[ECON] Hold on to your hats! Sept 28-Oct 4 08

[potter]

[quote=Fredfredson;743014]I agree with you Potter.
Personally I think we should just let this mess implode and suck it up!
However the global effects could be very serious, since it is the BANKS which will take the hit first.

Got Cash?


Yes Fred, thanks to your wise counselling over the past few years, I do.

[Tom Joad]

Originally Posted by potter

And in the long run, I think it would have actually hurt main street more than it helped.

I agree. It seems everyone is going apeshit about the credit markets drying up.

Well, credit is like heroin, and that's why were're in this mess in the first place.

We've built an economy based on the premise that the consumer will continue to go deeper and deeper in debt.

IMO it would be the best thing that has happened in a long time if credit dried up. Like Heroin, it'll be tough to go cold turkey, but it's the only way to get clean.

[potter]

Originally Posted by Tom Joad

I agree. It seems everyone is going apeshit about the credit markets drying up.

Well, credit is like heroin, and that's why were're in this mess in the first place.

We've built an economy based on the premise that the consumer will continue to go deeper and deeper in debt.

IMO it would be the best thing that has happened in a long time if credit dried up. Like Heroin, it'll be tough to go cold turkey, but it's the only way to get clean.

Well said

[Fredfredson]

Yup!

F

[florentin]

is there any implication for credit cards here?
thank you

[Fredfredson]

Final Results DJIA At 4:14PM ET: 10,365.45 777.68 (6.98%)

Florentin

Yes there is a definite implication for credit cards.

It's possible that the banking system will freeze up to the point that they have to declare a "Bank Holiday" like they did in the 30s. This would mean all banking transactions cease.

No tellers, no ATMs. no debit card purchases and yes no Credit Card action as well. This would also include stopping all cash advances against the cards.

Also as the credit markets freeze up further you will get banks simply cancelling the cards, which they can do at will, thus making all balances due immediately.

Hence my GOT CASH .

F

[Tom Joad]

Originally Posted by Fredfredson

Final Results DJIA At 4:14PM ET: 10,365.45 777.68 (6.98%)

Florentin

Yes there is a definite implication for credit cards.

It's possible that the banking system will freeze up to the point that they have to declare a "Bank Holiday" like they did in the 30s. This would mean all banking transactions cease.

No tellers, no ATMs. no debit card purchases and yes no Credit Card action as well. This would also include stopping all cash advances against the cards.

Also as the credit markets freeze up further you will get banks simply cancelling the cards, which they can do at will, thus making all balances due immediately.

Hence my GOT CASH .

F

You're scarin me Fred!

When you say "Got Cash"? How much are you talking about?

Hundreds? Thousands?

I had $300.

After I read your post I went to an ATM and got another $200. Is that enough?

[Fredfredson]

Tom

The rule of thumb I use is to keep two weeks expenses in cash minimum. They need to be small bills too not even 50s just 20s and under.

This does not include any automatic payments (of course cause there won't be any of those either).

Also having two weeks of groceries on hand, car tanks topped up and any med prescriptions filled is agood idea as well.

F


P.S. This situation is the equivalent of a Hurricane on our Financial infrastructure we have to treat it the same way with proper preparation and due caution.

[Fredfredson]

Hoyer Says Senate May Consider Crisis Bill This Week

(Update1)

By Laura Litvan and Alison Fitzgerald

http://www.bloomberg.com/apps/news?p...efer=worldwide

Sept. 29 (Bloomberg)

U.S. House Majority Leader Steny Hoyer said the Senate may take up legislation to address the financial crisis as early as Oct. 2, following the House's rejection today of a $700 billion bank-rescue plan.

``The Senate will be in Thursday,'' Hoyer said. ``The Senate perhaps can pass something. That is a possibility, and send it back to us in which case we would then take it up. We're not out of business until this is addressed.''

He said he has spoken with House Republican Whip Roy Blunt and both agreed they are committed to continue working together on a compromise.

``We're all going to be working on the phone, maybe here, to see if we can reach some agreement on how to move forward,'' Hoyer said.

Some West Coast lawmakers were on their way home after the final 228 to 205 vote was announced today, eliminating the opportunity for the House to immediately reconsider the bill, Representative Jim Moran said. The Virginia Democrat said Democrats might draft their own bill and come back to work Oct. 2 after the Jewish holiday.

``We hold the cards now,'' Moran said. ``We gave them every opportunity.''

House Republican Leader John Boehner said after the vote, ``I don't know that we know the path forward at this point.'' He said Democratic and Republican leaders would have to work to persuade more of their members to back a rescue.

Representative Barney Frank, a lead negotiator of the legislation, said lawmakers ``have to wait and see what happens'' and how the economy reacts to the vote.

Frank said he was persuaded by the arguments of Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke that there is a serious problem that requires government intervention.

``I would like nothing better than to be proven wrong,'' he said.
Last Updated: September 29, 2008 16:57 EDT

[Fredfredson]

Awesome

Bailout protestors offer Congress humidifiers, ThighMasters

by Mike McAndrew
Monday September 29, 2008, 1:07 PM

http://www.syracuse.com/news/index.s...fer_congr.html

Syracuse

About two dozen Central New Yorkers protesting the $700 billion bailout of Wall Street investment banks brought a broken humidifier, ThighMaster, printer and other unwanted merchandise this afternoon to the federal building in Syracuse to sell to Congress.

At noon, as Congress debated the proposed legislation, the crowd carried signs that said, "Bail Out Schools," "Bail Out Veterans," and "No Welfare for Millionaires."

"We want (Congressman James) Walsh, (Senator Chuck) Schumer and (Senator Hillary) Clinton to oppose this deal. It's a sham," said Andy Mager, a Syracuse Peace Council member and one of the organizers.

Madis Senner of Syracuse, a former Wall Street money manager, predicted the bailout will not solve the nation's credit crunch and will prompt other corporate giants to seek billions in taxpayer-funded relief. He said Congress should nationalize the country's banks.

If Congress is willing to bail out the investment banks, then it should be willing to buy protestor Jessica Azulay's ThighMaster and unwanted junk from other regular Americans, organizers of the protest said.

[Fredfredson]

Who will bail out the Feds?

By Bill Bonner • September 29th, 2008 • Related Articles • Filed Under

http://www.dailyreckoning.com.au/who...ds/2008/09/29/

About the Author

Bill BonnerBest-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.

"Bankruptcy of Neo-Capitalism," shouted a headline in Wednesday's Paris press. Scarcely since Hitler blew his brains out has the type been bigger or the contentment broader.

Almost everyone everywhere is enjoying the show. Each headline brings more laughs. The financial markets give people neither what they expect nor what they want, but what they deserve. What a treat to see people getting it - good and hard.

Near to home, that galling "millionaire next door" - many will take pleasure in seeing his portfolio of stocks marked down. "Stocks for the long run," he used to say, smugly; the silly old coot will be dead before his stocks come back! He'll have to work until he drops dead, just like the rest of us.

On Wall Street, the masters of the universe - who had the pay slips to prove it! - are now getting blown up by their own debt bombs. The top five firms on Wall Street were thought to be "too big to fail." But Bear Stearns has been blown to smithereens. Lehman is exploding into small pieces. Merrill ducked and missed the blast. Then, the last big capitalist desperadoes - J.P. Morgan and Goldman - waved the white flag. They petitioned the government to allow them to become regulated, deposit taking banks!

And George Bush will leave behind the biggest nationalization program in history. Surely, that's worth a snide chuckle. The takeover of Fannie and Freddie alone leaves half the country living in what are effectively, government-subsidized housing projects. Meanwhile, the coordinated takeover of Wall Street, put together by his apparatchiks, left even the hardened lefties at France's Liberation in shock and awe: "This enormous statist intervention...is the work of the most ideological and extremist administration that the US has ever had."

How heartwarming to see that the meddlers and world-improvers get a second wind. It's like driving around in a '33 Lincoln...or throwing rocks at the gendarmes in '68. The old, gray Bolshies feel young again! Impetuous! Brainless!

And every capitalist is behind the bail out program too. All over the world, markets are out - state-sponsored meddling is in. Free market principles are fine - until prices start going down!

And there's the breathtaking chutzpah of it! After proposing a $700 billion program, in which the government buys up Wall Street's mistakes - otherwise known as "cash for trash" - Henry Paulson says he had no choice: "We did this to protect the taxpayer," said the former Goldman chief.

Even Russia got into the act. New to counterfeit capitalism, it's getting the hang of it fast, pledging $20 billion in the fight to keep stock prices from falling to what they are really worth.

Then, not be left behind in general hysterical absurdity, SEC honcho Christopher Cox announced a list of 799 financial stocks on which shorting is banned until Oct. 2nd. In Britain, the FSA's ban on shorting financial shares lasts until Jan 16. But Pakistan gets the King Canute Memorial Prize; by law in that benighted land, stocks can't go below their August 27th close.

And what a bunch of numbskulls - Greenspan, Paulson and Bernanke! Every word they've said so far has been financial poison. "Greenspan relaxed about house prices..." reported the Financial Times in 2005. "Most negatives in housing are probably behind us..." said the same sage in October 2006. "We believe the effect of the troubles in the subprime sector...will be likely limited..." said Bernanke in March 2007. It's "not a serious problem...I think it's going to be largely contained," added Paulson in April 2007.

But these are the same numbskulls who now say they are saving capitalism from itself. Ah, there's the rub...amid all this giddy merriment is a serious threat. The feds have bailed out the bankers, the insurers, the mortgage lenders, and half of Wall Street. But who will bail out the feds?

Since 1971, the world's money system rests on the dollar. And the dollar rests on nothing but faith, hope and the kindness of strangers. And while the full faith and credit of the United States of America is elastic, it can snap.

Last week, the price of gold popped up $120 in two days. Then, on Monday, it added another $43. Oil gushed up 44% in the space of barely a week. Investors felt the geyser of liquidity coming from Washington and beat a retreat from the dollar.

For the last 15 years, the U.S. money supply has grown about twice as fast as GDP. Federal government liabilities, meanwhile, have grown three times as fast. As a result, the USA now has more financial obligations than assets. It is, effectively, broke. Nevertheless, the debit side of its ledgers grow heavier and heavier. This year's US government deficit will add about half a trillion. The US trade deficit is about $700 billion. The U.S. bailout plan will probably cost at least $1 trillion more.

Where will the government get that kind of money? There are only two possibilities - one honest and depressing, the other corrupt and alarming. Whether it borrows the money, or prints it up, the world enjoys no net increase in financial resources. Borrowing takes resources from projects that might have been worthwhile and diverts them to the losers. Interest rates rise, as a consequence of the extra borrowing; higher rates generally worsen the economic picture. And while the U.S. borrows, long term, at almost 5%, it lends at barely 2%. It's like a bank that has gotten its business model badly mixed up. The more it borrows and lends, the faster it goes broke.

If, on the other hand, it merely prints the money - or if it creates it "out of thin air," to use Lord Keynes' handy phrase - the results are even worse. Inflating the money supply with new currency, a la Argentina or Zimbabwe, wipes out debts. But it destroys faith in the dollar and brings down the whole world's money system.

Sooner or later, this is just what will probably happen. Not because capitalism doesn't work - but because it does. Capitalism is doing just what it should do - it is separating fools from their money. But the fools vote. After a big bubble, there are more fools than sages...and, in the United States of America, more debtors than creditors. Sooner or later, Americans will realize that they are better off destroying their own money than preserving it...and that they would prefer to stiff their creditors rather than pay their bills. That is when deflation will gives way to inflation...and the world's post-'71 dollar-based money system comes to an end.

Bill Bonner
for The Daily Reckoning Australia

[Fredfredson]

Asia stocks fall after US failure

http://news.bbc.co.uk/2/hi/business/7643340.stm

Screens indicate sharp losses on the Tokyo stock exchange, 30 September 2008
Tokyo fell sharply, with the news from Washington still fresh

Japan's benchmark Nikkei stock index has fallen almost 5% in early trading, hours after a US financial rescue plan failed to gain Congressional backing.

The US House of Representatives on Monday rejected a $700bn (£380bn) plan aimed at bailing out Wall Street.

The Dow Jones index fell 7% and suffered its biggest ever one-day points fall, ending 778 down.

President George W Bush is to make a statement on the deadlock over the bail-out plan early on Tuesday morning.

A White House spokesman said that the president was "very disappointed" by the vote's result.

Congress will not meet again until Thursday, with another vote unlikely before the weekend, the BBC's Jonathan Beale in Washington says.


A trader rubs his face as he works on the floor of the New York Stock Exchange, 29 September 2008

Why did the bail-out bill fail?
Q&A: US $700bn bail-out plan

The House's rejection of the bail-out plan came after a day of turmoil in the US and Europe, with Wachovia, the fourth-largest US bank, being bought by larger rival Citigroup, Benelux banking giant Fortis being partially nationalised by three governments, and the UK lender Bradford & Bingley taken into state ownership.

Now Asia is reacting to the shock, and in early trading on Tuesday, the Tokyo Stock Exchange's Nikkei-225 index fell almost 580 points to 11,163.74, a loss of 4.94% of its value in a matter of minutes.

Hong Kong's Hang Seng index dropped 5.47% in the first 10 minutes of trading.

Australia and New Zealand saw similar precipitous losses, with the S&P/ASX-200 index shedding 5.3% in Sydney and a 4.7% fall in Wellington.

World leaders expressed concern at the effect of the US vote.

"It will have a big impact on the US economy, and it will also greatly affect the global economy," said Japanese Economics Minister Kaoru Yosano.

Australia's Prime Minister Kevin Rudd said he had spoken to his British counterpart Gordon Brown and they agreed to urge the US Congress to reverse Monday's decision

"The attitude that we will adopt... is to urge the United States Congress to pass this or a similar measure when it is represented to the Congress later this week," said Mr Rudd.

Earlier, Brazilian President Luiz Inacio Lula da Silva accused the US and other wealthy nations of financial irresponsibility that could jeopardise the economic progress made in recent years by developing countries.

Brazil's Ibovespa stock index dropped 9.4% on Monday.

Washington blockade

The US rescue plan, a result of tense talks over several days between the government and lawmakers, was rejected by 228 to 205 votes in the House of Representatives.

About two-thirds of Republican lawmakers refused to back the rescue package, as well as 95 Democrats.

Henry Paulson: 'This is much too important to simply let fail'

Treasury Secretary Henry Paulson said, after talks with the president, that the government's plan to address the crisis facing the US financial sector was much too important to be allowed to fail.

US regulators would use "all the tools available" to help the US economy, but their powers were "insufficient", he warned.

He added that he would be working with congressional leaders to get something done "as quickly as possible".

Analysts say that without a bail-out plan, the banks will be left to handle all their own bad mortgage debt as best they can and more of them will be in danger of going bust.

But after several hours of impassioned debate, the bill's opponents - the majority of whom were from the Republican Party - got their way.

They had raised concerns about both the content of the plan and the speed with which they were being asked to pass it.

Blame game

The no vote plunged the world of Washington politics into turmoil, reports the BBC's Kevin Connolly from the US capital.

Pelosi urges bipartisan approach

So grave are the consequences of this decision, our correspondent says, that the speaker of the house paused for several long minutes after the vote was taken before declaring it official.

"The legislation has failed, the crisis has not gone away," said Nancy Pelosi, the house's Democratic speaker.

She said that 60% of Democrats had supported the bill, and urged both sides to try again to find a resolution.

"We must work in a bipartisan way in order to have another bite at the apple in terms of some legislation," she said.

HAVE YOUR SAY

I am glad the bailout bill failed. I work five days a week, save cash and pay my bills. I did not want to pay for Corporate America's greed

Lisa, Baltimore
Send us your comments

Republican leaders, meanwhile, criticised a scathing speech by Ms Pelosi about the Bush administration's economic policies for injecting partisanship into the issue and scuttling the vote.

Republican house leader John Boehner said: "We could have gotten there today had it not been for the partisan speech that the speaker gave on the floor of the House".

Republican presidential hopeful John McCain accused Democrats of infusing the debate with an unhelpful partisan approach.

"Now is not the time to fix the blame, it's time to fix the problem," he added.

He urged members of Congress to go back to the drawing board "immediately" and work out a new deal.

His Democratic rival Barack Obama countered that it was an outrage that ordinary people were being asked to clean up Wall Street's mess.

"If I am president I will review the entire plan on the day I take office to make sure that it is working to save our economy and (that) you get your money back," he said.

He added that he expected Congress to pass a bail-out bill in some form.

[Fredfredson]

How bad was Monday, really?
Commentary: From long-term perspective, Monday plunge isn't unique
By MarketWatch

Last update: 12:45 a.m. EDT Sept. 30, 2008

http://www.marketwatch.com/news/story/putting-mondays-plunge-historical-context/story.aspx?guid={8BD36911-5BB7-4A65-821C-5409BE91A104}&siteid=yhoof

ANNANDALE, Va. (MarketWatch) -- A little historical context, please.
Monday's market plunge may have been the worst point drop ever for the Dow Jones but in percentage terms it came nowhere close. It dropped 7% on Monday, or just one-third as much as the 22.6% decline in the 1987 crash.

In fact, there have been 16 other occasions since the Dow was created in 1896 in which the Dow's percentage drop was greater than it was Monday. That works out to an average of every seven years.

It furthermore has been almost exactly seven years -- Sept. 17, 2001 -- since the last time the Dow dropped by a greater amount than it did on Monday.

From at least one statistical perspective, this all adds up to Monday's drop being overdue.
Several years ago, researchers at New York University and Boston University derived a complex formula for calculating how often drops of a particular magnitude will occur over long periods of time (measured in centuries). Read study.

According to their formula, 7% declines will occur, on average, every 4.3 years. Going into Monday's session, the market had been going 2.7 years longer than this without that big a drop.

To be sure, the S&P 500 index (SPX) dropped by more than the Dow did on Monday -- by 8.8%, in fact. And, according to the researchers' formula, drops of that magnitude should occur only once every 10 years, on average.

But the last time the S&P 500 dropped by more than it did Monday was in the 1987 crash -- more than 20 years ago.

So, from this perspective, the S&P 500 was more than a decade overdue for a decline like the one we saw Monday.

This doesn't make Monday's losses any less painful. But the researchers' data serve to remind us that big drops are an inherent part of stock-market investing.
If we didn't know that going into Monday, we surely do now.

-- Mark Hulbert End of Story

[Fredfredson]

World leaders look to US for salvation as economies near abyss
Sep 30 08:18 AM US/Eastern

http://www.breitbart.com/article.php...show_article=1

World leaders called on the US government to take action to stave off global financial collapse Tuesday after Congress rejected a 700 billion dollar bailout in a move which stunned global markets.

Another European bank, Dexia, had to be rescued and shares went through another roller coaster ride after the House of Representatives voted 228-205 against the rescue on Monday.

European leaders led the calls for action by President George W. Bush who called close advisors into emergency talks after the defeat and was to make a statement on Tuesday.

"The US must take its responsibilities in this situation, must show statesmanship for the sake of their own companies and for the sake of the world," European Commission spokesman Johannes Laitenberger said.

German Chancellor Angela Merkel called for another vote on the plan this week to restore market confidence.

British Prime Minister Gordon Brown said he had sent a message to the White House to underline "the importance that we attach to taking decisive action". New Japanese premier Taro Aso said: "We should not let the world financial system collapse."

Australian Prime Minister Kevin Rudd said that he and other US allies would press Washington to take action.

US Treasury Secretary Henry Paulson warned US lawmakers they had to act fast after his plan was dramatically rejected Monday.

"Markets around the world are under stress," said Paulson, architect of the proposal to buy up the mountains of bad mortgage-related debt behind a wave of home foreclosures and spectacular bank failures.

"We need to get something done," he added. "This is much too important to simply let fail."

Central banks again poured money into markets an attempt to revive the global banking system but stocks rallied slightly in Europe after an initial slump following the lead set by Wall Street and Asian markets.

London shares dropped initially, but later showed a slight gain of 0.22 percent, Paris was up 0.21 percent but Frankfurt was down 0.75 percent after a 4.1-percent fall in Tokyo, and losses in Asia except in Hong Kong which gained 0.8 percent.

The Dow Jones Industrial Average sank 777.68 points or 6.98 percent on Monday, in a record points fall amid panic after the House vote.

Hiroichi Nishi, equities chief at Nikko Cordial Securities in Tokyo, said: "The market is exploring where the bottom is now."

French-Belgian bank Dexia was rescued by the French, Belgian and Luxembourg governments which put in 6.4 billion euros (9.2 billion dollars). Governments also had to step in to save Dutch-Belgian bank Fortis and Britain's Bradford & Bingley this week.

French President Nicolas Sarkozy called a pre-dawn meeting of key advisors and after talks with top bankers promised measures before the end of the week. A senior official in his office said. "Banks are in trouble in Germany, Belgium and Great Britain. We feel a bit surrounded."

France and Ireland reassured people with deposits in banks that their money was safe, echoing similar statements across Europe.

The euro fell again, to 1.4376 dollars in London from 1.4432 in New York because "credit worries are deepening over the European financial system," said Saburo Matsumoto at Sumitomo Trust Bank.

"The euro may fall further," he said. "We fear the credit worries may spread into emerging economies."

A vacuum of fear is causing a desperate shortage of funds in the interbank system, despite infusions from central banks, and is a critical factor in pressures that have brought down many top names in US and European banking.

Some analysts now suggest there could be concerted central bank action to cut interest rates because likely economic slowdown, even recession, arising from the crisis would sharply cut inflationary pressures.

"Central banks emergency cuts: if not now, when?" asked Citi analysts in London. But some other analysts doubted that there would be a pan-European initiative.

Around the world officials and commentators used the language of disaster and despair to describe the possible impact of further delay in US action on the world economy and especially the interbank lending system.

In London, a leading global financial centre along with New York, The Guardian newspaper said: "This has become a crisis of confidence in the banking system as a whole, which is unprecedented in modern times."

The Times wrote: "The collapse of the plan threatens all of Main Street, in America and further afield."

Central banks again pumped out huge sums to keep global banking liquid with the European Central Bank renewing one-day loans of 30 billion dollars (20.8 billion euros). It also allocated 190 billion euros under a regular arrangement which once again revealed great tension on short-term bank interest rates.

The Japanese central bank injected 3.0 trillion yen (28.8 billion dollars).

Former World bank chief economist and Nobel economics prizewinner Joseph Stiglitz, forecasting that the crisis would ensure that Democrat candidate Barack Obama would win the presidential election.

"We will have other dramatic failures of financial institutions. The American economy is headed into a long recession."


Copyright AFP 2008, AFP stories and photos shall not be published, broadcast, rewritten for broadcast or publication or redistributed directly or indirectly in any medium

[Fredfredson]

Sure, Paulson Plan Will Be Passed, But It Still Stinks

Posted Sep 30, 2008 10:52am EDT by Henry Blodget in Investing, Recession, Banking Related: ^dji, ^gspc, ^ixic

http://finance.yahoo.com/tech-ticker...t-Still-Stinks


From ClusterStock.com, Sept. 30, 2008:
One of the most galling aspects of this crisis is the refusal of Hank Paulson and Ben Bernanke to revisit the core concept of their bailout plan: overpaying for crap assets. So as Congress points fingers and Hank and Ben change a couple of sentences in the bill and get ready to resubmit it, let's revisit:
The Paulson plan: A great idea if you have no idea how to read a balance sheet. --John Hussman
TARP: A disgrace, a rip-off, a sop to shareholders and bondholders--and ineffective -- Nouriel Roubini
Paulson's plan is fine as long as the government pays market prices for those trash assets -- Warren Buffett, Bill Gross
Instead of a waste-hauling service...why couldn't Paulson have just picked one of these three better ideas? --Martin Wolf
Bad idea and won't even work: -- Reader, Asset manager
Not sure why so few people seem to fully appreciate the problem of overpaying for bad assets. Even if fully funded, the Paulson plan would only purchase a fraction of the bad assets, leaving banks with hundreds of billions in more firmly overmarked assets. Part of the reason banks aren't lending is that they are hoarding capital to protect against future writedowns.

Ideally, you want 1) banks to immediately write down everything to a level where there is no risk of future writedown; and 2) simultaneoulsy recapitalize the banking sector. The Paulson plan would sort-of accomplish a little bit of #1 (by getting some bad assets off books) and a little bit of #2 (by overpaying and buying warrants).

In the context of the worst financial crisis since the Great Depression, it's a pretty shitty plan. It was also, we have now learned, politically naive.

Logic tells me Congress will get something passed, but it's hard to read the politics. Democrats, who feel Republicans just screwed them, may not simply give the Republicans a do-over, especially if Democrats believe continuing turmoil solidifies Obama's lead, and the Republicans may balk at further concessions.
It's all Paulson's fault. -- Reader, Bank analyst
(1) I totally agree with yesterday's WSJ article that laid the blame for the
crisis at letting LEH collapse in the way that they did. That's what turned
systemic stress into a full blown, systemic funding crisis.

(2) This led Paulson to bring forward a rushed, flawed plan. It is easy to
hate on a number of levels, and Paulson probably realized it was flawed, but
he has just desperate to create the "greed motivation" from private capital
("I'm going to miss this historic bottom in the MBS market") rather than the
fear motivation ("MBS go down every day so let's stay on the sidelines
there, reduce our bank exposure and keep our powder dry in treasuries....)

(3) His intention to mobilize private capital is absolutely the correct
thought process, and the details of the plan would have been of secondary
importance had the market just believed relief was on the way. But he sold
it poorly, and the political freak show that ensued in the last week is not
inspiring anyone's confidence.

(4) The markets (both credit and equity) now "expect something." Doing
nothing would now be catastrophic. Doing something thoughtful and considered
would take weeks and is not really an option in terms of the timeline,
either politically of in terms of the funding crisis. As a result, congress
will probably approve some face saving version of the measure we voted down
yesterday.

(5) It will cost a lot more and be less effective than had they just
backstopped Lehman first place or given Paulson what he asked for.

[Fredfredson]

Opinion: This Isn’t a Bailout — It’s a Stickup
Sounding Off On the Administration’s Plan
By Matthew Davidson
September 30, 2008

http://tech.mit.edu/V128/N43/matthewd.html

As of Sunday it appears that Congress will pass a Wall Street bailout bill with expenditures potentially totaling more than $700 billion. After a week of fear tactics put forth by the executive branch and the Federal Reserve, the Congress has apparently caved.

According to Treasury Secretary Henry Paulson, the billions will be spent to shore up credit markets by buying “illiquid” assets that are weighing on the balance sheets of foreign and domestic banks.

This is just the latest in a series of bailouts performed by the Federal Reserve and the treasury in which billions of taxpayer dollars have been put at risk. Since March, the Federal Reserve has loaned out more than $100 billion to rescue failed financial institutions.

Recently the Fed became worried that its own balance sheet was being depleted and the U.S. treasury came to the rescue, effectively bailing out the federal reserve by auctioning debt on behalf of the Fed. Add to this $200 billion for Fannie Mae and Freddie Mac, and the total new liabilities for the U.S. taxpayer are more than $1 trillion.

This robbery of the American people has been performed under the guise of preventing a recession, although more frightful language is often used by supporters of the bailouts. The fear generated by the actions and words of Federal Reserve have scared Congress into adding more fuel to the fire of the recession which will inevitably occur as a result of our the failed monetary policy pursued by the Fed itself.

Understanding the Fed and its language — termed “fedspeak” — is often difficult, perhaps purposely so. It is important to first understand that the Federal Reserve System is made up of Federal Reserve Banks, which are private banks whose shareholders include such Wall Street titans as JP Morgan Chase, Goldman Sachs, and Citibank.

From its inception in 1913, the Federal Reserve has crafted monetary policy which has resulted in alternating periods of inflation and deflation of the money supply. The most recent inflation of U.S. housing prices is just another example of the effect of Fed policy.

In 2001, the Fed lowered its benchmark interest rate from a high of 6.5 percent to below 2 percent and maintained this level for more than two years. This change in the mandated interest rates for interbank loans resulted in an oversupply of “cheap” money which resulted in malinvestment. This malinvestment took the form of overdevelopment of commercial and residential real estate, sub-prime mortgages, and many other forms of irresponsible lending.

As a result, millions of Americans were lured into accepting adjustable rate mortgages to pay unaffordable prices for overvalued houses. When the Fed raised interest rates, housing loans became less affordable and the prices of housing fell along the demand for these loans.

While some prospered from the booming real estate prices, the overwhelming effect of the Fed’s monetary policy was to inflate a housing bubble that drove millions of Americans further into debt while investment banks posted billions of dollars in profits from creating and trading debt instruments backed by these loans.

These same debt instruments have now become “illiquid” after the realization that the housing bubble had burst, and the underlying collateral backing these debt instruments had lost value. These assets are said to be illiquid because banks are not willing to sell them for the prices currently being offered by the market.

Now thanks to the lobbying efforts by the Chairman of the Federal Reserve, which is owned by Wall Street banks, and Henry Paulson, a former banker at Goldman Sachs, the American people are now completing the cycle, moving further into debt, while the bankers benefit.

On top of this, all the cheap money flowing through the system has caused our dollar to steadily lose value against world currencies. This has driven up the price of oil, food, and all essentials of life. As a result of dollar devaluation, all the stock market averages, which are valued in dollars, have been falling for years. Valued in 2001 dollars, our Dow Jones Industrial Average would be well below the 8000 level. Yet we continue to tell ourselves that we are not in a recession.

Adding to our national debt will only further this inflation problem. We must realize that we are already in a recession and not be swayed by fear-mongering from Wall Street. Instead we must clean house and remove these bankers from the halls of our government.

Congress has failed us for now, but the people still have the power. We can change this system any time. We only have to declare our independence from the banking system. We can all vote with our dollars buy removing them from the banks and converting them to gold, silver, or other currencies which are out of reach of devaluation by the Fed.

If you’re as outraged as me about this situation, let’s get together on the steps outside Lobby 7 this Friday at 5 p.m. to show the bankers at the Fed that MIT students have declared our independence!

Matthew Davidson is a graduate student in the Departments of Physics and Nuclear Engineering.

[Fredfredson]

Heh

The Website for the Congress has been slashdotted email wise.

https://forms.house.gov/wyr/welcome.shtml

F

[Fredfredson]

September 29, 2008

My God, What have We Done

Filed under: Old Posts — John Galt @ 9:32 am
by John Galt
September 29, 2008

Tim Harris from J.P. Morgan Asset Management was on European Squawk Box this morning and observed that European banks were leveraged at 274% of GDP versus the norm of 210%. As he spoke, my heart sunk. He said that this meant the European system had almost $5 trillion in deleveraging facing the system. If Europe has that much to deal with what does this mean for the U.S.


My God, what have we done.


The United States is far more leveraged than Europe.


The Financial Times of London had a fascinating article last week titled Paulson’s Plan was Not a True Solution to the Crisis by Martin Wolf in which the dramatic damage which has been inflicted by this orgy of debt was reflected in this part of the article:
I suggest we should take a broader view of events. The aggregate stock of US debt rose from a mere 163 per cent of gross domestic product in 1980 to 346 per cent in 2007. Just two sectors of the economy were responsible for this massive rise in leverage: households, whose indebtedness jumped from 50 per cent of GDP in 1980 to 71 per cent in 2000 and 100 per cent in 2007; and the financial sector, whose indebtedness jumped from just 21 per cent of GDP in 1980 to 83 per cent in 2000 and 116 per cent in 2007 (see charts). The balance sheets of the financial sector exploded, as did the sector’s notional profitability. But leverage, alas, works both ways.
Since US net international debt was 39 per cent of GDP at the end of 2007, virtually all of this debt is an asset of another domestic entity and would net out to zero. But when the gross debt stock is huge and economic conditions difficult, the chances that many entities are bankrupt is high. When people fear mass insolvency, lenders stop lending and the indebted stop spending. The result can be the “debt deflation”, described by the American economist, Irving Fisher, in 1933 and experienced by Japan in the 1990s.
The following chart from the same article says it all:

Unfortunately, the price of deleveraging will leave us cratering in a manner for more severe than Japan as they are savers and we are not. This means there is no cushion for our standard of living and for many people in the U.S. that standard of living will decline at a rate far in excess of the deleveraging which is about to accelerate. The problem that the American consumer will experience is about to be complicated by the attempted nationalization of debt which the Congress will start voting on later today. If the spigots are turned wide open by the Treasury the pace of debt nationalization will have to outpace the decline in perceived and assumed asset valuations by a factor of 4:1 to have any prayer of keeping the credit markets from collapsing on short notice. This means that securities with real values of zero will be assigned a valuation by a bureaucrat and not the markets, a very dangerous and inflationary prospect.
The issue facing Paulson and company that the American public does not want to deal with is that his actions might accelerate the very decline in equity and bond prices he was hoping to avert. By intervening in the markets in this manner, the U.S. Government is providing a back stop for foreign banks which allows them to return more toxic waste to our shores and may not allow our system to reprice our own holdings in a timely manner using the free markets. The effect of this will be a tsunami of dollar denominated assets returning to our shores that have no future return and in fact cause the cost of borrowing to increase as interest rates rise in a more proportional manner to the total national debt which will exceed $11.3 trillion after this fiasco passes and probably increase at over $1 trillion per year thereafter.


The other unintended consequence of attempting to do a good deed will be the destruction of the traditional pension inside the U.S. as inflationary forces outpace any growth in these instruments. With liquidity issues abounds and the PBGC severely underfunded to deal with the crisis that bail out will be next on the agenda if the FDIC funding issue does not supersede it first.


I am afraid we have lived life on the high hog for way too long and now, sadly, we are burdening this generation and the next two following ours to a life of payback.
For which they were neither responsible nor had the opportunity to enjoy the life we intended for them.


My God, what have we done.

[Fredfredson]

Senate to vote on bailout Wednesday

By J. Taylor Rushing

Posted: 09/30/08 07:55 PM [ET]

http://thehill.com/index2.php?option...ge=0&Itemid=70

In a surprising development, Senate leaders Tuesday night announced a Wednesday evening vote on the $700 billion Wall Street rescue plan rejected Monday in the House of Representatives.

Senate Majority Leader Harry Reid (D-Nev.) and Minority Leader Mitch McConnell (R-Ky.) announced the agreement in a joint appearance on the Senate floor just after 7 p.m. Agreements are in place for a voting procedure and the vote itself is expected sometime after sundown, to respect the Jewish holiday, both leaders’ offices said.

Democratic presidential candidate Barack Obama (Ill.) will return to Washington for the vote.

The agreement came together after a daylong effort that involved as many as nine conversations between Reid and McConnell and their lieutenants, as well as calls back and forth from Capitol Hill to the White House. The stock market plunged 777 points after Monday's 205-228 vote in the House, sending leaders from both parties scrambling on Tuesday to head off any more political and financial fallout. The bill is believed to enjoy a wide margin of support in the Senate, usually the more difficult of Congress's two chambers for controversial legislation.

"It has been determined, in our judgment, this is the best thing to move forward," Reid said. "This is good for the country."

McConnell called the announcement "one of the finer moments in the Senate."

"We have come together on a bipartisan [basis] and structured a way forward on an important rescue package for our country," he said. "This is an important accomplishment and a way forward to get a result that we need to achieve for the American people."

Reid's office said the final agreement came together very quickly late Tuesday.

Usually, constitutional issues prevent the Senate from acting on legislation that involves tax issues — any such bill must originate in the House. However, the Senate can circumvent the the rules by taking up a pending House bill, stripping it and putting in place substitute language. Senate Banking Committee Chairman Chris Dodd (D-Conn.) had cast doubt on that scenario after Monday's failed House vote, saying it would only "compound" the situation, but others, such as senior Banking Committee member Robert Bennett (R-Utah), confirmed it was a leading idea.

"Anything that's within the realm of the rules is within the realm of possibility," Bennett said.

Some observers said a successful Senate vote could be an important tool in persuading wavering House members who may be considering changing their vote.

[Fredfredson]

Could be an interesting day.

US stocks head for lower open after rebound
Wednesday October 1, 8:11 am ET
By Tim Paradis, AP Business Writer

http://biz.yahoo.com/ap/081001/wall_street.html?.v=8

US stocks point to lower open after rebound; Street awaits fate of financial rescue plan

NEW YORK (AP) -- U.S. stocks headed for a lower open Wednesday, indicating stocks could extend this week's gyrations as investors prepare for a possible Senate vote on the government's proposed $700 billion financial sector bailout.

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Stocks fell sharply Monday after the House surprised Wall Street by rejecting the plan but the market then staged a partial rebound Tuesday on hopes party leaders would find the votes to pass the measure.

Champions of the plan say it is necessary to absorb the soured mortgage and other debt from banks' books to restore faith in the credit markets. Nervousness about the debt has made banks hesitant to extend loans to one another as well as to businesses and consumers.

A drop in loanmaking makes it harder for the economy to grow; the fear paralyzing the credit markets is making it extremely difficult and more expensive for companies to fund their day-to-day operations, putting basics like payroll and purchasing at risk.

The House's rejection of the measure came after detractors said the plan was too costly and was unnecessary.

Credit markets remain tight, however, and a key rate that banks charge to lend to one another shot higher Tuesday. The rise in the London Interbank Offered Rate, or LIBOR, underscores the anxiety gumming up the world's financial gears.

The bailout plan is headed for a Senate vote Wednesday night. Leaders there surprised some observers Tuesday by adding tax breaks for businesses and the middle class and increasing deposit insurance.

Financial markets likely will remain nervous until the votes on Capitol Hill are complete. Dow Jones industrial average futures fell 73, or 0.67 percent, to 10,788. The Dow fell 778 points Monday then rallied 485 points Tuesday.

Standard & Poor's 500 index futures fell 9.90, or 0.85 percent, to 1,159.10, and Nasdaq 100 index futures fell 11.50, or 0.72 percent, to 1,593.00.

Bond prices rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.77 percent from 3.83 percent late Tuesday. Yields on short-term Treasury debt remain very low by historical measures, particularly when compared to lending rates between financial institutions; that indicates intense demand as investors seek a safe place, even with little or no return, to put their money.

Light, sweet crude fell 64 cents to $100 a barrel in premarket electronic trading on the New York Mercantile Exchange.

Beyond monitoring the course of the bailout bill, investors also will looking for reports due after the opening bell on construction spending and manufacturing.

Wall Street expects the Commerce Department to report construction spending declined in August. Economists polled by Thomson/IFR predict that construction spending will fall by 0.5 percent following a 0.6 percent decline in July.

Also, the Institute for Supply Management, a trade group of purchasing executives, is expected to report that its manufacturing index declined to 49.5 last month, according to Thomson/IFR. Investors will be looking to determine whether export sales are continuing to show recent strength.

The dollar was mixed against other major currencies, while gold prices fell.

Overseas, Japan's Nikkei stock average rose 0.96 percent. In afternoon trading, Britain's FTSE 100 rose 1.39 percent, Germany's DAX index fell 0.24 percent, and France's CAC-40 rose 0.56 percent.

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com