Uno!

First for the first time?

Exactly my sentiments Robert. And eventually there will be enough with these same sentiments with sufficiently eroded trust to call the bluff that is the US printing machine er US Treasury and bail on US dollars. Let’s see THEN if they can print enough greenbacks to keep the US going. My bet is that they will , for a time . But not before sending the US into a hyperinflationary meltdown.We’ll see.

Please explain this statement for those who do not understand where the money for all the bail outs and spending is going to come from.

Isn’t this argument about a link to a solid store of value, land, gold, space station, whatever potentially relevant vs. trust? I know Forbes, Steve advances it. He even says that demand has nil to do with oil price, it’s all a currency fluctuation.Fact is the fiat printing of money has swelled liquid “trusted” currency stores from 1/2 of global GDP to 4x since the late 70′s (McKinsey). That happened exonentially and monotonically e.g., with NO dip.What worries me is what if we have just papered ourselves into a bizarred diflationary corner where we will see complete failure of the fiat money printing press.Consider the AIG bail-out is $140 B and GM has a market value of $2 -3 B in the “real” economy. So what? we have thrown 70 GM’s at AIG, all the while we even read on this site of cogent arguments while AIG bail out is fruitless,and we have to simply capitulate to CDS issues and tube AIG to bankruptcy, simultaneously indicting the competence of the new Treasury Secretary?OK so what do you all think…

More than 2 years ago i claimed Prof Roubini will be proven as too optimistic.His support of überKeynesian policies is deeply disappointing.After 2 years politics and economics of US will resemble Latin America-Turkey in the 80-90′s.Ouantitative Easing (money printing) policies may seem harmless right now since massive deleveraging process still continues but after this process stops a run on the USD is guaranteed.Combined with health care expenses of rapidly aging baby boomers and massive un/underemployment of the masses public finances will be a disaster. What most economics still fail to understand is years of debt driven consumption massively distorted US economic structure which means US will not have the resources to become strong productive industrial country again.Let us hope i will be proven wrong!

The government issues treasury securities, like Treasury Bills(less than 1 year maturity), Treasury Notes(less than 10 years), and Treasury Bonds(at least 10 years). The government issues these securities, and the people who buy them give the government their money in exchange for the treasury security. The government promises to eventually pay for the security when it matures, along with any interest. Currently, if the government were to issue any treasury bills they would be paying next to nothing(in interest payments), due to treasury security prices being at an all time high.In a globalized world with no capital controls whatsoever, anyone who wants to buy our securities will do so. These are countries like China, Japan, etc. Currently China holds roughly $1 billion in our treasury and agency securities.As to the original definition of how money is created, this is basically what your economic professor means when he says “the money supply is expanded”: the central bank buys a government security from the public, and that person deposits a portion of that money into the banking system, and with that money the bank can loan out more, and with the money from the loan the person spends his money and tadah, we have money creation. You basically have money that has entered the economy that was not originally there. This is a lot more complicated when you have no capital controls and the financial system is globalized.

We can pay for it if someone is willing to buy our treasury securities…which they are, according to many economists.That money will eventually be repayed after, hopefully, much growth in our economy.

People like Summers and Rubin are pragmatists(ie clintonistas)and were easily influenced by free market right wing ideologues. Now that they know for a fact that those losers can be safely ignored, they will be pursuing good strategies for once.

To Payam,The latest long term treasury auctions have been a disaster. No, “someone” is not willing to buy anymore. Foreigners are spending the money on their own economy since they know we can’t possibly pay out debt back. What the Fed is doing is giving away lifeboats to the rich while the Titanic is going down.

To Guest,If nobody was willing to buy, rates on the treasury’s would go up. So why are long term treasury’s at ~3.5% and short term securities at close to 0%? There is no fear whatsoever about our government…in fact, the US government is the most trusted institution in the world, which is why treasury securities are the ultimate safe haven during any crisis.

Read Post 5 and all the comments in response to it, since you have no idea what you’re talking about.

So for the next few years the US will focus on debt (huge sums) repayment and less time on improving productivity, GDP. Chaos for the short and medium term (and all dead in the long term).

I think some people below really miss the point. The core issues nowadays are trust and confidence. These are something no economist on earth has the right model to deal with. Otherwise, we will not be in such a mess today. The values behind the greenbacks are trust and dignity. This is the job of those politicians, bankers and industrialists to restore those values although they themselves usually lack of.

Debt is what got us into this crisis and now we are told to believe, that incurring more debt will get us out? Do I lack the intellectual acuity for not being able to understanding the logic in this?Furthermore, how is Obama going to cut taxes AND increase spending (probably more than any other president in history)?There is a saying that if it sounds too good to be true, then it probably is…I believe ultimately that the casualty of this crisis will be the USD.

Please read Post 4 also.

That is not strictly true. If you introduce the Federal Reserve into the system, then you can actually create money. The US Treasury will issue bills/notes/bonds and the Federal Reserve will buy them with accounting entries. The US Treasury now has money created out of thin air. This is taking monetary creation to the extreme: government entities coming together to create credit. It is funny money and its scary.

Thanks for spelling out the answer. There are too many ‘lies’ around. We are hearing lies from the Bush administration everyday, lies from those investment bankers and now lies from those auto makers. Without the minimum level of trust and dignity, how can the economy back to the right track. Professor Roubini was telling us serious recession and deflation. To me, it means depression. It is up to you to put the word “great” in front. We need no more lies but realities. I think the Fed needs to tell us how the money was spent in propping up some of the banks that are supposed to be way under water.

But this is not a headline for Bloomberg or marketwatch.

Spell it Gloomberg

Red,If rates were go up dramatically, investors will LOSE on the their purchases on their Treasuries.

So what happens when the crisis calms down and buyers move their money out of treasury securities?Yeah it’s working for now, but it is not a long term solution. That money will eventually be repayed after, hopefully, much growth in our economy I think the key here is how much hope you have that economic growth will outpace the interest payments on the federal debt.

Wolf in the Wilds and Guest-o-Rama: I wrote replies to you in the previous thread. Please go there to check them. CCan someone, please tell me how I can keep my Dell laptop keyboard from jumping around to other lines when I type? I am sure I am not hitting any unintended keys by mistake. So far the only solution I’ve found is gentler typing which is not my style:-)

My recollection is that turkey week is usually a week for the bulls. How was it last year? an easy way to check just occurred to me: Get historical weekly pricing data on the indices via google:Date Open High Low Close Volume23-Nov-07 1,456.70 1,456.70 1,415.64 1,440.70 146,837,500 (Down 16 points)24-Nov-06 1,401.17 1,407.89 1,397.85 1,400.95 82,149,100 (flat)…

Professor, your main search tool ignores 100% the little guys posting in your blog. You should consider, if feasible, including A “search comments in the blog archives” feature. When I started posting here my plan was to use my public comments here for note taking but my posts are “gone with the wind” once you post a new thread. After a few days, it is virtually impossible for me to fish out one of my old comments.AS a result of the password protected login process, the comments don’t show up in a google search either. This has advantages and disadvantages; e.g., it makes the blog more private, allowing for more “radical posting” than I would otherwise dare:-). If you want to enable Google searching of the password protected posts, I am sure google can help you do this if you authorize them.

No surprise to see NR endorse the “O Team” – You went long last week – smart – what are you doing now and for how long if I may ask. I got trapped a week or so ago and from what I hear a lot of this is short covering since credit continues frozen. Thanks

NR’s statement – “What policy can do – at best – is to minimize the financial and economic losses and limit the length of the economic and financial crisis, not to prevent it.”It would seem that feeding debt with more credit, which of course turns to debt, should reduce the possible free fall of financials losses and thus minimize them. However, by adding more debt I see little rational to it limiting the extent and severity and length of the economic crisis.NR, you can’t have it both ways, imo.Comments?

No surprise to see NR endorse the “O Team” – You went long last week – smart – what are you doing now and for how long if I may ask. I got trapped a week or so ago and from what I hear a lot of this is short covering since credit continues frozen. ThanksI haven’t changed my views on the length and depth of the recession but believe the citi bailout was the most effective bailout (actually the first one that will be effective) to date in terms of stabilizing the financial markets. There is a guy from citi in bloomberg right now making this point (Tobias Levkovik).The citi bailout took away a big chunk of the fear as it protected the bank’s shareholders and provided insurance against the potentially very large but less likely losses in “bad” assets by having the bank cover the initial loses instead of later ones. This is the best of both worlds as it implements the bazooka approach Hanky supports, it will end up costing taxpayers less, and it will be a lot more effective in stopping a run on the bank (BTW, I have not seeing such positive take anywhere yet, but strongly believe I am right in my views).Please note I am giving you the facts on the bailout and my opinion on what the effect will be on the markets. I am not passing judgement on how good it was for taxpayers, moral hazard etc. I will leave that to others; I will not spend any more energy on that. Such exercise is a great one for people interested in policy development but a looser from an investing standpoint.So the bottom line is that, IMO, the credit crisis will improve significantly from this point on, i.e., we will FF a couple of innings. And given that the markets went down so much (we are still virtually at the October lows with S&P 500 now at 852 vs the October 10 intraday low of 839.80) stocks may rally really really hard from here. Add to that the fact that: i. there are still some stupid people short out there, ii. we are in turkey week which is in general kind to stocks, and iii. that financials are still well below the overall market YTD, and we may get a mother of a rally. Some people think tax selling season will bring the bear back, but, IMO, that may happen in the second half of December, not now.All this being said, trying to predict short term market movements is the best way to get egg in one’s face but based on the fact that my score in predicting short term moves lately has been right much better than 50% of the time I have dared to stick my neck out.

What happens to all the plans to (1) save Wall Street and (2) save or create 2,500,000 jobs if there is no response by Obama in the Supreme Court by December 1 in the pending Berg Petition for a Writ of Certiorari or if at the Conference in the Supreme Court on December 5 Cert is granted in Donofrio? The issue in both is the interpretation of “natural born citizen.” Translation: Is Obama qualified under the Constitution? That the Donofrio Petition went to Thomas after being rejected by Souter gives you a clue that the October surprise may come in December before the Electoral College meets. Then Summers can stay at Harvard and opine on the size of women’s brains and Little Timmy can stay at the NY Fed and make bad deals.

I would have thought, with all the debate that has occurred, that it was well known that the FED IS NOT A GOVERNMENT ENTITY. It is a private institution making PROFIT for its SHAREHOLDERS, ie JP Morgan, etc.HTH.

Thanks – I have followed your posts and while I don’t always agree with your politics, the positions you take are fact based, thoughtful and intuitive. It’s interesting you point out the Oct 10 low – and breaking up through that yesterday seemed to have gotten lost – I agree you can get killed in short term trades (I have) – The real game is to predict the end game and position yourself accordingly – USD collapse>which currency/commodity? deflation>inflation?Separately I think the biggest news is the Goldman issuance of government backed debt – what are they going to do with all that money?Thanks again

Futures are through the roof

It’s not surprizing N.R. is so pro keynsian economics and also that he supports Summers and Geitner. As I’ve posted here before the professor would not be head of NYU if he didn’t rub elbows with the elitist in charge and support the economic system that provides base support for the oligarch ruling class. Take some one like Michael Hudson who is an absolute genius but he’s relegated to obscurity because his views are openly and highly supportive of a middle class. People like N.R. claim to be supportive of the middle class then turn around and support “free market” globilization idealogues who insist on throwing trillions of dollars towards banks while doing nothin thus far for workers. It’s backwards economics in support for the elite and N.R. speaks out of both sides of his mouth. One day he’s upset about the bailouts the next he talks about the necessity of them and then supports people who are neo-liberals from the Clinton era who are largely responsible for us getting here. I respect his abilities to forecast but I am also aware of his politicaly opportunistic side.

Your wrong, same thing my girl friend told me. 

I don’t know about hyperinflation, but it does seem to me that there’s a great risk of double digit inflation on the other side of this recession. It troubles me that, according to the Economist, Bernanke suggested in 2003 that Japan get out of it’s dilemma by adopting what would have been clearly inflationary policies. I would very much appreciate reading what others think about the possibilities of a serious inflation on the other side of this recession and if Dr. Roubini or any of his cohorts should care to write about this possibility in depth, I’m sure there are plenty of readers avid to hear their thoughts.

This friggin Gloomberg idiots are not capable to produce streams which are available for Macusers.They should rust in hell.

Case Shiller Housing data (from calculatedrisk)

I would like to congratulate Mr Roubini´s view of the financial system. I have been reading his point of view for more than a year, and as an economist I and former worker of a large international bank, I have always agreed with him.In adition, I would like to know if in your opinion, the opportunities in economic fields (bussiness and financial) did fly now to the emerging countries, with less developed financial system. I mean, if we will see the highest economic growth in the least financial developed countries for the next years.

Dear Robert5 millions are coming to Obama’s inaugural-large # of people trust in Obama to lead us our of the wilderness————an even larger # are still scared- especially the 80 million Baby Boomers who have seentheir pension funds, 401s quickly dissolve and who had to run to the banks to save their meager deposits————the consumer index is Way Down – and “everybody” is scared of a pink slip”trust and confidence” — FDR had the trust of the people but they lackedconfidence because “everybody” was waiting for the pink slip———Obama says he will hire 2.5 millions starting immediatelybut until they actually get a steady job, most will continue to lack confidence+ add into this, many (not Generation X) are reducing their debt…consumer spending will continue to be very poor for the next 2 years+ add into this the continuing deflation means many will hold back from buyinga house/”falling house” – but I believe Obama will give a huge tax deduction tofirst time homebuyers so this will change over the next year or two————-as for US Debt: what’s in it for Euroland, Oil Block and BRIC? -to keep making believethat they trust the Dollar and US Debt-I believe they will out of self-interest – pure business (their own)it has nothing to do with “trust and confidence”–and yes, we will have inflation come back in 3-5 years

Consider, what would happen if after all these projects, all these bailouts and fiscal stimulus packages the economy was still in shambles.You would still be in a economic crisis but now with even more debt a USD thats nearly worthless – one positive are all the news roads that would be built.

The great question is, will and can the average American loan and spend as before?If not, what then?Where are the answers to this?Nowhere.The solutions here and everywhere have only one target- persuade this idiots to loan and spend.

Simple explanation: right now, the US govt as well as world economies are in a total panic mode! Their main purpose is to stabilize and save the financial system no matter what it takes! This is done by providing essentially unlimited financial support. This is necessary because until the banks feel safe, they will not lend to each other, businesses (large and small), homeowners (mortgages, car loans, credit cards, etc). And what is so often left out by most other analysts, is without being replenished by the Fed, they do not have the means to grow even larger!!! The ultimate goal of this is to save the financial system and the economy by essentially restoring it the way it was before: entice the American public to borrow much more than they can afford and continue consuming until the next bust!This allows these companies to continue to grow, become more powerful and again, become “too big to fail” (another future govt bailout). The concern for the average American is to keep him/her addicted to the spend “willy nilly” attitude and remain in debt. One example is that the credit card industry has the highest profit margins of all consumer loans! Finally, as long as the public is blind to what is really happening (economic slavery), things will continue the way they are. There are people who are beginning to see the light and raise interesting ideas (see post above by upsidedownt)but ultimately, the public must drastically reduce spending, support small and local businesses, become more self reliant (produce your own electricity-solar panels), grow your own food or support your local community grower, etc). If we continue to support those who do not have the public’s welfare as top priority, we will continue to be ruled and enslaved by those whose only priority is profit!!!

I think you’re right.

Whenever a disaster occurs, no matter it’s an earthquake or a tsunami, rescuers will tend to save those who have the biggest chance to survive. Here we have a team of rescuers who saves companies by rules we hardly understand. Since money is no longer a concern, should GM be saved or not?

US government is to use the new debt to cover the old debt.No recession!

But this seems to be a catch-22. Local mom-and-pop stores, and smaller retailers, cannot match the prices offered by Wal-mart and the large chain stores. I know, I used to run one and was put out of business when Wal-mart came to town, and my prices were as low as I could afford, and still cut a profit. So, in order to “spend less” consumers are forced to find the retailers with the lowest prices (read Wal-mart, K-mart, McDonalds, etc…), thus leaving out the local home-owned businesses, who then either go into debt trying to stay in business, or close up shop.Solar panels are a nice thought, and I’d love to have them, but the initial cost is prohibitive (although dropping) and would require most people to incur more debt to switch. We’ve looked into wind power, but again, same situation.From downtown Main Street, I don’t see a lot of upside here for the average man on the street.

You mean those working at JPM?

PayamIt may not comfort you much but i studied industrial engineering and economics and i know very well what i am talking about. You better get familiar with austrian school of economics and a good grasp of history.

Payam, I do not recognize your name so I am not sure if you’ve been posting on her for awhile or even reading Nouriel for more than a few weeks. Almost all of Nouriel’s predictions have been optimistic. At the time they appreaed pessimistic but everything he predicted happened earlier than he expected. Nouriel has written the blueprint for this disaster but even he has not predicted its severity. I believe he has under appreciated the threat of hyper-inflation after this deflationary period.John Williams from ShadowStats is predicting hyperinflationary conditions starting in 2010. Shadowstats uses the economic models used prior to Clinton. Unemployment is already above 14% and inflation is over 13%. According to Williams the US has been in a recession for over two years. The Clinton Admin changed the models that analyzed economic growth which enables our government to paint rosy pictures in troubled times.

Maybe the Prof meant that Geithner is an excellent choice for the financial establishment that created this debacle.

Red, I asked this question the other day too. PeteCa gave me a great answer. I’m too lazy to find it but essentially we are in a deflationary period because the Fed is giving money to the banks but taking toxic debt in return. As of now no money has been created. If I understood PeteCA the money is actually being destroyed since this junk paper was once worth a lot more money.However, I still think the US is heading towards a inflationary period. ShadowStats has shown that the US is currently dealing with 13% inflation. The models for inflation used by the government are bogus. The same goes for the unemployment numbers. Anyway, the reason I think the US is heading towards severe inflation is that this crisis has only just begun. The US government will bail out the states and local governments. It will also give money to the big three and provide money to boost aggregate demand in the form of public works. We are likely looking at over 1 trillion in new spending. In order to expand the money to this level the US must issue more debt.What happens when China finally says no?

yup

PeteCa, I agree with you. I do not know a lot about Tim Geithner but I know he was a very powerful man in the Fed system. He therefore has some culpability in the actions taken by the Fed to solve this problem. I believe people will start to realize that Obama is a trojan horse. He was able to sap the energy of all the progressive movements in the country to follow a once poor half black man who believed in the audacity of hope.Everyone was so busy listening to him talk that they forgot to look at his actions. Obama voted against capping predatory credit card rates. After hearing about this vote I knew everything I ever needed to know about the man. He is a tool of the elite and he has surrounded himself with members of that elite that have overseen economic, social and political catastrophes across the globe. I expect him to fail brilliantly.Also, are you starting to see why I fear a major bout of inflation? The US can not continue to print this much money while accepting toxic debt. Eventually someone will sell off their dollars creating a run on the currency. After this happens any new money must be inflationary. Also, the US is about to pump hundreds of billions into the economy to prop up state and local governments. I’ve also heard that the Dems want to emulate FDR and spend billions on public works. This money needs to come from somewhere.

Yup, probably sooner than later.

I would elect this as the comment of the day:

So what happens when the crisis calms down and buyers move their money out of treasury securities?Yeah it’s working for now, but it is not a long term solution.That money will eventually be repayed after, hopefully, much growth in our economyI think the key here is how much hope you have that economic growth will outpace the interest payments on the federal debt.By Theta on 2008-11-25 04:23:30

I did come up to the same conclusion, but I probably did not emphasize it here. This is the mechanism that will break any recovery. As I said sometime ago, dollar and US bond crash are incompatible with deflationary debt unwinding. However, as soon as investors perceive a marginal safety, they would be struck with a new wave of crisis: The Treasury will be left holding the bag, most of it, promising yields next to nothing. OTH, investors that will be gaining more confidence would dump them in favor of higher yielding securities. This outcome does not need to be preceded by an inflationary period, but it will be followed by one.

doom and gloomers – the gold bugs – expect black yearsunless an unexpected event (Black Swan) appears, a US/World govt bailout of the US/World Recession will drag everyone through the next few years-

the ones work for me…

These aren’t liars, they’re swindlers. Of course, swindlers have been know to lie a bit from time to time.

if the government sends us 1 million cash to spend, prices go through the roof, and we end up looking like Weimar Germany. Look it up – it ain’t pretty

That’s assuming people will spend the million; if they have learned anything from this debacle, it is to stop excessive spending, stay out of debt and save for one’s retirement and to help their loved ones.

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.comHide replies Reply to this comment By Guest on 2008-11-24 15:04:09I’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.Hide reply Reply to this comment By Guest on 2008-11-24 15:26:26g, they are too smart to lie in defence of a fraud.Reply to this comment By blindman on 2008-11-24 16:55:46 Great Article!!Reply to this comment By MM CA on 2008-11-24 15:28:28 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.Hide reply Reply to this comment By CHRIS DAVIS on 2008-11-24 22:55:16c.d., you say..”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.”are you serious? whiff of conspiracy? in finance? i think the system greatly rewards those who can best organize conspiracy in business and finance.am i being naive, cynical or realistic? the system also says, and rightly, too big to fail. how about too failed to save? sometimes it seems to say too corrupt to prosecute.the lenders and borrowers misallocated the dollars, not america or just americans; irrational and exuberant speculators. some borrowers were gaming the system, made lots of money and then got stuck. a shame, oh well. some were first time home buyers and were taken advantage of out of their own desperation, mostly the not greatly rewarded for their labor types. the professional, highly organized, efficient and greatly rewarded finance group was bleeding the stone and they should have known better. that they will argue that they are innocent because they were ignorant is curious. look at this…FDIC moves in on banksVikram Pandit and Ken Lewis worry about what Hank Paulson and Ben Bernanke will do next. It’s Sheila Bair they should fear.By Katie Benner, writer-reporterNovember 25, 2008: 6:25 AM ET.”In July, Bair proposed a narrow record-keeping rule that, simply speaking, allows the FDIC to ask any troubled institution it regulates to turn over details of all its qualified financial contracts, or QFCs. QFCs are contracts between a bank and a counterparty, and they include everything from securities and repurchase contracts to currency and credit default swap agreements – some of the same murky derivatives behind Wall Street’s biggest blowups.Many banks still don’t know their exposure to these products or details about the counterparties, which they are also required to provide by the new ruling. The way Bair sees it, they don’t know because no one has ever forced them to know. “.they don’t know? they give themselves and each other million dollar bonuses in this efficient business and finance industry and they don’t know what it is that they do for a living? i feel weak. i’m not only blind, i’m dumb and going deaf.this will be their defence when the law suits come to pass. we didn’t know. we didn’t know. the mantra started months ago, years even. history is full of horrible things done by people who defend themselves by having no idea what they did or were doing but, buying insurance against failure of your operation,”assets”, is an indication that you knew something wasn’t quite right..besides that, i agree with many of your other points. when the brutal reality is fraud it needs to be denigrated and then corrected. or…as president g.w. bush said.. “this sucker could go down.”we are learning again it is not about money and power but about knowledge and confidence, first.Reply to this comment By blindman on 2008-11-25 10:04:41

By then the tax base will be substantially supported by higher ordinary income receipts and capital gains will also favor income and lower rates on the latter will favor the investment climate. In the meantime, federal debt resulting from fiat currency to fund debt security value transition will be amortized by budget. You will hear more about this in the weeks to come.

The Road To Nowhere

Excellent points! Total transparency is essential for if we the public cannot see what is happening, we will be blind sided again and again!

WAIT UNTIL THE INTEREST IS DUE ON ALL THE TRILLIONS OF BAILOUTS THE FEDS PLAN TO IMPLEMENT TO KEEP OUR CREDIT CRISIS GROWINGEven Obama knows you can’t add taxes to Detroit or Citi Bank, etc….who’s left? Boeing and Microsoft, etc? Even Obama knows if you tax our companies, they pass on the costs by increasing layoffs.So who does that leave to pay the bailout mess interest? Look in the mirror.I estimate all our net pay, if we’re lucky enough to have jobs in 2009, will be cut like 20-30%. This will cause even more home price deflation, it has to.

Posted comment by Chris Whalen:” “We have been less than enthusiastic about the choice of Timothy Geithner to be the next Treasury Secretary. Granted, the idea that we will have someone who is intelligent, knows a thing or two about the markets, and is not from Goldman Sachs makes him a big improvement over the Bush incumbents…”But Geithner did work for Goldman Sachs, IMO, in that he has been “actively involved in the central banks’ policy before and during the financial crisis.” And Stephen Friedman of Goldman Sachs is chair of the NY Fed where Geithner receives his salary… and past CEO of Goldman Sachs Hank Paulson works hand-in-treasury with the Fed. And Goldman Sachs’ Robert Rubin was Geithner’s mentor. And who benefits? Why, Goldman Sachs. Follow the money. It is Goldman Sachs et al. who have used and benefited from the high standard of living Americans and the rest of the world would now be enjoying had not the fruits of their labors been usurped these many years by the international bankers. It is the American taxpayers who are being forced to rebuild Goldman’s imploded financial empire.It is to be remembered, IMO, that Federal Reserve “created” money is used not only for financial matters: it is used to maintain the bankers’ control of all aspects of political, economic and social life. It is used to bankroll political candidates big time, swell budgets of universities, provide huge outlays required to start newspapers, magazines, television networks, internet sites and Soros-type CAPs… and a vast array of “think tanks”.It was that champion of democracy, Thomas Jefferson, who said: The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered.And, now, the homelessness begins…

When will it be time ? How about march 09 One and a half million people surround the white house. Parents and their children, carpenters, roofers, artists, police, members of the military, scientists, doctors all of us as people not consumers and in force grab onto the fence that surrounds the white house and show them that the banks and wall street do not own this land.Overthrow the bastards and their greed.

It is disgrace that Roubini has admiration for thives and liars like Geithner and Summers who are robbing taxpayers and bailing out friends on Wall Street.

he used to work for them

First, I told the Newsweek reporter – as full disclosure – that I had worked for Tim Geithner and Larry Summers when they were both at Treasury:

Asthonishing.Nouriel seems to lose credibility in his own blog.

Great quote by Jefferson! The ultimate American tragedy: how the noble intentions of the Constitution can be ignored, reworked and twisted to benefit those in power!

Not that simple word change, OVERTHROW ! Show them they are not in charge. Revolution. A show of force that will be escalated

That attitude toward government is soooo 20th Century.

With the actions that this (and the upcoming) government is taking it seems that no company or individual will be “allowed” to fail. So much money is being thrown around that all the depression/deflation scenarios are very much improbable.If that is correct, then what is next?I am impatiently waiting for Professor’s post with his thoughts as to the way ahead. With so much money flooding the nation it is very confusing path forward; maybe not for him or some of you. Any thoughts?

Amazing how many idiots post on this blog. If I were Nouriel I would hire someone to erase the posts of people who clearly understand little of finance and economics.

To Guest:Talking about attitudes on a blog full of unintelligent/uninformed posts is a waste of time. This blog has no rules whatsoever, which is why just about anyone is allowed to post. Unfortunately the majority of the posts are made by people who feel their opinions and reflections are worth more than an economist’s, by frequently challenge NR by telling him he’s wrong.Then it becomes apparent in their posts that they understand little and make up arguments a lot. As I said elsewhere, if I were NR I’d have someone on duty just to erase your posts. They are a blight to this website, and bring down it’s credibility.

Capone:I agree with you. However, I’m worried for your health. Take it easy, short the market and enjoy the ride!

And more foreclosures

Just a note to all Bloggers……I’m changing my “handle” or name to “RanMan”.

I’m retraining as a printing press repairman so I have a job after I’m laid off shortly.

c, nailed it.

Hey buddy, the last I checked the ARGUMENTS USED to deregulate everything was done by free market ideologues, including of course libertarians. The blame here is on the obvious inability of the free market to police itself and on the free market ideologues that deregulated everything. You cannot blame the “government” for this current debacle.

Payam, you believe what you will and when you are desperately looking for food to feed your family, remember kaan’s email adress. I’m guessing he will be prepared and you will just be another fool. But even if we are wrong, is there something so terrible about trying be prepared for the worst? Why do you so vehemently oppose this? Do you have another agenda here?

I really do not think the NR’s prescription for dealing with the crisis is very controversial. It was when Hank Paulson initially started trying to develop a solution on the fly a couple of weeks before the election. Now that the political war is over, economists and policy makers from both sides have been able to speak their minds. And all but a few free market fundamentalists believe that we have to choose among a bunch of critical and bad choices. The first one is stimulus to get the economy moving. Because if the economy is in recession, the tax base shrinks, deficits increase and social spending has to go up. There is NO alternative to economic stimulation. Once the economy is moving, then you can deal with cutting spending and addressing the Bush National Debt.

I suggest that the CORE problem is one of a generational dynamic that can only be corrected through experience and that it will take a decade or two for that experience to be deep enough to truly change how we act.My generation never lived through really tough economic times so we spent, spent and then spent some more, creating exotic financial instruments to create wealth out of thin air. This is not the first time this has happened and it won’t be the last but the future has largely been written by the actions of our recent past.

Remember Dr. Doom?Back in 1979 – 80 Henry Kaufman of Salomon Brothers was known as Dr. Doom for his pronouncements that interest rates would stay high. He was late on seeing the change in expectations.To all the people upset at NR for advocating stimulus: Monetary easing (raising the price of gold, going off the gold standard, zero interest rates) was not effective in the depression, fiscal stimulus (ie WPA, CCC etc) was also necessary. Fiscal stimulus was not done sufficiently then; it appears Obama’s team will be enacting a huge stimulus package.

Don’t read any Austrian Economics, it’s basically a fringe in the world of economics. If you make yourself believe the dumb stuff they do you will never get yourself out of it, because it’s a belief system rooted in ideology, not empiricism.

Dear Guest,Most of this money is only being loaned out, not spent. It will be returned when the time comes.

Amen

Morbid asks me: How About A New Economic Model While You Are At ItI reply: This is the largest, most wasteful, most corrupt money system in the history of the world. My economic model would be to stop the stagecoach at this point, cool the horses, and turn around and go back in the opposite direction.

http://www.chrismartenson.com for starters check crash course.

And I’m quitting my job as a doctor to become an ink supplier to the Treasury!

Payam,Please post as much information as you can, please explain your system of analytics, and a summary of your findings, then for the sake of all of us stupid people, please find somewhere more enlightened to post! WE WILL NOT MISS YOU!

No dude,I don’t like it when people pull out outrageous numbers that almost no academic economist believes, or the federal reserve itself.The thing is, nobody would allow hyperinflation to ever take root in the USA, and it simply wouldn’t occur because we aren’t just printing money like Zimbabwe does, most of the time we issue securities to expand the money supply. You simply don’t understand this.We’re entering a deep recession, of that there is no doubt. Espousing fears that we’re entering into a hyperinflationary period, on the other hand, only shows your lack of understanding of policy in the USA. If you want to listen to the fringe that espouses all of this nonsense, then go ahead. Just don’t share it with me.

The free markets did police themselves until they were forced to loosen there self imposed lending standards, once forced to break their own rules the opportunists realized they could make fortunes while exploiting the uneducated. Both political parties sat there and watched it happen because they were too stupid to realize what was going on. But hey they bought some votes along the way now that fruit pickers in California could afford to buy McMansions.

That’s IT, the bubble that’s been forming is the BAILOUT bubble! Obviously this one isn’t going to last long…

Returned?In what value? Hyperinflated dollars? The selling of these bailouts to the public under the impression that the government will get paid back or that the taxpayer will get paid back is so FOS!How many times have I heard the line, can I borrow this , that or the other. Translation: Can I have it?

If you read the last several months of this blog and it’s contributors you would see that when people speak of hyperinflation they are talking 1-2 years down the road. Is it all that unfeasible to see? I personally don’t think it will go there, but I do think it is a possibility and not many economists saw the current situation 2 years ago either. Economics is fluid and you must be willing to accept possibilities when actions are put into play that could lead to that outcome no matter how unlikely. Personally I believe 2-3 years from now we will be in a large inflationary environment, not more than 100% but greater than 50% and on an individual micro economic level that is devastating.

I have been responding to you guys post by post. The only thing I have done is tell you that the onus is upon you to show information that backs your claims. Most of you do not clearly understand the workings of the economy to make these claims, as has been shown time after time. Is there something wrong in me telling people they’re ignorant?

It’s not a good idea to do away with the FED. They do an innumerable amount of things that the average person simply does not understand. There has to be a monetary policy body independent of the economy to make considerations on interest rates. The only times they have fucked up is when they thought the market could police itself(Alan Greenspan anybody?)

Your responses have been much more educational and civil than your original “you are stupid” posts. Educate people don’t insult them, and no one here will have a problem. Had your initial comments been as cordial as your responses, I for one would not have a problem, I respect your economic input and thoughts. Most of us are here to learn from each other and make educated decisions for ourselves based on what we glean from the group. There are many very well educated and helpful people here, you would do well to read much of the postings here from regular contributors such as Miss America or OR. You may not agree with them, but their comments are typically well studied and informative. For those that come here and make wild comments, usually it’s a vent, a place to show some frustration. Do I think we should let the Big 3 fail, No, but am I furious they are in Washington asking for money YES, so we make commments, but everyone here knows how to read through the BS! Don’t read into those people too seriously.

“The selling of these bailouts to the public under the impression that the government will get paid back or that the taxpayer will get paid back is so FOS!”What is your impression the government won’t get paid back? Do you have anything that suggests they won’t? Ok dude, let’s go through the logical steps. Let’s assume they pay us back. This means taht the economy has returned to at least some degree of normalcy, even if we are still in recession. This means the money is returned to pay off the treasury debt. Let’s assume they don’t get paid back. That means we are really fucked, because that indicates we are still in a deep recession or maybe close to depression. But, what would have happened if the government didn’t make any of the loans(actually preferred stocks)? We and the world economy would have entered a depression.Do you understand that the only logical conclusion is for the government to get involved? It seems you’d rather innocent people/companies/businesses got hurt than letting the government loan money to save the system and thus save us.

Bailout Pledges Hit $7.7 Trillion Bloomberg is reporting U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit.The money that’s been pledged is equivalent to $24,000 for every man, woman and child in the country. It’s nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office figures. It could pay off more than half the country’s mortgages.“It’s unprecedented,” said Bob Eisenbeis, chief monetary economist at Vineland, New Jersey-based Cumberland Advisors Inc. and an economist for the Atlanta Fed for 10 years until January. “The backlash has begun already. Congress is taking a lot of hits from their constituents because they got snookered on the TARP big time. There’s a lot of supposedly smart people who look to be totally incompetent and it’s all going to fall on the taxpayer.”http://tinyurl.com/6h7pu6

But I forgot to mention, I have a deep hatred of ideology, and thus free marketeers/libertarians/Mises fools. You may see me make rude comments towards them and them alone.

This has already been happening in the form of loans. Americans have been given massive loans to buy property, they have spent the money on goods (from China) and on assets, forming a massive asset bubble. The only way out is too re-inflate the asset bubble or kill it.

Funny how many of you personally take offense when I mentioned nobody in particular. It appears many of you already knew the obvious.

Fair enough for me.

g, i think benjamin franklin did something like that.

you are an idiot if you think we should not get rid of the fed. who are you anyway. Benny in disguise?

Find me one non-libertarian/mises institute economist that supports your position and I will gladly espouse the removal of the FED.

No, there is nothing wrong with calling people ignorant. In fact you should do it more often, as many can see that the current application of economic policy is not only impressively effective, but strikingly fair and balanced.

Hey dude don’t listen to this guy. Don’t go near Austrian Economics, it’s a fools game.

A study by the American Economic Association found that top economics graduate students were better trained in “formal modeling techniques than” in solving “real world problems” and that nonacademic employers “registered disquiet about the ability of the profession’s recruits to conduct empirical research” (William J. Barber, “Reconfigurations in American Academic Economics: A General Practitioner’s Perspective,” Daedalus 126 (1997), pp. 87-103, at pp. 96-98.)Economics is an artifact of human imagination, and the agreement among certain humans who “play the games” together — thereby it is a social technology. There is no underlying physical reality other than what is identified by the players to be components. Granted, the interactions within the system may be complex, and the economic properties are determined by what people study. Nevertheless, in the economic properties are determined by and limited only by the beliefs of the “players.” To build economic models one must assume certain features, and the models become part of the generators of the results. Since they are not inherently tied to the physical and biological realities, they may fail arbitrarily as the physical and biological world view of humans change — or as people believe the physical and biological world exists. Economics in large part reflects human belief systems. When physical and biological constraints become seriously constrained for humans, economics becomes irrelevant. The game ends.Disclaimer: I trained as a physicist.

quote of the day:”One of the big problems we have is that there has been a lack of demand for debt.”- Scott Brown, chief economist at Raymond James & AssociatesHmmm. I’ll let you guys let me know what *you* think before I respond to this one…

Becky Rynor, Canwest News ServicePublished: Tuesday, November 25, 2008OTTAWA – Record numbers of working Canadians are turning to food banks to supplement the family food basket, according to a national study released Tuesday.HungerCount 2008, prepared by Food Banks Canada, found that 704,414 Canadians – more than one-third of them children – went to food banks to bring home enough to eat during the one-month study period last March.”Even after more than a decade of economic growth, food-bank use is still six per cent higher than it was in 1997,” said Katharine Schmidt, the executive director of the non-profit organization….it would seem growth was better in this sector than s&p 500 over 11 years

Go do your reading buddy, it seems you have a lot of catching up to do:http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.htmlPlus, Fannie and Freddie only hold 20% of all subprime loans. So making the suggestion that mortgage companies made the loans because of Fannie and Freddie is obviously preposterous.

I think that’s akin to a hospital that says: “the problem is that there isn’t enough disease so we can have more patients and be more profitable and keep the system going.”

The Fed and Its Lies | Anthony Gregory(Based on a talk given outside the Federal Reserve Bank of San Francisco, on November 22, 2008, during the first national End the Fed Rally, the grassroots protest at every Fed office and bank in 39 cities all over the United States.)Last month, Alan Greenspan told a House panel that the current financial crisis has shown he had “made a mistake” in trusting the free market to regulate itself. As a true free marketer, I took offense at this. Here he was, the former head of the Federal Reserve, the governmental monopoly of the money supply, implying that what he had championed was free-market capitalism.Of course, a true free market would mean a separation of money and state. There would be no Fed, no central bank, no legal tender laws… What most of us here would expect to happen is to see gold and other precious metals once again take the role as the premier money in our economy.This all brings us to the major myth behind the Fed: That it is the center of our free enterprise system. In fact, it is the exact reverse. It is the state’s tool for socializing and intervening in the most crucial of all commodities in an exchange economy – money itself…If the free-enterprise myth is the thesis of monetary propaganda, and the progressive myth is its antithesis, they both serve together to form the synthesis of all of us being ripped off and very few understanding what is happening. In reality, the Fed is the worst of both worlds: Privatized profits and socialized risk: It is the key to corporate socialism and the corporate state: It is the intersection of the wealthiest private interests with the brutal power and monopoly that only the government can offer: It is economic fascism in our midst…Very recently, we’ve seen the Fed behave even more criminally than normal. Its operations are intrinsically fraudulent, but it has become even more brazen. It has reached for new powers to become more directly involved in financial central planning. During the Billionaire Bailout deliberations, the Fed was injecting hundreds of billions into the economy even without Congress or the president or anyone else having a word to say about it. In the last couple months alone we’ve seen a 40% increase in the monetary base…If you really believe in true free enterprise and oppose seeing it destroyed in its own name… Fight the power. End the Fed.http://www.lewrockwell.com/gregory/gregory174.html

Thanks:-)

Blah blah more nonsense from libertarian/mises institute whackos.

End The Fed!

Amen.

Some of us lurk here because his own blog disagrees with him. You can’t get a good, educational debate when everyone is parroting the same line.

How about no.

Yo, what’s up. I can do that too. Watch.”Speaking of ubiquitous ‘incompetence and stupidity’:”Forgive this guy, as he knows not that he is using rhetorical strategies to compare apples to oranges”

I heard it was 40,000 on NPR yesterday morning. (I’m from Littleton, CO)

look, everyone, Payam went underground! No more responding to “Anonymous”, either I suppose. Or, better yet, why don’t we all be grown-ups, and just not respond to inflammatory posts altogether?

I’ll go with you: I probably heard wrong — or my recall is misfiring. Thanks!

what is the origin for the word “gleaner”

pjb, damn man, you are a poet. but i prefer the translation .. “for they know not what they do.” or… “my god, my god. why hast thou forsaken me.”.. and of the cloth.. let us not tear it, but cast lots upon it to see whose it shall be.

Jefferson quote – SOURCE if you have it

More reading:Start at the beginning, written in 1776Adam SmithWealth of Nationsadd to thatGalbraithNew Industrial StateBoth talk about, among other things, the agency problem: corporate managers will act in their own interests and not shareholder interests. Adam Smith was the writer who gave us the line “it is not through the benevolence of the butcher or baker that we get our daily dinner but through their enlightened self interest.”

Let me see if I get this straight. First off, government programs were enacted in order to convince banks to over extend themselves to consumers. Consumers were encouraged by artificially low interest rates to borrow more than they could afford. These loans that were created were then bundled up and sold to investors around the world. These investors, to guarantee their invested money should these bundles default, also bought insurance to cover their bets. The consumer, who is underwater in debt, defaults on the loans they were encouraged to take. Insurance companies that provided bet insurance did not have enough money to cover the payments and had to ask for help from the Fed. Banks that held these bundles now have no income from these portfolios and are asking for help from the Fed. Banks can’t lend out to companies as their income has halted and those companies that only survive because of credit are calling to the Fed for help. So now government needs to encourage more borrowing by the consumers who cannot afford to make payments?

Nothing – unless you have a problem with a school of thought that posits theories that are actually predictive.People don’t like the Austrian school b/c it is too radical a departure for them from the status quo. As for me, I’m convinced a “radical departure” is exactly what we need.<Yawn>

Wrong, it’s slow and steady growth, it’s conservative it’s common sense.

@ PayamTimmy? Timmy Geithner is that you?

Even if you believe that Keynesian prescriptions are good, a question remains:How to control the amount of intervention?You have two extremes:1) no intervention = free market solution2) total intervention = government to buy all the firms (USSA – Union of Socialist States of America)In fact USA is NOT a free market because of the mechanism of pricing the cost of money lending = FED defined short-term interest rates so that (1) is impossible.Besides, the gov is clearly “rewarding” bad practices.Because of fear, people are agreeing with any plan. (Some dictators were elected because of this behaviour).What will finance the bailouts?-Taxes?-Inflation (Electronic non backed money)? = all dollar holders lose.-New Loans – Is a good idea to buy more bonds? Ask the foregners [John Connally once told furious Europeans that the dollar was "our currency, but your problem."]I think foreigners are now very very worried about the printing press solution. (See the monetary base expansion at the FED St. Louis.)Chinese will spend more than half their “dollar” reserve. I think the stimulus package is not their only oo intention (the other one is to drastically reduce dollar exposition).So that if the Government is not able to control a future severe dollar debasement, I think the stag-deflation thesis of Roubini (maybe inspired on the Debt-Deflation paper that Prof. Irving Fisher wrote in 1933 (after losing 100 million dollars in the stock market) can become the opposite problem(a strong inflation that can be asserted based on another Fisher theory, his equation of change MV=PT where price level is directly related to the quantity of money.

Try YOUTUBE and sort by date.

Thanks. The Way Back Is The Way ForwardAre you Roubini?

You’re not buying stocks -your Buying ticking time bombs with monopoly money. Remember K.I.S.S. keep It Simple Stupid, What are the chances of re-inflating the housing bubble, Right is wrong and up is down.

The Obama plan is a strange mix of Clintonesque Reaganism. They’re going to cut government programs for Main Street and give welfare to Wall St. Nothing new about that. They’re even allowing the guys who built (and brought down) the monti scheme to stay in place. Citi CEO was interviewed and when asked what he was going to do with our billions he said, with a sly smile, “buy paper”. Yikes! There are smart bankers who did not get involved with toxic paper. Get rid of the guys running the big banks, sell the toxic waste on the market and shift good assets to stronger and wiser regional banks to create a healthier banking system.No bailouts with our money!

So the FED just waved it’s wand and Sha-BAM $800 billion dollars is available for bailout?So what was the point of the initial $700 billion TRAP fund?Couldn’t the FED just as well created it?

They figured out if the Treasury could move some TARP over to the Fed the Fed could leverage it 10 to 1 which is what they did today – $20b of TARP to Fed who moved out $200b – watch this “TARPese”

Awesome article – Thanks for linking it Cahill. I avoided the whole finance game because of the idiots I met involved in it during and shortly after my first degree… I never met one I thought was capable of managing a loan for a night out, never mind a million here, a billion there…

I should add – one of my most successful (ex)friends working in finance studied a B.A in art history, spent his ENTIRE academic career stoned, plagiarized his entire dissertation and got a job via family connections. Obviously a solid grounding for understanding mathematics, research, etc.On the other hand – he did develop a good line in bullshit…He still owes me a hundred quid from about 16 years ago.

I’m sure the govt and the financial behemoths realize this; hence, they argue behind close doors “we must do everything possible to preserve the current system”!

i dunno, I’m pretty good at leaning on a shovel.

Good comment.

It’s ideology, pure and simple.

You should provide a link next time. Nouriel could get into trouble since some of this site is a pay site.

Do you enjoy making small talk on a blog of a prestigious economist?

The point is not to simply give a work to the unemployed, but rather to have them do something useful.The reason the private sector doesn’t hire this classes for their know-how is that finance and construction know-how is utterly useless right now. So either the government hires them to do nothing useful (to no good to the taxpayer) or it make them re-qualify.People who has know-how in those areas of the economy most affected by the debt bubble will re-qualify at some point, because we will not have another debt run like the past one in our life-time. The sooner they re-qualify, the better for them and for the society. There is simply nothing (good) the government can do about it, but make the process faster.@PayamI’m one of the nuts who likes Austrian Economics, don’t bother talking to me, I’ll not bother either.

Let’s read The Case Against the FED by Murray Rothbard to understand the problem with a FED-supported fractional banking system

glean[Middle English glenen, from Old French glener, from Late Latin glennāre, probably of Celtic origin.]c.1330, from O.Fr. glener, from L.L. glennare “make a collection,” from Gaulish (cf. O.Ir. do-glinn “he collects, gathers,” Celt. glan “clean, pure”). Figurative sense was earlier in Eng. than the literal one of “gather grain left by the reapers” (c.1385).http://dictionary.reference.com/browse/gleanAnd on that harvesting note: Happy Thanksgiving!

Read Cournot

Really Guests, if you post here you want to be read, but if you post as Guest you lower your chances because many people here routinely skip most Guest/Anonymous posts, I sure do it.Choose a name and put your credibility on the line.

Very good commentary.

Keep in mind that nothing is permanent, therefore there are only temporary “solutions.” If you’re asking what’s the biggest bang for the buck, then I’d have to say conservation. Invest in anything that helps conserve.

Shadow Stats:Flash Update November 23rd, 2008• Monetary Base Annual Growth Now at 75.5% • Systemic Solvency Crisis Intensifies Anew • Increased Nationalization of U.S. Banks Ahead?Flash Update November 19th, 2008• Annual CPI Inflation Slowed to 3.7% (11.6% SGS)* in October • Inflation/Deflation Traditionally Measured in Terms of Annual Change • Industrial Production, Housing Starts Showed Deepening Downturnhttp://www.shadowstats.com/*Note: SGS statistics are figured by the pre-Clinton era method.

payam=nouriel??nnnaaaahhh

So, if my real name happens to be Bill Gates and I don’t want to advertise that, should I use a pen name or guest; what is the difference? Maybe I should choose guest as my name!

Uh, he looks the same, except younger and slightly longer hair.

Austrian losers have been declaring gloom and doom since time immemorial. They didn’t exactly call this crisis for the right reasons. They thought there would be a run on the US government and everything would collapse. But in fact, people are putting more and more trust into the government than ever(by looking at treasury yields) and even so much that the dollar has appreciated.

Using a distinctive name would make traceability and evaluation much easier. It also builds a personality (even if it is a virtual and fake one) and credibility (or lack thereof). If a post is signed by “Guest”, it is very difficult to have the courage to take the effort to read it, especially if it is lengthy. Having a name attached to your comments make other readers build a “profile” of you, store your ideas and beliefs, which also saves time.As an example, when I see a post signed by Alessandro, I read it, no matter how long. I also know “much” about him, his “unspoken” and underlying ideas and know from what perspective he is talking, which elucidates much confusion; imagine that for every new post signed anonymously, I need to do this “background” guessing game with no available data, to see if I would agree or not with the person: exactly similar opinions or posts by two different virtual people do not bear the same weight, are not equally convincing and most importantly, if they are right, they won’t be right for the same reasons (the meaning of being right for the wrong reasons).I absolutely have no interest in knowing who is who in real life (at least if that person does not wish to) – the fact that you are Bill Gates or not would not change the way I value your inputs. But if Bill Gates had consistent and relatively valuable inputs here, over some period of time, to convince me he is worth the time to read, inputs that were signed and sealed, and therefore, traceable, I would have changed my idea about him.You are giving a name to you ideas and opinions, not to who you actually are; that is a privilege we don’t have in real life – we even have the privilege to baptize ourselves. Having a name does not reveal your identity nor does conceal your visibility.But if anyone choose to stay in double anonymity, I totally respect that.*This is not an investment advice, do not trade accordingly. Do your own research.

Far leftist Air America host Randi Rhodes said today, “Ummm. Seven and a half trillion! I can’t figure out if they’re trying to privatize the Treasury or socialize the companies… Looks like they’re trying to empty the whole ocean to bail out the boat.And on the far right today, Rush Limbaugh was dramatizing how bailouts keep coming, one after another, and nothing happens, and another bailout is needed, and nothing happens, and…And some guy was saying on one of the talk shows, You know the economy is very important and we shouldn’t do these bailouts unless there is an emergency, like a Bear Stearns, say, or a Lehman, or a Freddie and Fannie, or a Goldman, or Morgan Stanley, or AIG, or JP Morgan, or the Golden Nine, or Citi… and more to come.

Me forgot to addWe solve all you future problemsAfter we sell you cheap toy and cheap products all kinds with also cheap electronic, now will sell you cheap computer and very soon we delight sell you very cheap car you will like, and also we built hospital for you get cheap health care (we combine to you with nice holiday and tourism fun) and solve your health care crisis.We solve all problems of you. You do nothing.Don’t worry. Be happy.Love to you all economist like payam

PayamA piece of advice, if you think it is worth it:Payam is a relatively new name here if I’m not mistaking. The minute you started posting was to argue and bitch (sometimes for good reasons) which is a fine thing. What is not, from an adoption point of view, is to call this one and that one ignorant and losers (when you don’t name anyone specifically, it means you are addressing it to EVERYBODY). Most people do not know your “backgrounds”, i.e. what school of thoughts you follow, what ideas you hold, and therefore take any arguing from your part as an insult. It doesn’t matter who is right or wrong, if we are to restore a friendly environment for debate.Piece of advice … off”But in fact, people are putting more and more trust into the government than ever(by looking at treasury yields) and even so much that the dollar has appreciated.”I would not call that an “in fact”; people are putting money into treasuries, yields are dropping and the dollar is regaining some strength for, I believe, evident reasons that has nothing to do with trust, well it does, but not the way you description let it appear. Most of the momentum is driven by debt deleveraging and trade unwinding. Most of the rest of the momentum is driven by fear and flight to RELATIVE safety of treasuries; investors know well that in the worse case scenario, if everything has to fall apart, UST market would be the last one that does so:When everything (or most of things) is in free fall, all becomes a matter of relativity; who/what is falling faster than the others, that is where we are now.At some point, after the synchronized free fall comes to an end, it will rather be question of who/what will land (softly or hardly) and who/what will crash (and also who/what will blow sky high)

I think a vote of NO confidence is already….WAY OVERDUE!I believe you are correct, sir.

There is no such thing as a free market in the real world. A “free market” is a simplified model of an always more complex economic reality. Sometimes a useful simplified model with good predictive value. Sometimes not.The map is not the territory.

economists rule – Bernanke, Greenspan,Guithner, Summers … couldn’t agree more we should leave this to actual economists…

you mean like for example “Payam” – as a guest who reads all but the posts in upper case I am more interested in the content. Having said that I do enjoy seeing the regulars such as PeteCA, OR, LB et al.(I do miss SGG though) – but for now I am just happy to be Guest – the admin knows anyway.

I agree. Who is going to buy a house in this market?

The revisionist machine has started regarding Guithner who, according to Bloomberg, Struggled to Get Movement on Swap Dangers (Update1) Bloomberg on GuithneerNov. 25 (Bloomberg) — Timothy Geithner was among the first policy makers to shine a light on the unregulated $47 trillion credit-default swap market back in 2005. The New York Federal Reserve president has struggled since then to get dealers to carry out reforms.(I guess he must not have read his March 23, 2007 speech March 2007 – Yves Smith on Guithner Speech)Timothy 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.”

hmmm…so we should leave this to the economists, because obviously economic principles are way too complicated for the common man to sort out. (Sort of like CDS contracts or home ownership contracts.) But not all economists. Just the right ones. Do you have a list of “Right” economists that I could look at?

Payam, the logical move will be not to lend money, but to write down these assets, writedown the risk takers and to restart the lending process. But in their desperation to save the shareholders, they have put at risk the whole nation. Lending money to economically generative activities makes sense. Lending money to financial institutions to fund delinquent assets doesn’t. The government will not be paid back for these. They are just giving money away to entities that should not exist in their current form, and will cease to exist once the vested interests have milked as much from the nation as possible.You have a very naive view. If you truly understood the extent of the problem, you would realise that the nation cannot possibly sustain such a path without itself being destroyed. I seriously suggest you do some research before commenting.There are ways to solve the problem. Trying to bailout risk takers is not the way.

Yeah, Nouriel Roubini. Bernanke isn’t bad himself.You really have to feel sorry for the economics profession. It’s the one profession where every non-economist feels they are professionals in. You don’t see that kind of problem with any other profession.

Yeah we’ll see that you’re wrong. You mises folks are a joke.

Personally, I do not subscribe to any school particularly. I am somewhat lost between the elementary and the high ones.However, I always thought that any theory has its merits … even the craziest of all, and I would not discard (or for that matter accept) all what a theory has to say.What I’d do with those bits of theories is another question.

The USD trend is in process of changing, as I expected.Should it break to new lows then I will be assuming that a USD crisis is at hand.(Speak to the finger Payam)

so. economists are expert at studying other peoples money. that’s all. you go and leave it to them if you like.where it is in the game. the rich have won. they have all the money. they lent for a while till the poor and the working class ruined their own credit participating in the debt pyramid. now, it’s over and the available money to be had is managed by professionals and the rich and it is end game times, with them competing with each other. the large corporations have outdone the small but, coincidentally, there is now no money or credit in the economy for them to earn because they used up all the credit to kill their competition.so they talk about trillions of dollars, like a life boat in the sky for their profits and earnings. like the stars in the heavens, a penny for your thoughts and all that..debt cubed for the sinners and the young. join the army and see the world….when the fed says we will back to 7 trillion, they mean 70 trillion and the offer is not going out to citi, it is a global offer for a global currency. we’ll see if the world wants in. or part there of.just a thought.

Might I be so bold as to state that while I do truly respect economists and am fascinated by the feild. “ECONOMISTS DID NOT BUILD THIS GREAT COUNTRY OF OURS” The common man did, the amerian worker did, the free thinking people did. So please don’t tell me or anyone else to STFU, if that was how this country worked then we would still be a British colony! Open your eyes and your mind Payam, the solution to all this may come from the least likely people.

Re auto request for loans:Detroit news outlets report today that Chrysler now likely to fail very soon, not able to wait until end of year for possible fedl loan funds. May consider merger into GM, or break-up. this was on local news, didn’t see it on national news.

The Fed and Washington boys want the dollar to dive so we can stay more competetive. Problem with that is it will lower our standard of living. Devalueing the currency has never worked for the long run. All the new boys Obama picked are no better than the old ones. All of them were standing around holding their dicks while the economy was going south. They will be more of the same. They are only new talking heads. I think the dollar will go bust in less than six months.

Pete,As I said earlier, I do not believe that any trend down in the USD/UST would start before the “flight off safety” starts.It is in the best (shortsighted) interest of the US that the credit and equity market turmoil to continue.On another front, do you believe that power shift to the new administration would be accompanied with some kind of poisonous gifts; each administration trying to make the other take most responsibility?

Haha that’s about par! I know how you feel I have 3 friends on wall street and not one of them was sober during much of college or understood any of our business classes.I never let anyone manage my accounts for me, I do all my research and investments myself.

……….along with soaring prices at the checkout and petrol pump.Over time the US is headed for a good old fashioned LatAm style flameout. Brought on as a result of the US Govt’s irresponsible approach to it’s currency and it’s wanton antics in the Fed. It is impossible to sustain the current level of toxic waste laundering by debasing Fed assets and avoid a currency implosion.The US believes it can because it is the US and the worlds reserve. Well, that is about to be put to the test.

You are absolutely right! That’s simply money printing. They should come up with some edible paper money just in case.

From last thread:@Wolf in the Wilds: “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.”Most countries have temporary leaders. It is all too tempting for a leader who just doesn’t care, or doesn’t see the long term consequences, to simply borrow and live it up while in office. They gain *great* popularity because the economy seems to zoom, all on borrowed money. Then when the bill comes due, they are long gone. I give you the examples of the Perons of Argentina and Reagan of the US. Yes, it is true, as you say, that those countries didn’t have to borrow, however it wasn’t the citizens doing the borrowing.

This is the paradox of thrift. But debt is now necessary to avoid the greater evil–deflation. The question will be whether to encourage thrift and cut back (& raise taxes) once the threat is over. The verdict of the last 8 years is that noone is willing to take away the punchbowl. Right now, the punchbowl is at risk of being shot by a 50 caliber machine gun.This is from a person who loves thrift.

“There is no path to return to the good old days without pain”Good days were based on irational spending from money that population dream to have some day in the future. So most of these “good old days” are not based on economic reality but just crazy spending by crazy people. Otherwise I agree with your final statement: “…politicians are willing to tell the Americans the truth : they need to consume less, save more.”

Payman is actually an Iranian name, I just found out. Is this Ahmadinejad, president of Iran? I wonder if he is supporting the current U.S. policy since he knows that will crash our system.:-)

A final thought. This comment by Mr. Brown is disgusting. These people want to impoverish and imprison us, and they will do anything to make a dollar off the backs of others. Even the idea of taking out debt, knowing that these financiers are salivating to enslave me, makes me nauseated.Please, if you don’t have to, don’t let your freedom be stripped from you by these monsters. Simplify, simplify, simplify, and find the peace and joy that comes from simple living.

Alright I just figuered it out THE DOUCHEBAG that’s you Payam, lost all his money in the market because he let some dipshit at Goldman invest his money for him and now he wants to blame anyone that doesn’t believe in his system. You would have been the perfect Hitler follower back in the 30′s Payam.

ROFL,I’m not a right wing ideologue. You’re a libertarian/right wing fascist, so don’t give me ur bullcrap.

Here we are, most trained academics and economists talk about how letting Lehman fail was a complete mistake, and you’re calling ME naive?I realize many of you would rather we have entered a depression. I, however, would rather not.”Lending money to financial institutions to fund delinquent assets doesn’t.”The money does not “fund” delinquent assets, it only shields them from immediate insolvency due to further writedowns. Eventually shareholder value will go down to very low valuations, and eventually banks will start the loaning process again and pay off these accounting losses.Keep in mind that the only reason the banks are having problems is because the cost of borrowing for them had gone up dramatically. Their “collateral” was worthless in the REPO market. Eventually all of these banks will return to normal, and I will be there to laugh in your face and make sure you realize the fallacy of your thinking, and that goes for all of you who think that somehow most of this money won’t be returned.As to the post below this, the federal reserve cannot become insolvent, there is no such thing as an insolvent central bank .

Amazing John, so now I’m Ahmadinejad, Roubini, Geithner, and Bernanke secretly posting at the RGE BLOG under the pseudonym Payam!!!

?? I really don’t see Austrians as supply-siders. Can you suggest any link where this issue it is discussed?Free-market freaks, yes, but supply-siders, I really don’t see it!

“Once the economy is moving, then you can deal with cutting spending and addressing the Bush National Debt” – Which never happens in real life…

The only realistic way to do it is to collapse the Dollar. Thats why Gold is outperforming

Thats a great story. Really shows you how bankrupt the US system is. Short dollars next, its going to be a big one!!

@ GSMMichael Pettis:

China runs a massive current account surplus with the US and, in recycling this surplus, an equally large capital account deficit. This recycling has been both the main source of the global liquidity that has engulfed the world until recently and a constraining factor in the global economy. Given their magnitude it is impossible for either country to adjust without a major counterbalancing adjustment from the other, but it is far from clear that policy-makers on either side, especially in China, have a clear grasp of how big the necessary adjustments must be. The result is likely to be a steep drop in global growth, much of it borne by China, and possibly even a collapse in global trade.

(my emphasis)full article

It’s Humpty Dumpty Time

or with a different IP address

Payam gets it.It’s quite simple actually. Say, you handed over a crisp $100 bill to your dad and bought a pink slip of IOU paper labelled ‘AAA $100′ (You sure trust your dad). You dad built a house and buried the $100 bill under the house. The termites ate the $100 Bill.Your dad’s dead now. Your dad’s Big Brother i.e. Uncle shows up (we’ll call him Sam) saying he’ll take the unredeemable IOU back from you and gives you a freshly minted $100 bill.Did Uncle Sam really print? No, he’s just liquified a junk IOU that had previously destroyed the value of an old $100 bill.The $100 bill is now back in circulation and the toxic ‘AAA $100′ IOU is in Uncle Sam’s gut. Luckily for us, Uncle Sam’s gut is just an accounting entry; remember he’s still got the Aircraft Carrier that can still commandeer a Sirius Star if need be to settle any dues.And you’re happy you’ve got your $100 bill back. So what’s the problem?Till the losses continue to come as Prof. Roubini predicted on the AAA CDO pigs, etc. we can, you guessed it,Print First (and) Ask Questions Later.P1AQL.

Michael Pettis periodically shifts from bullish to bearish back to bullish on China.Don’t you think that if trade started to shrink the PRC would make some kind of adjustment in their macro mix – out of self interest if nothing else?

@P1AQL,Thanks for explaining your handle.I guess we all must in the end trust our gut. My gut tells me that we are just in the beginning of an unimaginable financial STORM the likes of which the world has never seen. The policy wonks will never put Humpty Dumpty back together again. Their endless strivings only add more fuel to the FWMD unleashed – strengthening its blast wave effect. The only ongoing questions center around “what’s next” – to crash. The true horror begins when we see the world population crashing due to lack of services, food, health, wars, etc.I guess my handle is self-explanatory.

and why is this relevant to this discussion unless you’re a mises/libertarian fanatic who can’t stop talking about gold?

j, not final yet. i agree with your sentiment. the comment brown made is blatantly obvious, like he just realized we have a problem. but it makes me think. the system does commodify debt at its core. it is fundamental. so if we look at it as a resource in the economic or ecological model, what do we do with a commodity or resource that we have way too much of and no demand for? if it was water, what would we do? if it was toxic waste, or lumber, or sugar or seaweed or construction debris? what do we do with excess? there has to be a solutionand that is what i want to know.

Payam: A piece of advice – since you are new here. We tolerate a wide variety of opinions on this blog. And we don’t mind if people disagree with various viewpoints. But if you want to survive as a long-term contributor, you need to back up your arguments with substance.PeteCA

rYskAmP in a mirror is PAY + bounce back = AM ===> PAYAMThen of course there is Mabus…

and also, on the contrary, these bailouts create a false sense of security.. like doing business with citi is doing business with treasury.by the way, what did poor lehman (not) have?

That’s the $64,000 question. We would all like to know that. Even Lehman’s CEO didn’t know the answer. Did the Fed and Treasury just screw up? Did the US Gov’t say to themselves that Lehman had a lot of assets in E. Europe, so its failure would sabotage the Russian stock market? I don’t know. Speculation is wide open, but we may not know the truth for years – until someone on the inside publishes their memoirs.PeteCA

Jubilee!!

IMHO: The adjustment in China is one of the key factors – in terms of whether the global economy comes out of a recession or drops deeper into something worse. The Chinese need to re-tool, and go after a different set of exports i.e. they need to drop their reliance on the US consumer. If they can succeed – and that’s a big IF – then Chinese consumers will start to take over where US consumers have left off. But it is unclear if the Chinese can make this critical transition. They are doing their best, though.PeteCA

The FED and the government need to increase the money loaned to the financial institutions by an order of magnitude as quickly as possible inorder to stabilize the financial system. The bazooka didn’t work now they need a bunker buster.They should facilitate the merger of Citigroup, Bank of America, and J. P. Morgan Chase. To incite the merger, they can provide a lump sum payout to the board of directors and upper management that do not remain during the consolidation. The lump sum can be financed from the savings assumed by the elimination of overlaping job duties from non and lower management.

Dr. Roubini,While I respect your intentions for pointing out the obvious as others we deluding themselves in the euphoria of the latest Ponzi scheme created as a result of this so called fractional reserved banking system, I find your high praise of these inept social engineers to be misplaced. It is evidently clear that we have no learned anything from our experience in the Great Depression – an event that was caused and perpetuated by the Federal Reserve. At that time, our currency was theoretically tied to gold, which prevented us from printing our way out of financial turmoil of the time. We have no limitations today. It is clear from what Obama is saying and doing, along with his fine team, is that we will spend our way out of the current mess. We do not have the money for such luxuries, nor do our kind friends who have loaned us money in the past as they intend to do the same for their own economy. As a bankrupt country with no hope of external financing and little industrial base to manufacture or produce anything of value, our only hope is to finance this scheme through the printing press. The world would lose any remaining confidence in the dollar. With exponentially higher supply and equally diminishing demand, the floor will fall underneath the dollar. This is the definition of hyperinflation – the complete lack of confidence in the nation’s currency. I would not focus too much on the false reports from the government on the dollars value or the economy’s progress. This is already happening and will be evident to all within a couple of years. I wonder if Dr. Roubini would like to enlighten his readers on this event now or maintain his claims that this is the finest economic team that anyone could assemble.

I think so many of you are just viewing this wrong, I get that historically layoffs work but in this current circumstance it needs to be a little more trickle up. Laying off thousands of people to protect profit margins is insane right now. If 10% off the population is unemployed the other 90% are so scared they aren’t spending a dime they don’t have to thus hurting profit margins for everyone. The rest of the populace that are working are forced to fund social programs making it even harder on them to spend on luxury items. Companies should cut overhead costs, streamline what you can but the more mass layoffs this country has the darker the picture is going to get.

A profit from Gold, no matter how large, may never compensate for the possible stigmatation of being a libertarian. I would rather starve.

Fine by me, I’ll enjoy my food you go for starvation….I won’t cry for you there Ghandi.

The value of gold is, in fact, constant. It’s value come from the fact that you cannot make more of it at the whim of government.So, your “investment” did not double in the last two years, rather the dollar lost half of it’s value.

Precious metal ownership is just a proxy for those who lack belief in our fine financial system. A system that has evolved over almost a century. To ignore it now, to live with an economy with no central banks, it’s just unappetising.

ALOT of people will continue to bank with Citi.There are either unaware of it’s financial stateor simply believe it’s just as safe as any otherbank.

Roubini said that taxes and reduced services would be one of the ways this will all get paid for — what you are saying is dead on, but doesn’t factor in the bailouts just reduced revenue — so its double bad.

Have either of you heard of Diversifying? I didn’t dump all my money in Gold, quite thinking in absolutes. I’m saying my gold holdings did double in Dollar value and if you use the logic you just used then my stock holdings that gained in dollar value did so for the same reason you expressed so it looks like WE ALL LOST!BT err Payam, I lack belief in any system buddy, I do my best to stay prepared for the worst and capatilize on any opportunity I see.

Obama Chooses Wall Street Over Main Street by Robert Scheer | Posted November 26, 2008 | 06:45 AM (EST)Maybe Ralph Nader was right in predicting that the same Wall Street hustlers would have a lock on our government no matter which major party won the election. I hate to admit it, since it wasn’t that long ago that I heatedly challenged Nader in a debate on this very point.But how else is one to respond to Barack Obama’s picking the very folks who helped get us into this financial mess to now lead us out of it? Watching the president-elect’s Monday introduction of his economic team, my brother-in-law Pete said, “You can see the feathers coming out of their mouths” as the foxes were once again put in charge of the henhouse. He didn’t have time to expound on his point, having to get ready to go sort mail in his job at the post office, but he showed me a statement from Citigroup showing that the interest rate on Pete the Postal Worker’s credit card was 28.9 percent, an amount that all major religions would justly condemn as usurious.Moments earlier, Obama had put his seal of approval on the Citigroup bailout, which his new economic team, led by protégés of Citigroup Executive Committee Chairman Robert Rubin, enthusiastically endorsed. A bailout that brings to $45 billion the taxpayer money thrown at Citigroup and the guarantee of $306 billion for the bank’s “toxic securities” that would have been illegal if not for changes in the law that Citigroup secured with the decisive help of Rubin and Lawrence Summers, the man who replaced him as Treasury secretary in the Clinton administration.As Summers stayed on to ensure passage of deregulatory laws that enabled enormous banking greed, Rubin was rewarded with a $15 million-a-year executive position at Citigroup, a job that only got more lucrative as the bank went from one disaster, beginning with its involvement with Enron in which Rubin played an active role, to its huge role in the mortgage debacle. It is widely acknowledged that Citigroup fell victim to a merger mania, which Rubin and Summers made legal during their tenure at Treasury.Yet despite that dismal record of dismantling sound regulation, Summers has been picked by Obama to be the top White House economic adviser and another Rubin disciple, Timothy Geithner, is the new Treasury secretary. Geithner, thanks in part to the strong recommendation of Rubin, had been appointed chairman of the New York Federal Reserve Bank after working for Rubin and Summers during the Clinton years. Once at the New York Fed, he was the main government official charged with regulating Citigroup, a task at which he obviously failed. Yet over the weekend, it was Geithner who hammered out the Citigroup bailout deal with Treasury Secretary Henry Paulson and a very actively involved Rubin.As the Washington Post reported, Paulson had indicated last week that no further bailouts were planned before the new administration took office until “Rubin, an old colleague from Goldman Sachs, told Paulson in phone calls that the government had to act.” Rubin conceded in an interview with the Post that he had played a key role in the politics of the bailout.This outrageous conflict of interest in which Rubin gets to exploit his ties to both the outgoing and incoming administrations was best described by Washington Post writer Steven Pearlstein: “The ultimate irony, of course, is that just as Rubin and Co. at Citi were being bailed out by the Bush Administration, President-elect Barack Obama was getting set to announce a new economic team drawn almost entirely from Rubin acolytes.”As opposed to the far tougher deal negotiated on the bailout of AIG, the arrangement with Citigroup leaves the executives, including Rubin, who brought Citigroup to the brink of ruin, still in charge. Nor is there any guarantee of the value of the mortgage bundles that taxpayers will be guaranteeing. That is because, as candidate Obama clearly stated in his major economics address back in March, the deregulation pushed though during the Clinton years ended transparency in banking.Why then has he appointed the very people responsible for this disaster to now make it all better? Why not ask him? Heck, yes, it is time for the many of us who responded to his e-mails during the campaign to now challenge our e-mail buddy as to why he suddenly acts as if the interests of Wall Street and Main Street are one and the same.http://www.huffingtonpost.com/robert-scheer/obama-chooses-wall-street_b_146577.html

You can’t just write off or inflate debt, there will be serious consequences. On the other end of every debt there is someone for whom this is wealth. Ironically, the same people are on both ends of the debt, the average American citizens. The other end of a lot of debt is wealth owned by retirement funds, or money considered as health insurance entitlements. In other words, a few decades of future wealth has already been spent.

Seems he fooled his voters like every polition does since the beginning of mankind.Why so staggerd?

I completely agree with you that there will be serious consequences but I don’t see any other way to do it. Financing it to future generations could be done but they face the same implosion and we can’t push it that much further into the future.

BoA and GE Are NextI read something recently (WSJ?) where Bank of America and GE are going to be next to start going under.

DEBT WALL – The Immovable ObjectNice image. Maybe Roubini will use it in his next State of the Union!

They substituted the loan for preferred stock, which costs AIG less. The 11% interest rate on the loan was too much of a burden.

Cahill, if I had done a lot of different things I could have doubled my money, or more. For example, if I shorted financial stocks I probably would be up 100-200% right now.

g, and we can’t trust that anyone will look into this? forget the market, the mentality and spirit of the system are in the dark ages. i was talking to a guy today about catching “falling knives” and he commented, ‘yea, but people are crazy, thank god.’ i thought that was hilarious but true. i think we will be hearing a lot of people in high places “confessing” deep levels of ignorance in the near future. we will be living in a time where ignorance becomes a sound legal defence.

No, inflation/deflation is not always a monetary phenomenon. Inflation can be completely contained by monetary policy, but it is not the caused strictly by monetary phenomenon. Blaming today’s deflation on what the Fed has currently done is laughable, or even after the 2001 bubble crash when in 2003 deflation was a concern.It is not creating hyperinflation. There is not a single non-mises(ie non-dumbass) economist out there suggesting this would most likely occur.I already know the problems with the different inflation tools available like CPI, but you mises fools claim they are completely fabricated. Go suck on a cock loser, if anything disagrees with your ideology you call it a fabrication. Get the hell out.Worst Regards,-P

Um, I believe the person I responded to didn’t provide any substance himself.