsustainable), sooner every election would have been a landslide for the last 100 years. Read your history, the Brits, loved the liberal labor party till they got in a jam, then they came looking for the ultimate hard ass conservative Mr. Churchill to get them through it.

painter • November 23rd, 2008 at 4:32 am

but isnt all that money in just a few hands ? so what if money is put into the stock market, its the working class that is broke and whith out us you can put a price of anything on anything and it just does not matter.It seems we have to take the money from the ones who have it and give it to the ones who do not.

Guest • November 23rd, 2008 at 5:11 am

Problem is money doesn’t work it just sits there, people work and they have no jobs. A bunch of investors recirculating their money through investment brokers is just a con game. Now if these people started businesses which they won’t because that’s too much work then I’d be encouraged.

Guest • November 23rd, 2008 at 5:18 am

I think it is rather that FED does not like deflation because FEDs job is to create (keep up) a small on-going inflation. So deflation is their enemy. In fact that sort of thinking is where all this nonsense has been coming from about how bad the deflationary years have been on Japan. They have not really been that bad. As a couple of proofs of this, look up the amount of lay-offs in Japan within the last 15 years (far less than what has been going on in US within the last couple of years) and the savings rate of the Japanese. They are in fact still able to save more than Americans.

Guest • November 23rd, 2008 at 5:18 am

Oh but wait 3 million big3 workers have to loose their jobs because 25 billion was too much to spare and they’re not as important to society as the mafia/bankster useless non productive spread makers.

Guest • November 23rd, 2008 at 5:30 am

None of these companies are important to society with the exception of GE’s industrial side not their banking interests. Let the banks and insurance companies die there has never been a greater conflict of interest to allow private banks to make a spread off of a fiat based currency/system that allows fractional reserve lending.

Guest • November 23rd, 2008 at 5:33 am

Now I know we’re just about to hit bottom, listen to all of the posts and you get the idea things will start turning around over next 6 months.

canadian • November 23rd, 2008 at 5:37 am

According to Paul Martin (Canadian P.M. and former finance minister), the banks were not the only ones complaining. At every G8 and Finance Minister’s meeting the U.S. and British would push strongly for Canada to open (i.e. de-regulate) it’s financial and banking systems so as to be more in line with theirs. Martin’s (and the governments) resistance to these pressures along with their no-deficit policy is why we’re in relatively good financial shape.

Guest • November 23rd, 2008 at 5:40 am

I can’t wait to hear your idea of a good song? Perhaps the greatest pop songwriter of all time and some knuckle head who probably listens to Metalica or rap knocks John Lennon. Where can I go to listen to your songs? Hopefully you were being sarcastic?

Wild Bill • November 23rd, 2008 at 5:41 am

If you have an idea and you give it to me, and I have an idea and I give it to you, We both now have two ideas. We’ve each gained one. Where’s the loss?

Guest • November 23rd, 2008 at 6:57 am

And this from Krugman: Obama to the Resuce -

Depression analogies…The reason we’re making analogies with the Great Depression — and the reason I’ve come out with a new edition of The Return of Depression Economics — is the collapse of policy certainties. In particular, the Fed’s sudden impotence — its inability to cut rates any more, because they’re essentially zero — is a very real parallel with the Depression, and necessitates drastic responses.Now, if all goes well the Obama stimulus plan will head off the worst. But that will be precisely because we understood that the current crisis is, indeed, like the Great Depression in important ways. Only those who learn from history can hope to avoid repeating it.and thisThe grownups are comingSo, it appears that a sinister cabal is taking control of economic policy, not only in the United States, but in much of the world.Seriously, isn’t it amazing just how impressive the people being named to key positions in the Obama administration seem? Bye-bye hacks and cronies, hello people who actually know what they’re doing. For a bunch of people who were written off as a permanent minority four years ago, the Democrats look remarkably like the natural governing party these days, with a deep bench of talent.That doesn’t mean they’ll succeed — this might be a good time to reread The Best and the Brightest. But what an improvement!

Paint as bad a picture as you can so as to set up the arrival of the hero of the day, but just in case include a caveat or two. Krugman to replace Bernanke? (you can count on it when Benny’s term is up).

Guest • November 23rd, 2008 at 7:35 am

@OR”I would stick with Geithner. BTW, I also admire Bill Buckley who was Republican. Your points are well taken but I hope you also agree that none of the your posts above address the content of the article. You limit yourself to attacking the messenger.By OR on 2008-11-22 16:47:33 “http://reps.chelseagreen.com/files/pdf/ObamasChallengePR.pdf_______________________________________Interesting that you would select Geithner over Roubini – From my perspective Roubini had the prescience to see this crisis coming whereas Geithner did not even as it was underway e.g. he was behind the curve (which to me automatically disqualifes him and many others too). It might even be argued that Geit was part of the problem.As for the link to article about Kuttner’ book I agree I did attack the messenger (Kuttner and his endorsement from the radical left of the Democratic party e.g. DailyKos) as opposed to the content. The link you provided included this excerpt from his book and with that I rest my case:

“Now it is time for the wheel to turn again. Barack Obama has both thenational moment and the raw material to be a transformative president. A46-year-old freshman senator, an African-American no less, does notdecide to pursue his party’s nomination against a universally presumedcertain nominee unless he has an unerring sense of timing, confidence,and a feel for the broad stroke. Obama has exceptional skill at appealingto our better angels, and a fine capacity to be president-as-teacher. Heinspires, as only a few presidents have done. But Obama will need to be amore radical president than he was a presidential candidate. Radical doesnot mean outside the mainstream. It means perceiving, as a leader, thatradical change is necessary, discerning tacit aspirations and unmet needsin the people, and then making that radical change the mainstream viewfor which the people clamor.”

MM CA • November 23rd, 2008 at 7:44 am

Citi will start sleeping soon!At the time of its failure, Lehman Brothers was counterparty to $729 billion in derivatives trades.As of Sept 30, Citigroup was counterparty to $36.8 trillion in notional derivatives trades (10-Q page 40, last line). If there is any company whose bankruptcy would destroy the global financial system, Citigroup is it. With the possible exception of JP Morgan.http://www.sec.gov/Archives/edgar/data/831001/000104746908011506/a2188770z10-q.htm#page_cy46101_1_40http://www.nypost.com/seven/11232008/business/pandit_needs_to_move_his_assets_140294.htm

Guest • November 23rd, 2008 at 7:53 am

Big rescue coming, can you hear the choppers in the distance – there’s Hank with his Co-Pilot Ben and Tim is riding shotgun -

Guest • November 23rd, 2008 at 7:59 am

Only about 10% are Credit derivatives – still a big number compared to Lehman – and the fall out on the FX and other derivatives would be seismic – the only question is how many hours before the Asian markets open will there be a press conference to announce the rescue. Next question how will it be greeted? I love Sundays and wish I had been long going into the weekend. Then again maybe not.

anton kleinschmidt • November 23rd, 2008 at 8:02 am

The “tons of cash on the sidelines” is in the hands of the retail investors and their pension funds. They have been dumping equities and are unlikely to return to the market until THEY think it is safe to do so. The first step in restoring the confidence of these retail investors is to deal with the market predators such as day traders, short sellers, hedge funds, ETF manipulators, etc. These predators are inimical to the intersts of serious investors

Guest • November 23rd, 2008 at 8:36 am

Right they don’t like deflation but it’s hyper inflation that terrifies them that threatens the very core of their power. I guess hyper deflation does too but only in the sense that it undermines GDP and tax revenues which would ironically cause hyper inflation because of the level of debt the government has. It really is inflation that scares them otherwise they’d be bailing this fall out a lot harder, they go to great lengths to sterilize credit and on and on. The FED knows the U.S. dollar is fundamentally weak and has been weakening steadily for 70 years and they’d rather go through a great depression than weimar republic if they . If Weimar republic occurs then the banking cartel/FED reserve would be wiped out their power base gone.

Crazy • November 23rd, 2008 at 8:41 am

NR,So what does “Crazy” mean?1. mentally deranged; demented; insane.2. senseless; impractical; totally unsound: a crazy scheme.3. Informal. intensely enthusiastic; passionately excited: crazy about baseball.4. Informal. very enamored or infatuated (usually fol. by about)5. Informal. intensely anxious or eager; impatient: I’m crazy to try those new skis.6. Informal. unusual; bizarre; singular: She always wears a crazy hat.7. Slang. wonderful; excellent; perfect: That’s crazy, man, crazy.8. likely to break or fall to pieces.9. weak, infirm, or sickly.10.having an unusual, unexpected, or random quality, behavior, result, pattern, etc.: a crazy reel that spins in either direction.

jomos • November 23rd, 2008 at 8:41 am

Central banks are obsolete. They are walking cadavers much like citi. Instead of chasing my tail over and over again regarding what needs to happen. This post is forward looking and what is going to happen. Central banks were only a vehicle to consolidate “the many into a few”. It provided the regional block structure to actively manage capital movement. Once this regional identity was established, the greater goal to consolidate ” the few to one ” was obtainable. Central banks could fail, take the blame and be tossed to the trash heap of social idea. Any thoughts on the “one” ?

Guest • November 23rd, 2008 at 8:44 am

Citigroup Failure Imminentby Martin D. Weiss, Ph.D. 11-23-08http://www.moneyandmarkets.com/citigroup-failure-imminent-6-28244″Thus, whereas it was possible for the authorities to arrange buy-outs for banks like Wachovia and Washington Mutual, there is no buyer big enough in the United States to absorb Citigroup. Nor is it likely that an international consortium of banks would want to squander the precious capital they have left on a sinking titanic the size of Citigroup.What will happen next? No one can say with certainty. However, it’s likely that: “

Grey Matter • November 23rd, 2008 at 8:59 am

Brilliant Deflation analysis article by our honored Professor Roubini!Comment:I recall that Japan in the 1990s was continually criticized by the US “for not doing enough” to stimulate their economy, that was then mired in a deep recession. I do not recall if Japan actually ran the printing presses — as was done by the US Carter administration in the 1980s that caused high double-digit Inflation and a Prime Rate of 21.5%?Question:Is there a value and/or a formula to predict that specific amount of stimulus by US Government Federal Reserve Bank and Treasury actions could create a powerful enough Inflationary force (printing money and etc., etc.), so that the effects of those Inflationary actions would counter-balance and reverse as necessary the forces of Deflation?Any feedback is most welcome…

Guest • November 23rd, 2008 at 9:01 am

What would happen if the Government allowed all the banks fail and traders and derivative holders would all lose then the government could simply go in nationalize them and start lending again? Why are we throwing tons of money to protect creditors? Isn’t it the debtors that make the economy go? We’re jumping through crazy hoops to save everyone’s credit rating when it boils down to it. But credit ratings can improve quickly both as a nation or individually.

kilgores • November 23rd, 2008 at 9:16 am

I have been advised by a senior officer at Citigroup that a failure of Citigroup will likely lead to a failure for JPMorgan Chase, as the two institutions share a great deal of cross-trade.SWK

Guest • November 23rd, 2008 at 9:26 am

Paulson, Rubin, Giethner, Bernanke, Greenspan, Summers, all of them, have thier fingerprints all over this mess for the last 10 years…. Enough Goldman Sachs links – I say let Goldman and Citi go under right now and they will all stop thinking of creative ways to make Goldman bigger…. I bet Obama will think twice soon about all his economics advisors/team… His first big mistake already and he’s not even on the job….

Theta • November 23rd, 2008 at 9:38 am

And if at the end of four years things have actually improved what then? Will you eat your words, or will you attribute it to something outside Obama’s influence?The problem with most of these debates is that the debators are already set in their beliefs and it doesn’t matter what happens it can be spun to fit their views.

OuterBeltway • November 23rd, 2008 at 9:50 am

I have an interesting question, and I ask you to consider it.What if Citi fails, and via counter-risk, takes with it a few of the remaining very large banks.What are the absolutely vital functions that these banks perform, that cannot/are not being performed by the Federal Reserve or other extant players in the financial sector?At the moment, these players have little role in the Housing/Real estate sector (new originations, not holdings), the retail-banking functions they perform could easily be performed by credit unions or smaller, healthier regional banks. That leaves commercial credit, which they are doing precious little of at the present, anyway.What key function – which they currently perform on a large scale – am I missing that would have an adverse impact on the real economy?What would be different if Citi and JPM, maybe BaC failed, were immediately declared bankrupt, and were nationalized.What would be the essential functions that would be immediately re-started post-bankruptcy?

Guest • November 23rd, 2008 at 9:58 am

Yes, it’s like trying to find a solution to the impoverishment from robberies while ignoring the robbers.

oller • November 23rd, 2008 at 10:04 am

“The Origin of Financial Crises” by George Cooper is an excellent read. He takes Minsky’s Financial Instability Hypothesis and brings to light the scientific inadequacy of the “Efficient Market Theory” Dogma. His Maxwell-like analogy of governor controls for economic turbulence is very interesting. The upshot is that the Fed screwed up in preemptively trying to stop credit contraction and should be have been targeting asset bubbles. The cumulative effect of the perpetual Greenspan put was to create a huge debt bubble. The solutions open now are not great,and massive printing of money will come. The Inflation Monster will be let out of its cage!!

Guest • November 23rd, 2008 at 10:13 am

No rally, other than a few days or weeks. A misused, abused, imbalanced, victimized sleeping giant has awaken — The Economy, and it’s hitting back, shaking off the pretenders, the straw men in the market.

Guest • November 23rd, 2008 at 10:15 am

This is exactly what I was asking? I don’t see the logic in saving these giant banks that aren’t really purposeful to a society, they produce absolutely nothing and can easily be replaced.

Guest • November 23rd, 2008 at 10:19 am

Mike Morgan:”As for what we are going to do, I have no idea right now . . . other than this is going to be one of the most interesting weeks we have yet seen. With Thanksgiving coming up, the trading should be light. That means the ability for traders to manipulate the markets either way. Then there is Citigroup. They could fail this weekend or they could continue the charade, as are thousands of other banks . . . and the FDIC, Treasury and White House. The FDIC only let three banks fail this week. One of the banks was Downey, and they have had their hand up for months now. It still amazes me that we are not seeing 50-75 bank failures a week. It would have been much better if they started this a year ago. Sheila Bair is the wrong person for the job, as are Paulson, Kaka Kari and so many other frat boys.This week we could see any number of news issues that rock the market or pop the market. We could see anything from pirates blowing up a tanker to a nuke going off in one of the third world countries from Eastern Europe to Pakistan . . . and anywhere in between or outside these areas. On the other hand we could see Obama come out with a Kool-Aid plan that includes cookies and party hats. But more likely we will see more bank failures, country failures, state failures and just about anything else you can dream of. Detroit, Korea, Thailand, Pension Funds, Hospitals, Florida, New York, California, Iceland, Dubai, Africa . . . and on and on. We are in perfect position to take advantage of anything that comes our way. But I do have one huge fear.My biggest concern is Obama. I have a premonition that he has a red X painted on his head. I don’t see how the Secret Service can protect him, and there are too many folks out there that see that red X as their ticket to financial riches, as well as throwing the US into the dark ages. I can’t stop thinking about the riots after Martin Luther King was assassinated. I had a lot of time in the car this weekend on my trip to Atlanta, and I kept on coming back to Obama. I remember what happened after King was assassinated. I was in Asbury Park NJ, when it was burned down. I was offshore on a boat working as a deckhand when the Captain said it reminded him of World War II bombings. He had tears in his eyes as we watched the smoke rise and listened to the radio. All we could see was thick black smoke and what looked like the end of the world. And, I was in high school when the schools were shut down because of the rioters came into the schools and started beating up students. I’ve also been to Newark and Camden.That was 40 years ago. One Biblical generation. I talk about Biblical generations quite often, and it always makes sense. Remember, we are two Biblical generations removed from the Great Depression. Just enough time to forget and repeat. Go back a few thousand years. The Exodus took 40 years, so God could eliminate one generation and allow a new generation to enter the Promised Land.As for what is coming. I simply don’t see how they can protect Obama and his family, unless they put them all in a Kevlar bubble. When people ask, how can things get worse? They can, and they will. We are going deeper into a Depression that everyone seems to underestimate. We still have buffoons like Barney Frank and Chris Dodd in Washington, posturing for the devil only knows what. I’ve yet to see a single politician or business executive tell it like it is. Nardelli, Wagoner and Mulally are frauds that belong in jail. You had to want to smack Mulally as he testified with a grin and a smile, making sure to let everyone know he’s the new guy and he has no blame. WRONG. Take a look at the disaster Mulally left at Boeing. These frat boys are in control . . . until we see a revolt that will be ugly and violent. Let’s face it. Has the world ever come out of a financial crisis without some excruciating pain . . .and usually war and death. World War II killed millions and slowed the birth rate down worldwide for years. We also destroyed cities and resources throughout the world. But it was that pain, death and destruction that started us on the road up. Unfortunately, it looks like this time it will be much more severe than anyone is anticipating. We still allow executives and elected officials to grand stand as if they have magic dust to make it all better. Instead of damage control, we are witnessing viral damage creation for the near term . . . and the next generation. I’m going to cut it short with that. “http://realestateandhousing2.blogspot.com/

Guest • November 23rd, 2008 at 10:39 am

Meredith Whitney on CITI(New York Post)

Last updated: 1:49 amNovember 23, 2008Posted: 12:45 amNovember 23, 2008Superstar stock analyst Meredith Whitney believes Citigroup is such a basket case that Stephen Hawking, the renowned physicist, lacks the brainpower to fix the stricken banking giant.Whitney, in an exclusive interview with The Post, called Citigroup Chief Executive Vikram Pandit and his minions “naive” for their continued belief that the bank can shrug off recent massive share-price declines.”Pandit and his executives are completely naive if they think the share price is not important,” Whitney fumed. What is more, the Oppenheimer bank analyst balked at Pandit’s belief that Citigroup can continue down the same path it has traveled for the past year, foregoing the sale of major assets like Smith Barney or the credit-card business.”Pandit is wrong, Citi will not be able to stay in its current form,” she said, adding that the banking giant must break itself up and sell off the pieces to raise capital and reduce its size.”Citigroup is in such a mess Stephen Hawking couldn’t turn this company around,” the money maven added. “It has lost the most money of all the banks, and has the greatest leverage.”Whitney spoke to The Post at the end of Citi’s most disastrous week in the last 10 years.The share price closed down 20 percent on Friday, to $3.71, after losing more than 60 percent of its value in the preceding week.Once the biggest bank in the world, the embattled Citigroup is worth just $20 billion today, compared to $250 billion in 2006. Not even the prospect of a $350 million cash injection from Saudi Prince Al Waleed bin Talal was enough to reverse the tumbling share price.The only bright spot in the entire week was a brief respite before the market opened on Friday as a rumor leaked out that the Citi board was to meet to discuss a breakup of the group or a merger with another bank.But Pandit soon ended the fun as another leak cited the Citi chief’s opposition to a breakup of the group, and in particular, his unwillingness to sell Smith Barney.Senior sources within Citigroup were fighting the share-price fire all week, trying to boost the bank’s standing with investors and the media as speculation mounted that Citi could follow Lehman Brothers and Bear Stearns into the banking graveyard.The senior sources claimed that Citi is very different from banks that have collapsed in the credit crunch because it is well capitalized.Still, Pandit is expected to be huddling today with executives and conferring with government officials and an announcement regarding more federal assistance or a spin-off of assets could come later on Sunday.But Whitney took issue with the bank’s defense.”Citi is wrong if they say they are adequately capitalized. No bank is adequately capitalized today and Citi is no exception,” she said.Whitney gained notoriety in 2007 when she published a damning research note about Citigroup, claiming the bank needed to cut its dividend and sell assets to avert a $30 billion capital shortfall.Citi lost more than $15 billion of market value in the carnage that ensued and Whitney started getting death threats from the bank’s investors.Her note sparked a broader sell-off that wiped $369 billion off the value of the Dow Jones industrial average, which led to her pro-wrestling husband – 6-foot-6, 300-pound John “Bradshaw” Layfield – canceling his travel plans to protect her.Whitney expects the Citi share price to keep falling until Pandit takes decisive action – but warned it has not got much farther to go.”The company cannot raise capital, there are no buyers even if he [Pandit] wanted to sell Smith Barney,” Whitney concluded.

Link

Guest • November 23rd, 2008 at 11:18 am

I’ve been a doom and gloomer for the past year or two when the consensus was everything was just wonderful, well now that the consensus is overwhelmingly turning bleak I’m starting to see hope. Following the crowd is never very trend setting so I think it’s time to think about getting on the positive train. That doesn’t mean jump in the stock market as that is obviously ridiculous at this point but it does mean though that very positive change is on the horizon I can feel it. Maybe the bankers will lose their grip on power and we’ll all be set free, I smell freedom.

Guest • November 23rd, 2008 at 11:27 am

Good points- too bad people refuse to see this! All I can say is: “I pledge allegiance to the great banks of the United States of America, and to the new world order for which it stands: one Nation under the Federal reserve, indivisible, with economic slavery and injustice for all”!

Guest • November 23rd, 2008 at 11:35 am

@Krugman: “how impressive the people being named to key positions in the Obama administration seem… hello people who actually know what they’re doing. For a bunch of people who were written off as a permanent minority four years ago, the Democrats look remarkably like the natural governing party these days, with a deep bench of talent.”@Kuttner: “Barack Obama has both the national moment and the raw material… A 46-year-old freshman senator, an African-American no less… an unerring sense of timing, confidence, and a feel for the broad stroke… exceptional skill at appealing to our better angels, and a fine capacity to be president-as-teacher. He inspires… But Obama will need to be a more radical president… discerning tacit aspirations and unmet needs in the people, and then making that radical change the mainstream view for which the people clamor.”You are absolutely right about the moment, and the man. But there was a force behind the man obviously, i.e., the early money, the early bridge making. And, now, it’s becoming a little more clear — the force that was connected with the Clintons, the force that put Podesta in Chicago in charge of more than 400 transition people, the power that enabled scores of former Clinton operatives to pick the Cabinet officials to guarantee the transition with the investment bankers.With this force that has been and is so powerful, only one thing was needed. A frontman. What a calm manner; what a serene, mature presence; what beautiful words: if only they were his.

Guest • November 23rd, 2008 at 11:36 am

Interesting how the automakers have to beg and plead in public for 25 billion to keep their blue collar employees working while Citigroup works behind closed doors with Hanky Panky and Big Ben to figure out how to steal $250 billion for their over paid white collar crooks!!!Wait and see!

MNmom • November 23rd, 2008 at 11:39 am

My husband and I have a mortgage with Citimortgage. Does anyone else on this blog have a mortgage with them? My local community bank officer told me that if we decided to try to bring our mortgage back to our hometown bank, that they’d probably sell the mortgage to someone else, anyway, and would not be the holders of it. Any advice as to what we could do? I’m really concerned. What happens to our mortgage if Citi goes down? Does it just get sold to another party? We have a 30-yr. fixed mortgage @6.5% interest. Could that contract be broken? Any feedback would be much appreciated.I appreciate the information on this site Professor. You don’t know what it means to me. Thank you – and please keep this site free!!OK, its time to make some brownies – confort food always tastes good in times like these. Maybe some pumpkin bread too.

Average Jane • November 23rd, 2008 at 12:17 pm

My local news is reporting the State of Minnesota is now facing a $4 billion budget deficit over the next biennium. A couple of weeks ago they reported it was going to be $2 billion.Maybe the sheiks in Dubai want to buy a State for a bargain-basement price?

Guest • November 23rd, 2008 at 12:18 pm

Yet one more Clintonista named to a key position: Secretary of Commerce will be Bill Richardson former UN ambassador and Secretary of Energy under Clinton. I’d comment but I think it’s already clear what is happening.

kilgores • November 23rd, 2008 at 12:18 pm

Your comments tie in to my preceding post a couple of spots above about the prospect of JPM going down next. I am becoming particularly concerned that the speed of the problem could quickly accelerate if JPM follows Citi. I could imagine a virtual cascade of bank failures arriving all at once, overwhelming the administrative capacity of the FDIC to handle, despite the fact that the government ultimately would take steps to ensure the FDIC was provided with sufficient supplemental funding to cover the losses to account holders. The seamlessness that has characterized the takeover of various banks of late may not continue, such that account holders in failed institutions could be waiting days, if not weeks or perhaps months, before they would be able to access their cash. Keeping enough cash on hand at home in a safe to cover a few months’ worth of expenses — probably a difficult proposition for most of us — might be advisable at this juncture.It seems to me that as a society, we should be considering how to place meaningful curbs on the size of banks and other companies so that they cannot become “to big to fail” or alone create a risk of systemic failure for the financial system and economy. The trouble is, in theory, monopoly power arises from superlative efficiencies which can be lost when government restraints are imposed. Moreover, arbitrarily capping the size of companies likely would create unintended disincentives to productivity. It’s a difficult problem with many dimensions, but one which really needs to be addressed if we are to better manage future risks to the health of the global economy.A previously posted link in this thread referenced an article by Dr. Martin Weiss, Citigroup Failure Imminent, in which the author points out that there isn’t another bank big enough to acquire Citi. He also noted that Citibank, N.A., Citigroup’s primary banking unit, holds $37.1 TRILLION in total notional value derivatives, of which around $3.6 trillion — roughly 10% of the total — are in credit default swaps. Bad, bad, bad…SWK

kilgores • November 23rd, 2008 at 12:21 pm

AJ:Notably, that is not a word I recall reading in Adam Smith’s “The Wealth of Nations” nor in any texts describing how free markets are supposed to work!SWK

Guest • November 23rd, 2008 at 12:22 pm

That’s not freedom you smell, it’s just a changing of the guards, don’t give up your bunk it’s going to get more crowded in there.

Guest • November 23rd, 2008 at 12:26 pm

Allegedly the carmakers are on the ropes, allegedly the bankers are on the ropes, and allegedly the carmakers came for a loan. And Congress said come back to us with a plan, come up with green cars. You are not going to see any money until we see a plan.The carmakers are not asking for a bailout, they are asking for a bridge loan. And there is some precedent for business loans being repaid, such as Chrysler’s.When the bankers came, they came not for a loan, but for free money. And Congress said, how much do you need and when? Oh, yes, there was a stated reason in the beginning, but as soon as the money started flooding in, the reason flowed out the door. The bankers said, we want total authority, no oversight, and we’re not going to tell you who gets it, nor how we spend it. And we want it now!Did Congress ask for a business plan? Did Congress say that before the taxpayers get hit with this monstrous outlay, we need a plan on how the banking system can be revised so this crisis never happens again? For any question, the bankers said: “There isn’t time.”Before the sun was set, the money was on the way and Congress was out the door.Why the difference? With the car companies on the ropes, Congress is the boss. With the bankers on the ropes, the bankers are the boss. Case closed.

Guest • November 23rd, 2008 at 12:28 pm

PART OF THE ANSWER:Large numbers of small, locally owned banks who knew their customers and who understand that for them to succeed, those they lend to must succeed would replace the multinational global institutions where the motto has been: “as long as we can make ridiculous profits and dipose of these toxic assets to someone else, all is good”. It is far easier to deceive, cheat and abuse power when you are so big that no one can touch you and that’s why the Good ole boys club at the Fed will do whatever is necessary to preserve the current system. Only the public can demand a change for a fairer, more transparent, responsible system.

kilgores • November 23rd, 2008 at 12:30 pm

If you are continuing to make your mortgage payments under the terms of your note and keep all that well-documented, it shouldn’t make any difference to you whether Citi retains the note and mortgage or assigns it to another entity. Is there some particular concern you have? Certainly you’re in a better position owning Citi money that having money at Citi, or invested in Citi (in which case you might well have concerns about the preservation of, and continued access to, your principal).SWK

Guest • November 23rd, 2008 at 12:33 pm

It’s like throwing honey all over the forest and then being surprised by an out of control problem with bears (and bear markets)!

blindman • November 23rd, 2008 at 12:34 pm

sg, thanks for the post. i could barely look at the graphics never mind read it all but this jumped out … speculation on a lap top…….ps. i’m anticipating some not only “crazy” monetary capital injections butsome down right wacky ones. and if you read the professor again you mightthink twice about what that might be. maybe not so bad considering theenvironment we’re in and the alternatives..” The dollar’s global reserve status confersprivileges on the US including insulationfrom risk of currency shocks, whichenables lower interest rates, while a steadysource of outside demand for US dollarsaffords the US a unique ability to runlarge fiscal account deficits withoutreproach from the global economy.Enjoyed by the US for more than 60 years,these privileges have perhaps so permeatedUS thinking as to go unnoticed. While totalloss of reserve status is unlikely, the dollar’sdecline may force the US into difficulttradeoffs between achieving ambitiousforeign policy goals and the high domesticcosts of supporting those objectives. In theface of higher interest rates, higher taxes, andpotential oil shocks, the US public wouldhave to weigh the economic consequences oftaking strong military action, for example.The impact on others desirous of a strongerUS role could be equally great if the USwould decline or be unwilling to take action.In addition, US financial dependence onexternal powers for fiscal stability may curtailUS freedom of action in unanticipated ways.More Limited Military SuperiorityIn 2025, the US will still retain uniquemilitary capabilities, especially its ability toproject military power globally, that othernations will continue to envy and rely on tosecure a safer world. The United States’ability to protect the “global commons” andensure the free flow of energy could gaingreater prominence as concerns over energysecurity grow. The US also will continue tobe viewed as the security partner of choice bymany states confronted with the rise ofpotential hostile nuclear powers. Althoughthe emergence of new nuclear-weapon statesmay constrain US freedom of action, USmilitary superiority in both conventional andnuclear weapons and missile defensecapabilities will be a critical element indeterring openly aggressive behavior on thepart of any new nuclear states. The US willalso be expected to play a significant role inusing its military power to counter globalterrorism.“Anticipated developments in the securityenvironment leading to 2025 may raisequestions about traditional US advantages inconventional military power.”However, potential US adversaries willcontinue to try to level the playing field bypursuing asymmetrical strategies designed toexploit perceived US military and politicalvulnerabilities. In the future, advanced statesmight engage in counterspace strikes, networkattacks, and information warfare to disrupt USmilitary operations on the eve of a conflict.Cyber and sabotage attacks on critical USeconomic, energy, and transportationinfrastructures might be viewed by someadversaries as a way to circumvent USstrengths on the battlefield and attack directlyUS interests at home. In addition, thecontinued proliferation of long-range missilesystems, anti-access capabilities, and nuclearweapons and other forms of WMD might beperceived by potential adversaries and USallies alike as increasingly constraining USfreedom of action in time of crisis despite USconventional military superiority.

Stephan • November 23rd, 2008 at 12:34 pm

I would not get too excited yet about the home prices in San Diego. If you want to establish an estimated value of home prices in the area, take the average family income from this area, take 38% of it, assume a 25% downpayment with a 30 year fixed rate loan. How low does the price of the property to be for the family to afford it by these measures. I think we have quite a way to go…

OuterBeltway • November 23rd, 2008 at 12:35 pm

SWK – it was your prior post which triggered my remark. Like you, I’m wondering what the impact of the next major failure(s) will be.But I’d like to get out of worry mode, and spec out the actual impact. The Fed has recently gone into the business of issuing short-term commercial paper, performing the role that the banks won’t.This suggests to me that the Fed and Treasury are certainly alive to the possibility that they’ll be in the banking business in a big way in short order.The core question I’m trying to answer is “what singular, unique and unavailable-from-elsewhere function, on a going-forward basis, do these behemoths perform?”If these banks fail, what functions would have to immediately be performed by other entities?And of course, the corollary question is “are these other entities ready to do it?”.If they’re not, that ought to be the focus of the action at the Fed and the Treasury.Is that their current focus?There’s little left that either the Fed or Treasury can do from a monetary perspective.What remains for them is to fund the stimulus package, and perform the banking functions abdicated by the banks, and to (rightfully) take the blame for the enormous mis-allocation of global savings that they caused (not presided over, but caused) over the past two decades.Comments anyone?

Gloomy • November 23rd, 2008 at 12:39 pm

BOND VIGILANTES RETURNAs Obama starts rolling out his massive stimulus package and even larger than proposed tax cuts, watch for the bond vigilantes to rise up, just as they did when Clinton tried to push though his health care plan in the 90′s. Apparently congressional Democrats will begin work in earnest now so that a bill will be ready to sign immediately following inaguration. Hearing this news, vigilantes will push long term treasury rates higher, increasing the cost of borrowing along with them and constraining Obama’s plans. Gloom will deeepen as optomists realize that government action will be constrained. All the more as Citi is nationalized. The fun is about to really begin

kilgores • November 23rd, 2008 at 12:39 pm

Bill Richardson has tremendous substantive credentials, and is certainly not a Clinton syncophant (after all, he bailed on endorsing Hillary Clinton to endorse Obama). It would be unrealistic to expect Mr. Obama to bring it folks you have never heard of that had no prior experience in Washington or the White House, or you’d wind up with a Carteresque administration, foundering around for the first year or two while they were learning how to get things done in Washington because of an undue emphasis on the need for “change” in the abstract. Since the Republicans have dominated the White House for nearly 30 years now, it stands to reason that Mr. Obama would have to draw on a number of players in the only Democratic presidential administration since 1980: that of Bill Clinton. Change comes from the top. I think we need to wait to see just what Mr. Obama does with these former Clinton folks before we pass judgment. At least give the guy a chance to get sworn in first….SWK

OuterBeltway • November 23rd, 2008 at 12:42 pm

Please don’t hesitate to repeat far and wide your message, Guest.It is my intention to demonstrate that “the emperor has no clothes”.Tell me again what it is that these megabanks do that is so vital to our real economy. I eagerly await an answer.* They issue credit cards.* They trade in derivatives.* They used to trade in ST commercial paper.* They used to spread risk by lending to one another.* They own vast retail networks to siphon up local savings, and use those savings to leverage enormous amounts of consumer debt* They packaged and sold ABS, which were erroneously rated and distributed around the world.Now, maybe I am limited in the amount/diversity of reading I’m doing, but I’m struggling to think of a function that they currently perform that is vital to the functioning of our real economy.Can someone help me out? I fear my emotional bias against these banks is clouding my judgment, and while it’s OK to have one’s axe to grind, a reality-based view is a useful thing to have.Please provide some rebuttal if you can. I’d appreciate it.

kilgores • November 23rd, 2008 at 12:44 pm

Gloomy:How do you feel about Dr. Roubini’s suggestion that at least partial nationalization — which apparently may be coming soon to Citigroup — is a vital response that must be carried out in the near term in the hemorrhaging of the financial system is to have a chance of being successful?SWK

OuterBeltway • November 23rd, 2008 at 12:47 pm

If I did pray, I’d pray for an end to hyperbole and fear-mongering.As it is, I just keep my eyes on the ball. We need solutions, not fear.

kilgores • November 23rd, 2008 at 12:48 pm

Great question. I suppose my assumption has been that the functions they perform are all capable of being performed by existing smaller banking entities. It is really beyond the scope of my knowledge, however, to say for sure whether there are some particularized functions that these mega-banks perform that only another mega-bank or the government could step in and take over. I would defer to London Banker on this one, perhaps.SWK

kilgores • November 23rd, 2008 at 12:53 pm

Of course, that’s sound advice when a hiker walks into a dark cave in the spring and finds a large, hungry bear staring at him as if he were a bone-in ham, but in such circumstances it is often difficult not to give in to a bit of trepidation over one’s potential pending consumption while still alive, or to avoid asking himself why he made the mistake of walking into the cave in the first place.SWK

Guest • November 23rd, 2008 at 12:54 pm

True, true, true, true, true, true, true… but the emperor in fact does have clothes; unfortunately, it’s the shirts off the backs of all the American people!

kilgores • November 23rd, 2008 at 12:55 pm

Perhaps we all need to review our copies of the Hitchhiker’s Guide to the Galaxy with the words, “Don’t Panic!” printed in big, friendly letters on the front cover (kudos to the late British author, Douglas Adams).SWK

Gloomy • November 23rd, 2008 at 1:01 pm

I believe that government interventions can lessen immediate pain, but only at cost of prolonging the suffering. There are no free lunches.

Guest • November 23rd, 2008 at 1:01 pm

Well, I used to keep my eyes on my bonds, equities and commodities, but lately I haven’t been able to see them!

kilgores • November 23rd, 2008 at 1:12 pm

Thanks. I’m not so sure, however, I wouldn’t personally go for less depth and longer duration over greater depth (and uncertainly) and (potentially) shorter duration.SWK

kilgores • November 23rd, 2008 at 1:15 pm

Parenthetically, I might add that it has occurred to me this is like using credit cards: it ultimately may cost more, but stringing out payments over time doesn’t feel quite as bad, as long as you don’t wind up abusing your credit privileges.SWK

Andrew Held • November 23rd, 2008 at 1:33 pm

Along the same “lines”, courtesy of Melduke:Michael Santoli: “At the moment, the only close precedents for the past year are a pair of Great Depression-era bear phases. Andrew Burkly of Brown Brothers Harriman noted Friday that the current bear was 284 days old, and was down almost exactly as much as the 1929-’32 and ’37-’38 bear markets were after 284 days.And this was about the point where the paths of those earlier markets diverged, with the ’29-’32 example sinking relentlessly to an 86% loss, and the ’37-’38 version beginning a bounce that recouped 50% of its losses over six months before rolling over again. This history offers no immediate trading edge, but seems to suggest that being aggressively bearish from recent levels requires a belief that the economic implications of the present crisis at least rhyme with the Depression’s….The options market’s fear gauge, the Chicago Board Options Exchange’s Market Volatility Index (VIX), which is calculated by measuring the implied volatility of certain Standard & Poor’s 500 index options expiring in 30 days, set a new all-time closing high of 80.90 on Thursday. This spells trouble for stocks.

Bean • November 23rd, 2008 at 1:49 pm

OK. Deflation Sucks.Question: How will deflation affect Student Loans.Particularly Variable Rate Stafford Loans.Any gotchas, advice?

Guest • November 23rd, 2008 at 2:00 pm

Charles Gasparino of cnbc soothes us as by telling us everything is alright”Government officials fear taking over Citigroup would create a precedent: Unlike AIG, Citigroup’s balance sheet is relatively healthy, with relatively strong levels of capital particularly compared to most of its competitors.”Why we’re we all worried guys, Citigroup has a healthy balance sheet and tons of cash so whats the big deal?Everyone of those cnbc knuckle heads got this thing wrong they’re still lying through their teeth they’re the mouth piece for the wall street banksters it’s amazing anyone bothers listening to them they have zero credibility just b.s. after b.s. I love it when those snobby punks on Fast money who used to laugh at guys like Peter Schiff and now when he’s on their show they still try making fun of him but with zero credibility somehow they’re insults don’t stick anymore they just come off looking like the stupid retards they really are.. They remind me of the popular preppy kids in high school who were barely smart but never stopped running their mouths like can somebody please get all those butt kissing brown noser retards off the television. It’s no longer cute and amusing thinking how people lost their life savings by listening to all those punks. At this point it’s pure filth.

MNmom • November 23rd, 2008 at 2:07 pm

Thanks SWKMy deepest concern is that the mortgage would be declared invalid in case ofbankruptcy, and then, to me anyway, we would be told that our mortgage wouldhave to be re-negotiated at some point. I’m illiterate when it comes to economics, so I’m not sure what would happen if Citi went under. I don’t like nasty surprises. Our mortgage is $992/month and we also carry a second mortgage at $924/mo. We have a second mortgage because in 2002 we discovered that our roof, siding , windows (you name it) on our house was rotting away, so we took out a second mortgage of $42000 to do some badly needed home repairs. We just can’t afford to have our mortgage raised. OUr2nd mortgage will be paid off in about 4 years. So we can breathe a littleeasier after that. At about the same time , our loans for our daughters college education will be paid off. So we’re kind of holding our breath and hoping we can at least get through the next four years without too many problems. My husband brings home about $2000/month in pay and my pay, $1200/month covers our monthly bills plus money for things like car maintenance. What hurts us are things like a trip to the ER when my husband broke his ankle 2 years ago, unexpected expenses that we just can’t foresee. There is very little money left over at the end of the month.So the situation scares me.Sorry for the long post, but the Citi situation does not make me feel very good, and I for one do not want them to go under. BTW, we don’t have any money parked in Citi. in either IRA’s or any other account.

C • November 23rd, 2008 at 2:15 pm

In this market, a foreclosure can send a neighborhood into a downward spiral. The outlier foreclosure value becomes the point of reference for all home values within the neighborhood, instead of an aberration.

MNmom • November 23rd, 2008 at 2:19 pm

Hey Average JaneI’m from MN too. It’ll be interesting so see what to bozos in the legislature will do in January.And guest, as far as Al Franken /Norm Coleman go. They need a piece of advice that I’m sorry to say is not being heeded.Shut. Up. Now.The Senate recount is making everyone sick. Count on it. And the antic of theFranken/Coleman camps is making it worse.

Guest • November 23rd, 2008 at 2:23 pm

Detroit Free Press editorial- Mitch AlbomIf I had the floor at the auto rescue talksOK. It’s a fantasy. But if I had five minutes in front of Congress last week, here’s what I would’ve said:Good morning. First of all, before you ask, I flew commercial. Northwest Airlines. Had a bag of peanuts for breakfast. Of course, that’s Northwest, which just merged with Delta, a merger you, our government, approved — and one which, inevitably, will lead to big bonuses for their executives and higher costs for us. You seem to be OK with that kind of business.Which makes me wonder why you’re so against our kind of business? The kind we do in Detroit. The kind that gets your fingernails dirty. The kind where people use hammers and drills, not keystrokes. The kind where you get paid for making something, not moving money around a board and skimming a percentage.You’ve already given hundreds of billions to banking and finance companies — and hardly demanded anything. Yet you balk at the very idea of giving $25 billion to the Detroit Three. Heck, you shoveled that exact amount to Citigroup — $25 billion — just weeks ago, and that place is about to crumble anyhow.Does the word “hypocrisy” ring a bell?Protecting the home turf?Sen. Shelby. Yes. You. From Alabama. You’ve been awfully vocal. You called the Detroit Three’s leaders “failures.” You said loans to them would be “wasted money.” You said they should go bankrupt and “let the market work.”Why weren’t you equally vocal when your state handed out hundreds of millions in tax breaks to Mercedes-Benz, Hyundai, Honda and others to open plants there? Why not “let the market work”? Or is it better for Alabama if the Detroit Three fold so that the foreign companies — in your state — can produce more?Way to think of the nation first, senator.And you, Sen. Kyl of Arizona. You told reporters: “There’s no reason to throw money at a problem that’s not going to get solved.”That’s funny, coming from such an avid supporter of the Iraq war. You’ve been gung ho on that for years. So how could you just sit there when, according to the New York Times, an Iraqi former chief investigator told Congress that $13 billion in U.S. reconstruction funds “had been lost to fraud, embezzlement, theft and waste” by the Iraqi government?That’s 13 billion, senator. More than half of what the auto industry is asking for. Thirteen billion? Gone? Wasted?Where was your “throwing money at a problem that’s not going to get solved” speech then?Watching over the bankers?And the rest of you lawmakers. The ones who insist the auto companies show you a plan before you help them. You’ve already handed over $150 billion of our tax money to AIG. How come you never demanded a plan from it? How come when AIG blew through its first $85 billion, you quickly gave it more? The car companies may be losing money, but they can explain it: They’re paying workers too much and selling cars for too little.AIG lost hundred of billions in credit default swaps — which no one can explain and which make nothing, produce nothing, employ no one and are essentially bets on failure.And you don’t demand a paragraph from it?Look. Nobody is saying the auto business is healthy. Its unions need to adjust more. Its models and dealerships need to shrink. Its top executives have to downsize their own importance.But this is a business that has been around for more than a century. And some of its problems are because of that, because people get used to certain wages, manufacturers get used to certain business models. It’s easy to point to foreign carmakers with tax breaks, no union costs and a cleaner slate — not to mention help from their home countries — and say “be more like them.”But if you let us die, you let our national spine collapse. America can’t be a country of lawyers and financial analysts. We have to manufacture. We need that infrastructure. We need those jobs. We need that security. Have you forgotten who built equipment during the world wars?Besides, let’s be honest. When it comes to blowing budgets, being grossly inefficient and wallowing in debt, who’s better than Congress?So who are you to lecture anyone on how to run a business?Ask fair questions. Demand accountability. But knock it off with the holier than thou crap, OK? You got us into this mess with greed, a bad Fed policy and too little regulation. Don’t kick our tires to make yourselves look better.

Guest • November 23rd, 2008 at 2:28 pm

His approach all along has been ‘uh there’s some trouble going on at Bears Sterns it looks pretty dicey but come on guys it’s Bears Sterns in the end they’ll be fine they just need to flush out the top guy and everything will be normal.

Octavio Richetta • November 23rd, 2008 at 2:30 pm

Rumor? the article says citi’s CEO opposes the deal. Is Hanky trying to steer the boat too much on GS’s direction?http://www.express.co.uk/posts/view/72511/Citi-in-merger-talks-with-Goldman-Sachs

Octavio Richetta • November 23rd, 2008 at 2:30 pm

Rumor? the article says citi’s CEO opposes the deal. Is Hanky trying to steer the boat too much on GS’s direction?http://www.express.co.uk/posts/view/72511/Citi-in-merger-talks-with-Goldman-Sachs

kilgores • November 23rd, 2008 at 2:37 pm

It will make them harder to pay back in real terms, since the dollars to pay it back will be worth more than they were when the loan was negotiated.SWK

kilgores • November 23rd, 2008 at 3:00 pm

Your note and mortgage would constitute assets of Citi’s bankruptcy estate. There would be no motivation for anyone to ask a court to invalidate them, as would be the case if Citi owed YOU money. It sounds like you don’t have anything to worry about in regard to the continued integrity of your payment terms. Take a deep, cleansing breath now… ;-) SWK

Guest • November 23rd, 2008 at 3:05 pm

I wish I could cherry pick bankrupt businesses for pennies on the dollar while leaving the bad parts of the business and all of their debt for U.S. tax payers to pay. We need to start revolting!

Brian • November 23rd, 2008 at 3:11 pm

View from 10,000 Feetby Brian ShusterNovember 23, 2008With so many moving pieces in the current economic maelstrom, it is easy to loose sight of the simple fundamentals that operate without regard to the specific crisis of the moment.Just as a forest fire can be viewed by speculating which tree or grove will next explode into flame, economic spectators are looking at a failure of Citigroup, JP Morgan, the “Big Three,” and the Obama team member selections as if they were actually relevant.In truth, speculation on the next tree to burn is irrelevant to the real nature of the forest fire. The pattern of the fire, the wind speed, the humidity, and the forces and options available to fight that patter is what counts.So, what is happening to the economy right now? What are those large patterns and forces, and where do they lead us?Follow the money…There is a mantra of the bulls that goes like this, “Money is sitting on the sidelines.” When the market bottoms out, that money will rush in to stocks and it will begin the turnaround of the economy. After all, “the markets predict the economy six-months out” (don’t believe that one, either, by the way).Where is this sideline money? If it truly exists, then it would be a major force. However, there is no such thing as money on the sidelines. Money is always somewhere. Right now, money has moved from stocks and commodities into treasuries. When money moves into treasuries, it has moved TO THE TREASURY! From the Treasury Department, it has moved into bailouts.So, as money flows out of stocks, a few things happen. Wealth is destroyed (as holders of stocks that are not sold loose value), and money is given from the private sector to the Treasury. The Treasury then gives that money back to the public sector in the form of “loans” and investment (socializing of the banks and insurance companies and just about everything else…)There is massive inefficiency in this system of money transfer, of course, as wealth is destroyed by plunging stock values, and much cash is destroyed in the form of debt paydown or margin calls, but the simple model holds very true that as equities fall, treasury sales rise.This is fundamental to how the current economic machinery is able to operate. We will return to this idea in a moment, after we discuss:Balance of Trade…Two great forces have begun to act upon the global flow of money. The winds have picked up in this forest fire.First, the price of oil has collapsed. Even as wealth funds from oil barons have been burned by trying to buy into stocks at repeated “market bottoms,” the amount of money flowing into oil wealth funds has dried up.Second, the US depression, global recession and skyrocketing US dollar has resulted in a reduction in the US trade deficit. With regards to China, this has caused the Chinese government to enact a huge bailout, and to refocus on its own internal economy for future consumptive growth. In the instant environment, fewer dollars are moving from the US to China.Overall, with fewer US dollars moving into those entities which have been the main buyers of US debt and equities, the improvement in the Balance of Trade is resulting in a reduction in foreign investment in US bonds and equities.WHAT DOES THE FUTURE HOLD?There are many other forces at work than those mentioned in this piece. I may choose to discuss more in a future article. (The stronger dollar and deflation, for example, and the impact of those forces on increasing the relative debt burden – public and private); however, just from the forces as discussed, we can draw some conclusions:The current economic policies are predicated on a stock market decline. As stocks fall, the Treasury is able to extract the funding it needs to finance its program of bailouts and loans without a debilitating program of money creation (even though significant money creation has occurred, it has not yet caused a dollar crisis).Stock declines and “flight to safety” have replaced diminishing foreign investment in US Treasuries as foreign wealth funds have been forced to reduce their buying due to decreased receipts of US dollars.When the stock market bottoms, outflows of dollars to US Treasuries from this source will end.If the stock market rallies, this trend will REVERSE.If funding for Treasuries from stock market outflows dries up, and certainly, if money begins to move from Treasuries into stocks, the Fed will need to create huge new sums of money to replace these outflows.It then becomes possible to see an environment where stock values increase in nominal terms, while Treasuries also remain valuable in nominal terms, both resulting from money creation.Because the Treasury will already be fully committed to the funding obligations of the bailouts, there will be no other option than for the Fed to purchase all necessary Treasuries. This, then, is the true end-result of the current fire: massive money creation that inflates both stocks and bonds.The result is a path to a word we have all heard before, but have begun to discount in the current deflationary environment…This is how we end up with HYPERINFLATION.The canary in this coal mine will be a bottoming of the stock market and a return of the “Money on the sidelines” into stocks.

Guest • November 23rd, 2008 at 3:12 pm

That’s exactly the choice the Japanese faced after their RE market crashed in 1990: serious Depression, or long, slow stagnation. They chose the latter, in all respects a better choice. Unemployment never got to 6%, their GNP never contracted, their industries stayed vital. So the Nikkei has lost 80% of its value from the peak — so what? Average people there have had to suffer no privations.

Guest • November 23rd, 2008 at 3:24 pm

Citigroup update rumor: Government to take on 100 billion in toxic debt for some stake in the company. What a bunch of cr@p. Essentially the government gives them 100 billion because the collateral is worthless and probability gets a tiny ownership percentage of the company when at this stage citigroup is worthless. I love the fancy language they use to dress up the fact that they’re giving away 100 billion dollars of tax payers money for absolutely nothing!!! So now when citigroup forecloses you because they’re so empowered they don’t have to write your mortgage down for you the tax payers already did that for them.

Guest • November 23rd, 2008 at 3:31 pm

Who was that arabian prince who just invested 350 billion dollars into citigroup. The entire system is rigged by illuminist interest, insider trading is organized by the treasury itself. Watch this saudi prince clean up on his 350 million investment he so timely made into a bankrupt company!!!!

Guest • November 23rd, 2008 at 3:37 pm

Oh yea round the table talks are happening right now as we speak this Sunday evening, they’re working really hard on our behalf trying to put a plan together just in the nick of time; our saviors.B.S. B.S. what’s been decided was decided long ago at least long before this Sunday evening but the impression to you and I is they’re really working hard on a Sunday evening, we’re really getting our a good bargain on our tax dollars don’t you see…

Wild Bill • November 23rd, 2008 at 3:37 pm

I believe that in fairness to all, no member of congress should get free medical coverage until every citizen of the U.S.A. gets it. No member of congress should get a raise until real wages in this country increase faster than the cost of living. No member of congress should get a recess until all American workers get a paid vacation equal in duration to that recess. In addition, all Americans should have free access to a gym and a hair stylist. All gifts given to congress members should be sold on E-Bay and the proceeds applied to the national debt. All lobbying money should be applied to the national debt until it is paid off. At theat point, the congress members would receive a fixed 25% of all lobby money. The remaining 75% would go to funding bail outs. As Jackie Mason said: “Put ‘em on commission.”

Guest • November 23rd, 2008 at 3:40 pm

And the decisions were really tough too it took all the way to Sunday evening to decide because they were so agonizingly tough. We should all feel bad for these guys see they’re martyr’s.

AfA • November 23rd, 2008 at 3:43 pm

@ OBRe: What functions do large banks perform that the smaller ones cannot?As I turned the question for a couple of minutes, I cannot come up with a function that cannot be performed by smaller financial institutions.From Wikipedia:

Financial institutions provide a service as intermediaries of the capital and debt markets. They are responsible for transferring funds from investors to companies, in need of those funds. The presence of financial institutions facilitate the flow of monies through the economy. To do so, savings are pooled to mitigate the risk broughtovide funds for loans. Such is the primary means for depository institutions to develop revenue. Should the yield curve become inverse, firms in this arena will offer additional fee-generating services including securities underwriting, and prime brokerage.

I do not see how size would matter to perform any of these functions. However size do matter for two reasons:- Economies of scale,- Leveraged profits (and losses),- Monopoly, and- “Moral Hazard”I thought that big institutions have an advantage in the top-down, global allocation of capital, but that is a function that can be easily fulfilled by smaller entities given the right environment with some real innovation. Then I thought that big institutions are able to handle mega IPO’s, but financial institutions have demonstrated they can perfectly work in consortium, teams, syndicates – and as typical service providers, they do not need to scale. Big banks, for now, are the only ones able to underwrite and issue big pool of assets – because of their role as Primary market. But that too can and is syndicated. A large bank can better withstand a localized run on the bank, but in a Fed and FDIC-insured economy, the probability of a localized run is smaller and that of a generalized run given a localized one is almost 100%.@ SWK”The trouble is, in theory, monopoly power arises from superlative efficiencies which can be lost when government restraints are imposed”My opinion is that this is a fallacy from the part of some of the capitalist theories. First, slack and waste, if well managed, are very important in a solid economy. They are what gives an industry its flexibility. Eliminating all slack by following blind efficiencies makes the system jammed and rigid – increasing the system’s venerability to chocks, even minor. Even bridge engineers would tell you the same thing (during warm and sunny days the metals and asphalt expansion would be destructive if not allowed for).Second, corporations are very good at adapting to almost any kind of “constraint” including regulations, given that they perceive them as such, i.e. regulations are implemented and punished when transgressed.

Guest • November 23rd, 2008 at 3:56 pm

Just when we thought newspaper journalism was dead in this country, here waves the old theme, “Don’t tread on me,” that draws the line — at last. Thanks, Guest, for this heartrending post that expresses so poignantly the cry from the heart of America, and the hypocrisy of her “leadership.” It has been a long while since I’ve heard words ring the sound of freedom. It begins…the stand, for America!

AfA • November 23rd, 2008 at 4:04 pm

Yep, the government rescuing Citi is only for fun, they don’t actually need it.I’m sure a new series by the name of “Bail me out” would attract record audience during prime time.

AfA • November 23rd, 2008 at 4:10 pm

Time out!I think that he’d taken more than 5 minutes.Point well made, but no. It’s the story of a thief who wants to be released because the guy who committed a murder – and paid the judge – was released.Two wrongs do not make it right.

Guest • November 23rd, 2008 at 4:19 pm

The point is is that if you’re going to make a wrong at least error on the side that’s most beneficial to everyday Americans. When you do decide to draw the line don’t do it the people in most need – on the eve of 100 billion that has zero chance of ever being paid back by citigroup.

Morbid • November 23rd, 2008 at 4:21 pm

The Freedom You SmellDear Sir,The freedom you “smell” is the coming new worldview – in it all that you know will come to an end. Now that is real freedom!

Morbid • November 23rd, 2008 at 4:27 pm

The Morphing Of ObamaSWK,What you say is true IMHO. He is smart and if he can extricate himself from the worldview of the idiots that he initially surrounded himself with he will find a new course. It is a real long shot though for most people follow the way of the herd.

Guest • November 23rd, 2008 at 4:29 pm

Of course. It’s been in front of our faces the entire time!The answer is 42.On the other hand, he wrote a 5-book ‘trilogy’. Clearly, he was misrepresenting the numbers on his books, so perhaps he is also in bed with the bankers. ;-)

Morbid • November 23rd, 2008 at 4:31 pm

Who Would Have the Balls To Buy a Car?Even if the Big 3 are bailed out who in their right mind would buy one of their green cars? I hope congress asks for a market forecast of such a flimsy future as these 3 have for their products, i.e., a survey of the general populace as to whether they would ever buy one of their “cars.”

Average Jane • November 23rd, 2008 at 4:33 pm

@MNmom–I have served as an election judge since the 2004 presidential elections and I have come to believe that MN has the best system out there–we do not have voter fraud, PERIOD, despite the rumors. Too many safeguards in place. And as for the Franken/Coleman circus, well, all I have to do is think back to Bush v. Gore. ‘Nuff said. SOS Ritchie is doing the right thing and doing it well.MN managed to skirt the last recession but it sure doesn’t sound like we’re going to escape this one. Thanks, Guv Not-Pawlenty.

Guest • November 23rd, 2008 at 4:42 pm

Citigroup: Government Now Said To Have Cold FeetUpdate 2: Sources with knowledge of the deal say government officials are now getting cold feet over the plan to buy the troubled assets from Citigroup.Situation is still fluid and people close to the company say some sort of a deal will likely be worked out tonight. one other option being considered now is for the government to put money into citigroup.http://www.cnbc.com/id/27873985

Fred Voetsch • November 23rd, 2008 at 4:46 pm

As one reads and learns more and more it is obvious that no one can save the economy. What each of us can do is to be aware and to look out for oursleves and our loved ones.To me that means a very simple approach that is proven by history: shorting the stock market. Even investors with limited accounts can now do so through ETFs such as the stock symbol SDS. As an individual I can convert all of my holdings to short the market in a flash and for just a few dollars while a big institutional investors is bound by rules, regulations, and the knowledge of a lifetime that is now letting him or her down.Be smarter but not too smart; take a simplistic approach to this situation and you will see that the one certainty is that the stock market is going lower. Gold and the dollar may go up or down but the stock market is going much, much lower based on simple mean reversion, not to mention our current and future economic outlook.As an individual investor you now have the advantage, even over someone like Warren Buffet; Do you have the smarts and guts to use that advantage?

Guest • November 23rd, 2008 at 5:11 pm

ASX flat after futures had indicated +3% on the upside – Japan closed today for yet another holiday, which explains why no huge rush for a CITI deal before the Asian markets open

Guest • November 23rd, 2008 at 5:15 pm

converting all of my holding to short the market in a flash would be a very bad option. Bear market rallies can kill you big time.

Wild Bill • November 23rd, 2008 at 5:36 pm

What an historical precedent that would be. I’d be the first Italian-American president. I would scrap the dollar and have the new currency backed by provolone and soprasatta. I’d be perfect for the job. From where I live in New York, I can see New Jersey so foreign policy ain’t a problem. My wife isn’t as scary looking as Michelle either. I might have a problem because at Woodstock, I inhaled but that was some time ago. I’ve been holding my breath ever since. My energy policy will give incentives to those who burn the midnight oil or convert elbow grease into bio diesel. Instead of Hail to the Chief, there will be a recording of Frank Sinatra singing “I Did it My Way”. For the Department of Homeland Security, I would appoint my cousin Paulie. Nobody will mess with him.Wild Bill in 2012! You’ll never catch him with his pants down.

Guest • November 23rd, 2008 at 5:44 pm

Oh my the tough decisions that are going on- please! This is all part of the sales job “we didn’t want to do this and we at one point almost didn’t but in the we had to save the system”. Window dressing b.s. so people don’t come after them with pitch forks, they know the mobs are ready to form.

Guest • November 23rd, 2008 at 5:45 pm

@AfA – Two wrongs do not make it right.I think congress is finally trying to figure out how many wrongs actually do make it right!

Guest • November 23rd, 2008 at 5:48 pm

Isn’t it amazing that we’ve received like three pieces of real time inside information inside of an hour? The illuminati lets us know only what they want us to know when they want us to know. Oh the transparency of the situation I can’t believe it.

Guest • November 23rd, 2008 at 5:49 pm

The Austrians Were Right by Ron PaulBefore the U.S. House of Representatives, November 20, 2008 (excerpt)At least 90% of the cause for the financial crisis can be laid at the doorstep of the Federal Reserve. It is the manipulation of credit, the money supply, and interest rates that caused the various bubbles to form. Congress added fuel to the fire by various programs and institutions like the Community Reinvestment Act, Fannie Mae and Freddie Mac, FDIC, and HUD mandates, which were all backed up by aggressive court rulings.The Fed has now doled out close to $2 trillion in subsidized loans to troubled banks and other financial institutions. The Federal Reserve and Treasury constantly brag about the need for “transparency” and “oversight,” but it’s all just talk – they want none of it. They want secrecy while the privileged are rescued at the expense of the middle class.It is unimaginable that Congress could be so derelict in its duty. It does nothing but condone the arrogance of the Fed in its refusal to tell us where the $2 trillion has gone. All Members of Congress and all Americans should be outraged that conditions could deteriorate to this degree. It’s no wonder that a large and growing number of Americans are now demanding an end to the Fed.The Federal Reserve created our problem, yet it manages to gain even more power in the socialization of the entire financial system. The whole bailout process this past year was characterized by no oversight, no limits, no concerns, no understanding, and no common sense.Similar mistakes were made in the 1930s and ushered in the age of the New Deal, the Fair Deal, the Great Society and the supply-siders who convinced conservatives that deficits didn’t really matter after all, since they were anxious to finance a very expensive deficit-financed American empire.All the programs since the Depression were meant to prevent recessions and depressions. Yet all that was done was to plant the seeds of the greatest financial bubble in all history. Because of this lack of understanding, the stage is now set for massive nationalization of the financial system and quite likely the means of production.Although it is obvious that the Keynesians were all wrong and interventionism and central economic planning don’t work, whom are we listening to for advice on getting us out of this mess? Unfortunately, it’s the Keynesians, the socialists, and big-government proponents.Who’s being ignored? The Austrian free-market economists – the very ones who predicted not only the Great Depression, but the calamity we’re dealing with today. If the crisis was predictable and is explainable, why did no one listen? It’s because too many politicians believed that a free lunch was possible and a new economic paradigm had arrived. But we’ve heard that one before – like the philosopher’s stone that could turn lead into gold. Prosperity without work is a dream of the ages.Over and above this are those who understand that political power is controlled by those who control the money supply. Liberals and conservatives, Republicans and Democrats came to believe, as they were taught in our universities, that deficits don’t matter and that Federal Reserve accommodation by monetizing debt is legitimate and never harmful. The truth is otherwise. Central economic planning is always harmful. Inflating the money supply and purposely devaluing the dollar is always painful and dangerous.The policies of big-government proponents are running out of steam. Their policies have failed and will continue to fail. Merely doing more of what caused the crisis can hardly provide a solution.The good news is that Austrian economists are gaining more acceptance every day and have a greater chance of influencing our future than they’ve had for a long time.The basic problem is that proponents of big government require a central bank in order to surreptitiously pay bills without direct taxation. Printing needed money delays the payment. Raising taxes would reveal the true cost of big government, and the people would revolt. But the piper will be paid, and that’s what this crisis is all about.There are limits. A country cannot forever depend on a central bank to keep the economy afloat and the currency functionable through constant acceleration of money supply growth. Eventually the laws of economics will overrule the politicians, the bureaucrats and the central bankers. The system will fail to respond unless the excess debt and mal-investment is liquidated. If it goes too far and the wild extravagance is not arrested, runaway inflation will result, and an entirely new currency will be required to restore growth and reasonable political stability.The choice we face is ominous: We either accept world-wide authoritarian government holding together a flawed system, OR we restore the principles of the Constitution, limit government power, restore commodity money without a Federal Reserve system, reject world government, and promote the cause of peace by protecting liberty equally for all persons. Freedom is the answer.http://www.lewrockwell.com/paul/paul494.html

kilgores • November 23rd, 2008 at 6:05 pm

I’m just drawing on what I recall from the anti-trust classes in my economics program 30 years ago. I don’t doubt that there may be some limitations to, or perhaps even fallacies in, monopoly theory as I was taught it back then.SWK

Guest • November 23rd, 2008 at 6:08 pm

Money thrown at the derivative black hole is lost money forever money thrown at the big 3 can actually and would save hundreds of billions of dollars for the tax payer. Save jobs etc……

Guest • November 23rd, 2008 at 6:12 pm

Oh no, Citibank news-I was just e-mailed by Citibank: “Good news! Citibank is participating in the FDIC’s Temporary Liquidity Guarantee Program. Through Dec 31, 2009, all of your non-interest and interest bearing checking deposit account balances are fully guaranteed by the FDIC for the entire amount in your account.” WHY are they sending me this now?

Guest • November 23rd, 2008 at 7:20 pm

With Guithner as the pre-announced new Treasury yet currently NY Fed Pres – whatever happens with CITI will have Timmy’s mark and therefore Obamas’s mark on it. This is Obama’s first big situation – it will be interesting to see how he plays it.

hazleton • November 23rd, 2008 at 7:54 pm

@y Guest on 2008-11-23 15:12:30You state that the Japanese have had to suffer no privations ? How about a high suicide rate? How about one of the lowest birth rates on the planet? etc, etc, Japan is dying.

kilgores • November 23rd, 2008 at 8:24 pm

Actually, Dr. Roubini began by calling for a recession that would last anywhere between 12 and 18 months from the time it started. He indicated early this year that he thought the recession had begun as of the end of the fourth quarter of 2007 or the beginning of the first quarter of 2008. It was not until sometime this summer, I believe, that he began suggesting that conditions had grown worse and that the recession would last between 18 months and two years. We’re only about halfway through the two-year recession he has predicted, based on a late 2007-early 2008 start date. I would add that Dr. Roubini has made it clear that depending on what actions are taken to mitigate the downturn and whether they ultimately are effective, the possibility remains that we could be in for a multi-year period of economic difficulties à la Japan in the 1990s with an ‘L-shaped’ recession.SWK

Guest • November 23rd, 2008 at 8:30 pm

ETF’s are exchange traded funds- so for example if you wanted to invest in the Dow Jones industrial average, which consists of 30 stocks there is an ETF that represents those 30 stocks (DIA is the ticker). If you want to invest/trade in the S&P 500 there are at least two ETFs that reprsent the S&P 500, tickers IVV or SPY. Then there are hybrids that allow you to go short on indexes such as the the S&P, ticker SH. Then there are ultra hybrids that exaggerate the impact by a magnitude of 2x or 3x of for example the ultra long SSO or the ultra short SDS which track the S&P 500 in an exaggerated form.Visit Ishares.com for more information or Proshares.com or talk to your broker.

Guest • November 23rd, 2008 at 8:34 pm

It may be and it may surprise in how it is constructed. The market will not be the best measure as it is so bipolar when these things happen — The test will be to see if there is a creative and enlightened approach that doesn’t screw the taxpayer. But make no mistake this is Barack’s baby as his guy will need to sign off.

Guest • November 23rd, 2008 at 8:36 pm

I think this is why it is taking so long – too big to fail and too big to drop the ball on politically. He should have waited a week to announce his team.

Guest-o-Rama • November 23rd, 2008 at 9:00 pm

It may also mean that starting salaries are smaller and raises are slower to come than anticipated further eroding payback power. It would seriously suck to try to pay back a 50,000 debt with rising interest AND downward wage pressure. And students are told student loan debt is “good debt”. Ha! No good debt if you end up underwater for the rest of your life!

Guest • November 23rd, 2008 at 9:00 pm

NEWGovernment to Make Equity Infusion into Citigroup The U.S. government will make an equity infusion of between $10 to $20 billion into Citigroup, Capitol Hill sources close to the ongoing negotiations tell CNBC. The infusion plan is provisional and subject to change.source CNBC 10 pm

Guest-o-Rama • November 23rd, 2008 at 9:17 pm

So what I’m wondering is, is the reason the CITI stock price dropping is a problem is because the company owns its own stock and if the prices drop that eats into their overall net worth putting them in a situation like AIG was where they are undercapitalized? Is that the problem or is it really that CITI will fail because it has too much crap on its balance sheets and when that happens all the CITI investors including State pensions, school endowments etc are just going to crash and burn along with CITI?Or is it not a problem and we in the Banana Republic of America are just being swindled by congress who are subject to lobbying from the same people who pay for their campaigns and now its payback time.

C • November 23rd, 2008 at 9:25 pm

Citi’s demise could be the trigger that forces the Professor’s predicted shutdown of the markets. The market isn’t in cardiac arrest, it’s catatonic.

Robert Wong • November 23rd, 2008 at 9:58 pm

I have friends being sacked by Goldman and ING not long ago. Are you the next? I guess so, otherwise you won’t have time to read all these! It would be a miracle if prices go up when people are being sacked. Who will spend money on things other than necessities until job is being found? Economic reports don’t tell you the future because those are the things of the past. Talk to you friends, if they manage to find new jobs, recovery will not be too far away.

CHRIS DAVIS • November 23rd, 2008 at 10:02 pm

Brian,you need to take a course in Econ. We are in the midst of a debt deflation, which is the exact opposite of what you are describing. It is quite likely as the crisis continues that the rates on longer dated Treasuries will fall. Many of the transactions you describe above are, in fact, asset swaps, not money creation.For instance, the Fed is now buying commercial paper no one else will buy in a market which has already dried up a couple of times in post-war recessions.When the CP market reopens, the Fed can sell the paper it then owns and get its money back. The same would apply for other asset-backed paper the Fed may decide to purchase.On the other hand, the govt will actually lose money in the TARP program, probably around 50%, and this 50% would satisfy your criterion of “printed money.”But keep in mind, while the Treasury Dept. may be inflating with TARP + guarantees of Fannie and Freddie, the consumer is simultaneously defaulting on $1.0-2.0 trillion of mortgage debt, just to name one category.

Guest • November 23rd, 2008 at 10:04 pm

See how they eased into the price 10 -20 billion. That sounds a lot better than 25 billion altogether, but we all know 25 billion will grow to 300 billion very soon. Also the plan is provisional and subject to change in other words they’re really trying to protect the tax payer so their bargaining and battling it out. These guys really care about us I feel like I’m in good hands.

CHRIS DAVIS • November 23rd, 2008 at 10:10 pm

Bank Credit Analyst has done a study on banking/credit bubble crises in other countries similar to this one and they found that a bottom occurs only when the majority of the bad debt is addressed. As consumer savings sky rocket in response to collapsing asset values, only the govt can speed up a recovery thru fiscal stimulus, ie, massive borrowings. Since, thanks to the clowns in Washington, we will have no consensus for another two months on a unified policy, it’s very likely a second crash will occur before Jan 21.

RED • November 23rd, 2008 at 10:26 pm

Please note the below is purely speculativeFor decades, foreign countries (particularly Asian) have built their economies on the basis of exporting to the US under a managed exchange rate policy. Foreigners liked this economic policy because it stimulated employment while earning US$ in hard currency. The powers in the US allowed this to continue because they were able to lower business costs and increase corporate profitability, while maintaining government deficit spending due to the influx of overseas lending.This economic strategy works over time if the mercantilist economy slowly substitutes internal demand for its external demand. This way both countries benefit as the market for both countries products and services increases, creating wealth for both. Unfortunately, the Asian countries have never come to grips with this last part. In the 90’s, when this should have been occurring, US treasury people (Rubin, Summers, et al.) would have been strongly urging the Asians to open up their economy to the market.The Asians, sitting on rising employment levels and bigger and bigger surplus’s of AAA paper, didn’t see any need to open up their economy. Smug in their ways, they told the US they had a long term approach, wouldn’t rebalance, and wouldn’t revalue their currency. The US had no choice but to re-inflate and bubble away.Now that the debt supercycle is coming to an end, it is the Asians that will feel the full wrath of the market, not the US, and here is how it will play out• The US, not able to raise money from foreigners to reinflate its economy, will print dollars• The US dollar will drop, foreigners (who hold all the Tbills) will sell trillions to escape from devaluing dollars. Holdings of US companies by foreigners will also be sold. These assets will be sold at rock bottom prices creating one of world history’s greatest buying opportunities.• Foreign countries will be on their knees with no export markets• Following this bloodbath, the US will raise interest rates to 20% (ala Volcker), creating a violent upsurge in the dollar and a downward spiral in other currencies.• Team USA will then proceed to buy up great assets around the world using the strong US dollar• The Asians, having no export markets, no internal demand, and no more US dollars will sell themselves down the river

Guest • November 23rd, 2008 at 10:27 pm

Citi is huge with 100′s of billions in leveraged instruments and will not be allowed to fail. The Fed will toss them an appetizer of 10-20 billion and them sneak them much more. This is truly the 300 lb gorilla and its banana time!

PeteCA • November 23rd, 2008 at 10:39 pm

Mark: It’s really just how things balance due to downwards pressure (people taking short positions) and upwards pressure (people taking long positions). Right now, many people are trading inverse ETF’s, thereby putting a lot of downwards pressure on stock prices. But therre are also buyers who believe the market has reached a bottom (or at least a temp bottom). If suddenly all the short buyers sell their current positions and leave the market, there is typically a bounce upwards. The upwards bounce is magnified if some smart players expect this behavior – they pile on additional LONG positions thinking this is going to happen. It’s a so-called short covering rally. It’s happening right now as options expire, and as people who are buyers of inverse-ETF’s are taking profits after a significant drop in the market.PeteCA

AfA • November 23rd, 2008 at 11:07 pm

This is madness, you don’t need to wait for the opinion of an analyst to value a company whose CEO goes by the name of a Pundit. It suspiciously sounds like a fake one.Vikram Pandit = Victorious Expert = Star Trader in modern language = Hedge FundThe Citi didn’t save its “umbrella” for the rainy day and it has no one else to blame for it.

Wolf in the Wilds • November 23rd, 2008 at 11:08 pm

Citibank just for US$20b in new preference shares, and a backstop on US$300b of assets at 15% first loss. What is this about!??! They are effectively buying “bad assets” at 85c to the dollar. The tax payer is going to foot the rest of the losses. Remember, most of these assets are pretty worthless now. And do you want to know something else? That is probably only the tip of the iceberg in terms of bad assets.What I would like to know is who approved this? How can the American people be pillaged like this? I am very angry at the moment, because clearly, no one is willing to accept that the US financial system is completely (and I mean COMPLETELY) bankrupt. They are willing to let the disease spread to the rest of corporate and healthy America, and to every corner of the globe. I cannot imagine how any other country would accept being destroyed by the incompetence (or corruption) of the US Treasury and the Federal Reserve.I am stunned, stupified and in despair. It is hopeless.And I am pretty certain we are heading to war.This is not a good way to start the week.

Guest • November 23rd, 2008 at 11:19 pm

A near-riot and parliament besieged: Iceland boiling mad at credit crunchhttp://news.scotsman.com/world/A-nearriot-and–parliament.4722970.jp

THOUSANDS of Icelanders have demonstrated in Reykjavik to demand the resignation of Prime Minister Geir Haarde and Central Bank governor David Oddsson, for failing to stop the country’s financial meltdown.It was the latest in a series of protests in the capital since October’s banking collapse crippled the island’s economy. At least five people were injured and Hordur Torfason, a well-known singer in Iceland and the main organiser of the protests, said the protests would continue until the government stepped down.As crowds gathered in the drizzle before the Althing, the Icelandic parliament, on Saturday, Mr Torfason said: “They don’t have our trust and they are no longer legitimate.”The value of the Icelandic krona has been cut in half since January…. …Gudrun Jonsdottir, a 36-year-old office worker, said: “I’ve just had enough of this whole thing. I don’t trust the government, I don’t trust the banks, I don’t trust the political parties, and I don’t trust the IMF.”We had a good country and they ruined it.”

CHRIS DAVIS • November 23rd, 2008 at 11:37 pm

No! No! No! You have correctly outlined the LEAST LIKELY case of economic mutually assured destruction!! The Asians have zero motive to crater the dollar – exactly the opposite is true; they will continue to accept low yielding Treasuries in return for us subsidizing their employment — they have no political choice in this……..

jugglingcdos • November 23rd, 2008 at 11:57 pm

no bank runs on hanky’s watch..war?im 30 this year, if what you predict comes true(in 1-10 years),ill prob be enlisted as an officer (i expect this to be the same in other nations, people aged 20-30)i will most prob lead young troops into the field, kids aged 7-15 now.no wonder someone told the japanese to start having babies, their demography isnt too promising at the moment..sorry for the rant… the W word have that effect on me

Mark • November 23rd, 2008 at 11:59 pm

The question is whether Mother Nature will support you/us.We’ll be pretty much scrubbed clean during the next glacial period anyway.

Mark • November 24th, 2008 at 12:00 am

“Ideas” do not have any repercussions until put in motion- physical action as a result of the ideas. OK, perhaps ideas can spawn happy feelings in others, but that’s about it until “the rubber hits the road” (ideas are put into motion).As an example of a “good” idea gone bad (applied) I give you exhibit “A,” the Green Revolution. By nearly ALL measurements it’s been deemed a great success, but upon further inspection (by those who are “cynics”), it has been noted that it will be, before all is said and done, perhaps the worst decision ever taken up by man: long-term measurements no show that the “ideas” have resulted in devastating soil mining (over-extraction of soil minerals- poor mineral content = poor food); as the availability of fossil fuels, which the Green Revolution relies on, dwindles there will be catastrophic food shortages (meaning massive levels of starvation).And then there’s also nuclear energy, which was supposed to provide us unlimited free power. Clearly “unlimited” is not possible given that uranium IS limited. Then there’s the issue of waste, not to mention nuclear weapons.I needn’t have to point out the damage that “ideas” generated in this current economic crisis.

CHRIS DAVIS • November 24th, 2008 at 12:07 am

Dear Wolf in the Wilds,You WANT Citibank with it’s two trillion of assets to collapse? Just like that, huh? And, only curious here, what were your plans for after? You like camping?Like a twenty-year-long camping trip to nowhere in a tent?The US financial system is NOT completely bankrupt, it’s merely insolvent as Prof.Roubini has been telling you for months. The “Consumer”, an obese, self-centered,profligate just got a $4.0tn mortgage on a $2.5tn house, ie, we taxpayers are going to pick up the tab on three to four million extra houses that got built so Wall Street could bonus itself out at $75bn/year for five years. That’s called “socializing the losses”, so we, the electorate, in our wisdom, hired a guy named Obama who loves to socialize things, while the “Consumer” pouts in a corner because the Beach Boys took his credit card away.o the takeup rate is 1.2m houses per year; the three million extra houses aren’t worthless, they just arrived a little earlyo most of the Fed’s actions are asset swaps and, by definition, aren’t inflationaryo Treasury actions that are inflationary, eg, TARP, will be more than cancelled out by consumer debt default of $1.0-2.0tno this is hardly the first time the US banking system has experienced a total equity wipeout — where have you been?? The country survived the last two fineo American consumers aren’t being pillaged: they overborrowed and are now paying the consequenceso but, Uncle, in his munificence will borrow a couple of trillion at three per cent and put everybody back to work againo meanwhile, that moron, the “Consumer”, will pay down/default on a couple of trillion of his debts, so the burden will shift from a weak credit to a strong credit who can borrow all day every day at three per cento SO, we can fire a lot of those AWFUL bankers who rubber stamped the garbage mortgages AAA, packaged them in abstruse vehicles and sold them to each other and our trading partners, because we won’t be needing them anymoreCheer up and buy XLF at the bottom

JLC • November 24th, 2008 at 12:13 am

Same thing here in Washington State. We’re facing a $5Billion deficit in the next bienniem. Way worse than last month’s estimate. State revenue fell off a cliff in the past couple of months.Soon there will be a new addition to the Fed’s aplhabet soop, tageted at state and local governments.

Wolf in the Wilds • November 24th, 2008 at 12:19 am

Red, I suggest you look at the numbers carefully. The Asians have already been moving away from the US market, and they will dump US assets. Foreign countries will just cut off the gangreneous arm that is the US of A and continue with life, albiet probably at a lower standard of living. The US$ will be worthless and will stop being used as a global settlement currency. And the US will be bankrupt because it will have no foreign reserves to support its imports. Do you really want to know the outcome to all this?The US will attempt to gain an exportable reserve and will try to use military might to do so. However, the world will rise up against them and eventually, the empire will collapse ( or if we are REALLY unlucky), the idiots in Washington will try to nuke the world.The US has become the largest nuclear capable banana republic. The world has good reason to be scared.

Wolf in the Wilds • November 24th, 2008 at 12:30 am

Chris,You don’t have to do this to keep Citibank alive. That is my point. You need to wipe out the holders of equity, subdebt, and even to some extent, lenders of Citibank. You DO NOT HAVE TO PUT THE FUTURE OF THE COUNTRY OR THE WORLD AT RISK!The Government and the Treasury can nationalise Citibank via a Asset vs Equity Swap, where you take dubious assets off Citibank’s balance sheet at 30c in exchange for equity. Make Tier1 (preference shares) holders convert to equity. Make Tier2 (sub debt) holders convert half of their holdings to equity. Make senior debt holders convert 25% of their holdings into equity. The state ends up holdings assets at low prices which may perform or at least recover. It owns shares in the bank which is now able to LEND (thereby preventing wholesale economic collapse outside the financial sector). If the bank is profitable, the share price WILL INCREASE. The tax payer doesn’t have to foot the bloody bill.But what they are doing now is basically tranferring all the risk to the tax payer and the government, from the risk takers who made the bet in the first place! What they are doing now is spreading the risk to the government, spreading the cancer, which was isolated in the financial sector, to the everyone else.THERE IS NO WAY TO FUND THIS. The only way to fund this is quantitive easing (MONEY PRINTING). And we all know where that leads to. History is littered with examples….

BigB • November 24th, 2008 at 1:11 am

I believe all those Jews get appointed so morons like Bleher can spend their days playing with their jewish conspiracy theories. Meanwhile, the WASPs behind the scenes, who really run the show, go unnoticed.

Robert Wong • November 24th, 2008 at 1:32 am

The economy is so bad that we haven’t seen the worst yet. Professor Roubini is talking about serious recession and deflation. If you put them together, it means depression. It’s up to you whether you want to put the word “great” in front. Anyhow, 2009 IS THE WORST YEAR SINCE THE END OF THE WW II in terms of economic. We better skip that and turn to page ’2010′. I think we can start buying stock after Easter next year (2009) as whatever left should be safe.

Alessandro - http://castellidicarte.blogspot.com/ • November 24th, 2008 at 2:09 am

Wolf in the Wilds,I’m with you. City collapse is not the end of the world, as is has not been BSC collapse and even LEH.Those who did the wrong bets need to foot the bill. Easy.Once debt is restructured in a form similar to what you describe, the banking operation can just go on as usual, that is much better that it is working right now.All those “bank rescues” are really “bondholders rescue”. Why should you rescue them? They made the wrong bet themselves. Why would you want your kids pay in full for other people mistakes?This crisis is not going to end well because the elites are determined to destroy the system in the process of trying to keep it from changing. I’m really sick of it.

RED • November 24th, 2008 at 3:00 am

My point here is there are plenty of disaster scenario’s. Deflation, Hyperinflation, war, Financial armageddon.Perhaps we and world will somehow muddle through this

RedCreek • November 24th, 2008 at 3:11 am

Why do markets bounce following the Citi news??? this is madness, utter nonsense!Citi bad assets over US$ 300 bn.And the TARP was going to clean up the system with 700bn???It is obvious that the rot is far bigger than previously thought – by everybody.Also, where does the preferred equity injection into Citi rank? is it senior, equal or junior to the previous (Arab) injections of preferred equity? If it is equal or junior, then the Treasury is basically safeguarding the recent Middle Eastern injections while wiping out common equity holders. Some clarity please Mr. Bandit – sorry – Pandit?

Wolf in the Wilds • November 24th, 2008 at 3:30 am

Red,I really really hope so, because that is the only good outcome. Somehow, from the past 8 months, I fear otherwise. Collective humanity (countries) are not known for benevolence.

Little Saver • November 24th, 2008 at 3:31 am

There you go, leading a good and dedicated life as fisherman, saving some krona’s for the future, unaware what white collar fat cats are doing with them.What will white collar answer be? Bail out of white collar friends with the following message: shut up, don’t interfere with our business and go fishing.

RED • November 24th, 2008 at 3:46 am

I expect we will muddle through as all countries have too much to lose. But….if we don’t, and a disaster scenario erupts, its really foreigners who carry most of the risk. A devaluation of our currency will give the US workers and US business’s the competitiveness they need to rebuild and take on the world again.

jugglingcdos • November 24th, 2008 at 4:18 am

Red my friend,if your scenario materialize, US will be in the same dipshithole as TROTWdo you know US imports 2/3 of its energy?? how are you going to rebuild your industrial based if you rely heavily on importing energy (in mitigating this invading oil nations is an easy option,that happened already am i right)if youre focusing on US military strength, yup US have an advantage, but will Russia/China/Brazil/India keep quiet about it and do nothing, i doubt itnations are busy securing energy/resources deals, do you know the story of chinese co’s trying to monopolize the steel industry..anyway, in the end nobody wins…except the men in black armani/prada suitsPres(R)Gen Ike once said to win WW3 is to avoid it, that is a gem of an advice coming from a well respected manp/s: he aint sayin that just to please the crowd like most pres now do..

RED • November 24th, 2008 at 4:54 am

Juggler,not sure what TROTW is, but again on energy, if foreigners don’t want to buy dollars/treasuries in exchange for oil, then who are they going to sell it too? China? Their economy is blowing up due to lack of exports to the USA. Will oil countries insist the US pays in Gold? The only way out for the rest of the world is if they all get together and go onto the gold standard together without the US. What chance of this, 0%.On Steel, China cannot monopolise steel because they don’t have enough of the key ingredients, Iron Ore and Coal. Australia and Brazil sit on the world’s supply of Iron Ore, the price of Iron Ore has quadrupled over the past four years as China has dramatically increased its steel making. Australia effectively controls the lowest cost supply of iron and it sits under the US military umbrella. Again, US holds the cards.

Octavio Richetta • November 24th, 2008 at 4:56 am

FWIW, below are my posts at CR’s “waiting for the citi news” post:http://www.haloscan.com/comments/calculatedrisk/7156721754550176647/?a=45323As posted in this thread, I went heavily long financials: C, BAC, GS, JPM, GE, WFC. The posts below hint at some of the rationale behind my move, specially the bold posts.Octavio Richetta writes:From previous thread: “Fred – if the Citi common is not diluted, then JPM, BAC and WFC will ask for the same gift from heaven”I think Uncle Sam’s strategy will be to try and plug the drain in the financials not just citi. IMO, their actions will also be aimed at putting a floor on banks stocks for several reasons: 1. Financials are 19% of the S&P 500 you cannot stop the bleeding in stocks unless you plug financials. 2, Capital Markets are not the economy but they are a fundamental part of it. 3. For the banks to raise meaningful private equity stakes, they need a meaningfully positive share price.Octavio Richetta | 11.23.08 – 9:09 pm | #Octavio Richetta writes:”Prepare for widespread bank disintegration in the next 6-9 months.”Banks go down; we all go down with them:-)Octavio Richetta | 11.23.08 – 9:12 pm | # Octavio Richetta writes:”Too bad there is not enough honor in these bailouts to include provisions requiring Hari-Kari from the executives.”Hari-Kiri would be less painful for these guys than forcing them to plow back any of their wealth back where it came from! We are talking the greediest people on earth. They rather be shoot than give up a single buck.I have met plenty of folk like that personally.Octavio Richetta | 11.23.08 – 9:28 pm | #Octavio Richetta writes:”I lost my bet that the Broncos would win today. Can I get a bailout for my bad bet?”Yes, if you are a bank.Octavio Richetta | 11.23.08 – 9:29 pm | #Octavio Richetta writes:”Paulson Weighs Ramping Up Aid Again “This guy displays no strategic thinking whatsoever. How did he get to be GS CEO? is he getting alzheimer’s?Octavio Richetta | 11.23.08 – 9:31 pm | #Octavio Richetta writes:”This ignores the fact that the majority of deposits are overseas. Will the American citizens be responsible for non-US deposits?”This is one of the key reasons why citi will be saved. The WW banking franchise they are.Octavio Richetta | 11.23.08 – 9:35 pm | # Octavio Richetta writes:all equity infusions are dilutive.Octavio Richetta | 11.23.08 – 9:38 pm | #crispy&cole writes:They have $60 billion left over in the TARP…crispy&cole | Homepage | 11.23.08 – 9:38 pm | #Octavio Richetta writes:they will go to citi:-)Octavio Richetta | 11.23.08 – 9:38 pm | #Octavio Richetta writes:”All they want is to pump up the stock price with token measure and hope they can get private capital to saddle up. “Sounds like a good plan:-) (a-posteriori note: One of the government objectives is to prop-up share prices so that Banks have an easier time raising private capital instead of using taxpayer money)Octavio Richetta | 11.23.08 – 9:44 pm | # Octavio Richetta writes:”Not anymore they arent. Financials are down to only about 13% of the S&P.”Ups! I was going by the latest SP500 talksheet on the index:-)Octavio Richetta | 11.23.08 – 9:46 pm | #dryfly writes:Octavio Richetta(Good) writes:please post a link to watch cnbc online. I am in Argentina. I only get Bloomberg via DirecTVOctavio Richetta | 11.23.08 – 9:43 pm | #OR – if you are in Argentina then you don’t need to watch; you already know how the plot ends – it isn’t a happy ending.dryfly | 11.23.08 – 9:47 pm | #Octavio Richetta writes:I don’t care about the ending I care until turkey day:-)Octavio Richetta | 11.23.08 – 9:48 pm | #Octavio Richetta writes:”The financials balance sheets are so opaque”Not even CPAs can read them. And anyways a lot of stuff they don’t show to you if is off the books.They have to show the FED though. Specially when they are begging for $$$Octavio Richetta | 11.23.08 – 9:50 pm | #Octavio Richetta writes:”Citigroup equity infusion wouldn’t preclude other actions to bolster bank: report, citing Capitol Hill sources”This line is meant to scare the shorties:-)Octavio Richetta | 11.23.08 – 9:52 pm | #Octavio Richetta writes:Hanky first asks for a bazooka and gets it, and then when he has it, he hides it away in the closed Phony guy:-) No strategy whatsoever…Octavio Richetta | 11.23.08 – 9:54 pm | #Octavio Richetta writes:”10-20 billion? Thats like walking around money, shiiitt.”No this is lotta money. it is just that we get used to the big numbers.20 billion is 20 turckloads of gold with 88000 lb of gold each, calculated at $700/ounceOctavio Richetta | 11.23.08 – 9:55 pm | #Octavio Richetta writes:I used to live in NYC when the citicorp building opened up in lex and 52?st. What a cool place that was. I loved the free concerts. They had an Alfredo’s too. I wonder if it is still there.Octavio Richetta | 11.23.08 – 10:37 pm | #Octavio Richetta writes:”Buying toxis assets at market prices does not solve anything as your equity takes a hit – you have less assets but even less equity, so you are even worse off.”1000% correct. equity injection is equivalent to amount of money above book value of level 3 assets government would be willing to pay and they save cash equivalent to the book value of the level 3 assets. Plus sheeply taxpayers don’t get as mad.Octavio Richetta | 11.23.08 – 10:46 pm | #Octavio Richetta writes:”C is insolvent. everyone knows that. throwing away taxpayer dollars for and insolvent institution violates the 2 principles of central banking”The problem is that since the Glass-Steagall act was repealed, regulators were coconspirators in all the crazy stuff the banks where doing.Since banks are quasi-government institutions now the government and thus taxpayers are in the hook.There is some thruth to the saying than banks are more important to the US ecenomy than GM.Octavio Richetta | 11.23.08 – 10:58 pm | #Octavio Richetta writes:The question of citi’s insolvency (or any of the too big to fail banks) is a very fuzzy one as these institutions have a licence to make money from the US government. So even if they are insolvent at this moment; if uncle Sam takes them under his wing for a while, they will make enough money to get back to a positive book value.Octavio Richetta | 11.23.08 – 11:10 pm | # Octavio Richetta writes:what inning are we in again?Excellent question. They say we are kind of bottom of the seventh but it feels more like start of the third.But, if you think hard, what inning we are in is irrelevant as a game of baseball can in theory go on for an infinite number of extra innings!Octavio Richetta | 11.23.08 – 11:13 pm | #

Octavio Richetta • November 24th, 2008 at 5:27 am

Joint Statement by Treasury, Federal Reserve, and the FDIC on Citigrouphttp://www.federalreserve.gov/newsevents/press/bcreg/20081123a.htmhttp://www.federalreserve.gov/newsevents/press/bcreg/bcreg20081123a1.pdfThis is very powerful stuff. If you are shorting stocks, Financials in particular, ignore it at your own peril.There is definitely moral hazard in all that is being done but the government had to do it (See my post above on the regulators being coconspiators on the mess the banks got in; now, they must clean up their mess. Hopefully the regulatory framework that will emerge will keep things in check for another 70-80 years)You guys know that I am very bearish on the economy, and have been even more bearish on the stock market (I was a bear for the last 11 years). However, one needs to recognize when the time to switch gears has come; if not to go long, at the very least to stop shorting stocks.I doubt we have seen the lows but stocks went low enough that a bounce is due, and if no bounce, the risk is much lower than getting in at SP&500 1400. How deep into the market? I try to do it at a measured pace but I doubt I will go above 35% of assets even when getting a green light from the ECRI folks.

Octavio Richetta • November 24th, 2008 at 5:41 am

The text of the FED strategy:For immediate release November 23, 2008 Joint Statement by Treasury, Federal Reserve, and the FDIC on CitigroupWashington, DC — The U.S. government is committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth. In support of this commitment, the U.S. government on Sunday entered into an agreement with Citigroup to provide a package of guarantees, liquidity access, and capital.As part of the agreement, Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup’s balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.In addition, Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program in exchange for preferred stock with an 8% dividend to the Treasury. Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC’s mortgage modification program.With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy.We will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks. The following principles guide our efforts:We will work to support a healthy resumption of credit flows to households and businesses.We will exercise prudent stewardship of taxpayer resources.We will carefully circumscribe the involvement of government in the financial sector.We will bolster the efforts of financial institutions to attract private capital.So as I said in the CR posts above, the FED is not only bailing out the banks but now it is also trying to put a floor on the share price (which implies stockholders will no-longer be wiped out) so that the banks have an easier time raising private capital. The US is a capitalist country, nationalizing banks Chavez style is the last thing in our list.

CHRIS DAVIS • November 24th, 2008 at 6:07 am

TO ALL THE CHICKEN LITTLES:Do yourselves a favor and read up on similar rescue programs for bank credit bubbles in Scandanavia and S&L Crisis in USA before you have another meltdown.Let’s review:o Do not confuse moral outrage with finance; moral outrage is for Hollywood; finance is a never-ending amoral battle over scarce resourceso Massive credit misallocations can and do wipe out ALL bank equity from time to time,resulting in nasty recessions that are not the end of the worldo The bottom of the crisis is arrived at when the authorities have addressed the MAJORITY of the problem loanso Ironically, financial stocks – suggest you buy the index — go up the most from the bottom, because they typically were the most depressedo Octavio Richetta above has it nailed: we want govt to socialize the LOSSES not the banks. That’s what govt is for: no one ever said capitalism was perfect. You have booms, you have busts, and govt smooths thm out

Roga • November 24th, 2008 at 6:13 am

I AM NOT A GOLD NUT. That having been disclosed the following is fairly moving evidence that down is not the general direction gold prices will be moving based on a simple understanding of Supply and Demand.Mint suspends orders amid rush to buy bullionSarah-Jane Tasker | November 22, 2008Article from: The AustralianFEARS of the unknown long-term effects from the global financial crisis have sparked a new gold rush.With retail and wholesale clients around the world stocking up on the precious metal, the Perth Mint has been forced to suspend orders.As the World Gold Council reported that the dollar demand for gold reached a quarterly record of $US32 billion ($50.73 billion) in the third quarter, industry insiders said the race to secure physical gold had reached an intensity that had never been witnessed before.Perth Mint sales and marketing director Ron Currie said the unprecedented demand had forced the Mint to cease orders until January, with staff working seven days a week, 24-hour days, over three shifts to meet orders.He said Europe was leading the demand, with Russia, Ukraine, Middle East and US all buying — making up 80 per cent of its sales. One European client purchased 30,000 ounces for $33 million.”We have never seen this before and are working right at capacity. And we are seeing it from clients in the shop buying one ounce, right up to 30,000 ounces from overseas clients,” Mr Currie said.Robert Jaggard, manager of bullion and rare coins dealer Jaggards, said business had picked up strongly and he expected it to increase further.”All around the world there has been a heavy run on physical gold and there is a shortage of supply,” he said.Mr Jaggard, who has been dealing in gold for 40 years and is an agent for the Perth Mint, said some clients were buying up to $1million worth of gold, paying a premium above the spot price.Late yesterday afternoon, spot gold in Sydney was trading at $US747.30 an ounce, up $US8.15 on Thursday’s local close.”Professional business people who have previously bought small amounts now want more gold because they are suffering in other markets,” Mr Jaggard said.At a conference this week in Munich, delegates were lined up 30-deep to purchase physical gold. And reports out of the Middle East suggested that there had been unprecedented gold buying in Saudi Arabia during the first half of November, with an estimated $US3.5 billion purchased in recent weeks.The World Gold Council, releasing its global demand trends yesterday, said identifiable investment demand, which incorporates demand for gold through exchange-traded funds and bars and coins, was the biggest contributor to overall demand during the quarter. It was up to $US10.7 billion, double last year’s levels.The figures showed retail investment demand rose 121 per cent to 232 tonnes in the third quarter, with strong bar and coin buying reported in Swiss, German and US markets.The quarter also witnessed widespread reports of gold shortages among bullion dealers across the globe, as investors searched for a haven. Overall, quarter three saw Europe reach an all-time record 51 tonnes of bar and coin buying. France became a net investor in gold for the first time since the early 1980s.World Gold Council chief executive James Burton said gold’s universal role as a store of value had shone through during the quarter, helping attract investors and consumers to all forms of gold ownership.”The rise in demand for gold bars and coins has been impressive,” he said.Demand in India, the largest market for gold, recovered during the third quarter, encouraged by lower gold prices, a good monsoon and the onset of the festive season. At 250 tonnes, total consumer demand was 31 per cent higher than the same period last year. In value terms, demand hit the record quarterly sum of $US5 billion.

randy • November 24th, 2008 at 6:18 am

markets bounce on the citi news because all the news is so bad, any little bright spot gets a foothold and people grab onto it like a drowning man grabbing a lifepreserver!It won’t last more than a day or two and we’ll be headed down again. If you’re short…grab ‘em and hold on!

Guest • November 24th, 2008 at 6:18 am

So do you sell your C today (this week) or increase your position? Why? by the way good call last week on getting long

randy • November 24th, 2008 at 7:10 am

OR:I guess Im a little dense. How exactly does the FED attempt to put this “floor” on the share price of banks, specifically, CITI?Thanks…..:>

Guest • November 24th, 2008 at 7:33 am

I think one of the main reasons most people cannot accept the Feds actions is because we have been told time and time again that govt debt and deficits are completely out of control and the country can no longer continue down this road and that adhering to budgets and fiscal restraint is imperative; yet now, all of this logic has been flushed down the toilet with a seemingly endless supply of govt money and no mention of the disastrous effects on the public’s tax burden. Yes, the average American sees this behavior as the ultimate hypocrisy and contadiction: “believe what we tell you while we then do the opposite”!

MM CA • November 24th, 2008 at 7:36 am

The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the value of everything produced in the nation last year, to rescue the financial system since the credit markets seized up 15 months ago.The unprecedented pledge of funds includes $2.8 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the only plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis$4.4 TrillionBernanke’s Fed is responsible for $4.4 trillion of pledges, or 60 percent of the total commitment of $7.4 trillion, based on data compiled by Bloomberg concerning U.S. bailout steps started a year ago.“Too often the public is focused on the wrong piece of that number, the $700 billion that Congress approved,” said J.D. Foster, a former staff member of the Council of Economic Advisers who is now a senior fellow at the Heritage Foundation in Washington. “The other areas are quite a bit larger.”We are so doomed…. Children born in 2108 will be born oweing millions as soon as they take thier first breath

Guest • November 24th, 2008 at 7:39 am

Whatever happened to the auction system to ensure Americans get a good price for these bad assets(worthless assets)?It’s time to start organizing march’s and protest’s. The G.S. boys need to go.

Guest • November 24th, 2008 at 7:46 am

With the bad paper the FED is taking in and the 700 billion TARP we’re now pretty close to 3 trillion dollars of tax payers money to save the banks and this doesn’t include Obama’s new deal coming forward, the HOPE for homeowners, the taking over of Feddie and Fannie. I mean we’re talking about 10 trillion dollars of lost tax payers money when this is all said an done.

MM CA • November 24th, 2008 at 7:54 am

Government Mounts Huge Bailout For Citi (C) (C)John Carney | Nov 24, 08 1:26 AMThe plan to rescue Citigroup was finally announced early Monday morning, following a tense weekend of round the clock negotiations. The plan include a backstop of $306 billion in troubled assets, a $20 billion capital injection and leaves in place the current management.The question on everyone’s mind is: will it work?Here are some highlights of the stunningly complex plan. (You can read the joint statement by the Fed, FDIC and Treasury here. Citi’s press release is here.)A huge amount of troubled assets backstopped by the government. It’s no wonder that Hank Paulson and other had to cancel the original TARP plan to buy up troubled assets. A Citi alone there are apparently over $300 billion of assets that needed to be backstopped. That’s forty percent of the entire TARP at one bank.The Four Step Backstop. The backstop of the troubled asset portfolio has a four step waterfall for losses.The first $29 billion of losses from the portfolio will be absorbed by Citi entirely.The Treasury Department will take 90 percent of the next $5 billion of losses, with Citi taking the rest.The Federal Deposit Insurance Corporation will step in and take 90 percent of the next $10 billion of losses while Citi absorbs the balance.Losses beyond that will be taken by the Federal Reserve in the 90 percent government role. Note that Citi is still supposed to take the remaining 10 percent at this stage but it’s hard to believe that anyone really thinks Citi would be able to take any more losses once it had written down $40 billion more in this portfolio.Capital Injection. Citi is getting a $20 billion capital injection. This comes on top of the $25 billion it received only a few weeks ago. In exchange, the government is getting preferred equity that wil pay an 8% dividend. The government will also get warrants with its preferred.Citi Pays For Backstop With Preferred. Citi is also being required to pay for that FDIC, Fed and Treasury backstop by issuing an additional $7 billion of preferred stock to the Treasury and the FDIC.Dividend Cut. Citi is barred from paying the common stockholders a dividend exceeding one cent per share for three years.Compensation approval. While the current management has been allowed to remain in place, their compensation must be approved by the Treasury Department.Loan Modification. Citi agreed to participate in the FDIC’s loan modification program, providing direct relief to homeowners burdened with unmanageable mortgages. We kind of thought they were doing this anyway.DIscount Window Stuff. Citi has been provided expanded access to both the Federal Reserve’s Primary Dealer Credit Facility and the discount window. Citi also has access to the yet-unused Federal Reserve’s Commercial Paper Funding Facility and intends to issue debt under the FDIC’s Temporary Liquidity Guarantee Program. All this stuff was already in place, but the government wants us to remember it.Discount window Stuff? LOL – oh so that any future loans, money Citi needs is totally non -transparent to the public? easy access to cover the 300 billion in loses they admit to… what about the other almost 900 billion that have on the books? Citi will go under shortly

Guest • November 24th, 2008 at 7:56 am

How about that saudi prince’s 350 million dollar recent investment? Do you think the SEC will investigate?I used to laugh at a friend of mine who talked about an illuminati bla bla, I don’t laugh at him anymore it’s starring us right in the face. In broad day light the oligarchy/illuminati is laughing at us and daring the American public to do something.Democracy was always a joke people believed in.

Guest • November 24th, 2008 at 7:57 am

Auto Industry – lose the jets and come back with a plan and we might loan you $25BCITI – on top of the $25B we gave you, here’s another $20B and just in case an extra $306B to take care of some of those mistakes that were made – by the way when you head to one of your vacation homes how do you decide which of the fleet of G-5′s you take – most of us here prefer the one with the green interior.

Guest • November 24th, 2008 at 8:00 am

Yves at Naked Capitalism has breached the real core ofthe problem. Finance has become too large a part of the economy and must be paired back. The function of finance is to facilitate commerce. The financial companies have managed to destroy the economy and there is no discussion of paring back their functions to financing production capitalism. Regulations must be put in place to cut back Finance. I think that sooner or later banking will be nationalized just to control a transition to a new more controlled banking in the future. Finance has become cancerous and itsinefficiencies and parasitisms may crash the world economy. Some radical solutions are needed!

Guest • November 24th, 2008 at 8:20 am

And just think-most of this could have been avoided if only our short sighted bought and paid for leaders would have demanded that the greedy bankers reduce the mortgage rate to 3% (still 2% more than what they can borrow at)on the distressed homeowner. And even now when the govt essentially owns more than 50% of the country’s mortgages (Fannie and Freddie), they are still dragging their feet!

MM CA • November 24th, 2008 at 8:22 am

Bank of America and General Electric are next…. lets see we have 8 weekends b4 Obama gets in… These idiots will be working at least 6 of them…Bernanke just admitted he made a mistake on all the toxic mortgages… did’nt Greenspan admit a mistake too that got us in this mess… these guys have got to stop listening to the banksers and wall street – they are trying to coverup thier illegal activities for the last 15 years….this is hilarious:Bank of America (BAC) Shareholders Want Better Deal On Merrill Lynch (MER) (MER, BAC)Henry Blodget | Nov 24, 08 9:15 AMSome Bank of America (BAC) shareholders want the firm to renegotiate its takeover of Merrill Lynch (MER), the Post says…with the aim of paying a lot less for Merrill.Given that BAC’s stock collapse has driven Merrill into the single digits we’re not sure how much of a deal improvement they want. And given that BAC destroyed its own stock price by running out and doing a highly dilutive equity deal shortly after agreeing to buy Merrill, we’re not sure what the logic is. But, in any event…The Post: So far, [only] Proxy Governance Inc., a firm that advises shareholders, has come out in favor of the deal. But recommendations from two other leading proxy firms – RiskMetrics Group and Glass Lewis – are due today.What’s rankled some shareholders is the growing size of the deal spread, or the difference between a company’s stock price and the price the acquiring company has agreed to pay…What’s more, the spread nearly doubled last week, suggesting growing doubts that it will succeed.Opposition has been growing in recent weeks as doubts swell over the price tag the big Charlotte bank has placed on the brokerage firm.Some disgruntled shareholders are seeking the advice of professionals who help battle unwanted mergers, sources tell The Post.

MM CA • November 24th, 2008 at 8:25 am

Memo To Obama, Giethner, Summers, Richardson: Hank and the boys will ensure you have no money left to work with and you wont get it from us, because if we are not working we are not paying taxes…

Guest • November 24th, 2008 at 8:31 am

Shall we call it “Illuminacracy”; a form of government where control of the masses by the elite is best accomplished through economic slavery?!

Guest • November 24th, 2008 at 8:49 am

“Rescue for the few debt slavery for the many”byMichael Hudsonexcellent articlehttp://www.counterpunch.org/hudson10132008.html

Octavio Richetta • November 24th, 2008 at 9:05 am

To the several people asking questions above, this post may provide some of the answers you are looking for.One needs to be smart enough to get out of the way of a speeding freight train. We all know the history of the bailouts to date so I will not bother you with that. After the BS bailout, I covered my shorts that Monday. Then, when it was evident the break in the dam wasn’t plugged, I shorted again financials, emerging markets, RE companies, and others in early April up to a 30% short level(of course too early:-) as it is impossible to time these things to the day, even month).I stayed short until mid-September the morning of the TH Paulson asked for the bazooka, when I covered most of my shorts. Had Paulson done things well back then, the break down we saw in financials and markets in October and November would not have happened, but he fumbled the ball several times. I won’t bother you with the details as you know them well (I have written about it profusely in posts such as a recent one saying Hanky was gone, that he was cleaning his desk and the stream of CR posts from yesterday evening at CR).On BS, LEH, AIG, bailouts the FED/Treasury strategy was different. They were too hangup on the “we must wipeout the shareholders” thing, Which is right from the moral hazard point of view but terrible from the point of view of banks being able to raise private equity.The change of strategy with citi is so obvious that you must be able to see it by yourself: 1. No intent to wipe out shareholders. 2. Things were done smarter than with JPM in which Dimon screwed them with having the FED cover the first 29 billion in losses. Teh FED/Treasury have gotten smarter. Instead, they are now covering the larger losses which are less likely, but this is what is needed to have the market regaining confidence in the markets.Even though the analogy does not work 100% I would like to make an analogy with car insurance. I never buy collision as it is too expensive for the coverage you get. I can insure myself for the loss of a car. However, I do buy the maximum liability coverage which covers my against a catastrophic loss; and on top of that get an umbrella policy that covers me beyond the limits in the liability policy. The FED/Treasury are getting smarter. With BS they bought expensive collision that didn’t do much for them. With citi they are getting liability plus an umbrella policy. Now that the banks have the FULL backing of the US government, The markets may stay down but they will stabilize.I don’t have a crystal ball; I don’t know what the market will do today, and as I said the lows may not be in yet. But, IMO, financials saw a floor last week. I don’t know how long I will stay long financials but conditions are in place for waiting for long time appreciation. The bonanza of the latest neoliberal craze of the new millennium is over but these companies still have a money franchise granted by the government. I do hope their margins will be much lower in the future but even then, their stock prices do not reflect their eventual recovery.As for the overall market, I would not be surprised if it rallies with financials for a while. AS I write, the market is coming down but I would not be surprised to see it close with a few % pts gain as the smart guys realize what is going on.

Guest • November 24th, 2008 at 9:20 am

Problem is now going to be inflation, besides that no one really knows the depths of the whole derivative trading I mean it’s a quadrillion dollar industry. A few hundred billion could be a drop in the bucket no one knows.

Guest • November 24th, 2008 at 9:43 am

The 350 billion dollar bail out they successfully worded to sound like only 20 billion. The cons are getting better and better. Is this surreal at this point can value be restored, what is value?

Guest • November 24th, 2008 at 9:48 am

@Wolf in the Wilds: “What I would like to know is who approved this? How can the American people be pillaged like this? I am very angry at the moment, because clearly, no one is willing to accept that the US financial system is completely (and I mean COMPLETELY) bankrupt. They are willing to let the disease spread to the rest of corporate and healthy America, and to every corner of the globe. I cannot imagine how any other country would accept being destroyed by the incompetence (or corruption) of the US Treasury and the Federal Reserve.”“Too big to fail” means that the same people will keep managing the finances of the world, with profits for themselves through pillage, the gyrations of money growth rates, demolition and ingestion of the competition, government monopoly of the nation’s money, paid propagandists of the controlled media monopoly and academia, and control of the US treasury and finance regulation via a purchased Congress – profits for themselves and with disastrous results for everyone else.Lopez Portillo, President of Mexico, in addressing the Mexican National Congress of Mexico in September, 1982, called the world credit boom of that past decade a financial pestilence akin to the Black Death which swept Europe in the fourteenth century. “As in mediaeval times, it flattens country after country. It is transmitted by rats and it yields unemployment and misery, industrial bankruptcy and enrichment by speculators. The remedy prescribed by faith healers is forced inactivity and depriving the patient of food.”“Forbes Magazine” said of that period on October 11, 1982: “The world gasps for liquidity, not because the supply of money has contracted but because too much of it now goes to pay old debts rather than fund new productive investments.”“The Nation” on December 11, 1982, in commenting on the economic problems, said: “The blame for all this lies at the door of the Federal Reserve System working as usual on behalf of the international banking system.”And who decides who is “too big to fail,” and who is “too small to survive”? Why, the Federal Reserve System and the investment bankers do.

Guest • November 24th, 2008 at 10:07 am

@ RED: “Now that the debt supercycle is coming to an end, it is the Asians that will feel the full wrath of the market, not the US, and here is how it will play out.”Here is one economy replay from Fed history — on Africa. There are others:Can Africa survive Obama’s advisors?Patrick Bond, Durban21 November 2008One of US president-elect Barack Obama’s leading advisers has done more damage to Africa, its economies and its people than anyone I can think of in world history, including even Cecil John Rhodes.That charge may surprise readers, but hear me out.His name is Paul Volcker, and the 82-year-old banker was recommended as “a legend!” to Obama by Austan Goolsbee, his chief economic adviser.Volcker was profiled by the October 21 Wall Street Journal: “The cigar-chomping central banker from 1979 to 1987, he received blame for driving up interest rates and tipping the US into the deepest recession since the Great Depression.”Volcker shockBut why dredge up crimes nearly 30 years old?Because of the awesome financial destruction Volcker imposed, within most Africans’ living memory. His policies stunted the continent’s growth when it most needed internal economic coherence.Even the International Monetary Fund’s (IMF) official history cannot avoid using the famous phrase most associated with the former Reserve Bank chair’s name: “The origins of the debt crisis of the 1980s may be traced back to and through the lurching efforts of the worlds’ governments to cope with the economic instabilities of the 1970s … [including the] monetary contraction in the United States (the ‘Volcker Shock’) that brought a sharp rise in world interest rates and a sustained appreciation of the dollar.”Volcker’s decision to raise rates so high to rid the US economy of inflation and strengthen the fast-falling dollar had special significance in Africa, wrote British academics Sarah Bracking and Graham Harrison: “1979 marked a radical change in global economic policy, inaugurated with the ‘Volcker Shock’ … when the United States suddenly and dramatically raised interest rates, [which] increased the cost of African debt precipitously, since a majority of debt stock was held in dollars.“The majority of the newly independent states had been effectively delivered into at least twenty years of indentured labor. From that point on access to finance became a key policing mechanism directed at African populations.”Journalist Naomi Klein added in her book The Shock Doctrine, “In developing countries carrying heavy debt loads, the Volcker Shock was like a giant Taser gun fired from Washington, sending the developing world into convulsions. Soaring interest rates meant higher interest payments onforeign debts, and often the higher payments could only be met by taking on more loans …“It was after the Volcker Shock that Brazil’s debt exploded, doubling from [US]$50 billion to $100 billion in six years. Many African countries, having borrowed heavily in the seventies, found themselves in similar straits: Nigeria’s debt in the same short time period went from $9 billion to $29 billion.”According to University of California economic geographer Gillian Hart… For the REST OF THE STORY:http://www.greenleft.org.au/2008/776/39995

Guest • November 24th, 2008 at 10:10 am

Absolutely I’ll eat my words. I *want* Obama to succeed – truly. But there’s NO WAY he’s going to be able to make good on his promises. I studied public policy in graduate school, and these policies he puts forth are, as someone else mentioned, completely unsustainable. He may get things through Congress, and he may even put new programs into play, but they will only be trojan horses – like Medicaid and Social Security (two suicidal policy programs that Americans cheer for).I pray every night that this nation will find a leader that can deliver us from the mess we find ourselves in. I don’t care who it is – Bush, Obama, Winnie-the-Pooh. But KJ’s words, while as inspiring as BHO’s, are just as empty when the words meet the (electronic) paper.Rhetoric is not a substitute for reality.

Guest • November 24th, 2008 at 10:22 am

“learning how to get things done in Washington…”ummm, isn’t that the problem, SWK? That these people know how to get things done in Washington? Because the way you get things done in Washington is what led us to where we are, so continuing to do things that way will get us… well, you know where I’m headed.Only the most loyal Obamatons can close their eyes to what’s happening right now. This isn’t change – it’s anti-change. Oh, and it would be easier to “give the guy a chance to get sworn in first” if he would quit trying to push policies before he even has the authority to put any of them into play…

Morbid • November 24th, 2008 at 10:29 am

Ron Paul’s CourageContrary to the “bail, always bail” mentality of Washington there is one man who cries out like a voice in the wilderness. He says, “pay, always pay” for sins made. Congress has relinquished its duty and are letting non-elected Fed’s run the country! This is not the US Constitutional process! We are hoplessly doomed…The Austrians Were RightAlso seeRon Paul Archive

Guest • November 24th, 2008 at 10:30 am

Ron Paul is as eloquent and inspiring as Barack Obama, but has the added bonus of ideas that are empowering, substantive, and possible (it would be much easier – and more productive – to abolish the Fed than it will be to nationalize the health care system).

kilgores • November 24th, 2008 at 10:30 am

So what was the alternative? Mr. Volker was the Chairman of the Federal Reserve Board, and his primary allegiance was to the United States. His actions were not taken for the purpose of causing damage to the economies of other states, but to resolve a serious problem with the economy of the United States. If there had been a remedy for this country’s problems that would have been every bit as effective but would have caused less adverse consequences for other states, surely he would have implemented such actions instead.I have a real problem referring to anything Paul Volker did as Fed Chairman as a “crime.” That’s just inflammatory gobbledegook as far as I’m concerned.SWK

PeteCA • November 24th, 2008 at 10:45 am

Prof Roubini: One bad outcome of “stag-deflation” is simply an inflationary depression. That is one possibility for the USA.For a discussion of various outcomes along these lines, readers should see Mr Chapman’s charts at this link:http://www.321gold.com/editorials/chapman_d/chapman_d_112408.htmlNote particularly the 1′st chart in the article – which comes directly from Fed data. The US monetary base has exploded recently, in a way never seen before. Although some would say that this is the Fed saving the US banking system (that’s true), I would argue for a more basic interpretation. What this chart clearly shows is a COMPLETE FAILURE of the monetary policies of the United States. If any central bank (in this case it happens to be the Fed) has to resort to these kinds of measures to prop up the country’s banking system … then we have a complete failure of the long-term financial and monetary policies. Nothing more or less.Mr Obama needs to recognize this. At this stage the only thing that will set US policies straight is a complete re-vamping of our financial and banking system. The Fed’s role needs serious re-examination – and cross-examination. The Fed’s interaaction with the Prime Brokers needs to be completely re-thought and properly regulated (assuming there’s agreement that we even continue with the Fed). The current system amounts to nothing more than high-level corruption and pandering. If the new administration does NOT deal with this immediately, the USA is on its way to currency collapse and long-term economic turmoil.A check on the ABX indices today shows a new and drmatic drop in MBS values during November of 2008. This means that all those crummy (toxic) assets that the Fed has absorbed – have now sunk to even lower values. To a greater and greater extent, this toxic garbage (plus future printing of dollars by the US Gov’t) is a large part of the collateral that is backing the US currency. A very sad state of affairs.PeteCA

Guest • November 24th, 2008 at 10:46 am

What Barack Obama Needs to Know About Tim Geithner, the AIG Fiasco and CitigroupEmail PrintShareDelicious Digg Facebook reddit Technorati Chris Whalen | Nov 24, 2008On Friday, the FDIC closed and facilitated the sale of two CA savings banks, Downey Savings and Loan, the bank unit of Downey Financial Corp (NYSE:DSL) and PFF Bank and Trust, Pomona, CA. All deposit accounts and all loans of both banks have been transferred to U.S. Bank, NA, lead bank unit of US Bancorp (NYSE:USB). All former Downey and PFF Bank branches reopen for business today as branches of U.S. Bank.Earlier this year we wrote positively about Downey and the funding advantages it had over larger thrifts such as Washington Mutual due to the solid deposit base and strong capital. Indeed, as of Q3 2008, the bank’s Tier One leverage ratio was over 7.5%, more than two points over the minimum, and its charge offs had actually fallen compared with the gruesome 400 basis points of default reported in the previous period.But since the September resolution of WaMu and Wachovia, the FDIC, it seems, is not willing to wait to resolve institutions, even banks that are apparently solvent and not below any of the traditional regulatory triggers for closure. The visible public metrics indicating soundness did not dissuade the Office of Thrift Supervision and FDIC from seizing both banks and selling them to USB.The purchase of Downey and PFF is good news for the depositors and borrowers, who will all be offered the FDIC’s prepackaged IndyMac mortgage modification program as a condition of the USB acquisition. Bad news for the investors and creditors, who now see their already impaired investments wiped out.The resolution of Downey illustrates both the best and the worst aspects of the government’s remediation efforts. On the one hand, we have argued that the government should be pushing bad banks into the arms of stronger banks to improve the overall condition of the system. The good people at the FDIC do that very well – when politics does not intervene.In the case of Downey and PFF, it appears that the OTS and FDIC projected forward from the current above-peer loss rates and concluded that a prompt resolution was required. Reasonable people can argue whether this is the right call. But when we see the equity and debt holders of DSL, Washington Mutual or Lehman Brothers taking a total loss, we have to ask a basic question: why is it that the debt holders of Bear Stearns and AIG (NYSE:AIG) are granted salvation by the Federal Reserve Board and the US Treasury, but other investors are not?If the rule of driving money to the strong banks (see “View from the Top: A Prime Solution to the US Banking Crisis”) safety and soundness is to be effective, it must be applied to all. And now you know why we have questions about the nomination of Tim Geithner to be the next Treasury Secretary.If you look at how the Fed and Treasury have handled the bailouts of Bear Stearns and AIG, a reasonable conclusion might be that the Paulson/Geithner model of political economy is rule by plutocrat. Facilitate a Fed bailout of the speculative elements of the financial world and their sponsors among the larger derivatives dealer banks, but leave the real economy to deal with the crisis via bankruptcy and liquidation. Thus Lehman, WaMu, Wachovia and Downey shareholders and creditors get the axe, but the bondholders and institutional counterparties of Bear and AIG do not.Few observers outside Wall Street understand that the hundreds of billions of dollars pumped into AIG by the Fed of NY and Treasury, funds used to keep the creditors from a default, has been used to fund the payout at face value of credit default swap contracts or “CDS,” insurance written by AIG against senior traunches of collateralized debt obligations or “CDOs.” The Paulson/Geithner model for dealing with troubled financial institutions such as AIG with net unfunded obligations to pay CDS contracts seems to be to simply provide the needed liquidity and hope for the best. Fed and AIG officials have even been attempting to purchase the CDOs insured by AIG in an attempt to tear up the CDS contracts. But these efforts only focus on a small part of AIG’s CDS book.The Paulson/Geithner bailout model as manifest by the AIG situation is untenable and illustrates why President-elect Obama badly needs a new face at Treasury. A face with real financial credentials, somebody like Fannie Mae CEO Herb Allison. A banker with real world transactional experience, somebody who will know precisely how to deal with the last bubble that needs to be lanced – CDS.Last Thursday, we gave a presentation to the New York Chapter of the Risk Management Association regarding the US banking sector and the long-term issues facing same. You can read a copy of the slides by clicking here.As part of the presentation (Page 17-21), IRA co-founder Chris Whalen argued the case made by a reader of The IRA a week before (see “New Hope for Financial Economics: Interview with Bill Janeway,”) that until we rid the markets of CDS, there will be no restoring investor confidence in financial institutions. Here is how we presented the situation to about 200 finance and risk professionals in the auditorium of JPM last week. Of note, nobody in the audience argued.1) Start with the $50 trillion or so in extant CDS.2) Assume that as default rates for all types of collateral rise over next 24-36 months, 40% of the $50 trillion in CDS goes into the money. That is $20 trillion gross notional of CDS which must be funded.3) Now assume a 25% recovery rate against that portion of all CDS that goes into the money.4) That leaves you with a $15 trillion net amount that must be paid by providers of protection in CDS. And remember, a 40% in the money assumption for CDS is VERY conservative. The rise in loss rates for all type of collateral over the next 24 months could easily make the portion of CDS in the money grow to more like 60-70%. That is $40 plus trillion in notional payments vs. a recovery rate in single digits.Q: Does anybody really believe that the global central banks and the politicians that stand behind them are going to provide the liquidity to fund $15 trillion or more in CDS payouts? Remember, only a small portion of these positions are actually hedging exposure in the form of the underlying securities. The rest are speculative, in some cases 10, 20 of 30 times the underlying basis. Yet the position taken by Treasury Secretary Paulson and implemented by Tim Geithner (and the Fed Board in Washington, to be fair) is that these leveraged wagers should be paid in full.Our answer to this cowardly view is that AIG needs to be put into bankruptcy. As we wrote on TheBigPicture over the weekend, we’ll take our queue from NY State Insurance Commissioner Eric Dinalo and stipulate that we pay true hedge positions at face value, but the specs get pennies on the dollar of the face of CDS. And the specs should take the pennies gratefully and run before the crowd of angry citizens with the torches and pitchforks catch up to them.President-elect Obama and the American people have a choice: embrace financial sanity and safety and soundness by deflating the last, biggest speculative bubble using the time-tested mechanism of insolvency. Or we can muddle along for the next decade or more, using the Paulson/Geithner model of financial rescue for the AIG CDS Ponzi scheme and embrace the Japanese model of economic stagnation.And, yes, we can put AIG and the other providers of protection through a bankruptcy and force the CDS market into a quick and final extinction. Remember, when AIG goes bankrupt the insurance units are taken over by NY, WI and put into statutory receiverships. Only the rancid CDS positions and financial engineering unit of AIG end up in bankruptcy. And fortunately we have a fine example of just how to do it in the bankruptcy of Lehman Brothers.Our friends at Katten Muchin Rosenman in Chicago wrote last week in their excellent Client Advisory: “On November 13, 2008, Lehman Brothers Holdings Inc. and its U.S. affiliates in bankruptcy, including Lehman Brothers Special Financing and Lehman Brothers Commercial Paper (collectively, “Lehman”) filed a motion asking that certain expedited procedures be put in place to allow Lehman to assume, assign or terminate the thousands of executory derivative contracts to which they are a party. If Lehman’s motion is granted, counterparties to transactions that have not been terminated will have very little time to react and will likely find themselves with new counterparties and no further recourse to Lehman because, by assigning contracts to third parties, Lehman will effectively receive, by normal operation of the Bankruptcy Code, a novation.”The bankruptcy court process also allows for parties to terminate or “rip up” CDS contracts, something that has also been fully enabled by the DTCC. The bankruptcy can dispose and the DTCC will confirm.BTW, while you folks in the Big Media churned out hundreds of thousands of words last week waxing euphoric about the prospect for enhanced back office clearing of CDS contracts, the real issue is the festering credit situation in the front office. Truth is that the DTCC and the other dealers, working at the behest of Mr. Geithner, Gerry Corrigan and many others, have largely fixed the operational issues dogging the CDS markets. The danger of CDS is not a systemic blowup – though that will come soon enough. It is the normal operation of the now electronically enabled CDS market wherein lies the threat to the entire global financial system, this via the huge drain in liquidity illustrated above as CDS contracts are triggered by default events.The only way to deal with this ridiculous Ponzi scheme is bankruptcy. The way to start that healing process, in our view, is by the Fed emulating the FDIC’s treatment of DSL, withdrawing financial support for AIG and pushing the company into the arms of the bankruptcy court. The eager buyers for the AIG insurance units, cleansed of liability via a receivership, will stretch around the block.By embracing Geithner, President-elect Barack Obama is endorsing the ill-advised scheme to support AIG directed by Hank Paulson et al at Goldman Sachs and executed by Tim Geithner and Ben Bernanke. News reports have already documented the ties between GS and AIG, and the backroom machinations by Paulson to get the deal done. This scheme to stay AIG’s resolution cannot possibly work and when it does collapse, Barak Obama and his administration will wear the blame due through their endorsement of Tim Geithner.The bailout of AIG represents the last desperate rearguard action by the CDS dealers and the happy squirrels at ISDA, the keepers of the flame of Wall Street financial engineering. Hopefully somebody will pull President-elect Obama aside and give him the facts on this mess before reality bites us all in the collective arse with, say, a bankruptcy filing by GM (NYSE:GM).You see, there are trillions of dollars in outstanding CDS contracts for the Big Three automakers, their suppliers and financing vehicles. A filing by GM is not only going to put the real economy into cardiac arrest but will also start a chain reaction meltdown in the CDS markets as other automakers, vendors and finance units like GMAC are also sucked into the quicksand of bankruptcy. You knew when the vendor insurers pulled back from GM a few weeks ago that the jig was up.And many of these CDS contracts were written two, three and four years ago, at annual spreads and upfront fees far smaller than the 90 plus percent payouts that will likely be required upon a GM default. That’s the dirty little secret we peripherally discussed in our interview last week with Bill Janeway, namely that most of these CDS contracts were never priced correctly to reflect the true probability of default. In a true insurance market with capital and reserve requirements, the spreads on CDS would be multiples of those demanded today for such highly correlated risks. Or to put it in fair value accounting terms, pricing CDS vs. the current yield on the underlying basis is a fool’s game. Truth is not beauty, price is not value.If you assume a recovery value of say 20% against all of the CDS tied to the auto industry, directly and indirectly, that is a really big number. The spreads on GM today suggest recovery rates in single digits, making the potential cash payout on the CDS even larger.As Bloomberg News reported in August: “A default by one of the automakers would trigger writedowns and losses in the $1.2 trillion market for collateralized debt obligations that pool derivatives linked to corporate debt… Credit-default swaps on GM and Ford were included in more than 80 percent of CDOs created before they lost their investment-grade debt rankings in 2005, according to data compiled by Standard & Poor’s.”At some point, Washington is going to be forced to accept that bankruptcy and liquidation, the harsh medicine used with other financial insolvencies, are the best ways to deal with the last, greatest bubble, namely the CDS market. When the end comes, it will effect some of the largest financial institutions in the world, chief among them Citigroup (NYSE:C), JPMorganChase (NYSE:JPM), GS and MS, as well as some large Euroland banks.The impending blowback from a CDS unwind at less than face amount is one of the reasons that the financial markets have been pummeling the equity values of the larger banks last week. Any bank with a large derivatives trading book is likely to be mortally wounded as the CDS markets finally collapse. We don’t see problems with interest rate or currency contracts, by the way, only the great CDS Ponzi scheme is at issue – hopefully, if authorities around the world act with purpose on rendering extinct CDS contracts as they exist today. Call it a Christmas present to the entire world.Indeed, as this issue of The IRA goes to press, news reports indicate that C is in talks with the Treasury for further financial support under the TARP, including a “bad bank” option to offload assets. A bad bank approach may be a good model for applying the principle of receivership to the too-big-too fail mega institutions, but the cost is government control of these banks.Q: Does a “bad bank” bailout for C by Treasury and FDIC qualify as a default under the ISDA protocols!?We’ve been predicting that Treasury will eventually be in charge of C. On the day the government formally takes control, we say that Treasury should and hire FDIC to start selling branches and assets. Thus does the liquidation continue and we get closer to the bottom of the great unwind. Stay tuned.

MM CA • November 24th, 2008 at 10:49 am

More Goldman incest on the wayShould Geithner become Treasury secretary, Dudley, the New York Fed’s executive vice president for markets, may serve as interim president, Gramley said.Dudley, 55, former chief U.S. economist at Goldman Sachs Group Inc., worked with Geithner on conceiving and operating the special lending programs. He joined the New York Fed in January 2007 after two decades at Goldman and is in charge of the central bank’s trading with Wall Street bond dealers.

Guest • November 24th, 2008 at 10:50 am

With or without the typing erros I like your approach.I especially like that you highlight the one problem that Mr. Rounini never adresses: how is this crisis connected to the globalisation scheme?Globalisation is at the root of all this – run away trade deficits – that will keep occurring as long as no effort is done to create a mutual understanding of and agreement upon currency policies and monetary policies among the countries participating in globalisation.And, as you point out, as long as the chinese worker is paid $50 a week and chinese companies have no obligations what so ever regarding environment, pensiions and health care, China will continue to run huge trade surplusses.China should understand that it needs to develop into a country where the chinese can afford the goods that they produce – otherwise the globalisation scheme is going to end in a global disaster.Professor Roubini, tell us your wiew on the role of globalisation in the mess.

kilgores • November 24th, 2008 at 10:59 am

I understand what you are saying. My point, though, was that “change” was Jimmy Carter’s campaign mantra, too. Like Barack Obama, I think he meant to bring about real, substantive change. Mr. Carter, however, populated his cabinet with his so-called “Georgia Mafia” of outsiders who, while capable and intelligent, did not understand the political realities of Washington, and that set the entire administration back initially, and arguably, through the end of Mr. Carter’s single term as President. Piss and vinegar is no substitute for political savvy.Mr. Obama, by contrast, appears to recognize that he needs some experienced Washington players on his side if he is to be successful in implementing the changes he wants to make. The fact that he has pulled in Clinton folks and other Washington insiders to assist him doesn’t mean he doesn’t intend to bring about real change. It only means he’s completely realistic about how to make that sort of change happen, and it’s not just by projecting an image of change for popular consumption through appointing unknown Washington outsiders, however competent they may be, to his administration.SWK

Guest • November 24th, 2008 at 10:59 am

If you look at it theoretically – you can definitely print enough money to create inflation despite the economic decline – this is what they generally do, but the past situations are not as big. IMO this is the only way out for the govt – inflating the currency supports the Real estate values and decreases defaults and the expense of keeping the banks solvent. The question is whether they will put enough in to make it happen – they are already in for 7.4 Trillion – I think that creating the inflation, eventually, is the only way out for them.

MR • November 24th, 2008 at 11:09 am

What’s the difference between the credit bubbles in Scandanavia and the current one into USA, CHRIS DAVIS on 2008-11-24 06:07:52 , said that it is the same thing so the same solutions can be used. Is he right ?

Guest • November 24th, 2008 at 11:10 am

@ Guest: “The Nation” on December 11, 1982, in commenting on the economic problems, said: “The blame for all this lies at the door of the Federal Reserve System working as usual on behalf of the international banking system.”This is not 1980. This is bailout mania that everybody sees. This is electing what everybody thought was a leftist who was going to represent the underdog and fix the dominance of the ruling class — you know, what a leftist does.There is going to be disappointment and anger like you’ve never seen before.And, today, you know what the media is saying? Obama may have to back off eliminating the Bush tax cuts to the wealthy until 2011. Do you know what 2011 is? It is the Republican resurgent Congress. Too bad. Tax payers won’t get the wealthy back on the tax rolls, will they? You think that wasn’t in the plan all along? The Obama transition team hasn’t found out anything in the past week it didn’t know a month ago, has it?All which prompted John Boehner, the Minority Leader in the House, to say yesterday, “Why wouldn’t we have the President-elect say, ‘I am not going to raise taxes on any American in my first two years in office?’” Yeah. Why wouldn’t we?Already, the calls are coming into the progressive radio stations: Said one caller this morning: I really like Obama’s appointment choices. But you know what? I’m really worried about his economic choices. Because you know what? These look like the same people who brought us here…You think Obama’s smart? Guess who’s going to run his economic team? Larry Summers — the cherry on top of the cow patty. The Tim and Larry Show! Barron’s this morning said it all. To Barron’s, TG is a very good choice for treasury secretary. Why? Well, says Barron’s, he’s been on the ground working with these bailout programs: what better person to have to direct these programs in the future?

kilgores • November 24th, 2008 at 11:15 am

Come on, yourself. There are plenty of legitimate reasons to criticize this country and its policies. What I object to is shallow criticism coupled with a dearth of analysis as to constructive alternatives.Anybody with a mouth can grouse, but it takes someone willing to use their brain to go the extra mile and propose constructive solutions to serious problems. Patrick Bond’s piece fails to rise to this standard.SWK

kilgores • November 24th, 2008 at 11:20 am

These aren’t privations, but certainly could be indicative of increased pain in Japanese society. Pain will happen whether there is a deep, possibly short, downturn or a more protracted, arguably less deep downturn. The question remains, however, whether the pain suffered in each scenario will be equal, or is one scenario preferable to the other in terms of mitigating the human suffering that will occur in either event.SWK

ptm • November 24th, 2008 at 11:24 am

Deflation is a prediction, not a reality. We are still in an inflationary period. Lower home and oil prices have not eliminated inflation.In addition to Chapman’s piece, Williams, over the weekend, pointed out that the monetary base annual growth is now at 75.5%!Do not forget the additional hundreds of billions promised to Citi over the weekend. The automakers will also be receiving 10′s of billions. Oh, and Obama’s new million-job public works program? More hundreds of billions?Any reasonable person has to see this monetary policy leading to more and more inflation.

Guest • November 24th, 2008 at 11:34 am

We are the weekday men, waiting for the market to open, pretending there’s an honest equity market after the Fed and Treasury develop their bailout deals on Sunday.So many Sunday deals in past months, so many bailouts, so many Monday mornings waiting to watch our money make Wall Street happy once again. We are the weekday men: they are the Sunday men.We are the hollow menWe are the stuffed menLeaning togetherHeadpiece filled with straw. Alas!“The Hollow Men” T.S. Eliot

Guest • November 24th, 2008 at 11:36 am

From 1929-1933 the US was caught in deflation and this was the core of the great depression. Over these four years, the money supply declined, causing the dollar to rise 22% in value over those four years.What happens in deflations are that the central bank loses control of the money supply – it cannot increase it because money are not circulation – everybody’s waiting for the prices to frop further.This is why the immediate cure suggested is dropping money on the economy – but the problem is: how do you get that money into circulation when people sit tight waiting for the next cut in prices?How do you get people to invest in businesses when the money they need to borrow will increase in value during the period of the loan? And why would anyone create a business in a deflationary scenario?

MM CA • November 24th, 2008 at 11:39 am

Obama and his promises are full of rhetoric… his Team is more of the same… not one of them know what to do because they won’t address the the fundamental issues, that is the banks, financial firms and Fed reserve are all corrupt or at a minimum stupid. They need to clean house at the top levels of all three segments…. Again Obama is left with a piggy bank with nothing in it and now way to pay for anything… and the printing presses are overheating and will be broke by the time he gets in.. I feel sorry for him and all of us!!!!!!!!

Guest • November 24th, 2008 at 11:44 am

.sorry for the long post and choppy editing but the original is long and available……..Congress Should Bail Out of the BailoutRescue for the Few, Debt Slavery for the ManyBy MICHAEL HUDSONWe are now entering the financial End Time. …..The public media call this a panic, but there is nothing irrational about it. Who in their right mind would buy securities or buy into a bank without knowing what the securities were worth? Faith in junk mathematical models has ended..So we still await a public response to the problem of how to write down debts. Whose economic interest will have to give: that of debtors, as increasingly has been the case over the past eight centuries; or that of creditors, which have fought back to create a neoliberal economy controlled by the FIRE sector?It is not too late to decide which road to take, but Wall Street bankers and creditors have taken the lead in positioning themselves. Seeing which way the political winds were blowing, they moved to empty out the Treasury before the November 3 elections much like medieval citizens fleeing a horde of Mongolian raiders under Genghis Khan. “We’re moving. Clean out the cupboards,” much as Lehman Brothers emptied out their foreign bank accounts in Britain and elsewhere just before declaring bankruptcy, taking what they could and steering it to their best friends.The pretense was that a bailout was needed to restore confidence. But the ensuing week showed that the claims were false. It didn’t turn the stock market around as promised. The Dow Jones Industrial Average fell 2,200 points from Wednesday, October 1 through the following Friday October 10 – eight straight trading days, not even pausing for the usual zigzags. Friday’s plunge was 100 points a minute for the first seven minutes – a 690 point drop to under 8000. Each 100 points was more than a 1 percent drop, which was reflected on the NASDAQ. Nothing could withstand the pressure of so many Americans cashing in their mutual funds overnight and so many foreigners in earlier time zones putting in sell-at-market orders.Short sellers made one of the largest and quickest fortunes ever, and then covered their positions by buying back the stocks they had pre-sold. This pushed prices up even into positive territory just before 10:30 AM when George Bush began to speak. Half the financial stocks showed gains – a sign that the Plunge Protection Team had jumped in. But Mr. Bush said nothing helpful and stocks went back into freefall, ending down another 128 points despite the upcoming weekend G7 meeting. There was no talk at all of reducing debt levels – only of giving more money to banks, insurance companies and other money managers, as if “pushing on a string” somehow would lead them to lend yet more to an already debt-ridden economy.If Congress really wanted to restore confidence, here’s what it might have done: First, mark to market, not to model. Investors no longer believe America’s Enron-style accounting, debt rating agencies or monoline risk insurers. They don’t trust U.S. banks to be honest about their financial positions. They worry about the fraud charges brought by attorneys general in eleven states against predatory lenders such as Countrywide and Wachovia that Citibank, JPMorgan Chase and Bank of America were so eager to buy.The “Reality Problem”What did the “free market” theory underlying the giveaway leave out of account? For starters, “the monetary system” turns out to be a euphemism for the fortunes of financial gamblers using junk mathematics (the Merton-Scholes derivatives formula) based on junk economics (blessed with Nobel Prizes) to buy, speculate and even to insure junk mortgages, junk bonds and junk commercial paper and derivatives based on their relative prices. So what is left out first of all was full knowledge of the value of what is being bought and sold. Mark-to-market models leave the price up to the investment bankers. If trust existed and there really was honor among these thieves, a government bailout would not be necessary, because “the market” could clear…Making banks and insurers in the zero-sum derivative game whole, so that winners can collect their bets while losers can sell their bad investments to the Treasury, is supposed to re-inflate the credit pyramid. The idea is to solve the debt problem with yet more debt to prop up housing prices once again to unaffordable levels! This is not a long-term solution, but it would give insiders enough time to arrange a do-over and get out of the game more quickly, to sell out their junk mortgages and junk bonds to the proverbial “greater fool” – in this case, the “greater fool of last resort,” the U.S. Treasury, as long as it can be run by Mr. Paulson or, under Mr. Obama, perhaps the former Goldman-Sachs official Robert Rubin…The banks are to “earn” their way out of their negative equity position by selling more of their product – credit – to increase the economy’s debt levels and hence receive more interest payments. The problem is that most families are already “loaned up.” They have no more discretionary income to pledge to carry more debt. Without writing down their debts, there will be no fresh lending, and hence no source of credit and purchasing power for new autos, appliances, goods and services in general. Debt deflation is being imposed on the “real” economy. Creditors and speculators alone are to be made whole…The budget deficit will soar, without any prosecution of tax evasion scams by UBS or KPMG. Instead of a fiscal or regulatory comet driving these dinosaurs to extinction, the climate has turned more conducive to their proliferation. Our Age of Deception is to be locked in even more tightly. The Congressional bailout’s suspension of mark-to-market rules to rely on Wall Street’s “self-regulation” should win a prize for Oxymoron of 2008 as investors have no clue as to what financial assets are worth. No wonder lending has dried up, especially to banks themselves…Today we can see the debt-fueled bubble of asset-price inflation that Alan Greenspan trumpeted as real wealth creation for what it really is – credit creation to bid up real estate, stock market and packaged-debt prices. Tangible capital formation has been left out of account, as if postindustrial economies no longer need it…….

Mark • November 24th, 2008 at 11:47 am

The U.S. government is committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth.BUBBLE!Ever hear a doctor tell a patient that he/she has vigorous/robust cancer?We’ve had all this folks, it’s how we got to be in this mess. Growth is dead!

ex VRWC • November 24th, 2008 at 11:47 am

Your argument bold down to: The world will come, hat in hand, to the US because it is the world’s biggest consumer and therefore they come to us so we can consume. Therefore we will prevail in the end.This seems awfully short sighted. Being the ultimate consumer is no basis for national strength

Guest • November 24th, 2008 at 11:59 am

As you write Benjamin Strong was the FED – and he died in 1928. His successor had no clue as how to manage the money supply, according to the Cambridge scholar Niall Ferguson in this very comprehensive work ‘The Cash Nexus’. Mr. ferguson strongly suggests that the FED was the single most negative factor in the the great depression, repeastedlt doing the wrong thing at the wrong time.

ex VRWC • November 24th, 2008 at 12:03 pm

Exactly. We have no nationalized health care. We have been told it is too expensive. We have a weak social safety net. We have been told it is too expensive. On and on. Then, all of a sudden, we double and triple the debt and the Fed balance sheet to hand it out to Wall St. Its as simple as that.

Guest • November 24th, 2008 at 12:04 pm

Bourning, thank you for this post. Prof. Roubini never comments on the globalisation – it is at the root of this crisis and no matter how you try to fix US economy, you have to determine your tools and the effects in a global perspective.

Guest • November 24th, 2008 at 12:24 pm

Creating 2.5 million jobs has morphed to creating and saving 2.5 million jobs – Obama’s speech today:

Further, beyond any immediate actions we may take, we need a recovery plan for both Wall Street and Main Street – a plan that stabilizes our financial system and gets credit flowing again, while at the same time addressing our growing foreclosure crisis, helping our struggling auto industry, and creating and saving 2.5 million jobs – jobs rebuilding our crumbling roads and bridges, modernizing our schools, and creating the clean energy infrastructure of the twenty-first century. Because at this moment, we must both restore confidence in our markets – and restore the confidence of middle class families, who find themselves working harder, earning less, and falling further and further behind.

maybe he just mis-spoke or perhaps was having a freudian monmentFull Text of Obama’s speech (November 24)

Mark • November 24th, 2008 at 12:35 pm

Was the rest of the world experiencing financial meltdown? Had BRIC been overheated then? Was resource depletion the same or greater than now?

Guest • November 24th, 2008 at 12:37 pm

Hey that’s an improvement, could have been; creating 2.5 million McJobs at the cost of 5 million real jobs.His transition team is going to provide fresh thinking and bold new ideas.cough..bs..cough

Guest • November 24th, 2008 at 12:37 pm

Very well said: I would add in more simple terms some starting points for a solution: no more mega corporations, total transparency, incorruptible regulators and personal liability meaning if the people at the top are found responsible for their misdeeds, then seize all of their assets and imprison them, just like they do to the petty thief who steals $50 from a 7/11 in order to eat! Will we ever have equality and justice for all?!

Guest • November 24th, 2008 at 12:39 pm

I very most agree with you that decentralizing in food production would be a great idea in many ways.I live in Denmark, a ridiculously small Scandinavian country with some 5.5 mio inhabitants. Farming was the traditional way of living until the fifties of last century. Farming is still a major exporting sector here.Now – the farming industry met in a 48 hour marathon gimmick meeting to set up the future for Danish farming in the light of the assumed Global WarmingTheir suggestion: concentrate all animals for food production at one giant ‘plant’ in order to utilize the manure for energy purposes.Expect this type of idea to occur around the developed world – fight it!

Guest • November 24th, 2008 at 12:44 pm

Macy’s, who has always banked on the “joy of giving and/or receiving” at this joyous time of cha-ching, begins the season today (the word Christmas’s no longer a no-no word at Macy’s but still’s a hush-hush), with the unveiling of its magical window display theme for shoppers in Macy’s New York: BELIEVE.Not to be outdone by Macy’s magic, the investment bankers who usually greet the season with a ringing BUY, in keeping with this year’s more somber holiday tone, leave this bankers’ wish for all Americans and Congress as they depart for the warmer climes of Dubai and their high rises: GIVE.

OR • November 24th, 2008 at 12:45 pm

I do not agree with Krugman’s three liner post, nor the link to he provides. But the is just my opinion. I am not an economist; perhaps I am wrong but I think the bailout was cleverly designed. On Pandit, I don’t see why he has to go. Is it because he is a Hindu who is not part of the club? His credentials seem impeccable.http://en.wikipedia.org/wiki/Vikram_Pandit

Guest • November 24th, 2008 at 12:48 pm

Quite so – the catch phrase ‘the lost decade’ is repeatedly used about Japan’s economy during the 90ties but I fail to see the big problem. High employment, exporting high quality technology goods … but without any growth.This thing is all about growth …

MR • November 24th, 2008 at 12:58 pm

No, i agree, nordic economic is far smaller but there must be a lot of more differences, anybody could please point me then ? Or at least where can i check these to have some references ?

AfA • November 24th, 2008 at 1:16 pm

Here is a link:http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html?em“Sweden spent 4 percent of its gross domestic product…to rescue ailing banks. That is slightly less, proportionate to the national economy, than the $700 billion, or roughly 5 percent of gross domestic product, that the Bush administration estimates its own move will cost in the United States.”As you must know, the US has spent about $4T so far, and we seem far from a bottom.The US politicians would never have the guts to go down the same way Sweden did to solve their banking crisis.

Guest • November 24th, 2008 at 1:17 pm

7.4 trillion – isn’t that enough for a “stimulus” check for around 35-70k per taxpayer based on what the previous one was? can someone do some math on that.

Octavio Richetta • November 24th, 2008 at 1:20 pm

Cleverly designed to achieve the objectives in the FED press release I posted above with bold highlights. These guys are not hiding anything. They are clearly stating what is it that they are trying to achieve. You may not like it, but assuming that you and I want to see the US economy dig its way out of the whole, this is what needed to be done.http://finance.yahoo.com/tech-ticker/article/134277/Citigroup-Rescue-Raw-Deal-for-Taxpayers-But-It-Had-to-Be-Done?tickers=C,BAC,JPM,XLF,%5EDJI,%5EGSPCMake no mistake Laissez-faire neo-liberal capitalism is dead but other forms of capitalism are not. A gentler form of capitalism will reemerge in the US. And, IMO, this will be for the good of the country.

AfA • November 24th, 2008 at 1:23 pm

Let’s hope that won’t morph into just saving the last 2.5 million jobs … left.But maybe what he meant by “creating and saving” is that the jobs will be permanent not just temporary ones: they can always create a one time 2.5 million jobs, but the idea is to make these jobs last.

Guest • November 24th, 2008 at 1:31 pm

Nov. 24 (Bloomberg) — The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months agohttp://www.bloomberg.com/apps/news?pid=20601009&sid=an3k2rZMNgDw&refer=bond

Pausch • November 24th, 2008 at 1:38 pm

Gentler? Hope so, but it’s looking like one butt ugly baby right now, but that’s no surprise, considering it’s parents.

Guest • November 24th, 2008 at 1:41 pm

These lines from the Chris Whalen post above, “What Barack Obama Needs to Know About Tim Geithner, the AIG Fiasco and Citigroup,” IMHO, bear repeating:If the rule of driving money to the strong banks (see “View from the Top: A Prime Solution to the US Banking Crisis”) safety and soundness is to be effective, it must be applied to all. And now you know why we have questions about the nomination of Tim Geithner to be the next Treasury Secretary.If you look at how the Fed and Treasury have handled the bailouts of Bear Stearns and AIG, a reasonable conclusion might be that the Paulson/Geithner model of political economy is rule by plutocrat.Facilitate a Fed bailout of the speculative elements of the financial world and their sponsors among the larger derivatives dealer banks, but leave the real economy to deal with the crisis via bankruptcy and liquidation. Thus Lehman, WaMu, Wachovia and Downey shareholders and creditors get the axe, but the bondholders and institutional counterparties of Bear and AIG do not.Few observers outside Wall Street understand that the hundreds of billions of dollars pumped into AIG by the Fed of NY and Treasury, funds used to keep the creditors from a default, has been used to fund the payout at face value of credit default swap contracts or “CDS,” insurance written by AIG against senior traunches of collateralized debt obligations or “CDOs.” The Paulson/Geithner model for dealing with troubled financial institutions such as AIG with net unfunded obligations to pay CDS contracts seems to be to simply provide the needed liquidity and hope for the best. Fed and AIG officials have even been attempting to purchase the CDOs insured by AIG in an attempt to tear up the CDS contracts. But these efforts only focus on a small part of AIG’s CDS book.The Paulson/Geithner bailout model as manifest by the AIG situation is untenable and illustrates why President-elect Obama badly needs a new face at Treasury….President-elect Obama and the American people have a choice: embrace financial sanity and safety and soundness by deflating the last, biggest speculative bubble using the time-tested mechanism of insolvency. Or we can muddle along for the next decade or more, using the Paulson/Geithner model of financial rescue for the AIG CDS Ponzi scheme and embrace the Japanese model of economic stagnation.

Guest • November 24th, 2008 at 1:46 pm

that would be creating and keeping. I know it’s just semantics but he is a Harvard Lawyer and president elect.

Gloomy • November 24th, 2008 at 1:48 pm

The banking system is heading for total collapse and total nationalization, no matter what the government does. The government is forcing this process to be a slow motion affair which will leave the taxpayer on the hook for trillions. The banks should all be immediately forced to be completely transparent about their assets and enter bankruptcy en masse. The government should take over direct lending to creditworthy consumers and businesses until new banks can pick up the slack. This approach would be far less costly and would lead to a far faster and better recovery. Like Japan we will have huge zombified banks which suck off business from competent banks. Because of the severity of the crisis we are going to be in much worse shape.

Morbid • November 24th, 2008 at 2:05 pm

Inflation – Ah, HyperinflationThere are hurricanes and then there are real monsters called hypercanes. With already 10 Trillion committed to this bail in, bail out mania which one do you think is going to characterize the coming doom. This will make the 1922-23 German hyperinflation look like child’s play. The result is simple – all will become worthless.

Guest • November 24th, 2008 at 2:15 pm

How easy to mischaracterize a system of financial corruption as laissez-faire neo-liberal capitalism to make one’s point. You say that “They [at the Fed] are clearly stating what is it that they are trying to achieve,” and that, “You may not like it, but assuming that you and I want to see the US economy dig its way out of the whole, this is what needed to be done.”Well, I don’t like it, and it’s not of my opinion that this “needed to be done.” As Mises would say, “This is utterly fallacious talk.” In his explanation of laissez-faire capitalism, Mises says:What a triumph for the champion of planning to play this trump card. The truth is that the alternative is not between a dead mechanism or a rigid automatism on one hand and conscious planning on the other hand. The alternative is not plan or no plan. The question is whose planning?Should each member of society plan for himself, or should a benevolent government alone plan for them all? The issue is not automatism versus conscious action: it is autonomous action of each individual versus the exclusive action of the government. It is freedom versus government omnipotence.Laissez-faire does not mean: Let soulless mechanical forces operate. It means: Let each individual choose how he wants to cooperate in the social division of labor; let the consumers determine what the entrepreneurs produce. Planning means: Let the government alone choose and enforce its rulings by the apparatus of coercion and compulsion…All this passionate praise of the supereminence of government action is but a poor disguise for the individual interventionist’s self-deification. The great god State…Laissez-faire means: Let the common man choose and act: do not force him to yield to a dictator.We’ve had a near century of benevolent Fed planning, and I can attest to the fact that it’s been of no benefit to me. I voted for change: we seem to be getting just more of the same old status quo.

Morbid • November 24th, 2008 at 2:22 pm

The ignorance of Obama’s intelligence is…that he is one-sided. He should talk with Ron Paul or Ross Perot.

Guest • November 24th, 2008 at 2:28 pm

The financial institutions STILL lack appropriate regulation, and therefore are able to continue engaging in “risky behavior” and generate additional failures. Witness Citi’s attempt to buy another firm last week just for the sake of propping up their argument that they’re too big to fail. But the financial institutions are entitled to almost unlimited bailouts. The auto industry is lacking the ability to profit during bad times and definitely need some oversight and a new business plan, but are not entitled to one bailout. We spent 2 days hearing the dog and pony show conducted by politicians regarding the trials and tribulations of the auto industry, Citi gets a weekend sweetheart deal and almost unlimited guarantees of no failure just for showing up over the weekend for the meetings. Why is our government so bent on paperwork, finance and outsourcing, but doesn’t care how many jobs and businesses go down the toilet that manufacture or produce “things” in the USA? How did it become so biased, so much so, that they won’t even produce unbiased and disadvantaged tax incentives and plans?

Guest • November 24th, 2008 at 2:54 pm

How could the monetary system be rebuilt, when the total debt (public+private) of the US is 50 trillion? And as we can see, this is effectively all public debt, because if someone hits the debt wall, the government is there and converts private debt to public debt. And everybody and everything is dependent on new credit (more debt) to roll over old credit and in addition pay for current spending.We should face the truth: this is a Ponzi scheme, which can run maybe for a few more years, but ultimately it will end in complete disaster, no matter what you may try to do to avoid it.

Cahill • November 24th, 2008 at 3:04 pm

The Washington experts are indeed experts on Macro Economics but don’t know the tail from the head of a dog with regards to Micro Economics and they are not factoring in what happens when the small guy starts to fail, he quits investing he quits spending which makes their recovery models obsolete. They need someone in their to connect Micro and Macro before it’s too late, if it isn’t already.

Guest • November 24th, 2008 at 3:04 pm

in its entirety…read ‘em and weep.. see you in the morning..Congress Should Bail Out of the BailoutRescue for the Few, Debt Slavery for the ManyBy MICHAEL HUDSONWe are now entering the financial End Time. Bailout “Plan A” (buy the junk mortgages) has failed, “Plan B” (buy ersatz stocks in the banks to recapitalize them without wiping out current mismanagers) is fizzling, and the debts still can’t be paid. That is the reality Wall Street avoids confronting. “First they ignore you, then they denounce you, and then they say that they knew what you were saying all the time,” said Gandhi. The same might be said of today’s overhang of debts in excess of the economy’s ability to pay. First the policy makers pretend that they can be paid, then they denounce the pessimists as spreading panic, and then they say that of course students have been taught for four thousand years now how the “magic of compound interest” keeps on doubling and redoubling debts faster than the economy can squeeze out an economic surplus to pay.What has ended is the idea that “the magic of compound interest” can make economies rich without having to work and without industry. I hope we have seen the end of derivatives formulae seeking to make money by playing in a zero-sum game. A debt overhang always ends either in foreclosure of the debtor’s property, or in a debt annulment to preserve the economy’s overall freedom and equity.This means that the postmodern economy as we know it must end – either in financial polarization and debt peonage to a new oligarchic elite, or in a debt cancellation, a Jubilee Year to rescue society. But when the government says that it is reviewing “all” the options, this reality is not one of them. Treasury Secretary Henry Paulson’s first option was to buy packages of junk mortgages (collateralized debt obligations, CDOs) to save the wealthiest institutional investors from having to take a loss on their bad bets. When this was not enough, he came up with “Plan B,” to give money to banks. But whereas Britain and European countries talked of nationalizing banks or at least taking a controlling interest, Mr. Paulson gave in to his Wall Street cronies and promised that the government’s stock purchases would not be real. There would be no dilution of existing shareholders, and the government’s investment would be non-voting. To cap the giveaway to his cronies, Mr. Paulson even agreed not to ask executives to give up their golden parachutes, exorbitant annual bonuses or salaries.Plan A (the $700 billion to buy mortgage-backed junk that the private sector will not buy) failed partly because it let financial institutions avoid putting a fair value on the debt packages they were selling. Instead of telling the truth about their financial position by marking assets to market prices), they can “mark to model,” Enron-style. We have seen the result: A solid week of plunging stock market prices. The public media call this a panic, but there is nothing irrational about it. Who in their right mind would buy securities or buy into a bank without knowing what the securities were worth? Faith in junk mathematical models has ended.So we still await a public response to the problem of how to write down debts. Whose economic interest will have to give: that of debtors, as increasingly has been the case over the past eight centuries; or that of creditors, which have fought back to create a neoliberal economy controlled by the FIRE sector?It is not too late to decide which road to take, but Wall Street bankers and creditors have taken the lead in positioning themselves. Seeing which way the political winds were blowing, they moved to empty out the Treasury before the November 3 elections much like medieval citizens fleeing a horde of Mongolian raiders under Genghis Khan. “We’re moving. Clean out the cupboards,” much as Lehman Brothers emptied out their foreign bank accounts in Britain and elsewhere just before declaring bankruptcy, taking what they could and steering it to their best friends.The pretense was that a bailout was needed to restore confidence. But the ensuing week showed that the claims were false. It didn’t turn the stock market around as promised. The Dow Jones Industrial Average fell 2,200 points from Wednesday, October 1 through the following Friday October 10 – eight straight trading days, not even pausing for the usual zigzags. Friday’s plunge was 100 points a minute for the first seven minutes – a 690 point drop to under 8000. Each 100 points was more than a 1 percent drop, which was reflected on the NASDAQ. Nothing could withstand the pressure of so many Americans cashing in their mutual funds overnight and so many foreigners in earlier time zones putting in sell-at-market orders.Short sellers made one of the largest and quickest fortunes ever, and then covered their positions by buying back the stocks they had pre-sold. This pushed prices up even into positive territory just before 10:30 AM when George Bush began to speak. Half the financial stocks showed gains – a sign that the Plunge Protection Team had jumped in. But Mr. Bush said nothing helpful and stocks went back into freefall, ending down another 128 points despite the upcoming weekend G7 meeting. There was no talk at all of reducing debt levels – only of giving more money to banks, insurance companies and other money managers, as if “pushing on a string” somehow would lead them to lend yet more to an already debt-ridden economy.If Congress really wanted to restore confidence, here’s what it might have done: First, mark to market, not to model. Investors no longer believe America’s Enron-style accounting, debt rating agencies or monoline risk insurers. They don’t trust U.S. banks to be honest about their financial positions. They worry about the fraud charges brought by attorneys general in eleven states against predatory lenders such as Countrywide and Wachovia that Citibank, JPMorgan Chase and Bank of America were so eager to buy.So is it too late for Congress to change its mind and repeal the giveaway? If the $700 billion handout didn’t stabilize the unsalvageable for small investors, pension funds and even the financial sector itself, what did it do?What the Fed has been doing while the media have not been looking?Let’s put the giveaway in perspective. While Senators and Congressmen subject to voters’ choice were debating $700 billion for the major Wall Street contributors to both parties (admittedly only for starters, Mr. Paulson explained), the Federal Reserve already had given even more, without any public discussion and without the major media noticing. Since Bear Stearns failed in March, the Federal Reserve has used the small print of its charter to go outside its normal customers (which are supposed to be commercial banks), to give investment banks, brokerage houses and now large corporations almost indiscriminately some $875 billion in “cash for trash” swaps. (The statistics are released each week in the Fed’s H41 report.) Like Aladdin offering new lamps for old, the Fed has exchanged Treasury securities for junk mortgages and other securities that brokerage houses and investment banks did not have time to pawn off onto OPEC, Asian sovereign wealth funds or other investors.The press lauds Mr. Bernanke as “a student of the Great Depression.” If he were, he should know that what led to the 1929 collapse were harsh U.S. Government creditor policies toward its World War I Allied governments. This created a situation where the Federal Reserve had to provide easy credit to hold interest rates artificially low so as to encourage U.S. investors to lend to Britain and Germany, which would use these dollar inflows to pay their Inter-Ally arms and reparations debts. Mr. Bernanke’s predecessor, Alan Greenspan, promoted easy credit simply for ideological reasons, to enrich Wall Street by enabling it to sell more debt.A student of the Great Depression would understand the conflicts of interest between retail commercial banking and wholesale investment banking and money management that led Congress to pass the Glass-Steagall Act in 1933 – conflicts unleashed once again when Pres. Clinton backed then-Fed Chairman Alan Greenspan and Republican leader (and McCain hero) Senator Phil Gramm in leading the repeal of this act, opening up the floodgates to today’s financial double-dealing that has cost the American economy so much.If Mr. Bernanke does know this history, his behavior is simply that of an opportunistic student of the art of political self-advancement, toadying to Wall Street in campaigning for one last great rip-off before the Bush Administration goes out of business. The Fed has given Wall Street newly minted Treasury bonds, added to the national debt out of thin air. It has done this without feeling any need to rationalize it by drawing absurd public-relations pictures about how the government may “make a profit for taxpayers.”The Fed Chairman is not elected democratically. He traditionally is designated by the Wall Street financial sector that the Fed is supposed to regulate, acting as its lobbyist for creditor interests – the top 10 percent of the population – against that of the indebted “bottom 90 percent.” This “independence of the central bank” is trumpeted as a hallmark of democracy. But it is undemocratic, precisely by being isolated from public control.The Age of OligarchyTreasury Secretary Paulson has no such luxury. The Treasury is supposed to represent the national interest, not that of bankers – even though its head these days is drawn from Wall Street and acts as its lobbyist. Mr. Paulson presented his almost totalitarian giveaway gruffly to Congress on a take-it-or-leave it basis, announcing that if Congress did not save Wall Street from taking losses on its mountain of bad loans, the banks were willing to crash the economy out of spite. “Please don’t make us wreck the economy,” he said in effect. As Margaret Thatcher used to say while selling off the British government’s crown jewels in the 1980s, TINA: There is no alternative.In making this bold threat Mr. Paulson behaved as arrogantly as Lehman’s CEO Richard Fuld did when he tried to bluff Korea and other prospective investors into paying the full, fictitiously high book value for his company. (His bluff failed and Lehman went bankrupt, wiping out its shareholders, including the employees and managers who held 30 percent of its stock.) There turned out to be an alternative after all. Responding to the loudest public condemnation in memory, Congress called Mr. Paulson’s bluff.What made his $700 billion Troubled Asset Relief Program (TARP) so much more visible to the media than the Fed’s actions is that Congress is involved, and this is an election year. The level of deception and false argument is therefore enormous – along with a few tradeoffs and tax cuts to distract attention. Erstwhile Republican opponent Sen. Jeff Sessions of Alabama came right out and said that “This bill has been packaged with a lot of very popular things to give it even more momentum,” so that (as The New York Times explained), “instead of siding with a $700 billion bailout, lawmakers could now say they voted for increased protection for deposits at the neighborhood bank, income tax relief for middle-class taxpayers and aid for schools in rural areas where the federal government owns much of the land.”Left behind while Wall Street’s believers in the rapture of free markets were swept up to heaven by “socialism for the rich” have been mortgage debtors, student-loan debtors, the Pension Benefit Guarantee Corporation (PBGC, some $25 billion short), the Federal Deposit Insurance Corporation (FDIC, about $40 billion short), as well as Social Security which, we are warned, may run up a trillion dollar deficit thirty or forty years down the line. Only the wealthiest have been beneficiaries, not voters, homeowners and other debtors.Still, Congress was panicked into acting on Friday, October 3, because a week earlier, September 26, stocks fell 777 points after Congressmen responded to an unprecedented volume of voter protest against the bailout. “This sucker could go down,” Pres. Bush warned as Wall Street’s lobbyists blamed the market downturn to the failure of Congress to preserve the “monetary system,” and specifically the banks and insurance companies that already had lost their net worth and were plunging deeper into Negative Equity territory. Democratic leaders Barney Frank and House Speaker Nancy Pelosi said, in effect, “Look what you’ve done! You irresponsible politicians are grandstanding on principle, and wiping out peoples’ stock market savings and threatening their pension funds. If you don’t give Wall Street firms enough money to cover their losses so that everyone wins, they’ll kill the economy until they get their way.” Well, they didn’t quite say this, but that was basically their message. It certainly was Wall Street’s message: “Wall Street to Economy: Your money or your life.”So Congress gave in. Democrats ran like lemmings to “save the economy.” Yet the stock market fell a few hundred points, and kept on plunging all week long, much worse and much faster than had occurred right after Congress had initially defeated the bill.The “Reality Problem”What did the “free market” theory underlying the giveaway leave out of account? For starters, “the monetary system” turns out to be a euphemism for the fortunes of financial gamblers using junk mathematics (the Merton-Scholes derivatives formula) based on junk economics (blessed with Nobel Prizes) to buy, speculate and even to insure junk mortgages, junk bonds and junk commercial paper and derivatives based on their relative prices. So what is left out first of all was full knowledge of the value of what is being bought and sold. Mark-to-market models leave the price up to the investment bankers. If trust existed and there really was honor among these thieves, a government bailout would not be necessary, because “the market” could clear.“Free market” ideology assumes that each party will act in his or her self-interest. If this is so, why should foreign governments accumulate more dollar claims on the U.S. Treasury, which already owes their central banks $4 trillion? When there hardly were enough Treasury securities to go around even as the United States ran unprecedented federal budget deficits, U.S. officials urged these banks and sovereign wealth funds to buy packaged mortgages yielding a higher rate of return. And at least by buying these bonds, foreign governments would not be accused of funding America’s war in Iraq that most of their voters opposed. But investors made a fatal mistake in believing U.S. representations of the value of their junk-mortgage packages. This trust has now been lost, all the more so since the bailout’s permission to keep on “marking to market.”Congress thought that its $700 billion would distract attention at least until the November 4 election. But to no avail. Markets fell 157 points on Giveaway Friday, and kept on going down another 800 points on Monday, October 6 (to about 9500) before bouncing 500 points off the floor, only to fall even more through Friday. So the giveaway failed in its stated purpose to rescue stock market investors (“peoples’ capitalism”) or their pension funds. But that was not its real purpose. The time simply had come to clear out and take whatever one could.Making banks and insurers in the zero-sum derivative game whole, so that winners can collect their bets while losers can sell their bad investments to the Treasury, is supposed to re-inflate the credit pyramid. The idea is to solve the debt problem with yet more debt to prop up housing prices once again to unaffordable levels! This is not a long-term solution, but it would give insiders enough time to arrange a do-over and get out of the game more quickly, to sell out their junk mortgages and junk bonds to the proverbial “greater fool” – in this case, the “greater fool of last resort,” the U.S. Treasury, as long as it can be run by Mr. Paulson or, under Mr. Obama, perhaps the former Goldman-Sachs official Robert Rubin.The banks are to “earn” their way out of their negative equity position by selling more of their product – credit – to increase the economy’s debt levels and hence receive more interest payments. The problem is that most families are already “loaned up.” They have no more discretionary income to pledge to carry more debt. Without writing down their debts, there will be no fresh lending, and hence no source of credit and purchasing power for new autos, appliances, goods and services in general. Debt deflation is being imposed on the “real” economy. Creditors and speculators alone are to be made whole.If no revenue was available for future Social Security, public health care and repair the nation’s depleted infrastructure before this giveaway, think of how bare the cupboard must be now that the government has run up the recent trillions of dollars in new debt rather than writing off a penny of the bad mortgage debts being blamed for causing the debacle.We can see where this is leading. The wealthiest 1 percent of the population will come into possession of even more returns to wealth than the 57 percent that they are now taking. In contrast to the Statue of Liberty’s inscription “give me your poor … yearning to breathe free,” the Fed – and now the Treasury, with Congressional blessing – is taking from the public purse and giving to America’s wealthiest investors and insiders. This “Robin Hood in Reverse” program is being done without strings, without asking banks to stop paying dividends, exorbitant executive salaries and golden parachutes, and without taking over banks with negative net worth of the kind that many homeowners are experiencing.Nobody is talking about a debt write-down or moratorium. The subprime mortgage problem could have been solved by writing down just $1 or $2 trillion of the face value and interest rates of predatory loans. Instead, the $10+ trillion in financial-sector damage in recent weeks reflects Wall Street’s fraudulent packaging and sale of junk mortgages at unrealistically high prices, using junk mathematics to calculate junk derivatives and sell them to gullible investors who believe that the pretenses these mathematics, credit ratings and projected income have a basis in reality.The amazing feature of today’s crash is how many Wall Street firms actually believed that the game of musical financial chairs could go on before they had to stop dancing and indeed, escape from the room. I remember one day back in the 1970s when I warned Frank Zarb of Lazard Freres about the likelihood of Third World debt defaults, and suggested that the firm should do an ability-to-pay analysis. “We don’t have to do any such thing,” he replied. “We have the schedule of what they owe right here in this IMF report.” It was a thick printout of the scheduled debt service for an African country that soon became insolvent. But Wall Street’s mentalité was that of Herbert Hoover on the eve of the Great Depression: A debt is a debt, and that is that. The response is to blame the victim, as if the irresponsibility lies with debtors rather than creditors.No reversal of the Bush tax cuts is offered to re-inflate the economy, no move toward more progressive taxation of Wall Street speculators who pay only a 15 percent “capital gains” tax rate instead of the much higher income-tax and FICA withholding rates that wage-earners pay. (Wall Street has its own golden parachute program, so why should it pay for Social Security for the rest of society?) There is to be no reduction in the special tax benefits for real estate, whose tax favoritism led to the crisis by “freeing” more income from the tax collector to be pledged to mortgage bankers as interest. The Bubble Economy is to be re-inflated by Fannie Mae, Freddie Mac and the FHA lending to help buyers bid up housing and commercial office prices once again to a rate that promises to impose debt peonage on homeowners.The budget deficit will soar, without any prosecution of tax evasion scams by UBS or KPMG. Instead of a fiscal or regulatory comet driving these dinosaurs to extinction, the climate has turned more conducive to their proliferation. Our Age of Deception is to be locked in even more tightly. The Congressional bailout’s suspension of mark-to-market rules to rely on Wall Street’s “self-regulation” should win a prize for Oxymoron of 2008 as investors have no clue as to what financial assets are worth. No wonder lending has dried up, especially to banks themselves.Just as financial victims fail to vote and support their self-interest, predators also turn out to pursue self-defeating “free market” strategies. The financial sector’s short-termism is the greatest enemy to its survival. It has translated its wealth into a fatal political control of its legal climate, blocking [with the explicit support of Barack Obama, Editors] Congressional efforts to rewrite the oppressive bankruptcy laws that credit-card banks lobbied so hard to pass, [with vital help from Joe Biden, the senior senator from credit card company HQ, the state of Delaware, Editors] crucial. These hard bankruptcy terms prevent the courts from renegotiating homeowner debts to keep property occupied, accelerating the real estate price collapse. The result is today’s negative equity, posing the question of just who is to bear the cost of bring debts back in line with the economy’s ability to pay. Will it be the financial institutions that sponsored asset-price inflation and lobbied for deregulation of lenders? Or, will it be the debtors who thought they were riding the wave to get an inflationary free lunch?Instead of requiring creditors to absorb losses on the excess of debts over what can be paid, the debts are being kept in place, not scaled back to what the economy can pay. The government is to make creditors and computerized derivatives speculators whole – and will act as collecting agent for the overhead of bad debts the economy has run up.Today we can see the debt-fueled bubble of asset-price inflation that Alan Greenspan trumpeted as real wealth creation for what it really is – credit creation to bid up real estate, stock market and packaged-debt prices. Tangible capital formation has been left out of account, as if postindustrial economies no longer need it.Will voters see the asymmetry in Congress’s failure to offer debt relief for homeowners as real estate prices plunge below the mortgages that are owed? Will its members be blamed for not rewriting the nation’s bankruptcy laws to free families from debt peonage – and free housing markets from the price declines that result from today’s proliferation of foreclosure sales? For that matter, will there be no relief for corporations having to cut back investment in order to service their junk bonds and other debts with which Wall Street’s corporate raiders and “shareholder activists” have loaded then down?Evidently not.Michael Hudson is a former Wall Street economist specializing in the balance of payments and real estate at the Chase Manhattan Bank (now JPMorgan Chase & Co.), Arthur Anderson, and later at the Hudson Institute (no relation). In 1990 he helped established the world’s first sovereign debt fund for Scudder Stevens & Clark. Dr. Hudson was Dennis Kucinich’s Chief Economic Advisor in the recent Democratic primary presidential campaign, and has advised the U.S., Canadian, Mexican and Latvian governments, as well as the United Nations Institute for Training and Research (UNITAR). A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com

Guest • November 24th, 2008 at 3:26 pm

I’ve read a lot of Michael Hudson stuff and he’s probably the most dead on economists out there. If a guy like him and N.R. were in charge of the treasury and FED we would be in great shape. Why does brilliance get over looked for brown nosing fascists knuckle heads.

Guest • November 24th, 2008 at 3:40 pm

I wonder if the Professor is going to write anything on the Citi Bailout and where we go from here. I surely would hope so.

Guest • November 24th, 2008 at 4:18 pm

That may be, however the price was over inflated by manipulating leverage. The home owner that has a lose due to fraudulent acts that were made by wall street firms using leverage making profits off the uninformed consumers who does not read between the lines in most cases or reads a contract from top to bottom ever. That is naive but the general population was taken advantage of and those taking advantage of them knew it was not going to last and could care less the outcome for the general public. Screw the bank and anyone else that says you signed a contract and you should abide to it. Has the government changed the rules of the Tarp plan? yes they will change it as many times as they want when it benefits the interest of those closely tied to them, Of course. Send the keys back to the mortgage company. Save yourself while you have the chance. This economy is nowhere near a bottom and the worst depression that can be imagined is closing in fast.

GLOOMY • November 24th, 2008 at 4:47 pm

EVEN THE NY TIMES GETS IT!!”This guarantee, unlike the earlier ones issued by bond insurers and issuers of credit-default swaps, was made by an institution with a printing press that is authorized to print dollars. That fact makes this guarantee much more credible than the earlier ones.But as the government obligations rise into the trillions, at some point investors could begin to question whether a government running huge deficits could also credibly promise that the dollar would not lose its value. Such a worry conceivably could push up the very low interest rates the Treasury must now pay to borrow.”http://www.nytimes.com/2008/11/25/business/25assess.html?_r=1&partner=rss&emc=rss&pagewanted=printThe day of reckoning is coming!

g Anton • November 24th, 2008 at 4:49 pm

Wouldn’t it be nice if you could go out and buy whatever you wanted with your credit card (how about a new Cadillac to help the capitalistic worthy?)? And then when the bills come and you can’t pay them, the federal government will tell you, “Well, that’s all right, we’ll (“we” being in this case the taxpayers) pay it for you”? Of course, his will never happen to you, but it is happening more and more every day to the wealthy and powerful (where Power = Wealth–the more wealth you have, the more powerful you are).What is coming clear by all this is the fundamental inconsistency between Capitalism and Democrocy. Democracy is based on the supposition that all people are equal and every individual has the right of “free” speech. But Capitalism results in the concentration of wealth in small groups, and in todays society, speech is not free, but very expensive. Thus a rich man (or a rich cooperation) have much more influence on political processes than does a poor man (or many poor men. for that matter).Unfortunatly for the rich, the very rich are also very greedy, and this will result in ugly excesses the outcome of which will eventually be the (probably violent) overthrow of the system.

Guest • November 24th, 2008 at 4:54 pm

Democracy is a form of socialism whereby every voice has a equal chance to be heard through voting. Capitalism cleverly undermines democracy completely.

Guest • November 24th, 2008 at 5:01 pm

In America’s Fed folk-hero version of Paul Volcker, there’s a misinterpretation that many of the said “insiders” have followed the instructions of power and that Volcker was somehow apolitical. No one who’s been where Volcker’s been has ever opposed the core power of the banking cartel. Every Fed chairman carries out the wishes of the private banking cartel, and to think that Volcker is or was different is to mislead yourself. This is not a discussion of whether you liked his policies or not. It is merely a discussion of who he is.For instance, in “The Crisis of Democracy,” Samuel P. Huntington argues regarding the programmed decline of the American economy that if higher education is considered to be desirable for the general population, “a program is then necessary to lower the job expectations of those who receive a college education.”In an October 18, 1979, NY Times article, “Volcker Asserts U.S. Must Trim Living Standards,” CFR member Paul Volcker, former Chairman of the Federal Reserve, made this similar assertion: “The standard of living of the average American has to decline… I don’t think you can escape that.”By 1993, Volcker had become the U.S. Chairman of the Trilateral Commission. The Trilateral Commission was developed by David Rockefeller to coordinate the building of “the new world order” in accordance with the Richard Gardner strategy as “an end run around national sovereignty, eroding it piece by piece”(“Foreign Affairs, “The Hard Road to World Order,” April 1974).Says G. Edward Griffin, the objective of the CFR “is to draw the United States, Mexico, Canada, Japan, and Western Europe into political and economic union. Under slogans such as free trade and environmental protection, each nation is to surrender its sovereignty “piece by piece” until a full-blown regional government emerges from the process. The new government will control each nation’s working conditions, wages, and taxes. Once that happens, it will be a relatively simple step to merge the regionals into global government.”This was the reality behind the EU, NAFTA, APEC and GATT: they have little to do with trade.In the Trilateral Commission’s annual report for 1993, Volcker explains:Interdependence is driving our countries toward convergence in areas once considered fully within domestic purview. Some of these areas involve government regulatory policy, such as environmental standards, the fair treatment of workers, and taxation.As Toyoo Gyohten, the Chairman of the Board of the Bank of Tokyo, wrote in a 1992 Trilateral Commission report, Regional trade arrangements should be regarded as “supplements to global liberalization… A common currency… central bank… court and parliament…

Orange light • November 24th, 2008 at 5:30 pm

Will Citigroup go down regardless of the bailout?What are the consequences if Citi fails?Is a banking holiday just around the corner?

Guest • November 24th, 2008 at 6:01 pm

Warren Buffett quote posted to a discussion board by John Bollinger:”Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

RED • November 24th, 2008 at 6:49 pm

When and if the US Dollar falls, you would rather be in high quality equities that have good market positions, strong balance sheets, and good management. if you believe the people espousing hyperinflation cash won’t be worth anything.On the other hand, if deflation continues for another 12m, cash will be king.

Guest • November 24th, 2008 at 6:54 pm

Roubini is a Billionaire? Don’t know about that – I do know he doesn’t have an agenda or vested interest in the equity markets and I don’t think he bought into Goldman at $115 or GE at $22.

K in TX • November 24th, 2008 at 6:57 pm

Sign Of The TimesI just returned from my local grocery store. I paid $3.59 for a loaf of bread and $1.21 a gallon to fill up my gas tank. That was with a store loyalty card, but as you can tell I saved more on the gas.

MM CA • November 24th, 2008 at 7:10 pm

Top 5 shorted Stocks today were: you guessed right, Citi, Wells, BofA, Goldman and Merril… that means they are going down lower…

Guest • November 24th, 2008 at 7:13 pm

I may miss out on some money somewhere but I am covering different options, I’m in some equities with great balance sheets, I have socked away cash and I have some gold and silver reserves. If nothing blows up I don’t lose what I have, If something does blow up I lose out on a couple of items but make money on the other. So the moral is don’t put all your eggs in one basket. I think it is foolish to be advising people to go wholly into cash or equities either one, just be smart and be prepared

Gloomy • November 24th, 2008 at 7:27 pm

This makes me sick:Nov. 24 (Bloomberg) — Goldman Sachs Group Inc., the biggest U.S. securities firm to convert to a bank, plans to sell notes in the first offering of debt backed by the Federal Deposit Insurance Corp., according to a person with knowledge of the transaction.Goldman is leading banks in what analysts said may be a wave of as much as $600 billion of government-guaranteed issuance. Goldman’s benchmark sale may price as soon as tomorrow, said the person, who declined to be identified because terms aren’t set. Benchmark size typically means at least $500 million.http://www.bloomberg.com/apps/news?pid=20601009&sid=adK4Ed0FLgLg&refer=bond

Wolf in the Wilds • November 24th, 2008 at 7:28 pm

Totally agree with Afa here. Really heavy load of horse manure. Volker was the Federal Reserve. His policy directions are meant to take care of the US economy, not anyone else’s. When a country does not have conservative fiscal and monetary policy, it will pay the price at some point. That is the name of the game. Its the same for an individual (case in point in the US), corporation (remember 2000?) and countriesYou cannot blame Volker for what happened in Africa. You can only blame the leaders of these African countries for borrowing too much.

Octavio Richetta • November 24th, 2008 at 7:49 pm

Everyone: Thanks for the kind comments! Yesterday night was very intense and so was today. I am too tired to post now (well in spellchecking I realize that I did write some).The citi bailout is no magic wand, the US still faces the deepest recession since the great depression… Lots of mistakes were made on all sides regulators, bankers, etc. The solution to the mess won’t make everyone happy.I know lots of folks are mad but the financial markets were on a downward spiral that needed (needs) to be stopped. A country needs a banking/financial markets system to operate and, IMO, a regulated private banking system is better than nationalized banking. This is what the FED and Treasury are aiming for. The key change in the new strategy is that they have realized wiping out shareholders doesn’t work.The attitude “let them fail the system will fix itself”, sounds great, the blowing of steam makes you feel good but it would take this country’s economy and the world’s to the path of ruin.Once the banking/markets are fixed (we are not there yet but we are finally in the right track) the most important thing is to make people productive. You cannot build an economy on credit, the key is value added, not credit. You are supposed to send your kinds to college via hard work not a home equity line of credit.Obi’s job creation thing is a great strategy. Getting the world to agree in fair treatment and compensation of workers worldwide should also be an objective; as well as trying to do away with corporate tax heavens that make countries to bid down corporate taxes to ridiculously low levels.

Octavio Richetta • November 24th, 2008 at 7:51 pm

I posted this above in my first posy way up in this thread titled: “The Professor’s deflation post in terms that are easy for all to understand (and shorter)”Everyone: Thanks for the kind comments! Yesterday night was very intense and so was today. I am too tired to post now (well in spellchecking I realize that I did write some).The citi bailout is no magic wand, the US still faces the deepest recession since the great depression… Lots of mistakes were made on all sides regulators, bankers, etc. The solution to the mess won’t make everyone happy.I know lots of folks are mad but the financial markets were on a downward spiral that needed (needs) to be stopped. A country needs a banking/financial markets system to operate and, IMO, a regulated private banking system is better than nationalized banking. This is what the FED and Treasury are aiming for. The key change in the new strategy is that they have realized wiping out shareholders doesn’t work.The attitude “let them fail the system will fix itself”, sounds great, the blowing of steam makes you feel good but it would take this country’s economy and the world’s to the path of ruin.Once the banking/markets are fixed (we are not there yet but we are finally in the right track) the most important thing is to make people productive. You cannot build an economy on credit, the key is value added, not credit. You are supposed to send your kinds to college via hard work not a home equity line of credit.Obi’s job creation thing is a great strategy. Getting the world to agree in fair treatment and compensation of workers worldwide should also be an objective; as well as trying to do away with corporate tax heavens that make countries to bid down corporate taxes to ridiculously low levels.

ditchdigger • November 24th, 2008 at 8:21 pm

Now let me think for a moment: Obama has assembled the most brilliant economic and financial advisers in the country who with their deep analysis and understanding of what is happening come up with the profound solution to the country’s problem: KEEP PASSING OUT MORE AND MORE MONEY! Now you don’t even need a high school diploma to come up with that one!

Guest • November 24th, 2008 at 8:24 pm

Gloomy, isn’t this just a way for Goldman to sell bank notes at high interest to raise money because they’re now a “bank,” and then reinvest in market risk, risk free because its backed in full by the American taxpayer if they default? If so, if this doesn’t stop soon, we soon are going to lose the country.If not, would you or someone explain?

umanpowered • November 24th, 2008 at 8:25 pm

The Christmas Revitalization Bailout BillStarting November 25th, representatives from Congress will be dressed up as official “Bailout Clerks”, handing out $20 bills on the streets across the nation, as part of new legislation aptly entitled: “The Christmas Revitalization Bailout Bill”, the country’s most generous gift ever recorded in history. Most will be dressed up as traditional bankers, but a few will be dressed up as, Treasury Secretary Henry Paulson, former Clinton aide, Robert Reich and Martin Feldstein, the Harvard University economics professor.Democrats, Republicans and Barney Frank all stood together and announced: “Effective immediately, the entire investment community will be required to stand shoulder-to-shoulder, holding hands in a circle, along with all congressional representatives, the senate, and your next-door neighbor from all across the wonderful nation, both young and old, unemployed and employed, insured and uninsured, in their cities and towns to distribute the entitlements in the form of $20 cash bills, on street corners, barrooms and sports and entertainment centers, or anywhere where crowds are plentiful”.The sunny days that the U.S. faces is a recession that will be “deeper, broader and much stickier than the last couple,” says Martin Regalia, chief economist at the U.S. Chamber of Commerce in Washington. “This is not the time to be penny wise and pound foolish,” he adds. “And, furthermore, who cares?”Feldstein, from Harvard University stated, “Its money, its actual cash, so people will be inclined to spend it immediately rather save for education, pay down their debts, save for the future or anything stupid like that. “If its in the form of cash, and its just $20, wouldn’t people would rather just spend it right right away? If we sent actual checks, or something electronic, people will just transfer it to their savings account. We can’t have that happen!”On Bloomberg television on November 12, Feldstein stated: “I hate to say it, because I’m a guy who doesn’t like government spending and doesn’t like fiscal deficits, but I don’t see any alternative”. He went on to state: “If only I were young, I would be applying as fast as possible for every credit card on earth!”"The Troubled Asset Relief Fund could be compared to having a couple of beers to get rid of a hangover” said George Soros, the well-known financier. “But, in the world of shit we’re in now, this is like having a couple of bottles of OxyContin to get rid of terminal cancer.”Michelle and Toni Happyfriends, two, young, attractive, freshman women from the Manhattan’s Hooters School of Financial Lust, are ecstatic about being called to head the investment community into a Jim Cramer glossolalia. They appeared on Fox news, saying “We’ll be wearing beards and shaving our heads, and looking like central bankers and fun stuff like that. Like, we said to ourselves ‘Like Oh My God, This is like the ultimate donation to all the poor people, you know, and, like, we’ll meet people, and all that stuff’. Its going to be real cool, real exciting, and, like, its part of it being an American, you know, its what America needs.”Oprah Winfrey, Party Thompson, and Ben Bernake, who will be dressed up as Ben Stein, plan to hold a street parade of floats resembling Bank Vaults and Piggy Banks, where $20 bills which will be pumped out of GM Ford Trucks’ exhaust pipes. Bernake stated: “I’d rather see the money going to help out the depressed and disabled investment bankers and those starving automobile executives, their friends and their financial executive officers who have helped this country so much, and have used their love in the form of protectionism and loans to all those greedy first-time home buyers and Ford Truck hedonists.Professor Bank Rupcy, head of Providing Head to Major Dicks in the Finance Community, put it this way: “In the investment community, there is no accountability. And why should there be? Corporations pay taxes, too, and are entitled not only to charity from the government, but the subsidizing of their markets to keep themselves in business and their shareholders afloat. In fact, legislation is already being considered that all infants starting in January 2009 will start earing minimum wage for life, just for being born! (Unfortunately their parents will have to include them on their tax return).Tony Pepperoni, who’s known on Wall Street by his nickname “Tony’s Hedge Fund” was quoted by The London Financial Times as saying “Unfortunately, these poor financial investment companies got so much in trouble by making money for their top executives and shareholders that they forget they still have to pay into the ‘shadow employee system’, those employees burdened by the mysterious cost of health insurance and energy, selfish need to feed their families, fuel their cars, and drive the rest of the economy practically insane!. And now, rather than lining up their employees against the wall and putting them out of their misery — saving corporations the untold costs of providing health insurance in the process — these multi-nationals are being victimized by labor costs”Video game stores, convenience stores, soda, chips, bars and pizza joints are staying open late throughout the holidays to handle the increased supply of US Tax dollar Bailout money being thrown away into “The Christmas Revitalization Bailout” wind. Pizza joints are hiring more people under the table so they don’t have to pay taxes; convenience stores are loading up on the long lines for lottery tickets, beer and cigarettes, and bars are stocking their shelves with “Bailout Beer”"We call it ‘Bailout Beer’ because The Federal Reserve has provided a special emergency fund called “Beer Under Reorganized Protection or B.U.R.P for short” where we can buy this beer directly from the Federal Reserve at a huge discount. As a bar owner, I was totally unaware that the Fed BURPs up for special emergencies like the one where in now” Says Chet Hegelsten, who owns a bar in Manhattan’s upper West Side, “Chet’s Bet”. “And a beer that says ‘Brewed in China’, when it really isn’t, is the perfect ironic touch that’s bound to increase sales, both in fooling our lamest customers and enticing the high net ones. Someone over at The Fed either has a great sense of humor or is a complete fuck up.”Wall Street Journal’s Bank Rupcy said the following: “The is a bailout of the little guy. The guy on the street upset at the liberal media, upset at the way the fat cats in Washington and Wall Street have been jerking each other off all their lives, their plans to take over the world, to take over our jobs, enslave our liberal media women, and kick all the little children out in the street to play their with Bayberries and I-Pods and make independent movies.”The “The Christmas Revitalization Bailout Bill” is funded by $20-denominated bonds sold in fifty lots, in order to resemble long-term US Treasures. However, as Bath Water Santos from UBS stated, “these are not your normal securitized debt instruments, obviously. Not only are they nominally repackaged, but physically as well: they are fifty Xerox-copied $20 Bills, which are then wrapped in what appears to be a McDonald’s Double-Bacon Cheese wrapping, put in a box with a napkin, with a couple of Christmas bells and a DVD about a Washington Journal episode “Touring the White House with Laura Bush”"I don’t really understand what’s going on.” Santos stated, dejectedly, when he opened up his gift, to the disappointment to all those standing over him in his cubicle. Nevertheless, the return on their investment was what they had expected. And, besides, all other countries throughout the world are frantically bidding up the so-called “Bailout-Bonds” primarily because of fiat status, distinctive wrapping, the signed DVD by First Lady Bush, and the desperate way the debt is represented with a rotten hamburger patty. As one Canadian investment banker put it,”even if the bonds go utterly worthless, they will at least be remembered as a practical example of the light-hearted spirit of those generally retarded Americans.”

RED • November 24th, 2008 at 8:26 pm

These firms are all cashing up because they think equity prices will be alot cheaper in the future. If the dollar falls sharply, foreign debt and equity holders will be selling at any price. If the banksters have cash they will be buyers at fire sale prices

Guest • November 24th, 2008 at 8:40 pm

Don’t know if you caught in Obama’s speech today about Job Creation – he changed the language he has been using from creating 2.5m jobs to “saving and creating” 2.5m jobs. If he wasn’t a lawyer, who also reads off a teleprompter I would say maybe a just a slip – but the text of the speech was published and it seems is 2.5 number includes jobs saved e.g. auto industry.I would like to share OR’s optimism (and his profits from going long last Thrusday/Friday) but fear that with best of intentions on many parts the corruption that brought us to this place has not been rooted out (or worse). The incredible sums of money being handed out with almost no oversight is cause for concern.Separately,I take to heart the words of El-Erian and how this crisis keeps changing its form. Ben is a smart guy and so too is Hank (though there are issues with him) yet both have been doing trial and error and trial – The new guy Guithner has been involved from the beginning and some would suggest that the NY Fed has been ground zero -Also take note of Asian markets especially Japan it’s up only 3.6% after being on holiday yesterday. I also posted a link to an interview withTom Barrack of Colony Capital – it is a must see as he talks about the trouble ahead. (one of the biggest real estate investors on the planet)

Guest • November 24th, 2008 at 8:40 pm

Right on Red! Keep the cash dry, because the inner circle of mega banks will be issuing another margin call, causing stock prices to plunge again. Wise (and quick) little birds will be able to pickup the bread crumbs at the same prices as the hawks in due time.

AfA • November 24th, 2008 at 8:41 pm

The $14 Trillion question of course is whether the financial system would bring down the world with it because it [the world] let it the fall or because it tried to save it.”A country needs a banking/financial markets system to operate” … and, a banking/financial markets system needs even more a healthy country to operate.I believe the answer to this question is just a guessing game. No one’s opinion is worth more than others’.More important, the options are not limited to these two. But it seems that some would want to make believe they are.

blindman • November 24th, 2008 at 8:45 pm

o.r., here is a fine example of what your talking about. except maybe in the other direction ?.U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit (Update2)By Mark Pittman and Bob Ivry.Some of the bailout assistance could come from tax breaks in the future. The Treasury Department changed the tax code on Sept. 30 to allow banks to expand the deductions on the losses banks they were buying, according to Robert Willens, a former Lehman Brothers tax and accounting analyst who teaches at Columbia University Business School in New York.Wells Fargo & Co., which is buying Charlotte, North Carolina-based Wachovia Corp., will be able to deduct $22 billion, Willens said. Adding in other banks, the code change will cost $29 billion, he said..“The rule is now popularly known among tax lawyers as the ‘Wells Fargo Notice,’” Willens said.The regulation was changed to make it easier for healthy banks to buy troubled ones, said Treasury Department spokesman Andrew DeSouza…ps. it was the golden gimmick, and oil, that created modern day saudi arabia. i wonder what the wells fargo notice will create?

Octavio Richetta • November 24th, 2008 at 8:52 pm

“The incredible sums of money being handed out with almost no oversight is cause for concern.”Very important point. The management of these companies have to have regulators breading on their necks 24/7. The legacy of AG’s FED in this regard is not much reason for hope. My hope is that the Benny-Timmy will do better in this regard.http://images.google.com/images?sourceid=navclient&ie=UTF-8&rlz=1T4GGLL_en&q=Timmy&um=1&sa=X&oi=image_result_group&resnum=4&ct=title

Guest • November 24th, 2008 at 9:02 pm

Like the article suggest it’s a conflict of interest to have a private banking cartel in charge of credit within a fractional reserve system. Nationalize the FED and the banks and these problems probably wouldn’t happen. If I’m a banker and can extend credit 10 times what my reserves are then that 90% credit has no real value to me I didn’t earn it there was no sacrifice made and by lending it I make a lot of money so naturally why would I be so worried about it not being paid back it’s not my money and the more risk I take the more money i can make. If my gamble falls through I lose nothing. Bankers have almost nothing at stake and this is the problem it’s why it must be nationalized where the employees have no incentive to risk the system. Run it like the post office.

Octavio Richetta • November 24th, 2008 at 9:03 pm

Wells Fargo & Co., which is buying Charlotte, North Carolina-based Wachovia Corp., will be able to deduct $22 billion, Willens said. Adding in other banks, the code change will cost $29 billion, he said..“The rule is now popularly known among tax lawyers as the ‘Wells Fargo Notice,’” Willens said.Banks have a license to make money even without this latest advantage. Why do you think I loaded up on the large banks plus GE at the ridiculous prices we saw on TH/FR? I was nervous but I did pull the trigger. The result, I went up from 6.3% to 9.7% YTD. For the amount of equity esposure I have that was awesome!I fully expect to see reversion to the mean but I hope I will keep some of the gain:-) IMO, financials went down so much last week, that they should recover whatever ground they lost last week, and possibly overshoot for good reason. Much less risk in holding large financial stocks now as equity holders know they will not be wiped out.You would have to be on dope to be shorting large financials now.

Guest • November 24th, 2008 at 9:08 pm

U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit (Update2)By Mark Pittman and Bob Ivry……Automakers Struggle”The tally doesn’t include money to General Motors Corp., Ford Motor Co. and Chrysler LLC. Obama has said he favors financial assistance to keep them from collapse.Paulson told the House Financial Services Committee Nov. 18 that the $250 billion already allocated to banks through the TARP is an investment, not an expenditure.“I think it would be extraordinarily unusual if the government did not get that money back and more,” Paulson said.In his Nov. 18 testimony, Bernanke told the House Financial Services Committee that the central bank wouldn’t lose money.“We take collateral, we haircut it, it is a short-term loan, it is very safe, we have never lost a penny in these various lending programs,” he said.A haircut refers to the practice of lending less money than the collateral’s current market value.Requiring the Fed to disclose loan recipients might set off panic, said David Tobin, principal of New York-based loan-sale consultants and investment bank Mission Capital Advisors LLC.‘Mark to Market’“If you mark to market today, the banking system is bankrupt,” Tobin said. “So what do you do? You try to keep it going as best you can.”“Mark to market” means adjusting the value of an asset, such as a mortgage-backed security, to reflect current prices. ” ……so what is the point of giving an invisible bald man a haircut, i ask? peace of mind i guess, or the next best thing.

Guest • November 24th, 2008 at 9:12 pm

When the U.S. has the monopoly on what’s considered of value the dollar and then insists it gets paid back in that currency then you have slavery, and by raising rates you kill countries with weak currencies forced to pay you back in your countries currencies.

Guest • November 24th, 2008 at 9:16 pm

IS THIS WHAT WE HAVE COME TO?Day in and day out, morning, noon and night, on TV, in the papers, on the internet, with friends, with strangers we seem to all have become consumed with what’s happening to our money and yet we don’t realize what has really happened: our money worries have now consumed us!

Robert Wong • November 24th, 2008 at 9:18 pm

We’re all too young to know what had happened 80 years ago. 14th Century is even more distant to us but it is interesting to know that was the time paper currency as the predominant circulating medium in China. All the paper money at that time was backed by object of value. Today, all the paper money was backed by trust which is so sacred that nobody dares to question its real value behind. China is buying gold nowsday and with so limited quantity of gold around, we should not be surprised to see gold price hitting the roof again in the near future.

Wolf in the Wilds • November 24th, 2008 at 9:21 pm

OR,I do believe that a functional banking system is necessary, but I do not necessarily agree a private banking system is better than a nationalised one, especially if it means taking away precious capital which can be better utilised in other parts of the real economy. A downward spiral in stock prices does not mean that the banks are in default. It just means that the banks are no longer solvent and the private sector knows it. Nationalisation does not mean you let politics get in the way of running a bank. It just means the government will have to step in (via ownership and writedowns of existing stake holders) to ensure the system continues to run. Guaranteeing bad assets at inflated valuations does not stop the bleeding. It makes the banks more reckless, while the disease is spread across the rest of the real economy. Existing stakeholders made the mistake of underestimating risk and therefore should be made to pay for it. Nationalisation and guaranteeing deposits for 3years will ensure depositors are not hurt. An asset for equity swap (at heavily discounted prices) will ensure the banks are simultaneously recapitalised and delevered, thereby freeing up balance sheets so than lending can restart (conservatively of course). Converting stake holders to equity ensure that there is still upside if the nationalised banks start making money. When the time is right, the government can sell off its stakes in the banks, moving them back into the private space.There has to be discipline. New regulations to control leverage, and proper credit analysis and controls. The banks SHOULD NOT BE USED FOR POLITICAL AGENDAS. This must be made clear. They should function as they been always: as an intemediary for capital, and to allocate capital efficiently. I am not saying “let them fail and the system will fix itself”. I am saying in order for the system to continue to function, existing stakeholders must take the pain, not the taxpayer. The country will go down in flames if it continues down this path. It will not fix the system. It will not lead to lending. And it will not lead to recovery. It will just ensure the spread of the cancer throughout the economic system.

Guest • November 24th, 2008 at 9:23 pm

Timmy might just be another Palpatine – We are talking the NY Fed and while he talks a good regulatory story he didn’t rise to the top of that venerable institution (a position that some would say is more poweful than Bernanke’s) on his good looks alone. In fact he stood by much like gentle Ben, in denial as this crisis gained critical mass.

Guest • November 24th, 2008 at 9:25 pm

After 2 years of community college, the economic saviour has arrived!Banks failing-give em money; insurance companies failing-give em money;auto companies failing-give em money; airlines failing-give em money; world governments failing-give em money, people losing their homes-wait, we have run out of money, too bad!

Guest-o-Rama • November 24th, 2008 at 9:46 pm

If you were approaching retirement would you pay off your house mortgage ($125,000 or so) or try to hold the cash and keep making payments as you go? On the one hand paying it off means no debt deflation. On the other hand not paying off means more cash in the short term in case real estate bust wipes out way more equity than people think. This individual is worried about having cash on hand for medical costs/the need to enter assisted living. Her mother lived to age 90 but her mother was not a smoker and this person is.Of course the smart money says just keep working but the individual in question is 65 and works for a big managed care corporation so there may not be a job to go to come January if Obama does the free health care for everyone plan.Opinions are welcome. I never thought about it this way before.

Guest • November 24th, 2008 at 10:46 pm

Capitalism is dead, democracy and freedom are dying, and society and economic system are disintegrating. Politicians are greedy and self-serving. Governments are dysfunctional. People are clueless and will become victims of politicians. I wonder what will happen of our country and our citizen after 4-6 months?It’s sad!!!!

MM CA • November 24th, 2008 at 10:52 pm

Thomas J. Barrack, Jr.November 10, 2008Let’s review the state of play for the last week and attempt to re-calibrate where we are. Clearly the stormclouds are gathering across the world, establishing the worst global recession in six decades, blended with afinancial and banking crisis which is accelerating daily. What we all want to know is “how much worse canit get?” For those of you who have better things to do, read no further, the answer is “much worse”.What is happening???There is nothing good on the horizon:• Commodity prices freefalling at a pace never before seen• Dramatically reduced industrial output• Consumption and sales evaporating• Disappointing earnings in all sectors• Unemployment at staggering levels and numbers are still padded• Defaults in housing mortgages accelerating• Foreclosures on single-family residences increasing• Corporate defaults on various debt instruments increasing• Commercial real estate values falling and commercial real estate loan defaults on the horizon• Regional banks the next to fall• Previous capital infusions and all writedowns by big banks will prove to not be enough• Citibank mystery still unsolved• Auto industry in meltdown and on verge of nationalization and the airline and insuranceindustries right behind it• Japan, China and Europe all undergoing economic disruption and an explosion of protectionistmaneuvers• TARP has been mired in capricious stealth and has not addressed the mortgage securitizationmarket or its liquidity at all• The toxic dump will now include CLOs, CDOs, CMBSs and CDSs• Consumer confidence at historic lows• Government debt levels and deficits at historic highs• In spite of the deficits the dollar is increasing in value because the market views everything elseas worse

CHRIS DAVIS • November 24th, 2008 at 10:55 pm

Policy failures, eg, failure to implement mortgage relief, do not, ipso facto,automatically support a thesis for oligarchy, any more than Pearl Harbor meant America was totally corrupt. Free market ideology, which term does not always have to be offset by quotation marks, does not imply fairness, nor should it be confused with fairness as a moral & cultural value. Such arguments are disingenuous attempts to discredit those who benefit the most at the moment from market actions, which, we have seen, can suffer abrupt reversals,turning yesterday’s winners into tomorrow’s losers.Hudson professes outrage at capitalism’s crude boom/bust cycles and the attendant circus barkers, offering the latest impossible opportunity, all of which is greatly muted in the confines of the United Nations, think tanks and universities.This type of argument seems to require a whiff of conspiracy in order to denigratethe brutal reality that the system does greatly reward the most efficient organizers of business and finance, eg, Gates & Buffett, not the intellectuals,not the commentators and journalists and not academics.America has misallocated three to four trillion to build three to four million extra houses, which, in turn, has destabilized all major financial intermediaries.We have already run Case “A”, liquidate everything, for Dr. Hudson where the result was order, ordnung, and 55 million corpses. In Case “B”, we have muddle.Unlike Sweden, which faced a similar crisis in 1992, we have a divided government, with each faction trying to score points off the other at the expense of their constituents. And, unlike Sweden, which immediately implemented mortgage guarantees for all mortgages at the outset, this government has attacked the crisis in a halting, piecemeal fashion that is obviously exacerbating it. But,by its very nature liberal democracy is reactionary and not preemptive, so now we have our fiscal and financial Pearl Harbor. Millions of people will lose their homes, their jobs and their credit before it’s resolved. And predictably, noneof these individuals are blaming themselves for taking on too much credit, for freely undertaking the thrill of an option only adjustable rate mortgage, forthinking that $73/hr is good pay for assembly line work, for expecting a large annual bonus for packaging garbage securities or for believing everything that their congressman told them.But it is not the end of the world or capitalism or America.

MM CA • November 24th, 2008 at 10:57 pm

Sparta or Alice in WonderlandThomas J. Barrack, Jr.March 20, 2008A common question that we have received has been, “How bad do we think this financial crisis can get?” Due to theexigent circumstances and severity of the situation, we are rendering an early and clear response: “We have no idea.”However, we are sure that what is more important is to avail ourselves of the moment when everyone believes that”things are bad and can only get worse.” That is the moment for which we have been waiting. That momentwill most likely come fairly soon.Our business is not based on ultimately being correct on a macro-economic model, though we have never been far off.Our business is, however, based in part on finding mispricings in assets as a result of temporary aberrations invarious macro and micro markets. Obviously a crucial element in the success of this strategy is the timing of theacquisitions and dispositions of the assets. In order to get the timing right, the essential ingredient is anticipation.Anticipation, however, does not require choosing one outcome over another. What it necessitates is understandingwhich way the momentum seems to be flowing and how to start moving in that direction in order to be advantageouslypositioned. Anticipation is not a one-way street! It is offense and defense. Anticipation many times requires movingin the direction opposite to the popular flow.Consequently, we have formed hypotheses that seem to be the basis of two distinct points of view as to where we are atthe moment. We have assigned to each hypothesis a strategy, and both strategies are compatible with one another in oneimportant aspect, which we will discuss.Where do we believe we are now?The United States is experiencing a financial system correction which will require re-tooling at best and an adaptationof a new financial model at worst. This adjustment will have waterfall effects on the rest of the world, most of whomare languishing in varying degrees of denial. This is being triggered as a result of the meltdown of a financialdistribution pipeline that has been fueled by debt since the early 1970’s and the end of the Bretton Woods Agreement.This credit crisis is causing abrupt mispricings across all asset classes and may persist to the point wherenegative expectations become the overwhelming paradigm. This elongated moment will be the buyingopportunity of a lifetime for those who are armed with cash, courage, conviction and discipline.What if we are wrong? Let’s examine two points of view that could be portrayed by two different movies:Hypothesis A: “300” (Prepare for Sparta)• The American system of “Fantasy Finance” may be broken• America’s leadership may also be questioned as a result of the parade of horribles that has been unleashed as aresult• Home prices continue to erode in the USA and slowly infect other foreign venues• Foreclosures proceed at a record pace• Commercial property values may deteriorate as a follow-on• Subprime losses and other forms of paper follow suit, i.e., CDO, CLO, CDS, CPDO, etc.• Even more worrisome than assets “marked-to-market” are the assets “not booked for sale” (loan portfolio) whichwill likely incur much greater losses• The American dream of upward-only speculative gains on personal residences proves elusive• The collapse of America’s fifth largest investment bank, Bear Stearns, may not be the last• The parry and thrust of Fed rate cuts and direct lending prove not to be enough• Direct intervention from Congress to set a floor on an evaporating mortgage securities market and the super RTCtype entity (the son of Fannie and Freddie – “Flabby”) would buy and distribute securities and extinguish all2litigious claims of past buyers of those securities• Regional banks as well as those in Europe and Asia may suffer in the meantime• “Fair value” accounting may turn out to be the fair way to look at assets• China will continue to reap surpluses from extraordinary margins in its industrial sector• Corporates may experience revenue deterioration and a higher cost of capital• The impact of falling profits and incomes always lags and may be off by 50% from record levels in the financialsector• Hedge funds may join securitized subprime mortgages on the junk heap• The rating system and the monolines that perpetuate the fantasy may disappear• Municipalities may have to seek other capital sources with higher associated costs• Sovereign funds may continue to reap massive windfall surpluses, but due to protectionist pressure not re-investin the U.S. financial sector• Japan and other countries’ central banks intervene to stop their currencies from advancing• The speculator who had funds to answer the first margin call gets another equally urgent call, and if he meetsthat, there may still be another• The man with smart money who was out of the market at the beginning of the crash steps back in to pick upbargains – but too early• Inflation surges• Past speculative orgies all end the same way!The Strategy in responding to “300” is first, for our existing owned businesses to manage balance sheets conservativelyand assure stability and staying power in all business lines in case pessimism proves right. Second, we mustaggressively plan for acquisitions by raising large pools of cash that can be invested on a relativelyunleveraged basis when we have determined that asset underwritings are solid and that pricing isapproaching parity with the downturn in confidence and perception.Hypothesis B: “Alice in Wonderland”• This credit correction will end quickly and in an orderly manner and only the housing sector will remainimpaired through 2009• The Fed rate cuts and other rescue steps are effective and the rest of the world and other asset classes aredecoupled from the contagion• Banks have adequately addressed write-offs, bolstered their capital with new investments, and borrowers beginborrowing once again• The Fed contains inflation and the world balance and dominance of the dollar returns• The system is strong and effective, this was an isolated housing credit problem which the Fed adequatelyaddressed and capital returns to the sector• Private equity firms raise large debt and equity funds and put the money to work quickly in distressed segments• This is a consumer driven problem and corporates are in relatively good shape• Consumer spending rates continue to increase even without access to easy credit• The USA is the number one exporting country in the world• The trade deficit is diminishing• “Fair value” accounting gets suspended• Capital regulatory rules are eased for banks and capital certificates are issued to plug negative net worth of thebanks• Buffett buys FGIC and stabilizes the market• Counterparties are actually identified and trustworthy• Sovereign funds invest aggressively in U.S. institutions• Bear Stearns deal re-cut to reflect improved market conditions• Additional accounting changes allow the banks to save their balance sheets3• The banks’ “loan books” stabilize over time and do not incur similar losses to the “mark-to-market” assets• A homeowners bail-out bill is passed, which relieves foreclosures but does not chill the issuance of newmortgages• The Fed guarantees entirely all of the securities of Fannie and Freddie• Gold, oil and commodities diminish in value and normalize to historic levels• Peace comes to the Middle East• Inflation remains in check due to normalized exchange rate and energy costsThe Strategy in responding to “Alice in Wonderland” is only enhanced by preparing for “300.” However, the inverse isabsolutely not true, and we are not willing to wind up as a frustrated observer on the other side of the Looking Glass.Either way, the mispricing still exists and the differences will be whether the recovery will happen more or lessquickly and whether the downturn will be more or less dramatic.Anticipating and preparing for the worst is the key to survival and, correspondingly, success. This actionablemoment will come when the overwhelming consensus of the investing community is that “things are badand only going to get worse.” We believe that the clock is ticking down to that moment.You may feel that I have still weaseled away from answering the initial question, “How bad can it get?” I would like toanswer the question by begging you to read the enclosed book, The Great Crash, 1929, by John Kenneth Galbraith. Its200 pages comprise an exhilarating rendition of many conditions which resemble those which we are experiencing rightnow. Of course, there is a litany of reasons why the consequences that ensued in 1929 could not happen again. Read thebook from cover to cover in one hour, and when you are finished see if you feel that it was “once upon a time” or“once upon this time.” I promise, regardless of your point of view, you will find it riveting and a great insight into thepower of “confidence.”Our mantra is: when popular confidence goes cold, it is time for us to be bold.

MM CA • November 24th, 2008 at 11:01 pm

Today’s Debt is EquityPLUS a Few Suggestions to Help President-Elect Obama Ease the PainThomas J. Barrack, Jr.November 23, 2008It has been a tough week for leadership and an epic week for fear.• The Big Three embarrassed themselves in front of Congress and the American Public bymisunderstanding the congressional mandate – they were told to bring a “plan” not a “plane”• Financial Hurricane Hydra raised a few more ugly heads• Nationwide unemployment accelerated dramatically• Secretary Paulson announced that he would not use TARP to buy back toxic mortgages• Stock market took another big step back• Citi slipped below $4 per share on fears that it would take greater than expected write-downs• REIT equities continue to get slammed – the RMZ is down nearly 60% YTD and down over 70%from its all-time high• CRE mortgage market trumpeted hysteria as spreads widened to historic highs in virtually all formsCommercial Mortgage Backed Securities (CMBS); AAA-rated CMBS traded as low as 50 cents onthe dollar, with yields approaching 20%• Leveraged loans are trading around 65 cents on the dollar• By March 2009, the hedge fund industry will experience up to 40% redemptions• Publicly-traded private equity share prices have diminished in value by up to 80%• The holding company of CBS and Viacom blew through debt covenants• Forex markets worldwide are peripatetic – Canada and Australia in steep decline• Commodity markets sinking globally• Public Pension funds and College Endowments are encountering liquidity problems as a result ofdiminishing asset values and the dreaded “denominator effect”• Maxim magazine went into restructuring and Condé Nast laid off hundreds as the National Enquirerand Star magazine endure restructuring battles• Berkshire Hathaway’s five-year credit-default swap spreads have gapped out to at 475 basis points,more than triple the level two months ago – even the Oracle is not prophesying• Yields on two-year treasuries dropped to 1% for the first time; three month T-bills traded down to ayield of 1 basis point, the lowest since 1940• Eurozone and Russia egg-beating to stay afloat• Arab Gulf stocks are tumbling over fear of an impending funding crisis from lowering oil prices• Five Biotech firms filed for bankruptcy in the past week• This week Barrons cover is “Sand Castles – Half Price Mansions” – panic from Malibu to Manhattan2And just when we thought that all of the unpredictables had passed – a tribe of African pirates inspeed boats hijack a Saudi tanker for ransom – a satirical headline read: “Somali Pirates inDiscussions to Acquire Citigroup”We thought now was a good time to re-examine something we should know more than a little bit about – theCommercial Real Estate (CRE) market in general and the health of the CRE loan market in specific.Here is the Cliff Notes summary – Real estate is experiencing a seismic liquidity shock as a result of acomplete closure of the credit and capital markets for both debt and equity. CRE and the debt whichfueled its growth are in a massive meltdown.Let’s Go Back to Find the FutureCRE is rapidly depreciating in value across all sectors and geographic regions. For the past 14 years CRE hasbenefited from an expanding economy and cheap and plentiful debt that was lent on aggressive terms with norecourse to the borrower. The emergence of securitization dramatically increased available leverage andreduced its cost. New equity participants flooded the commercial arena, escalating real estate values. EquityREITs became popular and produced great decade-long returns and thus increased the equity pool availablefor acquisitions. Supply and demand remained in check, but only because construction financing didn’t fitneatly into the securitization model. For well over a decade, values continued to climb and pension funds andendowments correspondingly increased their allocations to CRE as a diversification tool and an inflationhedge. The market had seemed to have finally recovered from the hangover of the last CRE crisis and capitalwas pouring into the sector. As always, more capital drew novices and speculative investors that bid up allthe markets. Real estate was forgiven for being the “drunk driver” along the road of the USA economy.The Last Commercial Real Estate CrisisThe previous crisis for CRE was in the late 80s and early 90s – the result of the Savings and Loan Crash.That crisis was highlighted by an oversupply of newly-built projects which had been poorly conceived andexecuted by deregulated S&Ls on a purely speculative basis. As the RTC harvested and sold these properties,new owners purchased them at relatively low prices inheriting very high vacancy rates and extremely lowrental rates. As demand inched its way back from 1993, new owners would lease space for relatively shortterms at whatever rate they could achieve with the hope that when those initial lease periods expired, demandwould have increased and rents could be raised significantly. It was at this rental rollover that a refinancingcould take place and capital could be extracted from these projects on a tax free basis. (This tax-freerefinancing is also one of the drivers of borrowers’ demand for debt and securitization vs. sales.)How Did Wall Street Get Involved?There was very little institutional capital interested in real estate in the early 90s. Most of the institutions hadbeen badly burned and so capital had to be formed through another vehicle. In addition to a few contrariandistress buyers such as ourselves, Wall Street rolled out an old engine, polished it, refined it with lowleverage and new acronyms like FFO and AFFO, and most importantly lobbied for an all important tax breakfor property owner debtors. Interestingly, the resurgence of REITs was not truly due to a rush of interestedpublic capital, rather it was the solution of choice for large property owners and developers who hadrepurchased their debt from defunct banks and savings and loans at tremendous discounts. These REITsponsors were able to transfer their assets on a tax free basis into a REIT vehicle in return for OP shares andavoid the horrendous tax recapture and forgiveness of indebtedness tax liability that was generated by thediscounted purchase of their own debt. This is of note because forgiveness of indebtedness income will be ahuge upcoming issue for the borrowers attempting to buy in their own debt in the current crisis. It is also ofnote because now, as in the early 90s, institutional real estate owners have exceeded their allocations to realestate as a result of the “denominator effect” and their shrinking asset base. Who are the new equitysuppliers of the current crisis?Debt securitization had been used in the residential market since the 70s and the technology was wellengineered by Fannie and Freddie. The RTC had launched a few securitizations in the early 90s and thisstarted the commercial trend. The architecture and engineering kept being refined from the beginning of the90s until another major breakthrough for the securitization market took place towards the end of 1997.3The Quantum Leap for Securitization was the Repeal of Glass-SteagallIn 1998, the USA Congress repealed the Glass-Steagall Act which had previously prohibited commercialbanks from selling securities or engaging in other investment banking services. You may remember this wasthe era in which Sandy Weill combined Travelers (insurance company), Smith Barney (broker-dealer) andCitibank (commercial bank). This was the opening gun to the largest boom in real estate securitization andlending in history. Wall Street weighed in like a 10,000 pound gorilla. The repeal of Glass-Steagall allowedthe banks to originate commercial loans, batch and bundle them, carve them into tranches, induce ratingagencies to create rated levels of securities within those commercial mortgage pools from AAA (highestinvestment grade) to NR (not rated) and then sell these securities to yield-hungry investors who hadpreviously not been interested or enticed into buying whole loans.Add Some Positive FundamentalsBy 1997 the real estate market had stabilized and a metamorphosis took place in the fundamentals of CRE.First, there was a dramatic increase in demand for office, retail, hospitality, industrial and multi-family,pushing rental rates higher. What made the situation even more attractive was that nothing new had beenbuilt since 1990, so available inventory was contained. Owners of existing buildings with lease expirations in1997 found that they could substantially raise rents. Simultaneously, the “good banks” which had been reequitizedin the early 90s had clean balance sheets and were now focused on producing earnings. The bestway to do this was to lend money and an upward-trending real estate market created the perfect quarry.Lenders were back in the game and the perils of the 1980s real estate debacle were all but forgotten. The bigbank attacked the opportunity through originating and securitizing mortgage debt. The regional andcommunity banks were not invited to that party and consequently supplied acquisition and development,construction and mini-perm loans to the B and C projects that did not lend themselves to securitization.Now Add the “Green Machine”Then came the tech wreck of 2001which forced Alan Greenspan to open the Fed floodgates of easy creditpolicy which inflated the residential and commercial bubble. What followed were the boom years ofsecuritization, 2002-2007, and the market was dominated by commercial and investment banks acting as aconduit in which loans were funded, bundled, tranched, rated and sold.Where is the World of Commercial Mortgage Backed Securities Today?In order to understand the state of the CMBS market we need to take a few minutes to look at securitizationand the players that participate within it:Originating Bank• As a simple illustration, a bank could fund a $100 loan using $5 of equity and $95 of debt (95%advance rate or 20x leverage – note that investment banks were using up to 30x leverage).• During the boom, the bank could earn $1 (1.0%) for the loan origination fee and $2 (2.0%) forselling the securities at a lower rate than the underlying coupon of the loan. In the boom days, a bankcould make up to a total of $4 (4.0%) on the whole securitization process.• Assuming overhead is $2 (2.0%) and the cost of the debt is offset by the mortgage interest incomewhile the loans are accumulated, the bank could make an easy 20-40% profit on their $5 of equity,while effectively retaining no risk as they were able to push 100% of the loans to CMBS buyers.• An insatiable demand for both cheap mortgage debt and CMBS securities allowed the bank topackage and sell each $100 loan in large pools within 30-60 days of origination, allowing it torecycle the $5 equity invested 6-12x per year – pushing ROE well above 100%.• Once banks realized the profitability of these securitizations, competition became rampant and asusual, underwriting standards were sacrificed in a desire to source more product.CMBS InvestorsAs much as 88% of recent fixed-rate conduit issuances were rated AAA, giving investors exposure to realestate debt in the form of a bond that seemingly had the same risk profile of a US treasury bond, with ahigher yield and favorable risk-based capital treatment.4• AAA tranches also yielded a 20-30bps premium to similar corporate and RMBS bonds.• Investor base primarily consisted of life insurance companies, pension funds, hedge funds, SIVs andmoney managers.• Structured Investment Vehicles (banking alchemy) were created by originating banks to purchaseAAA securities off their balance sheets into non-consolidated silos that would not require them tocarry the corresponding liability. This was yet another technique to lower risk-based capitalrequirements and increase profitability.> Life insurance companies gobbled up AAA CMBS, which only required a 30bps capitalcharge, while whole loans, which used to be their bread and butter, required 3 to 7 timesgreater capital reserves.> SIVs, money managers and hedge funds had access to leverage even cheaper than the yield onCMBS bonds, allowing them to make huge returns off thin spreads with enormous leverage.> Mezzanine tranches (AA+ down through BBB-) were taken down by life companies,commercial banks and pension funds looking for yield and relative value – at the cost ofincremental risk. More recently, CDOs, hedge funds and other “fast money” investors becameactive investors. Leverage on leverage gave birth to CDO2.> Below-investment grade securities were sold to B-piece buyers – initially, experienced realestate investors affiliated with large financial institutions. The application of CDO (resecuritization)technology to CMBS introduced a new breed of financial buyer, pushing yieldsdown and savvy real estate investors out of the market.Real Estate Owners (Borrowers)• The securitization machine lowered the cost of commercial mortgages; much as it did in theresidential market. CRE owners quickly took advantage of the cheap debt to turbocharge theirreturns by purchasing CRE with less equity and refinancing existing mortgages to reduce their ratesand cash out built-up equity on a tax-free basis.• This virtuous cycle of cheap, plentiful debt, in the context of a very low interest rate environment,allowed investors to pay more for CRE assets, artificially increasing asset values to unprecedentedlevels that proved to be unsupportable once the source of debt was eliminated.Rating Agencies• CRE mortgage securitization was enabled by the rating agencies.• Many investors did not bother to do any property level underwriting; choosing to outsource their duediligence to the rating agencies and picking up bonds that suited their tastes.• The incredible irony is that the issuers paid and chose the rating agencies that issued the highestratings, a clear conflict of interest that is manifest in the path of subordination levels over time.> Total revenues for the three rating agencies (Moody’s, Fitch and S&P) doubled from $3 billionin 2002 to over $6 billion in 2007.> Moody’s profit quadrupled from 2000 to 2007 and had the highest profit margin in the S&P500 for five consecutive years.> Rating agencies were coach, player and referee.> No one was rating the rating agencies.Master Servicers and Special Servicers• Master servicers and special servicers are designated administrators of the pool.• A master servicer oversees the pool, collects loan payments, maintains records, escrows taxes andinsurance premiums, provides investors with reports and makes protective payment advances onbehalf of the trust (subject to a recoverability standard).• The special servicer is usually designated by the B-piece buyer and is responsible for foreclosures,restructurings or work-out loans that become delinquent. B-piece investors usually control theactivity of the special servicer and both servicers are paid servicing fees.5• There is a complicated mandate based on cash flow flowing sequentially from the most senior andhighly rated class (AAA) to the most junior (non-rated) classes with losses running in reversesequential order.• Default rates on CMBS have been at historic lows and CMBS has never faced a crisis like thecurrent one. It is really important to understand that the tools of a special servicer have actually neverbeen tested in such an impending work-out environment. This will be a real challenge in thecurrent crisis.Refinancing and Maturity Risk Is Upon UsLoans securitized in fixed-rate CMBS pools generally feature a 10-year term and are pre-payable onlythrough defeasance. Because of the arduous prepayment provisions, collateral securing these loans tended tobe more highly stabilized. The bulk of fixed rate CMBS loans trading today were originated in 2001-2005and will consequently begin to mature in the next few years.Loans securitized in floating-rate CMBS pools generally feature a shorter, five-year term with much moreflexible pre-payment provisions – frequently allowing for par prepayment within the first 12-18 months oforigination. For this reason, the collateral securing these loans tended to be more transitional. Borrowersfrequently refinanced floating rate loans within 12-24 months of origination, allowing them to monetizevalue creation and often cash-out invested equity, often several times over. Given its shorter term, maturingfloating rate CMBS will reflect more of the underwriting excesses of recent years than their fixed ratecounterpart.Pro Forma LoansAs the market became more competitive underwriting standards were sacrificed in reliance on the argumentthat default rates on commercial properties in 2006 and 2007 were at historic lows. As a consequence,originators underwrote loans that did not have sufficient income to service the debt giving credit to pro formaramp-up. Loans were up-sized to include an interest reserve to pay themselves interest until the property wasable to do so. These loans are almost exclusively found in a floating rate CMBS pools.A large majority of the pro forma loans were 2007 vintage (37% of floating rate securitization volume thatyear) and the interest reserves have been drained as the pro forma rents were not attained. Bottom line isthey are out of positive coverage and cash flow.Other Current CMBS Issues?The cause of the CMBS meltdown was a simple follow-on tremor from the subprime and prime residentialfreeze. Interbank lending stopped, distribution of securitized product no longer flowed, andoriginators were stuck with warehoused and unsold product.Additionally, there was no real organized exchange in which CMBS traded, buyers relied upon the brokersthat sold them the product to create a secondary market. Once the financial meltdown started, the brokerswere unable to create a fluid secondary market for this product and yields started to widen. Further,many foreign buyers had believed that the brokers had tacitly guaranteed to create a secondary market, whichof course they did not.Mark-to-Market accounting has been the inescapable palsy upon the CMBS market. As spreads started towiden the value of the held bonds deteriorated and owning institutions would be forced to take write-downsand correspondingly increase capital. In many instances, this caused the owner to sell more bonds to fix theirbalance sheet, which further pushed pricing down and the scenario continued. This is commonly referred toas the death spiral.To further aggravate the situation holders of CMBS found that there was no market for the juniorsecurities forcing them to sell the senior securities. By this time there were fewer buyers, again drivingprices down. As a consequence of all this, what they were left with were the less liquid junior securities.Sell off as a result of deteriorating MTM has simply led to further price declines and dispositions. Moneymanagers, hedge funds and SIVs had MTM leverage and short-term debt and were hit with margin calls.6Credit Concerns Have Now Appeared To Form The “Perfect Storm”Liquidity issues and technical MTM accounting problems are now being confronted by true credit concernsthat are being presented by the recession. As a result, spreads on CMBS securities have blown out tohistorical highs causing tremors throughout the credit markets.At first, pundits believed that the volatility in the CMBS market was as a result of Secretary Paulsonindicating that he would no longer use TARP money to buy the toxic assets. The market had been hopingthat TARP would set a floor to valuations and thereby induce liquidity.Other analysts believe that the blow out in spreads was primarily due to unjustified fear and that there was nostructural reason to be concerned. They argue that while delinquencies are creeping up, they are still wellbelow levels of prior downturns. In spite of this argument, AAA CMBS spreads, which have historicallytraded at an average of 70bps over 10-year Treasuries, were trading at 1500bps over on Thursday.Both the equity and credit markets are clearly pricing expectations of weakened fundamentals across everyclass of commercial real estate. Let’s take a look at a few facts to put this dynamic in perspective:• YTD Total returns for Office REITs is -48%• YTD total returns for Retail REITs is -55%• YTD total returns for Lodging REITS is -66%• YTD total returns for Industrial REITs is -82%Many REITs will not be able to continue cash dividends and meet their go-forward cash and refinancingneeds. Since REITs have to distribute most of their income, they can not retain earnings to pay off principalon debt and keep AFFO payout at past levels.All office tenants are suffering and correspondingly wanting to pay less for space. The largest tenants ofoffice space are financial institutions, service providers such as accountants and lawyers, technology andindustrial users. Massive consolidation throughout the financial sector has had significant knock-on effectsthroughout the service and other sectors. All of these users are attempting to reduce costs by giving backspace and demanding lower rental rates since they cannot control revenues in this spiraling economy.Tenants are also increasingly looking for short-term leases in order to avoid any long-term commitments.Sales transactions are off by 95% year-over-year in all sectors. Only sales taking place are hanging overexchanges that are tax deferrals. As a consequence cap rates are certainly creeping higher but since there areso few buyers no one really knows what an appropriate cap rate is. A cap rate is the price that a real buyerwill pay and there are none to be found.The retail sector is also suffering as a result of the consumer not consuming for lack of discretionary income.We have seen the effect on retailers: epic bankruptcies, massive closing of stores and outlets and dramaticallyreduced or stopped expansion plans. This results in directly negative sales growth and occupancy across theretail real estate sectors. Share prices for retail REITs have taken a serious beating with companies that havematuring debt leading the pack.Hospitality, Industrial and Multifamily are all experiencing similar down drafts.Are Default Rates An Accurate Indicator Of The Health Of The Industry?Real Estate is slow moving business. Let’s take an example of a B quality retail mall, Blackacre, with aCMBS Mortgage in place administered by a master servicer and a nationally recognized landlord. The tenant,who is a recognized national retailer, is renting space from landlord at $450 per sq. ft. minimum base rent,2% percentage rent, pro rata Common Area Maintenance (CAM) costs and has paid for his own TenantImprovements (TI). The tenant has predicated his rent payment upon his ability to sell $400 per sq. ft. ofgoods. In 2006, the tenant is experiencing sales equivalent to $450 per sq. ft. and is happily paying base rentand CAM expenses with total occupancy costs below 15% of gross sales. In January of 2007, the tenantreforecasts annual sales of $300 per sq. ft. of goods and starts getting concerned. He calls his suppliers andreduces inventory, he extends his payment terms to them and trims his advertising budget. No need for himto speak to his landlord and no need for landlord to speak to the master servicer of the mortgage.7In April of 2007, the tenant reduces annual sales forecast to $250 per sq. ft. of goods and now is more thanconcerned. He gets rid of his warehouse, further reduces inventory, puts goods on sale, and drags his CAMpayment for a month. He still pays rent to the landlord and landlord in turn to master servicer.In July of 2007, the tenant is on track for annual sales of $150 per sq. ft. and does not have enough revenueto pay the rent. Since the tenant is a national brand he makes the rent payment even though the store itself isnot generating sufficient funds. Now, he goes to landlord and says “We are having a problem.” The landlordtells him things will be better and the landlord will increase marketing budget, change merchandising ofother stores, add kiosks and valet parking and switch theatre companies to increase traffic. The tenant takes await and see approach and drags CAM expenses longer, as well as starting to question the landlord on CAMreconciliations.By September of 2007, nothing has changed and the tenant is tired of paying base rent from revenues derivedelsewhere. Now he goes to landlord and says “I am done.” If you want me to stay I will go to percentage rentonly and no CAM expense. The landlord has many other tenants on the edge and does not want to deal withempty space so he renegotiates a deal with the tenant. Still the landlord makes the payment to master servicer.The cycle of deferral and renewal of and hope is the same for the landlord in continuing to make debt servicepayments. The problems may have started over a year ago but do not show up in terms of a default for a longwhile. By the time defaults become transparent, problems have been stirring for a long while.When default rates are the lowest they only have one way to go and the market is smarter than the statisticianof default rates. The market perceives trouble is roaring down the pike. And it is.“Go where the puck is going, not where it is” – a famous Wayne Gretsky quote of real value in anticipatingthese markets.How Deep and How Long is this Trouble?Simply put, at the height of the market, CMBS pools were originated at an average 70 – 75% loan-to-valueratio. If asset valuations drop 30%, the pro forma loan-to-value would exceed 100%, meaning the equity isentirely wiped out.If you then applied this diminution in value and corresponding increase in LTV to a bond structure, lifebecomes interesting. Recent vintage fixed rate AAA-rated CMBS bonds generally feature 12% subordination(meaning 88% of total debt has been rated AAA). However, the AAA themselves are divided intosubtranches with greater subordination characteristics. Super-senior AAA (AS) carry 30% subordination,AAA Mezz (AM) carry 20% subordination and AAA junior (AJ) carry approximately 12% subordination.Note that these designations and subordination levels were developed not by the rating agencies but byinvestors who refused to believe that 88% of these structures were worthy of the AAA rating assigned byMoody’s, Fitch and/or S&P.Let’s put these subordination levels into perspective with regard to pricing, potential collateral losses andpreservation of capital. Today, AJ (12% subordination) bonds are trading in excess of a 20% yield-tomaturity(30-35 cents on the dollar). At this pricing, cumulative underlying collateral losses of 18% wouldeat into the investors’ basis. AM (20% subordination) bonds trade at up to 20% yield-to-maturity (40-45cents on the dollar), suggesting that these investors’ basis would face losses at cumulative underlyingcollateral losses of up to 24%. The diminution in values to reach losses that will pierce the “riskless” AAAthreshold can easily be reached when the downdraft in fundamentals is mixed with a tornado of illiquidity.Empty space is very unforgiving and requires large go forward capital commitments to repair. Rehabilitatingtenants will be tough and all capital will have to come from the landlord. It could be more severe than whateven the market perceives.What is CMBX and What Does It Do?CMBX has also been an issue which has caused volatility in CMBS. The CMBX is an index of 25 CMBSsecuritization trusts that is utilized as a collateral reference to buy and sell protection under Credit DefaultSwaps. It was originally designed as a tool for CMBS investors and market makers to effectively hedge theirpositions in the cash CMBS market. Amidst an illiquid cash market, CMBX has assumed significance as a8pricing reference for CMBS securities. However, CDS are issued utilizing the reference without the necessityof actually having to buy the underlying CMBS security. Consequently, a buyer can gain synthetic creditexposure to a diversified portfolio of CMBS by selling protection (long position) or buying protection (shortposition) to hedge long cash bond portfolios or express a macro view on commercial real estate. Recently,cash bonds have traded at yields well in excess of CMBX spreads which calls into question the correlationbetween the two and also underscores the dearth of liquidity in the marketplace today (cash bonds don’t havethe inherent leverage of the CMBX market).I have attached two “back of the napkin” charts which I used to explain CMBX to one of my Chinese friends.However, the main take away is that the index itself is one of the few reference points for MTM of CMBSsecurities themselves. Consequently, it is possible that by implementing a small transaction in CMBX onecan effect the actual MTM accounting of all underlying CMBS securities. The present gross notional value ofoutstanding CMBX CDS contracts is about $270 billion.Non CMBS Commercial Mortgages Are In Even More Trouble – Regional And Community BanksThe CMBS market is about $750 billion of CRE. There is over $2 trillion of commercial mortgages held incommunity and regional banks. These banks, due to their size, were not invited to play in the securitizationgame. As a consequence, they had to source whole loans from their communities. Usually these were oflesser quality and higher risk – otherwise these borrowers would have accessed the cheaper, more plentifulCMBS market. They consisted of acquisition and development loans, construction loans and mini-perms. Manyof these banks have CRE as a large percentage of their portfolio. These smaller, geographically specific, valueaddedprojects are the most problematic in the midst of the kind of recession we are now experiencing. Thegood news for the banks is that they have been able to carry them at cost since most of these loans areconsidered to be held to maturity. Many of these loans are currently in trouble and have not yet beensufficiently written down. The five regulatory agencies which supervise banks have been busy working on thebig guys and are just now getting to the 3,000 or so community and regional banks. When they do however,they will scrutinize these loans and start the process of a true mark-to-market by making banks take adequatereserves. This can be the next great shoe to drop at the heel of the CMBS scare.There are no refinancing sources for real estate today at any loan-to-value. Maturity risk is being outpacedby credit risk and it is unclear what return equity capital will demand to enter the real estatemarket at this point.Foreign buyers have shunned CRE due to the punitive aspects of FIRPTA (a 30% withholding tax)which is applicable only to their investment in real estate.Work-outs Will Be The NormLack of viable refinancing options will force a majority of these loans into extensions and workouts whichwill be quite a mess. Many borrowers have significant tax problems in losing a property or incurringforgiveness of indebtedness income to the extent they buy back their own debt at a discount. SpecialServicers as well as banks have lost their work-out teams and no longer possess the expertise or tools totimely restructure the massive amount of restructurings with which they will be confronted.The Bottom Line?CRE will suffer greatly in the near term, will struggle for refinancing options in the mid term, but will excelin the long term as a result of limited supply and eventual renewed demand. Well positioned properties in Aand B markets which have been reasonably leveraged will be fine.Realized losses in CMBS portfolios may hit or exceed subordination levels previously thought impossibleand the complications of working through unproven structures with a special servicer will not be simple.Many regional and small banks will be crushed by the weight of failing loans, especially of the CRE flavor.The greatest opportunity is in surgically carving through complicated debt structures and being prepared tofund “non-milking cows” in the short term. This will be a $2 trillion redistribution of real estate wealth tothose who have patient, non-mark-to-market capital and a restructuring tool kit.9Most real estate investors will be on the sidelines. Institutions will be overallocated, core and value-addedfunds will be handling their own issues, REITs are not structured to take advantage of this part of the cycle,Foreign investors are stymied by FIRPTA and volatility in exchange rates. This crisis will be morecomplicated than the early 90s, given the multiple constituencies involved with present structures: borrowers,master servicers, special servicers, trustees and myriad classes of investors with different motivations basedon the specific priorities of their tranches within the securitized debt stack.A Few Humble and Respectfully Submitted Suggestions To President Elect Obama With Regard ToCommercial Real Estate1) Shelve TARP!!!! Create an RTC2 to harvest the toxic commercial debt. Use the remaining $410billion form TARP for direct capital infusion for those banks that should survive. Close and forceconsolidation for those that should not! The equity capital should be invested after write-down of thetarget bank’s assets, transfer of bad assets to RTC2, dilution or extinction of existing shareholders andreplacement of existing management. TARP capital should provide for matching side by sideinvestment of private capital, which would provide an additional advantage of new management andgovernance.Good bank-bad bank structures should be revived and there will be great liquidity from theprivate sector as shareholders of a bad bank if the assets are transferred at the equivalentformula of the old RTC-defined “Derived Investment Value” (DIV).a. The defining of a DIV process will also set a bottom for the mortgage market and a methodto calculate tradeable value as a percentage of DIV. This is the only way to truly find amarket price. Mark-to-Market is a self defeating and useless process.b. The RTC2 will create a bottom for the mortgage market and private market trading willcommence soon thereafter.2) Empower one super regulatory banking agency (i.e. FDIC) which has seniority on the other 4banking regulatory agencies. Get rid of the interagency warfare. Arm this agency with the ability towrite forbearances, issue capital certificates to bolster balance sheets and rewrite RegulatoryAccounting Principles and Risk-Based Capital Rules.3) Banks must be encouraged to extend the maturity due date of performing commercial loans. Allowbanks to deduct 100% of write-downs in the year incurred and to carry those losses back 3 years andforward 5.4) Immediately put a moratorium on mark-to-market accounting – a “mark-to-maturity” or “markto-cash flow” model should be adopted and implemented immediately. The fight for integrity onmark-to-market was lost a long time ago.5) CMBS must be included in Secretary Paulson’s proposed GSE type funding facility of asset-backedmortgage acquisitions. This could be similar to those created for the money market funds andcommercial paper. Funding and liquidity will relieve the virtual losses being incurred from trappedand stale mortgages.6) Propose an IRS amendment which would provide a 3-year moratorium on forgiveness ofindebtedness income. This would induce borrowers to engage actively in restructuring their owndistressed debt. They are usually the best solution to the problem.7) The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), which currently inhibitsforeign investment in commercial real estate should be repealed.8) Most Important: Prior to confirming Tim Geithner (which by the way was a great choice) as yournew Secretary of the Treasury make sure that he can answer the following Fibonacci mathematicalproblem:If a pair of rabbits were put into a walled enclosure to breed, how many pairs ofrabbits will there be after a year if it is assumed that every month each pairproduces one new pair which begins to bear young two months after its own birth?

Guest • November 24th, 2008 at 11:18 pm

hey… its time to buy its the bottom, FINALLYsee this newspaper cliphttp://www.theonion.com/content/node/54508

Mark • November 24th, 2008 at 11:25 pm

Growth means expansion. If you need to more fully understand my position then I encourage you to watch Dr. Albert Bartlett’s Arithemetic, Population and Energy presentation (I’ve posted this reference/link so many times now I can’t count!).I only get into debates that I can win. And with Bartlett’s position it’s assured…

Mark • November 24th, 2008 at 11:32 pm

All this “infrastructure” is also not self-supporting, meaning, it doesn’t pay for itself. As resources get more scarce infrastructure (such as noted) will only become more expensive to maintain; at some point it’ll go into permanent decline.

Guest • November 24th, 2008 at 11:35 pm

@ Wolf in the Wilds: “You cannot blame Volker for what happened in Africa. You can only blame the leaders of these African countries for borrowing too much.”By 1982, almost every Third-World government was running behind in payments of their loans to a consortium of banks including Bank of America, Chase Manhattan, Citibank, and First National of Chicago. So perhaps some blame could be placed upon the lenders, not just the borrowers, and upon moral hazard, caused by the knowledge that the US government would bail out the banks if the loans weren’t repaid. It wasn’t just African countries that suffered from Volcker Shock’ … “when the United States suddenly and dramatically raised interest rates, [which] increased the cost of African debt precipitously…”In some ways, Mexico led the way by announcing in 1982 that it wouldn’t send any more money that year on its $85 billion debt. Although Federal Reserve Governor Henry Wallich rushed to Switzerland to negotiate an IMF loan so Mexico could pay back the commercial banks, it did not solve the problem. Mexico soon was in arrears again. And even though banks postponed payments, and issued new loans to pay off the old, the Federal government essentially told these Third World governments that the federal government, acting through the Federal Reserve, could be counted on to assist if the loans went sour.Paul Volcker as head of the Federal Reserve met with Mexico finance minister, Jesus Silva Herzog, and put the American taxpayers in the breach by extending a $600 million short-term loan called a “currency swap” whereby Mexico exchanged an equal number of pesos, which were virtually worthless in international markets.This loan was made by the Federal Reserve directly, acting as a central bank for Mexico, not the U.S. and was done in almost total secrecy. William Greider in “Secrets of the Temple,” said the public would not find out for three or four months as currency swaps were reported only every quarter. “By that time, Volcker hoped Mexico would be arranging more substantial funding with the IMF.”The currency swap didn’t work, so in 1988 the Fed introduced a debt swap, which was technically a bailout.The following year, the IMF gave Mexico a new loan of $3.5 billion (later increased to $7.5 billion) and the World Bank gave another $1.5 billion, and the banks reduced their previous loan values by about a third.That did not solve the problem, either, because the Mexican economy was suffering massive inflation caused by internal debt, in addition to the external debt owed to the banks. “Insight” magazine, in an October 2, 1989 article, “With Foreign IOUs Massaged, Interest Turns to Internal Debt,” said, notwithstanding, Citicorp Chairman John Reed, whose bank was one of Mexico’s largest lenders, was prepared to lend even more. Could it be, Insight asked, because the Federal Reserve and the IMF would guarantee payments?In addition to Mexico, there’s the case of Brazil, and the case of Argentina, and Rumania, and Cuba, and Zambia, and Morocco, and Peru… summed up by the “Wall Street Journal” on April 20, 1983, as “the international debt crisis…”Then, in 1980, Red China joined the IMF/World Bank and immediately began to receive billions of dollars in loans…As Journalist Naomi Klein added in her book The Shock Doctrine, ““It was after the Volcker Shock that Brazil’s debt exploded, doubling from [US]$50 billion to $100 billion in six years.” According to University of California economic geographer Gillian Hart, “It was the so-called Volcker Shock … that ushered in the debt crisis, the neoliberal counterrevolution, and vastly changed the roles of the World Bank and IMF in Latin America, Africa, and parts of Asia.”

Mark • November 24th, 2008 at 11:36 pm

Absolutely. More simple living and greater appreciation for sustainable things IS the future. Those predicating themselves on McMansions, McHummers and having the attitude McScrew_you aren’t longed for the world (thank goodness): excess is out.

Mark • November 24th, 2008 at 11:47 pm

That’s very disappointing to hear. Best to support your local farmers and get everyone else to do the same. The only way that we’re going to fight this oncoming catastrophe is to remove ourselves from the system that’s steering it over the abyss.

Wolf in the Wilds • November 25th, 2008 at 2:40 am

Sigh. Nationalised = ownership. It doesn’t mean it is run by the government. In Asia, we have a ton of government owned banks which are run on commercial terms. Its a matter of discipline. Maybe its not such a good idea in the US. The government HAS NO discipline.

Guest • November 25th, 2008 at 3:31 am

jack the (EU) market up 10% on mondaythen let it slide 2% per-daythat will last for a weekany important announcement that can influencethe mkts next week??

Guest • November 25th, 2008 at 3:31 am

jack the (EU) market up 10% on mondaythen let it slide 2% per-daythat will last for a weekany important announcement that can influencethe mkts next week??

Wolf in the Wilds • November 25th, 2008 at 3:36 am

It is simple. If the countries did not borrow beyond their means, they would not have suffered. At the end of the day, the lack of financial discipline doomed these countries. These countries DIDN’T HAVE TO BORROW.

Octavio Richetta • November 25th, 2008 at 4:17 am

Live longer and save some money*, stop smoking. Also, start exercising, walking or whatever. You will be surprised your quality of life improves. Don’t be a sissy, have the cojones to quit.I give you this advice in the hope you are less stubborn than my wife whom I have been bugging to quit for the last 8 years. She sees cigarettes as her companion, some kind of confidant, someone with whom you share good and bad moments. That is plain stupid. Hell, sometimes I think she would dump me before she dumps her smokes:-) You have to be smarter than that.On the other stuff, it does not matter as much what you do one way or another. It is a lot less important than the smoking stuff. However, if you want some “free advice” on the topic, please provide the following:1. I assume $125000 is your remaining principal balance. Please provide more information on your mortgage: remaining life, type of mortgage (fixed, variable, etc.) and rate; any prepayment/refinancing penalties?2. Provide a conservative estimate of what your house is worth today.3. What is your tax status. Single, head of household, married filling jointly/separately.4. I assume you itemize deductions. Provide the total amount and some detail on the breakdown: Mortgage interest, charity contributions, health care expenses, etc.5. I assume you have the $125K in a non-retirement account; what do you have it invested on?6. Do you have a retirement plan/401k/403b at work. Does your employer match some of your contribution?Please provide the answers in the new thread.