Hard to tell how this will all wash out at this point in time, but I think this recent bit of breaking news could eventually reveal much:

http://news.yahoo.com/s/ap/financial_meltdown_investigation;_ylt=AkxwqHv...
----------------------------
FBI investigating companies at heart of meltdown
-----------------------------

Jerome,

I've been waiting for you to weigh in on this. Your analysis is up to your usual standards: insightful and easy to understand.

Thanks.

Jerome,

Thanks for this. I hope inquiries are made about this scenario.

I very much agree with you that things that ensure that people can afford their mortgages are the most critical and upgrading housing to better energy efficiency is the sort of worthwhile economic activity that might support employment and wages. Direct investment in that seems better than the current effort. Please let me know what you think about my comment here: http://community.nytimes.com/article/comments/2008/09/23/opinion/23tue1....

Thanks,

Chris

Wolf, at 'The Financial Times' also views this as a scam - although he puts it more delicately - but only just -

The simplest way to recapitalise institutions is by forcing them to raise equity and halt dividends. If that did not work, there could be forced conversions of debt into equity. The attraction of debt-equity swaps is that they would create losses for creditors, which are essential for the long-run health of any financial system.

The advantage of these schemes is that they would require not a penny of public money. Their drawback is that they would be disruptive and highly unpopular: banking institutions would have to be valued, whereupon undercapitalised entities would have to adopt one of the ways to improve their capital positions.

If, as seems plausible, a scheme that imposes such pain on the financial sector would be rejected out of hand, the next best alternative would be injection of preference shares by the government into decapitalised institutions, on the lines proposed by Charles Calomiris of Columbia University.

http://www.ft.com/cms/s/0/a09b317e-898d-11dd-8371-0000779fd18c.html

Money already spent has gone towards evading regulation:

But the case of AIG, the US insurer, also shows the importance of another, hidden, link across financial markets, namely massive evasion of regulatory requirements. AIG’s last annual report reveals that it had written coverage for more than $300bn of credit insurance for European banks. The comment by AIG itself on these positions was that they were “for the purpose of providing them with regulatory capital relief rather than risk mitigation in exchange for a minimum guaranteed fee”

http://www.ft.com/cms/s/0/41960e1c-8972-11dd-8371-0000779fd18c.html

The analysis you present makes a lot of sense out of the seemingly irrational statements - a MacBeth syndrome, where so many wrongs have been committed that double or quits is the only answer, as their personal world is crashing.
Criminals reach a stage where they might as well continue, and raise the stakes.
Let us hope that it the next ploy is not military.
I think that is what Putin fears.

with the euro up by 6 cents since the plan was announced Thursday night

And now with today's congress activities saying it is not yet a done deal there is a bit of a pull back on that Euro rise!

After the FBI investigate Fannie and Freddie I understand they are going to be going for drinks with Alan G., you know shoot the breeze and have a few laughs at the taxpayers expense.

The part of the puzzle that needs to be added is

H. Paulson Treasury secretary is saying "this is the least painful way for the taxpayer"

but

H. Paulson the member of the board of directors of the IMF is the messenger delivering the message "pay up suckers" or "no liquidity for you"

The losses are already incurred, marked to market many banks are bankrupt, so if this is not passed then they have to somehow capitalize FDIC and they don't even have the people to handle the crisis.

This way they put the worst banks under one at the time, no dividends and the equity is wiped out, but they are rolled into GS or MS that already have people that can handle this.

Why else would they designate them as bank holding companies.

It also saves them as they are re liquified with the deposits from the BK banks.

All this really does is wind it down in a somewhat controlled manner, the taxpayer losses are already incurred.

The only way to minimize the cost to the taxpayers that did not overextend themselves is to give the draconian treatment to these that did in order to maximize recovery. There should also be a claw back of bonuses where the slightest scent of fraud can be detected.

Watch this video commentary on Treasury Secretary (aka: former Goldman Sachs
Chairman and CEO) "King Henry" Paulson's role (i.e. complicity) in **creating**
this theoretical financial mess.

http://www.youtube.com/watch?v=MO6P_yjKFR4

Are Humans Smarter Than Yeast?

Some related links of interest:

First, Paul Kedrosky brought to the fore a quote by Doug Kass:

I am in unsurprised dismay watching the Senate Banking Committee hearings this morning with Bernanke, Paulson, et al. Doug Kass gets it right in a comment moments ago:

"It reminds me of a bunch of school kids who turned in their homework too late."

Spot on, Doug. Spot on.

Paul points over to Barry Ritholtz's 14 Questions for Paulson and Bernanke.

Finally, Mish is calling you to action.

My comment, and why I have always been a "slow crasher" is this: Institutions will do that they can to maintain themselves, kicking the can down the road aways, so that someone else will deal with it when times are better. The catch is, of course, that times there are few stimuli available to resuscitate economic growth. In that environment, institutions will either go to war or print money...or maybe even both.

This has a very familiar feel to it. Kinda like " those are weapons of mass destruction". Anyone who disagrees is a traitor. I'm not saying that there isn't a problem, just that I'm not sure it can be solved by this magic bullet of 700 billion overnight.

I don't tip at restaurants where the service is lousy.

(If I did, I should not be surprised to receive more of the same, more lousy service and even lousier lousy service the next time around.)

Why is Paulson proposing to tip those who served us this foul tasting dish?
Why is Paulson pretending there are no other options?

I am a bit out of my depth in economic analysis, but here is a second letter that I have written and am about to send to my three congressmen. Feel free to use, modify or alter it in an attempt to stop this bailout.

September 23, 2008

The Honorable Senator ...,

The banking and finance industries need reform and rational regulation, not a $700 billion plus bailout. Start by eliminating the exotic loan products that have a fundimental part of causing the subprime mess, such as eliminating no documentation loans (NINJA) and adjustable rate mortgages (ARM). Since Alternative A-paper (Alt-A) mortgages are the next batch set to rot, they must be restrained as well. Subprime lending must be restricted to a small percentage of a FDIC insured bank's portfolio. To encourage responsible lending practices, banks should be encouraged to keep loans on their books or, if sold, bear the financial cost of a default encouraging responsible lending. Reinstate the provision of the Glass-Steagall Act that forbid the blending of commercial and investment banks. No corporation should be allowed to become so large, that its failure would harm the economy. After buying Merill Lynch, Bank of America is likely in this category. Ensure the FDIC does its job, rather than turn a blind eye to reckless banking activity. Criminally prosecute executives who mismanage their companies.

Karl Denninger has it right that confidence needs to be restored to the financial markets. He wrote an open letter to Congress that can be read at:

http://www.denninger.net/letters/paulson-bernanke-senate.pdf

He suggests:

1. Broker-dealer, insurance company and bank leverage ratios must be reduced to no more than 12:1.

2. “Level 3” must either be barred or all firms utilizing such a “bucket” for assets must disclose, to the individual CUSIP level (or equivalent) each instrument in that bucket and the full formulaic method, variables and assumptions that resulted in the derivation of its claimed value.

3. All OTC derivatives must be moved to an exchange or repudiated.

Banning short selling of stocks as was done during the Great Depression would be wise. Even the lesser actions of reinstating the uptick rule and the ban for short selling by mutual funds that was lifted in 2007 would be helpful. Regulate hedge funds. Placing greater trust in the finance industry by continuing deregulation as the disastrous consequences of this policy unfold is insane. Letting the free market reign freely is a failed policy. This $700 billion bailout rewards and gives more free reign to the financial titans that have brought us to the brink of depression.

Denninger also states there is too much liquidity in the financial system, but it will not circulate normally because no one knows who to trust.

"You can throw all the money you want at this problem but that
won’t solve a thing; there is in fact too much money in the
system but nobody knows who they can trust, and thus it will
not circulate normally."

A lack of trust is definately part of the problem because no one can determine the real value of mortgage backed securities. This needs to be resolved by transparency in the MBS's. I think he is wrong about the liquidity, though, because the devaluation of houses has greatly reduced liquidity in the banking sector. There is too much debt necessitating a return to bygone days of saner, regulated lending practices, such as requiring at least a 20% downpayment. The market can correct this subprime mess by lowering the price of real estate to an affordable level and sweeping away the irresponsible lenders. Let the banks fail and use tax payer money to maintain the FDIC insurance obligations. After banks are taken over by the FDIC, their good assets can be sold off; executives fired, denied bonuses & prosecuted for destroying their companies; insured deposits paid from the proceeds of selling the good assets and FDIC insurance; and uninsured deposits either abandoned or fractionally paid using any remaining proceeds. Because the majority of loans are good, MBS's can be sold if their true worth is displayed to the buyer.

There is no guarantee anyone will buy all of the debt this bill proposes for the U.S. treasury. Interest rates for T-notes and T-bills may skyrocket into double digits. This bailout will devalue the U.S. dollar and may precipitate the loss of it as a world reserve currency. If oil is no longer traded in dollars, the value of our currency will freefall driving the cost of all consumer goods up and placing a crushing burden on the middle and lower classes. Consumer spending would evaporate, unemployment would soar, borrowers would default and depression would be upon us. With a massive infusion of cash the finance industry would be sitting pretty. Look to Argentina for a real world example of stagflation and what not to do.

Even if successful, this Bush/Paulson/Bernanke bailout plan saves banks and leaves consumers and tax payers twisting in the wind to start another vicious cycle of privatized boom and socialized bust for the benefit of the wealthy.

This bailout gives the Secretary of the Treasury an unlimited, unsupervised tap into the tax payer's purse. The $700 billion is only the maximum toxic debt that the government can assume at any given time while the total amount would extend into the trillions. Do not allow foreign companies to unload bad debt on the U.S. tax payer. This bailout takes globalization to an unprecedented extreme. This bill has fleecing and fraud ingrained into it. Stop this insanity. Demand Bush's, Bernanke's and Paulson's resignations immediately for their blatant attempt to steal trillions from U.S. tax payers circumventing congressional and judicial oversight. Failing that, impeach them. Adhere to your Constitutional oath by defending the Constitution from their assault.

Congress and the president must get the federal budget under control. Repeal The Economic Growth and Tax Relief Reconciliation Act of 2001 while leaving the lower income tax rates unchanged. America needs to get out of debt, not bury itself farther into the hole. Slash government spending, eliminate the deficit and reduce the debt. Reinstate the IRS's investigative team that specializes in uncovering corporate tax evasion.

We, America and the world, are in the initial phase of an unprecedented energy crisis. The amount of global crude oil is finite, and its production has been stagnant since 2005. The amount available for export has declined during the same period due to the booming economies of oil exporting countries, an especially ominous situation for oil importing countries like the U.S. New discoveries of crude oil have been below the rate of world consumption since the mid 1980's and are currently at 1/3. Because the U.S. is 28 years past its peak production rate, opening the few areas held off-limits for drilling, drilling & drilling some more is doomed to fail. Its price has risen exponentially and become extremely volatile reaching a peak of about $147 / barrel and then in just over two months plunging below $100 / barrel. Yesterday the price shot up by a record single day amount apparently on concerns about this bailout bill. Crude oil supply is in an unsustainable state.

The ethanol mandate compounds the situation by driving food prices up and stressing the supply of fertilizer. The production of ethanol uses too much fossil fuel making its energy returned over energy invested (ERoEI) too low to be a replacement for gasoline. There is not enough farm land nor water to grow all of the crops. The ethanol mandate has directly linked the price of food and fuel together in the market causing them to rise in lockstep. Both the ethanol mandate and peak oil will continue to put long term inflationary pressure on the prices of consumer goods. Ethanol from corn is not a savior. It is a colossal misallocation of our limited resources at a critical time when we can not afford such mistakes. At least the mandate can be easily erased by repealing it.

America is also facing an economic crisis as baby boomers begin retiring in 2010 initiating a well publicized increase in Social Security entitlement obligations. Further, I find credibility in the Baby Boom Economic Theory which makes a long term prediction of consumer spending. Briefly when people are in their power years, roughly ages 45 to 65, they have paid off their mortgages, the kids have moved out and they have advanced to the pinnacle of their careers receiving the highest pay in their lives. They spend much of this available wealth generally through out the economy whereas during other stages of their lives they spend it in more limited sectors. When a large generation, such as the baby boomers, enter their power years, the economy expands in response to their increased spending. However, when the baby boom generation passes from their power years into their retirement years, they transition to limited fixed incomes and the smaller generation entering their power years behind them can not sustain the level of spending (because there are fewer of them). When there is less demand for products, business contract and lay off employees putting downward pressure on the economy. Because Social Security has been grossly mismanaged (Ponzi scheme is apt) requiring current tax payers to pay the entitlements, at the same time the number of retirees increases the obligation, the economy will contract reducing the FICA tax revenue compounding the problem.

The days of an ever expanding economy are gradually drawing to an end as we bump up against resource limitations. As we stand at a precipice we need long term planning that recognizes this shifting paradigm and at best aims for a steady economy. Lending money using the assumption that real estate will always rise in price and that someone else will have the ability to pay the higher price needs to stop. We need to greatly reduce our dependence on foreign supplies of energy. The economy can be stimulated by wise infrastructure projects and making our energy sector renewable, sustainable and environmentally friendly.

1. Make our electric grid much less dependent on fossil fuels. Extend the federal alternative energy tax credit beyond this year. Pass a feed-in tariff. Prevent installers from charging excessive fees. Upon request by the owner, require electricians to attach alternative energy systems to the electric utility grid that have been properly installed by their owners. Support legislation that prevents NIMBYism from delaying, increasing the cost of and defeating wind and solar projects.

2. First electrify and then expand our long distance rail lines to provide long distance transportation of goods independent of fossil fuels.

3. Require the development of plug-in series hybrid vehicles (PHEV).

4. Reregulate the electric power industry as a local monopoly and return the long distance interconnected grid to its role in providing backup electrical power.

5. Restrain population growth in America by keeping abortion legal, funding rational family planning that goes far beyond abstinence only sex education, legalizing death with dignity, eliminating the federal tax credit for more than two children, controlling our southern border and reducing immigration.

6. Eliminate the administration's moratorium on wind and solar energy projects on federal government land.

7. Increase the flat federal gasoline tax and add a 5% tax to discourage the use of gasoline and provide the funds to repair our roads and bridges, but be mindful of changing use patterns brought about by the high price of gasoline.

8. Improve energy efficiency.

9. Pay out Social Security benefits based on need instead of entitlement. The wealthy are better able to survive without Social Security benefits.

10. Expand research into alternative, sustainable and environmentally friendly fuels and energy sources. At the very least this should include hydrogen, fuel cells, better batteries and nuclear fusion.

To have any chance of surviving the specters of our time we must spend our limited financial resources wisely. America prospers when all Americans prosper. Please do not worsen the dilemma thrust upon America and the world by corporate greed, U.S. government debt, the energy crisis and retiring baby boomers in a desperate, forlorn attempt to restore the market to its former state. I can not stress this strongly enough: vote against the $700 billion bailout. It can not be salvaged by amendment.

Said by The Wall Street Journal:

Lawmakers wanted to know why the government couldn't get stakes in the companies participating in the program or any other concessions.

Mr. Bernanke argued that doing so would limit the number of firms participating and restrict the ability to develop a comprehensive market for the troubled securities. "We cannot impose punitive measures on institutions that choose to sell assets," he said.

Hey, Mr. Bernanke, you would be buying toxic waste, not assets, with public money. If they are such great assets that a company would want to keep them, then use your own piggy bank.

The bum's rush.

Neither McCain or Obama are objecting to the fundamental idea that the average and the poor are going to have more of what little wealth they have left transferred to those in power.

Print up another huge amount of debt based money, and the purchasing power will go down. This is how wealth is transferred by government edict to those who foolishly made bad investment decisions and you will be able to live less well as a result. And the justification is that they are saving you from the shock wave; be afraid; go along; don't object to to giving a handout to big corporations at the expense of your very survival.

Of course there will be a short lived shock wave without a bailout, taking out those who have not invested wisely. But with a bailout, there will be long term consequences that fall on many innocent people, and the pain will be drawn out for years if not decades.

This boils down to a fight between the power structure who want re-inflation, and the free market that demands deflation. We all should know by now that compounding growth systems eventually fail, and we have a compounding debt based money system, so we know which side will ultimately win, and that is deflation. Even in Germany after their great inflation of the early 20th century, they had deflation.

So you get screwed again for a few more months to keep the house of cards going to keep those in power in control for a little longer, and to keep the federal reserve engine of inflation printing at high speed. They cannot abandon the system and remain in control, yet they cannot make they system continue much longer, so we are approaching, or are at a pivot point.

I fully expect a huge bailout far beyond the initial $700 billion these clowns estimate. I fully expect an eventual financial collapse that will wipe out most debts, and I remind you that all the money in the USA except the minor amount of coinage, is bank debt; maybe next year instead of today.

I suppose this will please the Ludites among you, but those who are counting on government to fund or direct a transition to a possible (imaginary at this point) new sustainable future should be seriously disappointed that your rulers are making the choice to direct its efforts and your wealth into the hands of Wall Street squanderers instead of renewable capital assets like wind or solar. And for those of us who value freedom instead of collectivism, this is the worst blow since Roosevelt in the 1930's made gold illegal and substituted bills of credit which are now worth only pennies on the dollar as they have been printed wily-nilly.

So write your Congress person only to have them send you a polite brush off letter and watch them vote for their pals on Wall Street, for your own good of course.

This SOS (SackOfSh*T) Paulson and his little palm pal Bernanke need to be told that we aren't goin to bail out Wall street and the banks because they were stupid, greedy IDIOTS who couldn't see where that dark alley led to.

They can take they selfish greedy little asses out of Washington (and forget the combinations to the safes because, as they're all too wll aware, there's not a things left in there.

If those butt munches think that we're ponying up 1 trillion dollars (between 300 million people, only 85% of which aren't disabled and only 40% of which aren't in the crummy, low paying menial jobs left in this country, while the top 1% own almost 98% of this country, that almost $6,000 in debt for NOTHING!) they can go f*ck themselves.

Lets take the pain NOW, kiss the debt economy goodbye, and f*uck the asshole Bush and his croneys.

If I don't get a receipt, I ain't buying. It doesn't matter how many zeroes they try to put in front of it.

Fantastic article.

A couple of comments at the moment we are facing debt deflation most of the money lost has been in the form of bad debts.
Your 100% right I believe that since the Fed has tried to stop this its effectively insolvent if its counter parties default ala Enron.

However as far as I know all fiat currencies die via inflation not deflation. You have deflation at first but eventually the debt is monetized via printing money. Its fascinating that the Feds policy of trying to stop deflation has forced them into the corner of resorting to monetizing the debt via printing this early in the game. This does not bode well for the future.

But next your not really considering the effect of putting all this debt into the public balance sheet it will increase borrowing costs across the board this increase in interest across the already huge federal deficit makes putting it on the government books immediately debilitating the government simply cannot afford to pay more to service its own debts. I'd not be surprised to see the result being that almost all taxes collected each year would then go simply to service debt.

So I think the problem is a bit worse than your picturing it since if I'm right the government would then have to resort to printing money to pay down the debt.

So overall regardless of what we do we are faced with run away monetary inflation or allowing the debts to default.

Trying to dump the bad debt on the government does not slow the problem down but worsens it dramatically as it "taints" all the US government debt.

Now these guys understand this they are not fools they know the game is up. So I think whats actually going on is the biggest asset strip ever seen the plan is not to save America but use "bailouts" like this to buy up assets offload the debt on the government then quickly resale these assets to insiders at pennies on the dollar leaving the current government with a huge debt and no assets.

So the next step in the plan is will be to dispose of the assets bought and it will be done quickly and in a hidden manner.
In many cases it will be flagrant Goldman in Sachs will sell a MBS to the Federal reserve who will buy it back at say 85% of face value.
Then the MBS will be pooled and split up again probably with a fair amount of scrutiny on the debt. Next all the best mortgage will be repackaged into a new MBS and sold back to Goldman and Sachs at say 20-30% of face value if not less. Eventually the Fed is left holding the worst pieces although they won't admit to this restructuring these pieces will be bank rolled by the US taxpayer in the second half of the bailout as the Fed claims it can no longer sell any of the assets at any price.

So as you see its a two step bailout with two huge cash injections. First to recapitalizes the banks then to pay for any of the garbage that simply can't be sold even at fire sale prices.

The net result is of course the assets are transferred practically free and clear to the original defaulting agents via this asset stripping scheme.

Now of course at this point the dollar blows sky high and we probably have a new currency but a monetary meltdown does not change the fact that real wealth in the form of a lot of Americas intrinsic assets in the form of buildings homes and companies is now owned effectively free and clear by the likes of GS.

And to make it worse once this asset game is put in place peak oil just about ensures that both debt deflation and monetary inflation result in ever rising oil prices leading to even more defaults and bad debt. The newly recapitalized GS will be able to buy even more assets outright at pennies on the dollar as oil prices spiral out of control sending debt defaults soaring. The could well pull bail out like games off several times as they absorb the best assets of companies it would not be surprising to see the Government inject even more cash into GS.

Thats the real game thats being played in my opinion the destruction of the dollar is a sideshow. Although they will eventually use a different currency what your seeing right now is the creation of the worlds first multi-trillionaires that control the wealth formally owned by millions of people. This is what happens in the final concentration of wealth and conversion of America to a third world country.

We will see a concentration of wealth and power never before seen in all of history.

I don't expect it to end well.

Jerome said:

as the plan is currently drafted, giving $700 billion to the banks to relieve them of their bad assets protects the very institutions or people that lost money by taking stupid risks (and having seen it from the inside, believe me, it was truly stupid) without proposing any upside for taxpayers, nor any reform that would at least avoid the same mistakes from happening again;

And Robert Reich agreed:

http://tpmcafe.talkingpointsmemo.com/2008/09/23/the_bailout_to_end_all_b...

But will it work? Here's Paulson's and Bernanke's logic, made explicit at the Senate hearing today: There's only a certain amount of bad debt on Wall Street's books, left over from the wild and woolly days of lax mortgage lending. Once removed from the Streets' books, credit will flow again. And once credit flows again, even Main Street can breath a sigh of relief.

P&B failed to mention that bad debts are growing even among people recently considered good credit risks...

...Bailing out Wall Street's bad debts when millions more Americans can't pay their bills is like bailing out a rowboat springing more leaks while the ocean is rising...

...Congress should drive the hardest deal it can with Wall Street. But Congress also needs to pay direct attention to Main Street. It should extend unemployment insurance, freeze mortgage rates, and pass a stimulus package that generates more jobs.

Bottom line: Unless Americans on Main Street have more money in their pockets, Wall Street's bad debts will continue to rise -- which means the Bailout of All Bailouts grows even larger, which means taxpayers take on even more risk and cost.

Emphasis mine.

Cheers

Upheaval on Wall St. Stirs Anger in the U.N.

UNITED NATIONS — Wall Street and the Bush administration’s record of financial oversight came under attack at the United Nations on Tuesday, with one world leader after another saying that market turmoil in the United States threatened the global economy.

With a pillar of American power — its financial leadership — so badly shaken, there was a certain satisfaction among some of the attendees that the Bush administration, which had long lectured other nations about the benefits of unfettered markets, was now rejecting its own medicine by proposing a major bailout of financial firms.

Yet another loss of influence for the U.S., following its own use of force based on false information and the use of torture. Is there any "moral standing" even left for U.S. foreign policy?

*edit* I forgot to add Bush falling out of the nuclear arms limitation treaties with Russia over the strategic missile defense. That's another loss.

I wish I had the knowledge to figure out and understand the ways in which Paulson and crew are looting the nation and the world. It would require a knowledge of finance and tradition economics that I do not possess to a sufficient degree.

However, I do know that the laws of physics cannot be violated. There are resource constraints. Energy is one, it will become ever more costly. So too with metals and minerals. And so too with water. And so forth. Therefore growth is not in the cards. It was possible to grow out of the crisis in the 30s by mortgaging the future. There were still resources that could be mortgaged. But they won't be there this time. Therefore there will be, overall, negative net growth, and an ever declining material standard of living.

This is determined by simply analyzing physical resources, not finance, not economics. And I think this is now necessary. How this reality plays out within the framework of the "market" is thereby constrained.

A few deductions: the Western and the US way-of-life in particular is being massively devalued. E.g. what are McMansions, SUVs, cul-de-sacs, exurbs, suburbs, malls, expressways, skyscrapers, airliners, airports, and so on and on, now worth? So there is massive asset devaluation.

What about commodities, food, clothing, furniture, etc? The real cost and therefore price of these must go up. This is not inflation anymore than the cost of computers going down was deflation. Inflation is a general change in price level due to excess money.

Here we come the future that was already mortgaged. Our economy got where it was through debt, mortgages, credit cards, student loans, borrowing from other countries, borrowing from our own citizens in various guises. The engine of growth has been leverage, ever greater leverage, ever more dangerous and explosive leverage. But at some point, the chains of debt begin to snap, and deleveraging sets in suddenly and massively. The gov't bailout can only serve to gather up and concentrate that debt. But there is no way the mountain of debt can be paid back because there is no prospect of continued growth, therefore no more future to mortgage.

There are then only two choices: repudiate the debt or inflate it away. Some can be repudiated: social security, pensions, and so forth. Other parts cannot, e.g. foreign held debt, nor can all domestic debt. This leaves inflation. They both amount to the same thing, one immediate, the other slow, and perhaps not so slow. The Weimar Republic, for example, accumulated debts (and had them imposed) but could not repudiate them.

All the Fed's alphabet soup of emergency liquidity facilities innovated over the past year were structured around repurchase agreements. Toxic waste securities were used as collateral for US Treasuries and dollar credit at 85 percent of face value. But as each facility expires, it has to be rolled over and increased to keep pace with the implosion of credit in the interbank markets. Well over half the balance sheet assets of the Fed have been loaned out in this way, perhaps a critical amount in excess of this estimate. Without recapitalisation, the Fed is at risk of failure in the midst of this crisis. Its Enron-style accounting for the toxic waste makes it very vulnerable to a default by any of the repo counterparties it oversees and limits its ability to enforce any constraints as well.

Fed wants/needs to shore up IT'S balance sheet ... too big to fail, eh?

Paulson want's 'immunity' so he isn't prosecuted for fraud.

Anyone who understands the banking biz can see through it, anyway. How can all the crises stimulate confidence? Even if the Fed is recapitalized for a Trillion today, how about next week?

Real question in my mind is whether the $1 trillion from the Paulson Plan goes to recapitalise the Fed as I suggest, or whether it goes into offshore flight capital before the criminal mafia in Washington and Wall Street flees the jurisdiction.

That already happened a long time ago ...

It is effectively "broke." This is not what is supposed to happen to a central bank, which can print money without restriction, so let me explain what this means: it can no longer help the banks in a non-inflationary way. In order to take on more toxic collateral from the banks, it would need to actually print money, which would immediately be visible and would be seen as very inflationary. Instead, by getting government to take on more public debt, the impact is diluted in a much larger pool (public debt, rather than cash).

I'll actually give Paulson the benefit of the doubt that he is serving a public interest. The failure of Lehman caused an intermediation breakdown that infected the money markets. The run has already begun. You can vote on crooked or incompetent.

(I vote incompetent ... )

Please don't read my blog:

http://stevefromvirginia.blogspot.com/

I got to thinking about the 'claw back' idea of limiting CEO compensation and bonuses in participating companies. I is probably small change in the grand stinking scheme of things. What would really need to happen is that profits by these companies would have to be strictly monitored, with the US govt skimming off enough to pay it back. It would involve extremely draconian oversight of how the finance companies transact their business down to the fine detail level of what kind of assumptions are made in these credit swaps, etc. ad infinitum. I just don't see this happening. It' definitely a blank check scam.

Just crank up the presses and print more money!

On a more serious note - Chrysler has entered the electric car market. Yay!
http://ap.google.com/article/ALeqM5hNc7S9F0ntHtyL8ZMuEiOXqt3uEgD93CLGQ85

I wouldn't be surprised if it turns out that Bush plans to give the entire 700 billion to whomever he wants to. The demand right now is no oversight, no repercussions. Bush could theoretically give it all to his daughters, or he could give it away to CEO's as bonuses. Keep in mind that Bush despises anyone telling him what to do, and these are his last few months in the White House. Why wouldn't he give it away to help improve the book balance of the Republican Party?

You watch, Bush will not accept any form of control over how the money is spent. He will stand firm on that and there isn't anything anyone can do about it. Executive priviledge is what he'll say.

I think we're all screwed!

I don't think I have seen anyone ask WHY the proposal is written in such an unacceptable way. Hank and Ben know it is - so what's the idea?

Jerome suggests 'brinkmanship' and I think that's some of it.

I think they deliberately wanted it unacceptable. They are stuck in the middle of unstoppable events and they want out..

If they just quit at this dangerous time, the shakeup could de-stabilise. They would take a lot of abuse. But if the gov cannot, logically, agree to their demands (or even just delays too long by debating it) then they are 'off the hook' - history will say someone else was the cause when it collapses. The fact that it was going down anyway is masked (not very well obviously)

Maybe they arranged with the gov that the proposals had to be 'unacceptable' to get both sides off the hook..

This website is focused on oil and energy. Stick to the topic.

Hello TODers,

Has the Wall Street crisis now spread to Main Street? Is the HAPPY MEAL & BIG MAC now threatened?

http://www.bloomberg.com/apps/news?pid=20601103&sid=aDy9UdLRu6Xw&refer=us
------------------------
Banks have tightened credit following Lehman Brothers Holdings Inc.'s bankruptcy filing, the government takeover of Fannie Mae and Freddie Mac and more than $500 billion in writedowns and losses. Bank of America's reluctance to increase the loan may show that even well-known brands such as McDonald's face difficulties financing expansion.

``This is the first signal that turmoil in the financial markets is reaching McDonald's,'' Richard Adams, a former McDonald's franchisee in San Diego, said in a telephone interview.
----------------------------
Please compare McDonald's Golden Arches with the Hubbert Curve for further consideration.

Thanks for that insight Jerome.

Some people have speculated that this bill would allow an infinite bailout because the $700 is a balance sheet figure. I don't fully understand this, is that theoretically correct?

Anyone who's seen (and believes) this video, would suggest this is just the kind of blackmail they have been carrying out for centuries.

that deleveraging is NOT caused by lack of liquidity, but by risk aversion (investors no longer want to invest in anything that looks even remotely risky). Throwing more money at that problem will do nothing to solve it.

ShadowStats is showing a slightly different story:

While the aggregate is still growing, its growth rate is visibly slowing down. M2 has flattened and M1 is pointing downwards. Up to now, 2008 has shown a clear brake away from past paper-dollar expansion trends. Hence the 11% gain in the USDX from July to early September. Things going on the same path and M3 will level out and eventually start pointing downwards.

Of course, debating if the plan is sound or not is another matter. As some commentators pointed out above, while a bank bailout is on the menu, there seems to be very little concern about the middle class defaulting on their mortgages and personal credits and loosing their jobs. Without additional liquidity (or the perception of thereof) millions will loose their homes and jobs.

On another plane, GOP seems to be a shattered party at the moment. While the Democrats are not shy of delaying any action so to capitalize on the election, a good chunk of GOP are lining up with them. Another chunk supports the plan, while the rest just wonders how such concentration of power can ever be. I don't recall seeing anytime anywhere such disparate politic views in a single party. There is no clear political course set by the Republicans, with one of the hardest crisis ever hitting the US.

Nice analysis Jerome.

I'm not sure why some are suggesting more regulation as the solution. It seems to me that regulation is the cause of this problem. Specifically the degeneration into a command and control style economy, with a central bank setting the interest rate. Instead if free markets were used to set interest rates then they wouldn't have been held artificially low for so long.

paulson and bernanke seem to be saying throw open the doors to the treasury and let our buds loot, we dont have time for questions.

and that photo of bb& p (bush, bernanke and paulson) sorry, what came to mind immediately was lc& m (larry, curley and moe).

Just remember what Paulson said: "If we do not get this bailout we will go into a recession". Aren't we already there?

Great post and great follow-up comments by everyone. I am absolutely bewildered by what has been happening on Wall Street in these tumultuous weeks. I have to admit that I am no expert on these 'economic' matters, and in trying to make sense of all this, I've come across several op-ed pieces in the New York Times which I find to be witty and compelling. Here are the links to the various articles that have come out in the past couple of days. Also, I've included some passages from these same articles that are especially crude, revealing and denunciatory.

http://www.nytimes.com/2008/09/23/opinion/23herbert.html “A Second Opinion?”

"Lobbyists, bankers and Wall Street types are already hopping up and down like over-excited children, ready to burst into the government’s $700 billion piñata. This widespread eagerness is itself an indication that there is something too sweet about the Paulson plan.
This is not supposed to be a good deal for business. “The idea is that you’re coming here because you would be going bankrupt otherwise,” said Mr. Baker. “You’re coming here because you have no alternative. You’re getting a bad deal, but it’s better than going out of business. That’s how it should be structured.”

http://www.nytimes.com/2008/09/23/opinion/23brooks.html “The Establishment Lives!”

"Inspired in part by Paul Volcker, Nicholas Brady and Eugene Ludwig, and announced last week, the Paulson plan is a pure establishment play. It would assign nearly unlimited authority to a small coterie of policy makers. It does not rely on any system of checks and balances, but on the wisdom and public spiritedness of those in charge. It offers succor to the investment banks that contributed to this mess and will burn through large piles of taxpayer money. But in exchange, it promises to restore confidence. Somebody, amid all the turmoil, will occupy the commanding heights. Somebody will have the power to absorb debt and establish stability.
Liberals and conservatives generally dislike the plan. William Greider of The Nation writes: “If Wall Street gets away with this, it will represent an historic swindle of the American public — all sugar for the villains, lasting pain and damage for the victims.”
..."If you wanted to devise a name for this approach, you might pick the phrase economist Arnold Kling has used: Progressive Corporatism. We’re not entering a phase in which government stands back and lets the chips fall. We’re not entering an era when the government pounds the powerful on behalf of the people. We’re entering an era of the educated establishment, in which government acts to create a stable — and often oligarchic — framework for capitalist endeavor."

this is my first post, and my intent here was to promote greater analysis through an investigation into what the 'mainstream' press has to say about this...

thank you.

udjat.

I think debating what Paulson or Bernake "say" is like pissing into a fan. You get a warm wet feeling for a while, but the fan doesn't stop so you get cold.

Follow the money never their words.
D

http://americanenergycrisis.blogspot.com/2008/09/what-you-dont-knowsee-c...

I was speaking with our resident mad scientist last night, the good Doctor Lalani, and he mentioned a liability that I had not considered, but which I think was must be. What if gasoline prices, for whatever reason, rise to $6.50 + per gallon? What would that do to suburban home values? I think it would CRUSH them. And the government's rescue plan is NOT taking this issue into its calculations. After all, for ANY plan to succeed, home prices must not collapse outright, and they likely would if people could not get back and forth to their home.

The $6.50 number does not have to happen overnight. The process of unwinding this disaster is going to take YEARS. If the intersection of the X & Y graph happens before most of the unwinding is complete, the bailout could fail - with predictable consequences.

Can anyone verify this?...

A radio program (which will remain nameless for now) yesterday had a segment (?)implying(?) that Paulson had somewhere around 500 million (made while he was CEO of Goldman Sachs). A lot of which (MAY BE (my words)) invested in investment bank stocks.

IF SO, then to avoid an APPEARANCE of conflict of interest he should get someone with a commercial banking background to go in front of Congress instead of himself.

IF NOT, then ignore this post.

Quoted from above:
"My friend provides this video which says Fed has lent out $600 billion of its $800 billion balance sheet."

From the very start I thought it was odd that $700B was the number quoted. The program as communicated is a voluntary purchase of assets from banks. These assets are hard to value so as of now it is difficult to know how much they are going to bring in an 'auction'. So given that we don't know the price that the assets will bring and given that we don't know how many banks will come to the table why $700B? Shouldn't Paulson be talking about ranges? Should he be saying depending on the market and participation we will need $300B - $1T for example?

The answer may be that Jerome's friend is right on target. The treasury needs to recoup most of the $600B loaned. The extra $100B is there probably to actually do a bit of good in the market as they obviously have to show that this operation was at a minimum a not a complete failure.

Very interesting...

I just called my congresscritters. Three of them.
Only the staff person of one of them took my comments. The rest blew me off just as soon as they could.

I told them this:

If Congress passes this inane stupid bailout of the persons who brought this charade down on us that I would change my party affiliation to the Democrat party and never ever vote again for a Republican candidate from my state of Kentucky.

Two of the staffers acted very cold and aloof. They attempted to hangup on me after they got the first line(above). They also except for one did NOT tell me what my representative's take on the issue was.

For all you DC staffers out there reading this? Try to remember where your salary comes from. It comes from the backs of those who do 'real' work, out here in the vast flyover. Not those who spray hand sanitizers on their greedy paws each time they deign to shake the hand of a working person, seeking to garner votes when afterwards they wouldn't spit on you.

Airdale

Airdale

Great article and great posts all, I read everyone. I couldnt help but notice the anger, and rightous anger it is. I myself am no financial genius (I just act like one on the internet). I also couldnt help noticing the fear or at the very least, reluctance, to identify the mugger that just robbed everyone and now demands we pay for his services. When I write the names of the perpetrator (and all his aliases) Goldman Sachs, Lehman Brothers, Bear Sterns, Etcetera,
and add his legal defenders and advisors names, Charles Schumer, Benjiman Bernanke, Alan Greenspan, I can't help but notice a cabal forming, a pattern if you will. While I can understand the "Omerta" ("code of silence") from the tribe of criminals, I can't understand the exercise of silence from those that have just been pillaged and plundered.

Now that I have spoken what essentially is the truth and broken the tabboo of mentioning the unmentionable,
I expect full censor, I also expect a personal visit from Mike Chertoff....whoops..there I did it again.
Damn!...this living in self imposed exile aint as easy as it first looked...I hope I dont share a cell with Olmert or Moshe Katsav, those smucks kibbitz too much, Mordecai Vanunu would be okay, as CCPO mentioned
Scooter Israel Libby got a pardon, so he's not an option. Oy gevelt!. So get that red arrow in the red ink and mark me down faster than investment bank dividend...for saying what was true.

Russian saying: "Speak the truth and they kill you, keep your mouth shut and you die a miserable death anyway"

You know I don't post a lot here. I'm one of the folks who loves the science of why things are happening but is nowhere near knowledgeable enough to be considered a source of credible information. This scenario that we're talking about here scares the bejesus out of me because the hands that are shuffling the deck here weren't elected and are not accountable to me or anybody else. And they seem to think that they have THE RIGHT to dictate unilateral terms to the United States Congress. I know Congress as a whole seems to basically be filled with helium ballons with faces on them that are slowly leaking gas out but they still serve a function for our nation. If ever they were to serve a purpose to our nation it is now to stop these people from ruining what remains of the foundations of this country.

Sorry for the rant I know I'm not contributing anything but I will say that from the peanut gallery things look scary as hell to me.

I would like to hear the fed say:
A. Credit can not expand forever.
B. The credit cycle has turned.
C. Contracting credit will hurt the economy.
D. The federal government is powerless to prevent this.

I might be alone on this forum in thinking Ben and Hank are well qualified and well intentioned.
But it is going to end badly anyway.

Jerome,
dont't these repos have to be marked to market, thereby making price changes in the collateral explicit?
Rgds
WeekendPeak

Jerome great post, I think its important we DEFINE Brinkmanship. It is “the practice of pushing a dangerous situation to the verge of disaster in order to achieve the most advantageous outcome.” The question is what is the most advantageous outcome? US employees and investors? The voters? Government stability? That’s a question that the Fed would have to answer. With the budget projections currently at a tune of 70% of GDP I’m not sure who is going to benefit anytime soon.

I read this post and thought this comment was pretty funny "I think [this is ]at least one parallel to the circumstances of 1929 bears observation. It has often been said that very few people saw the Great Depression coming, it simply arose out of the fog like the iceberg the Titanic ran into."
It seems as if we are moving in a backward direction and our judgment is getting more and more foggy with these Band-Aid solutions opposed to getting to the real root of the matter. Maybe a recession IS a good thing. Look at Japan and China after they resurfaced?

Quote Source: http://www.stockresearchportalblog.com/2008/09/desperate-people-do-despe...

Keep these articles coming Jerome! love your perspective.

Here is a good write up by Dr. Ron Paul

By Ron Paul | Wednesday, September 24, 2008

Dear Friends,

Whenever a Great Bipartisan Consensus is announced, and a compliant media assures everyone that the wondrous actions of our wise leaders are being taken for our own good, you can know with absolute certainty that disaster is about to strike.

The events of the past week are no exception.

The bailout package that is about to be rammed down Congress' throat is not just economically foolish. It is downright sinister. It makes a mockery of our Constitution, which our leaders should never again bother pretending is still in effect. It promises the American people a never-ending nightmare of ever-greater debt liabilities they will have to shoulder. Two weeks ago, financial analyst Jim Rogers said the bailout of Fannie Mae and Freddie Mac made America more communist than China! "This is welfare for the rich," he said. "This is socialism for the rich. It's bailing out the financiers, the banks, the Wall Streeters."

That describes the current bailout package to a T. And we're being told it's unavoidable.

The claim that the market caused all this is so staggeringly foolish that only politicians and the media could pretend to believe it. But that has become the conventional wisdom, with the desired result that those responsible for the credit bubble and its predictable consequences - predictable, that is, to those who understand sound, Austrian economics - are being let off the hook. The Federal Reserve System is actually positioning itself as the savior, rather than the culprit, in this mess!

• The Treasury Secretary is authorized to purchase up to $700 billion in mortgage-related assets at any one time. That means $700 billion is only the very beginning of what will hit us.

• Financial institutions are "designated as financial agents of the Government." This is the New Deal to end all New Deals.

• Then there's this: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." Translation: the Secretary can buy up whatever junk debt he wants to, burden the American people with it, and be subject to no one in the process.

There goes your country.

Even some so-called free-market economists are calling all this "sadly necessary." Sad, yes. Necessary? Don't make me laugh.

Our one-party system is complicit in yet another crime against the American people. The two major party candidates for president themselves initially indicated their strong support for bailouts of this kind - another example of the big choice we're supposedly presented with this November: yes or yes. Now, with a backlash brewing, they're not quite sure what their views are. A sad display, really.

Although the present bailout package is almost certainly not the end of the political atrocities we'll witness in connection with the crisis, time is short. Congress may vote as soon as tomorrow. With a Rasmussen poll finding support for the bailout at an anemic seven percent, some members of Congress are afraid to vote for it. Call them! Let them hear from you! Tell them you will never vote for anyone who supports this atrocity.

The issue boils down to this: do we care about freedom? Do we care about responsibility and accountability? Do we care that our government and media have been bought and paid for? Do we care that average Americans are about to be looted in order to subsidize the fattest of cats on Wall Street and in government? Do we care?

When the chips are down, will we stand up and fight, even if it means standing up against every stripe of fashionable opinion in politics and the media?

Times like these have a way of telling us what kind of a people we are, and what kind of country we shall be.

In liberty,

Ron Paul

Bank run in Asia, from NYT:

http://www.nytimes.com/2008/09/25/business/worldbusiness/25emerging.html...

The whole 'bailout' comes down to an extortion scheme by the current Thieves in the White House.

This proposal they have offered is more like a gun to the head of Congress.

If Congress does not give dictatorial powers to Paulson, there will be a run on the US banking system.

It's Dead Broke and so is the FED and so is the Federal government (the budget deficit is approaching 1 trillion this year)

If Congress does give dictatorial powers to Paulson, there will be a run on the Dollar.

Nobody in the world will believe the taxpayers, who are tapped out in a major way, will ever make good on paying this public debt that Hank the Wank will dump on the public tab.

Everyone's paycheck is already spent several times over in ARM mortgages, maxed out credit cards, car loans, student loans, small business loans, etc...

There's no 'there' there.

It a run on the Banks or a run on the Dollar, take your pick.
.

An Eminent Domain Solution

I've been saying that part of the problem is too many houses. And, I've been trying to take this into account in suggested solutions. How do we productively keep houses off the market for long enough for demand to catch up with supply? The answer, it seems to me, is to upgrade the structures to net energy neutral homes through retrofitting. Bring them up to Architecture 2030 stadards: http://www.architecture2030.org/

This is great. It stimulates the economy through the work done on the retrofits. It stabilizes the housing market since you know the upgraded houses will sell for something but they are not sitting around depressing prices right now. It warns the building sector not to build new homes because the retrofits will be coming on the market.

But, how to get the homes? I suggested limiting the purchase of toxic securities to $0.10 on the dollar and being sure that we get a hold of the whole liability. That could do it. But, I'm thinking that the way to get banks to really consider working with their customers more would be to use eminent domain. The Supreme Court has said this can be used very broadly, even to transfer property from one private owner to another. So, instead of working form the paper side, what I suggest is that the government excercise eminent domain for every forclosure, paying $0.10 on the dollar value of the mortgage. This keeps all foreclosed properties off the market until they are retrofitted at least, and possibly longer in a housing depressed area. Based on the price paid, we can afford to keep these unit vacant (or rented) for some time since the return on investment should be about 30%. Banks, knowing that they can't get more that 10% if they foreclose, will try to come to terms that aviod foreclosure so the number of houses we actually aquire will be as few as possible. At the same time, the toxic securities will have a particular valuation and thus become liquidatable, ending the credit feeze up.

Chris

McCain is suspending his campaign and returning to Washington to focus on the crisis.
He is also asking to postpone the Presidential debate on Friday.

HE is trying to look concerned and helpful, but where was he for the last year that this has been brewing? It is too late now...............

Some crimes a of a nature that there is no way to make the victims whole. Murder makes victims of all those people close to the killed person and even giving the criminal the death penalty does not bring the dead back to life. It seems my entire life has been one of victimization where the solution to problems created by the rich and powerful meant the poor and powerless must "tighten their belts". In the 60s we were sent to Vietnam in order to prevent a domino effect from destroying the American Way of Life. The poor died while the rich profited. In the 70s we couldn't get a decent pay raise because it would "feed inflation". The poor paid more and the rich profited more. In the 80s we had to take a pay cut so our jobs wouldn't be shipped overseas. The poor became homeless while the rich got a big tax cut. In the 90s the jobs were shipped overseas anyway. The new millenium brought a "War on Terror" because the American Way of Life is non-negotiable. Once again the poor died and the government turned a blind eye to the crimes of the rich. Now they give us a threat of economic collapse if we don't rescue the very people who have been short changing us for decades. To pay for it we will have to eliminate entitlements like the only part of our retirement income (Social Security) and go without health care.

Is this the event which pushes the body politic over the threshold of accepting more burdens and finally accepts the progressive alternative? Will we insist on greater taxes from the rich in order to save their honey pot? Will we demand new tariffs on imports so good paying manufacturing jobs come back to America? Will we ban bank transactions with tax haven countries? Will we insist on the death penalty for white collar crooks? These things may not bring us back to the prosperity of the 1950s but if we know that the burdens are being equitably shared by rich and poor then perhaps a truly democratic society can be maintained.

Drudge Report Headline:

SOURCE: House Republicans met in am: Just 4 members support Paulson plan...

More of this, I guess....

This article is taken from the new report compiled by the Institute for Southern Studies called, "Blueprint for Gulf Renewal," giving a voice to grassroots advocates calling for greater federal accountability in the Gulf Coast rebuilding process. The report is available at: http://www.southernstudies.org/BlueprintShort.pdf.

When pressed on the slow pace of recovery in the Gulf Coast, President Bush insists the federal government has fulfilled its promise to rebuild the region. The proof, he says, is in the big check the federal government signed to underwrite the recovery -- allegedly more than $116 billion. But residents of the still-devastated Gulf Coast are left wondering whether the check bounced.

Another confidence builder....

Word from CNN, 8:40 PM Washington time, is that Obama and McCain have issued a joint statement that (and here I am paraphrasing from memory) while acknowledging the Paulson package as flawed, every effort must be maintained to hold up the American economy. In other words, their advice to Congress, hold your noses and vote for this sweet heart deal.

I really hope my gut instinct is wrong but I feel that what we are witnessing is a historic transfer of power to hide a multitude of financial sins.

As Ilargi stated at the Automatic Earth, September 24th 2008, http://theautomaticearth.blogspot.com/
this is a Faustian bargain to beat all Faustian bargains:

If the plan is accepted in anything close to its present form, the US can no longer be called a functioning democracy (assuming it could still be before). Well, you can call it anything you want of course, and many will insist it still is democratic, but that doesn’t make it true.

It looks like the devil is about to buy the souls of Senators and Congressmen alike. Adds new meaning to the words, God bless America.

Until the sheeple wake up and elect someone like Marci Kaptur it is going to keep sliding downhill-Obama hasn't even waited until after the election to backslide-his mealymouth comments on this whole crime are pathetic (McCain is beneath comment) http://tw.youtube.com/watch?v=mbD62gNi9WE

NO bailout.
I will eat cat food for five years and call it ice cream but I want to see this corrupt gang led away in handcuffs and I will do whatever it takes in sacrifice.

But no bailout, no way in hell.

DENNINGER ABOUT BEN'S SLOSH

"You wouldn't be trying to intentionally cause a bank failure or two to bolster your call for the $700 billion "bailout" plan, or perhaps intentionally lock the short-term credit markets, would you Ben?"

"If the market has a liquidity crisis, why would you be intentionally draining reserves from the banking system? Don't you think you ought to explain that to Congress?"

DOWN AT STREET LEVEL IN THE MIDDLE OF THE AMERICAN "OUTBACK".

Since this topic is on the TOD Europe board (???) I thought it might be interesting to give our European readers a bit of a report from the "outback" of the US, that is the part of the nation that lives more than 50 miles from either coast, and despite being the vast part of the United States now contains less than half of the population.

I am in central Kentucky, but am in constant contact with relatives in Alabama, Indiana, and I follow the news in Ohio by way of my work (where we have done heavy polling and market research). If you have not heard of these places, please google them.

So here is the view from the streets of the middle of the nation as I have seen it so far:

-It is amazing how few working class people know anything about the $700 million bailout. I asked several people I know who are not in the financial community what they thought of it, and they said "what bailout?" When I gave them a brief explanation, the common response was "I don't watch financial news, my 401K takes care of all that."

-The political backlash from the event is essentially non-existant, given the above, and the fact that most folks blame the big banks and not the politicians. Those who follow the story at all seem to see it as the unavoidable outcome of all those great years in the 1990's, sort of like the tech bubble meltdown, "what goes up must come down" is a phrase you hear often.

-Despite the hurricane in the U.S. Gulf, gasoline prices are down in Kentucky and much of the middle part of the country, so most folks think the "refinery shutdowns" as reported were a scam, and now that the refineries are back up, there is no real problem. Most folks in the outback do not believe there is an energy crisis, but simply the oil companies manipulating them, just as the banks manipulated mortgages and debt. Gasoline prices are the prime indicator used by most folks to judge the state of the economy, and so things don't look too bad to them.

-Most folks are clearly not blaming the Republicans for whatever economic crisis there may or may not be, as the presidential races and the congressional races are pretty much dead heats in the outback.

-Houses are still being built. Some developers seem overextended, as one set of "townhouses" in my local area had to be sold at auction before they were even completed, but this seems to be because people still want their own houses on their own property, and do not accept the "condo" concept here.

-House prices have dropped very little if any at all. I looked at a $180,000 "starter home" the other day, nothing fancy, just a normal "tract house" as we call them here. The sellers showed no willingness to negotiate. There seem to be more houses for sale (especially new ones) but no one is selling cheap.

-Credit is still available. I recently switched a 21% interest rate credit card with National City bank over to one with 0% introductory rate lasting until Feb of 2010. The new issuer of my 0% card is, get this, Washington Mutual! Auto companies are selling cars at distress prices and terms, and seem to be suffering far worse than the housing industry, and some really hot motorcycles are available for 0% interest for at least the first year of the loan, some much longer.

-There have been layoffs. My firm has cut it's staff by roughly half. This is not because they were not making money, they made more last year than at any time in the firm's history, but because they were purchased by a group of hedge fund/Limited Liability Partnerships who want to maximize the profit from the firm so they can resell it. This is now very common in companies throughout the nation. A company can be very healthy but still be bought by someone else and can be dis-mantled in a matter of months. That creates real fear.

-Out in the middle of the country, the aging population worries about one thing more than any other: Health Care. Many Americans are trapped in absolutely horrendous jobs because if they have any health condition and try to leave the company they have almost no hope of finding health care at any other firm. Many of these workers are over 50 and just now needing the health benefits that are so hard to get. It is one of the great silent tragedies of the United States. If anyone cares about the financial "collapse" or "bailout" it is simply because they know that almost a trillion dollars that MIGHT have been able to help them on health care benefits has disappeared.

-The contacts I have in the financial community when discussing the financial crisis and bailout simply sigh. Most of them see a mountain of regulation and oversight coming soon, meaning that any "risk" capital will dry up even more, as no one wants to take chances in the middle of uncertainty, and even if they did, they feel they will not be allowed to. One of my friends in the financial community said "what we have now is essentially a nationalized financial sector." No offense, but many Americans in the business community worry that we will become much more like Europe, with a commission of some sort overseeing and being able to veto any business activity, only ours will be in Washington instead of Brussels. This is greatly feared here.

-For most aging business people, this period looks very much like the 1970's. So people are enjoying what they can. They still eat at fine restaurants, play a lot of golf, and occupy themselves with their mistresses or boyfriends, and try to wait it out. It is a period of austerity. Bonds instead of stocks. Bank CD's are now popular again. We will see you in the rebound, most folks guess around 2012 or so. Many folks hope to be retired by then. Protecting what you have has become the priority, as opposed to trying to "leverage" upward and make more.

-Most young people see this whole issue as essentially an "old folks" problem, if they are aware of the finincial crisis at all. It is completely off the radar of most young people.

RC

This thread is pretty much universally against the current bail out plan (some posts are slightly off topic!).

Has anyone got anything good to say about the plan? Either posters on here or the MSM. What is Fox News take on it all? Surely they are most likely to support the current Administration.

In 1933, M2 money supply was $32.2 billion; today it is $7,712.9 billion, a 239.5 times increase. This money was created out of thin air by bookkeeping entry or printing press and loaned out at interest by the banking system; no wonder bank buildings are the nicest in towns. Quite a scam.

While the increase in money supply did cause prices of goods and services to increase, the increase in prices was not as great as the increase in money supply. This is because energy drove significant increases in production of goods so that the effect of the demand from increased money supply was moderated by increased supply of goods, as the supply/demand equation set prices.

Going forward from here, with deteriorating EROEI and being at the cusp of oil production (peak oil), production of goods will decline, not increase. Even if the money supply were held constant, prices would increase because of lower production of goods. Increase the money supply on top of decreased goods production, and the upward effect on prices will be quite noticeable (destruction of the dollar).

Since the federal government is increase its debt limit, I can only conclude that all this $700 billion bail out will result in additional government borrowing. Who will buy this new government debt? I think that most of it will be bought by banks, much maybe by the federal reserve bank, all with newly created money, which means that most of it will result in an increase in money supply, hence and increase in prices. Of course there are other forces acting on general price levels now but the isolated effect of the bailout should be to transfer $700 billion of purchasing power (via price increases) out of your hands into the hands of government, and then into the hands of Wall Street firms.

To my mind this is nothing more than theft, and it demonstrates the degree to which politicians are in the hip pockets of special interests to the detriment of the majority. As we progress down the right side of the oil production curve, I firmly believe that the US faces civil disorder on the magnitude of 1776 (American War for Independence) and 1861 (US War between the states). Up until now, the pain incurred from rebelling against the political system of plunder and control would have been greater than that from just accepting the effects of the rigged economic system; when life becomes so miserable from disintegration of the industrial age from lack of energy to fuel it, the pain from rebellion will be less than the pain just going along, so natural forces will be at work to encourage civil disorder.

I suppose those of us who believe in freedom and free markets should be encouraged by our masters screwing us a little more because it just adds more pain to the majority as we move along our path in history toward the inevitable.

How did this happen. That is the question that everyone is asking or has asked. None of the reasons provided by the mainstream media, and even pseudo-controlled sources like Alternet, The Oil Drum, and Mike Shedlock's site... none of them are completely acceptable. They're all missing out on the big picture.

People like Jerome are about as much responsible for all of this as Bush and Paulson. How? It's pretty simple actually:

9/11 inside job? Conspiracy theory! Aint gonna talk about it!
Plan to invade Afghanistan to secure opium production? Conspiracy theory! Aint gonna talk about it!
Plan to collapse the housing bubble and implode the economy? Conspiracy theory! Aint gonna talk about it!
Mercury in vaccines? Conspiracy theory! Aint gonna talk about it!
Fluoridated water dumbing people down? Conspiracy theory! Aint gonna talk about it!
Govt building FEMA camps for the population? Conspiracy theory! Aint gonna talk about it!
Govt dismantling bill of rights? Conspiracy theory! Aint gonna talk about it!

The list goes on and on. Chemtrails, Morgellons, cancer vaccines, race-specific bioweapons, most people havent even scratched the surface on the level of corruption here. Those who have... they knew this mafia-style financial takeover was coming for years.

All these conspiracy theories that no one wanted to talk about are culminating into one giant Karmic Wave of destruction. And THAT, you wont be able to ignore and ridicule when it smacks you in the face.

I've got hundreds of hours of audio with people like Alex Jones and Jeff Rense and Webster Tarpley and George Noory and many others, all talking to hundreds of experts going into incredible detail about how all this was coming. But they're kooks and whackos...

If you're disgusted by the way all of this is happening, then you should take the time to listen to two people in particular: David Icke and Jordan Maxwell. They're all over youtube. You should take the time to listen to them while you can. Because there may come a time in the not-so-distant future when you simply will not have access to any information even remotely related to what they and others like them discuss. At that point the entire human race will be lost, because it will have passed the event horizon and will remained trapped into a fatally narrow paradigm of thinking. At that point, HG Wells' vision of the future will be complete.

After rereading what Jerome's friend had to say, I've decided that it is mainly a description of what the Treasury proposed to do and did with the authorization of Congress. Taking all that collateral was just what was intended some months back. We should be over extended already because we intended to be to act as a balance.

And, the description of how the money ends up, in the fed (or actually paid out for the junk paper) or off in private accounts offshore are really the same thing unless compensation for bankers is suspended until the junk turns out not to be junk.

So, in the end, Jerome's friend is describing what was said pretty plainly to begin with about what would be done to try to save the system. It isn't working yet so essentially all the loans up until now are going to be forgiven (worthless collateral purchased).

Again, I think that this is not going to slow down until there are fewer houses up for sale. The banks, of whom much is forgiven, will continue to act just like the servant in Matthew 18:21-35 and foreclose on people who get behind. They'll do this because they'll say it is a contract and they must carry out the terms to protect their shareholders. But, people are getting behind because the market is low, and more foreclosed houses will keep it there.

So, the current approach just makes sure that the banks will eventually die a death of a thousand cuts because they will continue to act like banks and eventually our helicopter is going to stop working. I guess the fate of the servant was to be handed over to be tortured and that is something the current administration enjoys. Maybe we are taking this approach because, like the banks, we can't help ourselves.

But, I hope we start thinking in another way. I hope we'll do something about having built too many houses recently rather than fall further into this spiral we've started.

Chris