Paulson and Bernanke ratchet up the blackmail talk

Paulson, Bernanke Tell Lawmakers Urgent Action Needed on Treasury Plan

WASHINGTON -- U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke urged swift action on a Treasury Department plan to buy illiquid mortgage-linked securities and avoid severe spillover effects on the economy.

Mr. Paulson cautioned lawmakers against letting the plan get bogged down in a debate over unnecessary additions.

"Unnecessary additions" - things like accountability, transparency, making sure that the crisis does not happen again, and making sure that it solves the underlying problem. But nope, no "bogging down"...

The message could not be clearer - they are not avoiding the brinkmanship - they are escalating it, in the (not wholly unreasonable, given the recent past) expectation that the Democrats in Congress will fold, out of fear of being blamed for the tumbling stock market prices as the plan is delayed.

So, just for the record, a few arguments:

  • the stock market is going down again NOT because the plan is delayed but because, even if the $700 billion gift to the banks is granted, it will still not solve the underlying situation;
  • 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;
  • in the up leg of the bubble, the problem WAS too much liquidity (which helped take silly risks when these were not properly assessed); today's problem is massive deleveraging - 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. It will create simply a circuit whereby the government creates new Treasuries, hands them over to the FED, which uses them to create more cash, which it trades with the banks for dubious assets; the banks will use the cash to buy Treasuries. It's a closed circle which helps no one but the banks (and the Fed, see below).
  • the real worry is on actual economic activity, which is straining under the twin burdens of asset price depreciation (house prices crashing, leading to lower incomes for people, less construction activity and foreclosures) and the credit crunch (business no longer having access to credit to develop their activity). Given that companies and households are also deleveraging (reducing their debts or increasing their savings), or are about to be forced to do so, the real need is to inject actual revenues, ie wages coming from real activity, in the economy, and NOT debt. What government needs to do is to spur real economic activity - as it were, there are whole sectors begging for it, like investment in public transporation or renewable energy infrastructure.

The plan from the Bushies helps stricly no one beyond providing TEMPORARY relief to banks, which might be enough but does not quite explain their willingness to engage in such brinkmanship.

Which makes the following suggestion, emailed to me by a US central banker friend, all the more intriguing:


I've been puzzling why Paulson would propose legislation which is so obviously dictatorial, extra-legal and dangerous, even with the careful orchestration of the Lehman Brothers/Reichstag Fire.

I think I've just figured out why they are doing it.

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.

The Paulson plan will provide a one off opportunity for banks to take their toxic collateral back and sell it at a Paulson-determined price for cash. He issues Treasuries to finance the plan which increases the supply available. He selectively decides winners and losers, of course in making the scheme available and pricing assets, creating arbitrage opportunities and survivor bias in the process.

In the meanwhile, the removal of the toxic waste from the Fed balance sheet and redeposit of Treasuries and cash as the repos unwind gets the Fed off the hook for having hypothecated most of its assets against worthless toxic waste at Enron-styled false valuations.

If I'm right, the Paulson Plan recapitalises the Fed without ever publicly admitting that it was dangerously overextended.

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

and concludes a follows:

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.

The theory here is that the Fed has destroyed its balance sheet by taking on increasingly large chunks of non performing assets (the "toxic waste" made from mortgage-backed securities and the like) in exchange for loans of "real" cash to banks that may still end up not repaying them.

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).

So this is a desperate gamble by Paulson and Bernanke to avoid the run on the dollar that would be triggered by direct cash creation.

Obviously, as the market shows (with the euro up by 6 cents since the plan was announced Thursday night, and gold and oil similarly massively up), worries about inflation have not quite been killed, but they have been kept to a manageable scale.

At this point, of course, the goal is to avoid a bigger crash before the election.

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:;_ylt=AkxwqHv...
FBI investigating companies at heart of meltdown


We can hope that this investigation will reveal much.....but I just don't believe the FBI has enough political power to do a real investigation...they'll just be investigating the designated fall guys. Besides, trying to pin the blame on a few corrupt firms misses the point, IMHO - what we're experiencing is a systemic failure.

Anyway, take this as constructive criticism. I'm a fan of your postings. I wish you would take Leanan's advice and start a blog (you know Leanan is never wrong, stop fighting it! :^)


Brother Kornhoer

Political power? Hah! Since when has the FBI been independent? Not in the last seven years... No, I posit this is nothing more than scapegoating. Those eventually "caught" will be blamed for it all and the focus kept as far away from the truth as possible. Then they will be given sentences better suited to jaywalking and/or pardoned. And America will snore through it.

I offer Abu Grahib and Scooter Libby as proofs of concept.


They will probably conclude that Martha Stewart is Ms. Big behind the whole scam.

The article says there have been 26 investigations over the past year. How many successful prosecutions? I doubt that the FBI will have the ability to get very far with this since these companies under investigation will have used much legal advice to ensure what they did was not going to send them to jail. It might not have been right but was almost certainly legal.

The "independent" rating agencies will have provided valuations and so it will be difficult to prove they have misrepresented their assets.

One thing to do in congress might be to ask Eric Thorson, the Inspector General at Treasury, if there are similar internal investigations to look at connections within the department. But, Thorson was previously IG at the Small Business Administration where he seems to have muffed an investigation of an improper contract let by Steve Preston, the new HUD Secretary, to a GOP hack named Vernon B. Parker who served as assistant secretary for civil rights in the Agriculture Department from April 2003 to January 2006.

So, while IGs have had some useful roles during the present administration, it is not clear that the IG at Treasury is of that sort. Still, it would be worth asking just to cover the bases.


It's a nice distraction for the masses.

It gives people the impression there really is some Ken Lay etc types to blame, and then we even get to watch the trials on television.

Boring... Another boring collapse where everyone is asleep. At the end of the age of enlightenment even. Who'd a thunk it.

Actually, there are some criminals at the heart of the matter--those that naked shorted the system and started the collapse, floks like Einhorn and Rocker, and their "journalist" accomplices. I'm sure's CEO could give you a good list for starters, as could the folks at NCANS. Most of the top people at the SEC need prison terms, but then so does Bush, Cheney, Rice, Powell, and the rest of that crew.

These guys think they should be jailed, see "How to create an Angry American"

It looks like some people get away with lying.

Few have taken what I've said about how this crisis started seriously. It was started by Goldman Sachs. At the time, I was a shoreholder in NFI, the very best of the sub-prime brokers, which is bourne out by their still being in business and have yet to default on any bond payment. So, I was a witness to what happened, although it took some time to understand the how.

I offer this as further testimony as the author's financial credentials far outweigh mine. A sample:

When Goldman Sachs conjured up something called the ABX index by bundling up mortgages into billion dollar batches and selling them into the market, the industry responded as it should have. The market rocked. Novastar kept to their conservative underwriting and contributed like the rest of the industry by funding those indexes. But then something strange began happening. Massive short interest and even more massive naked short interest built in the Novastar market. Millberg Weiss sued (and lost). Novastar dropped from a high of near $70 to around the mid $30s. Novastar was still making $$. Their portfolio was performing within the model. The dividend was huge. But that was just because those pesky shorts had overdone it with the share price. They would pay. It was certain........

Then Goldman Sachs started massively shorting the very same ABX indexes they had just invented and sold to their investors. The shorting was merciless. The ABX index was small. It was a piece of cake to dominate the market with short sales. The prices on the indexes dropped clear out of sight.

There's much more evidence as to Goldman's criminal responsibility. And just who was heading Goldman at the time? Paulson.

Here we have bob o'brein recap how the media failed even when it was shown just what was happening and how. Some may remember this full page ad placed in the 8 FEB 2005 WaPost that detailed the caause of the coming crisis and demanded accountibility.

Now we have the Robber-in-Chief trying to rob every US current and unborn to the second generation citizen. IMO, all the members of BushCo need to experience the Bonny and Clyde treatment.

Yikes. Have seen references to this before and just started reading more about it. An article in Money magazine a few years ago described Paulson as being very interested in wildlife....especially birds and predators, and how the latter maintained their position in the top of the food chain. He also is fascinated by snakes. While I like wildlife and animals too, I'm struck by the analogies here...predators and snakes. So what are they planning...should we look forward to a world oligopoly? Also, I guess that means that any investment in the stock market is sort of like throwing your money into the wind. Great.

For those who haven't, I highly encourage reading this item by Michael Hudson:

There is a long pedigree for this kind of behavior. And it always seems to involve a partnership between kleptocratic insiders and the Treasury. Today’s twist is that the banksters have lined up complicit accomplices from the accounting industry and bond-rating companies as well. The gang’s all here.

As for investing in stocks, make sure you choose a properly regulated and transparent market, which means none in the USA. I favor Oslo because the companies I like are listed there.

One of NCANS founding members has this "better plan to save the US economy," which I hope will generate some responses:

1.) Restore the dividends for FNM and FRE preferred stock. This will immediately improve the balance sheets of small, "innocent" community banks $ 10 to $ 15 billion.

2.) Abandon the warrants the Treasury extorted from FNM and FRE. If "real" common equity is worthless, the Treasury is giving up nothing. If "real" common equity has value, then the warrants represent theft of equity from the common holders, virtually none of whom had any control over FNM and FRE managements' activities.

3.) Immediately enact a Federal direct loan program, offering a new 30 year loan at 5% interest to any owner-occupant for the full amount of money currently due secured lenders on the home, without regard to income, equity, or credit score. In addition to the current interest charged, the Federal government gets 25% of a eventual sale price in excess of the original loan amount. This makes the program attractive only to those borrowers who actually need Federal assistance to keep their homes.

This program terminates virtually all foreclosures of owner-occupied homes, which should significantly stabilize most home prices in most areas of the country. This program removes the worst loans from lenders' balance sheets, allowing them to make new, better quality loans, and should unfreeze the credit markets.

This program helps "Main Street" directly, and should benefit Wall Street indirectly, rather than current proposals which benefit Wall Street directly, and do little or nothing for "Main Street".

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.

This is correct. The Fed and the Treasury have misidentified and mischaracterized the nature of this crieis from the beginning, equating it to a garden variety 'money panic/liquidity squeeze'. Under such circumstances, the injections of Fed liquidity would be 'mopped up' after the panic had subsided ... and the Fed's balance sheet cleansed. In a money panic situation, the paper taken as collateral by the Fed in an open market operation would be good, but temporarily undervalued by the panic.

This crisis is a secular revaluation of assets. The paper taken by the Fed as collateral isn't good paper mis-valued ... it really is bad paper! After a year of crisis and bear markets in all forms of paper collateral ... the Fed's balance sheet is a mess.

A giant problem with the Paulson proposal is it will bring more bad paper out of the woodwork. $700b now, $1.2t next week, $5t the end of next year ... it will never end. All the banks - both in the US and abroad - are swimming in the stuff.

I disagree with the 'Base Money' scenario since it is an inflation plan. The Fed has plenty of subsidiaries - Fannie Mae, Freddie Mac and AIG come to mind - that can be converted into 'parking spaces' - holding companies for Fed waste. The Fed can replace the waste with more Treasuries and nobody would know. Bernanke could be doing this now, the only concern would be uncertainty over him keeping his job after January.

Restore the dividends for FNM and FRE preferred stock. This will immediately improve the balance sheets of small, "innocent" community banks $ 10 to $ 15 billion.

You have illustrated the core of the current crisis in one sentence! This is the lack of yield in all investments, particularly debt. 'Simple' return is insufficient, requiring excess leverage and complex intermediation. Instead of returns to savings/investments compounded over time with manageable risk, the markets have turned to 'growth' and speculation ... and complexity and intermediation to 'hedge' the unpredictable risk. Unfortunately, the decline of yield has taken decades to manifest itself and will not be solved overnight with a bailout.

The spark for Paulson's Plea was the bankruptcy of Lehman Brothers and the resulting shockwaves felt in the money markets. The common connection between all the failures is the derivatives markets: the CDS market which is leveraging debt downward (think 'Portfolio insurance') and the interest rate/cash flow swaps market. Trading, originating and settlements in these markets should be suspended until someone who has some insights into them can straigten them out. Doing this would calm the money markets and not cost the taxpayers a dime!

Don't visit my blog!

Great analysis by Jerome. I'd add one thing, while this is a blatant theft by the banksters we still have no choice but to inflate the currency in some manner. There is such a massive overhang of current and future debt (social security, pensions, etc) that the only "solutions" are either default or monetization/hyperinflation. Paulson's plan does accomplish eventual hyperinflation but we get no benefit from it other than whatever crumbs dribble back to the general economy from the banks. The best plan IMO (now that we have completely gone over to socialism anyway) would be to spend the trillion or two on transition to a nuclear/renewable power grid. But too bad, we will kill our chances to do that now. By the time they finish printing up the first trillion or so for the banks, there won't be enough confidence left in the dollar to afford any useful infrastructure projects. If people understood the scale of this issue they would be in shock. We are looking at the last chance for America's future being given away to a handful of banking parasites - and it is happening right under everyone's noses. At the very least people reading this thread should be emailing their representatives. It takes less time than reading the thread. Don't let it be said that we went down without even an objection.

Both the FBI investigation and the rumblings in Congress and the Senate are but sideshows. There were representatives this morning who had sincere doubts, but their hands are tied, They get to do token democracy, sure, but they won't be able to change the essence of the plan. Oversight? Paulson himself insisted today that he wants it, while Section 8 of the plan explicitly states there won't be any.

What I found remarkable is that Bernanke talked about maintaining economic growth, while it should be very clear that the US economy is shrinking like pants on fire. It's hard to estimate, but it would be safe to say that $10 trillion has vanished from the credit, buying power, give it a name, of the American people in the past year. So GDP growth is now a preposterous notion, but no Congressman says a word on that. More here: Growth? Where?

Jerome, there is not enough emphasis on the fact that Paulson gets to choose which banks fail, and which ones prosper. We know that most of the plan's $700 billion+ would go to Goldman and Morgan, but that's just a start. They will target banks by the dozen, to get to customer deposits, which they can do by forcing the banks to sell assets at a pre-set price. All banks will after all be made de facto government agencies. Yes, that means Paulson will be back as the boss at Goldman.

The word you will see used for all of it is "consolidation". It's a financial take-over the scale of which the world has never seen. It's not about money, it's something much bigger: power over money.

ilargi...I agree about the FBI and the bailout itself being a big show. For whom? I would have to guess those that are keeping this country running right now...the Creditors and owners of our debt. The Fed is trying to show China, KSA and the likes that we are doing "something" to try to fix this. If we lose their confidence, the FED knows how ugly it could get.

Paulson testifying before congress;

Paulson; “I’ll just read from my notes here…ahem…. We have very credible evidence that Sadam Hussain has weap… What the….? Damn it! these are Colin Powell’s notes. I said write me something LIKE Colin’s testimony you idiots.”

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...............

How can you tell whether he is "suspending" his campaign? He's had no campaign since the Palin news cycle blew out. And his campaign before that was "Obama is a bad ..." fill in the blank. Pathetic.

He has had enough of a campaign over the last number of months to miss some key energy votes. If he is ready to come back to Washington now, I have to say that I must form the opinion that he was ducking those votes which would have boosted renewable energy which he says he supports. Taking this dim view, it is very easy to see him as ducking the debate but saying something else to cover.

This does not seem like the candidate I phone banked for eight years ago. People used to swear at me saying that McCain was a traitor to POWs and had illegitimate colored children and all sorts of hateful made up stuff. He took it in stride and shot back at the folks who would break the ninth commandment, highlighting their hypocricy.

But, now, to me, hypocrisy seems to be part of where he is at himself. None of us can be free of it entirely. But, here is one who should be more aware of the harm it can do and be more careful. I haven't yet decided if he would be ruinous for the country the way I was pretty sure his opponent would be back in 2000. I'd had dealings with his father and there was a problem with him keeping his word. I figured the son would have problems as well. Turned out I was right. It is possible to have an OK president who is a scoundel. But, when character is basically all you are running on, being unable to deliver really really harms the country.


People used to swear at me saying that McCain was a traitor to POWs

This one, at least, is not made up. He has a VERY interesting history with this issue:

Vietnam Veterans Against McCain


Opposing legislation is part of the job of a legislator. If you don't like the position, you work to get the person out of office. But doing his job does not make him a traitor, no matter how emotionally invested you might be in the opposite position. I am going to say that the idea that we did not do everything possible to get back any who might have been left in captivity leaves a horrible feeling. But, there is that word possible to consider. It may be very sound judgement to decide that holding up a move towards peace is not possible.

The time to leave no man behind is during a orderly retreat. Our retreat was not orderly because Nixon delayed. If you want to assign blame, start there.


It was interesting but sad tonight that he closed the debate defending just these points. Obama did talk about funding the VA better, but that was not what McCain was answering. Kerry also ended up defending all the time. What horrible things that war has done to us.


IMHO from Yurop this is just another part of his campaigning. Remember politicians are mostly only interested in two things, getting elected and getting re-elected.

To the best of my knowledge McCain is no financial expert.

Catching the guilty may be useful for putting the fear of prosecution into the next batch of scammers, but don't expect to recover a significant amount of cash. The biggest chunk of cash went to homeowners who are defaulting, they either bought too much house, or refinaced their house as real estate prices rose. In any case, this is largely spent money. Its spending was a significant part of our 5 to 6.5% current account deficit. Having spent more than we produce for more than two decades, is the REAL problem we have. The overall level of debt owed to foreigners is just too large for any easy resolution. The amount owed by families, and businesses is even larger than what the government owes. The only cure is to go from current account deficit to surplus, but this means we have to produce more, and or consume less, by roughly 10% of GDP. That will make nearly everyone feel poor.

The FBI is completely compromised, as evidenced by their actions after 9/11. They will conduct their investigations, but nothing will come of it, except perhaps a few promotions of crooks.


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


Second this, Jerome i always look forward to your posts. The four bullet points are spot on.

This plan does nothing to fix the root cause. Give-me-your-money Paulson has said he's reluctant but there's no other choice and it would be too dangerous to do nothing and we must do it now without any further delays. Kind hearts would say he is punch-drunk with bailouts. The problems have been going on for a year so immediately giving the guy who was on duty a huge handout to use at his discretion with no comeback is clearly not the right answer.

The deleveraging will stop when the "assets" have been written down sufficiently and new capital has been injected. At the moment we are not at that point. Barclays bought part of Lehmans for about one third of what Lehmans thought it was worth so there is capital but not at the current prices.

The banks need to be on the hook and even if this grieves them greatly it is preferable to the taxpayer being stuck with overpriced crap. The deleveraging will cause pain on Main Street but this is already happening, e.g. problems by McDonalds in raising finance. By the government taking on a trillion more public debt the government will simply put increase the supply of dollars thereby forcing interest rates higher. Banks are still reluctant to lend to other banks and Libor has again risen together with cash from yesterday's Federal Reserve auction.

Instead of buying the crap instead there could be a swap of mortgage securities for government bonds so helping leaving the risk with the banks.

A guarantee to regular depositors must be provided to safeguard the public.

I agree, Jérôme is probably the best person on TOD to weight on this complex issue. I'm very concerned about the current financial situation. The irony is that Paulson has been a Wall Street tzar for a numbered of years and has enjoyed great personal wealth in return, but surprisingly the best person that should have been aware of the toxic BAU of Wall Street failed to warn us early in 2007 when he took office. Now he's asking congress to approve an unprecedented and unconstitutional plan that will make him the most powerful person in America where he and Wall Street banks won't be liable for anything and not string attached. I'm pretty sure that the $700 Billion won't be enough, we are just seeing the tip of the iceberg, there is still no transparency in institution balance sheets.

The US could potentially face a double whammy now: 1) high oil prices; 2) inability to invest in necessary alternative energy/transport infrastructure. US Automakers are finally starting to develop new products (Chrysler and GM) that are energy efficient but what will happen to those new plans if the US goes into a deep a depression? if peak oil hits in 2011-2012, we won't be able to make the transition, depletion will bite our ass and powerdown will be forced upon us.

You're right-at this point it looks like Paulson has basically driven the nail in the coffin re USA oil depletion mitigation attempts-contrary to public belief, the amount of wealth in the USA economy is not limitless, and this program potentially could suck out a major % of the wealth still remaining in the economy IMO.

Powerdown - should be present tense.

I think Ben Stein lays it out pretty well in this short article:
The Long and Short of It at Goldman Sachs

FOR decades now, as a writer, economist and scold, I have been receiving letters from thoughtful readers. Many of them have warned me about the dangers of a secret government running the world, organized by the Trilateral Commission, or the Ford Foundation, or the Big Oil companies or, of course, world Jewry.

I always scoff at these letters. The world is far too complex a place to be run by any one group. But the closest I have recently seen to such a world-running body would have to be a certain large investment bank, whose alums are routinely Treasury secretaries, high advisers to presidents, and occasionally a governor or United States senator.

This all started percolating in my fevered brain last week when a frequent correspondent, a gent in Florida who is sure economic disaster lies ahead (and he may be right, but he’s not), forwarded a newsletter from a highly placed economist at Goldman Sachs named Jan Hatzius.

That worthy scholar recently wrote a detailed paper about how he thought the subprime mess would get worse and worse. It would get so bad, he hypothesized, that it would affect aggregate lending extremely adversely and slow down growth.

Dr. Hatzius, who has a Ph.D. in economics from “Oggsford,” as they put it in “The Great Gatsby,” used a combination of theory, data, guesswork, extrapolation and what he recalls as history to reach the point that when highly leveraged institutions like banks lost money on subprime, they would cut back on lending to keep their capital ratios sound — and this would slow the economy.

This would occur, he said, if the value of the assets that banks hold plunges so steeply that they have to consume their own capital to patch up losses. With those funds used to plug holes, banks’ reserves drop further. To keep reserves in accordance with regulatory requirements, banks then have to rein in lending. What all of this means — or so the argument goes — is that losses in subprime and elsewhere that are taken at banks ultimately boomerang back, in a highly multiplied and negative way, onto our economy.

As the narrator in the rock legend “Spill the Wine” says, “This really blew my mind.”

So I started an e-mail correspondence with Dr. Hatzius, pointing out what I believed were a few flaws in his paper. Among them were his hypothesis that home prices would fall an average of 15 percent nationwide (an event that has never happened since the Depression, although we surely could be headed in that direction), and that this would lead to a drastic increase in defaults and losses by lenders.

This, as I see it, is a conclusion that is an estimation based upon a guess. I found especially puzzling the omission of the highly likely truth that the Fed would step in to replenish financial institutions’ liquidity if necessary. In a crisis like that outlined by the good Dr. Hatzius, the Fed — any postwar Fed except perhaps that of a fool — would pump cash into the system to keep lending on track.

I mentioned this via e-mail to Dr. Hatzius. He generously agreed that there was some slight merit to my arguments and that he was merely pointing out tendencies and possibilities (if I understand him correctly).

BUT forecasting is tricky, and I have a hard time believing that financial events to come will be qualitatively different from those that have already happened.

I do want to emphasize Dr. Hatzius’s gentlemanliness and intelligence. But I also want to emphasize that, as I see it, his document was mostly about selling fear. A spokesman for Goldman Sachs categorically denies this point and says that the firm’s economic research is held to the highest levels of objectivity and that its economists’ views are completely independent.

As I interpret it, Dr. Hatzius was saying that the financial system would possibly not be able to adjust to a level of financial losses that are large on an absolute scale but small compared with aggregate credit or the gross domestic product. He is also postulating that lenders would have to retrench so deeply that lending would stall and growth would falter — an event that, again, has not happened on any scale in the postwar world, except when planned by the central bank.

In other words, with the greatest possible respect to Dr. Hatzius, his paper is not really what I would call a serious overview of the situation. It is more a call to be afraid and cautious based on general principles that he embraces and not on the lessons of history. (In this respect, he is much like many economic journalists and commentators who sell newsprint by selling fear. The common cause of journalists and Wall Streeters in this regard is a subject I will address in the future.)

Now, let me make a few small points here and then get to my own big point.

Goldman Sachs is a huge name in terms of moneymaking and prestige. I totally understand the respect it receives for its financial dexterity. The firm is a superstar in that regard, and I, a small stockholder, am grateful. But it has never been clear to me exactly why its people are considered rocket scientists in any other area than making money.

Dr. Hatzius’s paper is a prime example of my puzzlement. It shows extreme intelligence but basically misses the point: yes, there are possible macro dangers, but you have to go all the way around Robin Hood’s barn to get to them, and you have to use what I think are extremely far-fetched hypotheticals to get to a scary situation. (This is not to diminish the real risks in today’s economy, I’m just not as gloomy about them as Dr. Hatzius.)

Why, then, is his document circulating? Perhaps as a token of Dr. Hatzius’s genuine intelligence, which is fine. But to me, his paper seemed like a selling document in the real Wall Street sense of selling — namely, selling short. (Dr. Hatzius notes that he has long been bearish on housing, since faraway 2006, but I respectfully note that that is a lot different from predicting a credit catastrophe. The spokesman for Goldman also noted the company’s bearishness on housing since 2006. He also noted that in the recent past, Goldman Sachs has moved to a considerably larger short posture and that the firm is net short.)

More thoughts came to me as I read a recent piece in Fortune by my colleague Allan Sloan, a veteran financial writer. Mr. Sloan traces the life and death throes of a Goldman Sachs-arranged collateralized mortgage obligation. He shows how truly toxic waste was sold to overly eager investors who now have major charge-offs, and he also points out that some parts of the C.M.O. were indeed safe and were either current or had been paid off.

But what leaps out at me from this story is that Goldman Sachs was injecting dangerous financial products into the world’s commercial bloodstream for years.

My pal, colleague and alter ego, the financial manager Phil DeMuth, culled data from a financial Web site, (for “asset-backed alert”), that Goldman Sachs was one of the top 10 sellers of C.M.O.’s for the last two and a half years. From the evidence I see, Goldman was doing this for years. It might have sold very roughly $100 billion of the stuff in that period, according to ABAlert. Goldman was doing it on a scale of billions even when Henry M. Paulson Jr., the current Treasury secretary, led the firm.

The Goldman spokesman would not comment on this except to note that other firms sold C.M.O.’s too.

The point to bear in mind, as Mr. Sloan brilliantly makes clear, is that as Goldman was peddling C.M.O.’s, it was also shorting the junk on a titanic scale through index sales — showing, at least to me, how horrible a product it believed it was selling.

The Goldman Sachs spokesman said that the company routinely shorts the securities it underwrites and said that this is disclosed. He noted candidly that Goldman is much more short in this sector than usual.

Here is my humble hypothesis, even after talking to Goldman: Is it possible that Dr. Hatzius’s paper was a device to help along the goal of success at bearish trades in this sector and in the market generally? His firm says his paper, like all of its economists’ work, was not written to support any larger short-trading strategy. But economists, like accountants, are artists. They have a tendency to paint what their patrons, who pay them, want to see.

From what I have observed over the years, Goldman has a fascinating culture. It is sort of like what I imagine the culture of the K.G.B. to be. You always put the firm first. The long-ago scandal of the Goldman Sachs Trading Corporation, which raised hundreds of millions just before the crash of 1929 to create a mutual fund, then used the fund’s money to prop up stocks it owned and underwrote, was a particularly sad example. The fund, of course, went bust.

Now, obviously, Goldman Sachs does many fine deals and has many smart, capable people working for it. But it’s not the Vatican. It exists to make money for the partners and (much farther down the line) the stockholders. The people there are not statesmen. They are salesmen.

To my old eyes, the recent unhappiness about mortgages and Goldman’s connection with them are not examples of sterling conduct. It is bad enough to have been selling this stuff. It is far worse when the sellers were, in effect, simultaneously shorting the stuff they were selling, or making similar bets.

Doesn’t this bear some slight resemblance to Merrill selling tech stocks during the bubble while its analyst Henry Blodget was reportedly telling his friends what garbage they were? How different would it be from selling short the junky stock that your firm is underwriting? And if a top economist at Goldman Sachs was saying housing was in trouble, why did Goldman continue to underwrite junk mortgage issues into the market?

HERE is a query, as we used to say in law school: Should Henry M. Paulson Jr., who formerly ran a firm that engaged in this kind of conduct, be serving as Treasury secretary? Should there not be some inquiry into what the invisible government of Goldman (and the rest of Wall Street) did to create this disaster, which has caught up with some Wall Street firms but not the nimble Goldman?

When the Depression got under way, the government created the Temporary National Economic Committee to study just what had happened on the Street to get the tragedy going. Maybe it’s time for an investigation of just what Wall Street and Goldman did to make money as they pumped this mortgage mess into the economic system, and sometimes were seemingly on both sides of the deal.

Or is Goldman Sachs like “Love Story”? Does working there mean never having to say you’re sorry?

Ben Stein is a lawyer, writer, actor and economist. E-mail:

Thanks very much for providing this additional evidence for my post above. IMO, Paulson must resign and then recieve the Bonny and Clyde treatment. Essentially, Goldman Sachs's behavior was no different from Enron's as the latter gamed the energy markets to make money while endangering lives and livlihoods. The company deserves to be pilloried, dismantled, and never again allowed to operate in the USA. I'm certain my sentiments will be echoed by millions of stockholders and homeowners.

IMHO for now the bail-out TARA will get the go-ahead. When give-me-all-your-money Paulson, Bernanke and the Pres line up to say it must be done then it's going to be done. Bush is meeting Obama and McCain later today and will strong arm them. How can they refuse to go along with this, they can't take the risk of being seen to oppose something when it might all go wrong shortly and voter's fingers can be pointed.

There might be some concessions, limits on compensation, help for homeowners, upside sharing and some oversight but you might as well start the printing presses now.

Something has to be done ASAP to restore confidence. The interbank rates have soared and the markets have frozen. A sub-prime frozen banking industry will bring everything else down. There are other ways to fix this problem but there is not enough time to spend weeks working on it. Here in the UK Bradford & Bingley has written down all its US subprime mortgages to zero and will cut 10% of its staff. For some unbelievable reason B&B had done a really stupid deal to take on $3bn US mortgages!!!


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:



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.

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”

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.

Criminals reach a stage where they might as well continue, and raise the stakes.

Dave - Are gamblers criminals? I'm not so sure. The financial investment system became a massive gambling house where Stock Brokerages stopped doing legitimate work and instead opened up a gambling house whereby the brokerages became the house making commissions selling these products to players who they assured couldn't lose with the blessing of rating companies overrating these bets. The problem was everyone was under the same delusion. As long as Real Estate Values continued to increase in value exponentially they couldn't lose. This is the classic pyramid scheme - when the pyramid reaches a Peak (the time where you cannot increase the base of the pyramid) it crashes.

Did the Wall Street types take advantage of a system that allowed them to profit from selling dubious investments? Absolutely. Is that a crime. Irresponsible sure but probably not illegal.

What is actually criminal is buying out the losses of the gamblers. The players and the house need to suffer a major setback. Should we let the system fall. Probably not. I don't think we're going to cut off our nose to spite our face. They have all of us involved in this scheme so we probably have little choice but to ante up.

It is however time to shut down the game!


I am using criminal in the strict sense of the word.
At AIG what appears to have happened is that they assisted the European Banks in evading the regulations regarding deposits to credit ratios.
Both the depositors and the shareholders in these companies put their money there on the understanding that they were more secure with higher deposit to lending rations than was the case, and hence AIG appear to have been part of a conspiracy to defraud.
It is the difference between gambling with your own money, which may be foolish but is not illegal, and taking money to buy groceries and spending it at the bookies, which is theft.

In the same way Paulson must be perfectly aware that liquidity could be provided much more cheaply by offering credit to borrowers either through existing sound institutions or new ones, and that any assets from reckless lenders could then be bought after normal bankruptcy proceedings at far less cost, instead of paying over the odds for duff 'assets' and keeping these bankrupt institutions propped up.
He is therefore attempting to defraud the taxpayer by misrepresentation.

He is also clearly trying to undermine the Constitution by arrogating unchallengeable power not subject to the courts.
I am not sure if that is a legal offence in the US - it would be in several countries, I believe.

Joe - Within your comment is a hint at a key element.

The investment banks shifted from looking out for investors money to looking after their own money.

When this happened and how is the subject for a great book.

I here by claim a small percentage of royalties. Heh heh.


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.

Obama Pictures and McCain Pictures

Heh! The devil quoting scripture, eh?

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"


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.

Musashi you evil acronym spouting devil I'll BK rupt you if I can get my hands on you:) Actually, instead, I think I will remove that minus one someone gave you, as I think you hide rather well a soft heart, and would agree that pity should be on those that actually and mindlessly believed that they could own a home, in these Greenspan fouled days, on a hamburger flippers salary.

Lots of ways of looking at it.

The "hamburger flipper", as you put it, bought a house with no down payment. Lived there for a period of time while making the payment. Say that even if he did not refinance and withdraw equity he still gets foreclosed. What did he lose? Nothing. He never put even a red cent of his own money into it. The great majority refinanced and took equity out, so not only did they not lose anything, but they made a tax free profit. There is no loss, just a slap in the face by reality.

Obviously there are some legitimate victims, those that bought with normal down payments, fixed loans and withdrew no equity, live in areas with heavy price drops and are making payments under duress.

If there is a way to help these specific people, a small minority, I have no problem with it in principle.
Thing is when very large movements take place very rapidly some people just get overtaken by events through no fault of their own. Always has been like that. C'est la vie.

On the other hand, since I used to be a multiple home owner myself (got out several years ago), do you suppose that if I play socialist for an hour or so I can get Hankie to give me back the house I gave my ex wife in the divorce settlement?
Maybe we can make a deal here. LOL

Musashi you accept a reality that is man made. That slap in the face of a hamburger flipper what is that, you tell me of, other than the reverse side of that coin -The American Dream.

I've talked to professionals who work in rewarding professions who complain about their hard lot, all I can think I would like to say to them is to go forth assholes and try flipping burgers or working in the thousands of cruddy jobs that support your way of life - when they are so disconsolate with their title and their wealth there is always (or used to be before they sucked the housing market dry) working the greenchain stacking lumber. (Actually knew one chemist working for a company involved in destroying the environment who went and did just that, told me he never felt better about his life than in doing that)

No let's just use this guy, this 'hamburger flipper' give him a taste of the dream he will never own and then slap his face and tell him that's reality chum get back in your box. Americans, in particularly, worry about socialism and sharing pennies for health care while capitalism gives them a 700 billion tutsie fruitsie and more in every orifice.

I would say at times Musashi, for all your innate goodness, in the case of the hamburger flipper you lack sensitivity but you do give me room to rant and rave, so thank you:)

Amigo, you obviously don't live in the US.

They call it "the American dream" because these days you have to be asleep to believe it.

Oh Cisco! ... the Last time I lived in the US I was doing "California Dreaming".

You know just before that time when as Hunter S. Thompson so finely defined it: "So now, less than five years later, you can go up on a steep hill in Las Vegas and look West, and with the right kind of eyes you can almost see the high-water mark — that place where the wave finally broke and rolled back."

He wrote some really good stuff.

That quote is the .sig on my email right now. I took out the "less than...look West" and it's even more appropriate.

"So now [...] with the right kind of eyes you can almost see the high-water mark -- that place where the wave finally broke and rolled back..."
--Hunter S. Thompson (1937-2005), Fear and Loathing in Las Vegas, p. 68.

RIP HST. I wish I could have shot things with you.

Yo Prof.

I know I am too old (lets just say over 50) but from your interests expressed on occasion, I would love to take your course.

Anything available online?

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

A controlled decent is the best they can hope for. Looking at whats happened over the last year they have been doing a fairly good job of this I think.

I disagree. The losses are already incurred - for the banks and their stockholders. Yes the FDIC bailout will cost a bit, but only a small fraction of what we are talking about now. No matter how you slice it or try to obfuscate the issue - and they will try - this is nothing but a trillion dollar transfer of wealth from the average American to the banking industry.

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.

Are Humans Smarter Than Yeast?

Hello Redshift,

Thxs for the terrific video link--> a MUST SEE. I must admit that I am not a finance guru, but this very astute analysis by Denninger scares me to death as he points out Hanky-Panky's earlier actions and present directions.

I agree, terrific video!

Occam's Razor, Khebab. Above in another comment you expressed surprise that someone like Paulson could "allow" this to occur.

Please consider a completely hypothetical alternative, but potentially simpler answer - could Paulson have intended for something like this to occur?

Actually, I see Paulson as only the front man. Many of us saw this coming years ago and it boggles the mind to believe that the insiders who had/have far better information than we, did not see what was coming down. The only reasonable explanation I can think of is that this is, indeed, a planned coup as I have posted before. Yes, a conspiracy of the elite. All you would need would be the top 100-200 people.


I disagree that this was a planned co-ordinated conspiracy. David Holmgren, of permaculture fame, has written about how human nature collectively conspires to use up all the resources as fast as possible. What we are seeing in the financial markets is the natural outcome of that greed and the playerz at the top are simply behaving predictably to type.

The conditions which led to Paulson and Bernanke's attempted coup have been created by the billions of small, everyday, decisions by Americans and other western nations, to buy and consume every new gadget and convenience which was put before them, with no regard to the source or ultimate cost.

The American people, and their bretheren in the rest of the developed world, are about to find that the true cost of their greed is the very freedom they so blithley pissed away in their feeding frenzy at the trough.


I guess we'll have to agree to disagree. I've lived long enough (I'm real close to 70) to have experienced life when there were no credit cards, no ref-fi's, no ARMs, you wouldn't even get in a bank's door for a house loan unless you had 20% down, etc. During my much of my life, people purchased things with cash they had saved...because they had no choice.

While buying crap may be stupid, what has caused the multitude of problems is that people purchased things they could not afford out of current income or savings. It was an exponential Ponzi scheme.

Memmel gives a good overview down thread so I'm not going to take space regarding why I see this as a coup.


As a point of interest, the only "stuff" we had when I was growing up was a radio, a toaster, a stove and a fridge. We had a coal fired furnace and a coal fired HWH. We were middle class. Life was good.

Hank (The Skull) Paulson likely has had a violin case full of alternative plans to fulfil his interests, whatever occurs. This just the one that fits the day.

Anyhow GreyZone, I think all this is larger than Paulson because: rooty toot toot the USA is just another guy from the institute! (world that is)

Here's the latest from Denninger.

Ben And Hank Dissemble on the Hill (9/23)

Best part is 4:50. There's a great comment on Buffett at the end.


When Denninger brings up the disconnect between the notion that this is a crisis, and the White House Press Office's statement that they had "been working on this for weeks and months", I think he misses an interpretation which prevents this from being a "lie": they had been working on this for weeks and months, but in terms of how to generate (or profit from) a "crisis", not solve an impending one.

I don't think he has seen Edward Scissorhands. Does this affect his credibility :)

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.

And what it reminded me of, looking at those two Paulson and Bernanke sitting there together, was the scene in Dicken's The Christmas Carol. You know the one in the company board room where the realization is made that Scrooge and Marley will save the company from bankruptcy by becoming the company.

Paulson has a brand new life after Christmas? I wonder is life is badly imitating art?

Professor goose, if they do go to war they assuredly will print money, but I wonder if the printing were to start in earnest first would war be able to follow?

This isn't anything that most folks around here don't know...but there has to be a point when you need economic growth to sustain your institutions, just to keep the debt service (and the printing presses) going. Resource dearths cause wars. Wars cause economic growth.

I am not saying that's right around the corner, because there's no way to know--and it likely will not start out as overt actions, so it will be slow posturing...even so, that would be just another symptom that will bring even greater concern and paralysis.

However, e.g., if/when China puts in a margin call and says "you all can't live that way anymore even if it hurts us a little," well, on that day, I would expect something interesting.

There's a lot of actors who could put in a call on our debt tomorrow, and I am not sure what we would do then. The US is remarkably vulnerable at this moment, even in a globally interdependent economy as we are in.

If I am on the other side of that, I am leveraging that weakness in some way. Even if it is just promoting foreign policies that are conducive to my long term interests or some such.

China holds the wild card in this poker play.

This is not an American phenomenon only. The USA needs its creditors to keep funding the borrowings.

Countries don't have morals, they have interests. They do not pursue trade & commerce out of the kindness of their hearts.

So far the dragon has been willing to breath fire under the wings of the eagle. Why? B/c it makes good business sense.

From a Chinese perspective: they make the goods, America buys them, and everyone is happy.

At what point is it in China's interest to stop the credit flow?

Answer that question and it will quickly become known whether or not Bernanke, Paulson, & Bush can even claim to be airborne.

Prof. Goose, you're right. The US is highly vulnerable right now. And China has a three thousand year cache of experience to draw on for its strategic thinking.

The 2008 Olympics showcased their rising prowess and virility. Keep your eyes on the dragon.

Yeah, but the dragon loses some of its luster when it feeds its own children with melamine in its milk powder.

You watch too much TV.....

Professor goose the hyperinflation in Germany occurred after the first world war. Germany was well on it's way to recovery before the second world war because of the optimism engendered by a populist leader who gave hope of recovery. I wonder what the economic results for Germany and the world would have been without the second world war. You say Wars cause economic growth I would broaden that to say that human activity whatever the cause results in economic growth and that war should be considered as unproductive growth, a bubble, (The only winners in a war are the jackals). (BTW, I am not promoting National Socialism here by any stretch, just musing, okay?)

The question I posed was:I wonder if the printing were to start in earnest first would war be able to follow?
Hyperinflation has happened in the previous decades in the form of excess credit which is currently unwinding. To print base money, in order to fight more war than is currently being fought by the US, seems unrealistic in the face of foreign US holdings . On a political level I think it would be next to impossible (see any chance of a draft?) unless it were war on the cheap as Matt Savinar might envision. As well a US 'land war in Asia' needs allies, I see none.

I suppose anything is possible but I see the world ending not with a bang but that whimper a la Eliot. Yes I quite agree with you it will be a "slow crasher" as you put it and I think will possibly lead to hyperinflation but only after the current balloon has deflated. Any war then I would see as very localized affairs or border skirmishes, rather brutish and definitely economically not very productive, as is war in any guise.

Wars cause economic growth.

No, they cause economic activity. They assist growth if you happen to be able to capture significant resources. If you do not expand your territory and capture or at least control new resources, war will create a bubble for about five years, but in the end is drag on economic output as it creates no capital and the benefits go to a very small group of people.

The "wars" we currently wage are part of the reason the economy is tanking. Here's a good look at the issue.

There has been relatively little attention paid to the Iraq War's impact on the U.S. economy. It is often believed that wars and military spending increases are good for the economy. This is not generally true in most standard economic models. In fact, most models show that military spending diverts resources from productive uses, such as consumption and investment, and ultimately slows economic growth and reduces employment.

Here's another:

Collateral Damage: Trade Disruption and the Economic Impact of War*
Reuven Glick
Alan M. Taylor
August 2005
Conventional wisdom in economic history suggests that conflict between countries can be
enormously disruptive of economic activity, especially international trade. Yet nothing is known
empirically about these effects in large samples. We study the effects of war on bilateral trade for
almost all countries with available data extending back to 1870. Using the gravity model, we
estimate the contemporaneous and lagged effects of wars on the trade of belligerent nations and
neutrals, controlling for other determinants of trade. We find large and persistent impacts of wars
on trade, and hence on national and global economic welfare. A rough accounting indicates that
such costs might be of the same order of magnitude as the “direct” costs of war, such as lost
human capital, as illustrated by case studies of World War I and World War II.


Great points, CCPO. If you're in the war zone, then the war destroys assets and capital and is a negative drain. If you wage war elsewhere as an empire, then the economic activity may be beneficial in increasing throughputs of energy and materials if they are available. Previous wars waged off American soil were examples of this. The reason the US was able to leap ahead of the rest of the world after WWII was due to our fossil fuel production in the US and the fact that our industrial capital was intact, unlike the rest of the world. The reason the current wars are no longer amplifying throughputs for the US is because of peak oil.

Additionally, I don't think this war does a damn thing for our industrial capital. We got a lot of spinoff effects from WW2 because, just as jukebox factories could be converted to make rifles, a bomber factory could be converted to making Kaiser-Frazers. We know that if Americans buy gadgets they will be designed and built overseas. None of the wacky junk built by overspecialized American high-tech firms for our military specifically to wage war in the streets of Iraq will in any way relate to any consumer goods we will be buying now or in the future. It will only relate to the Orwell gear that the government will bring home to spy on us, which I don't consider productive.

You all don't understand. The business model of the MIC is totally different (MIC = military-industrial complex).

The purpose of wars and geopolitical meddling (e.g. Georgia vs Russia) is self serving. We create instability/conflicts/wars abroad -> interested parties are buying from us our super-expensive weaponry so they have a chance to win. The target market for this model, are not only the parties in the conflicts we create or promote, it is also the domestic market in the face of the US taxpayer. This is the mechanism wars are creating growth, US style. It is a century old marketing strategy - persuade the customers they have a pressing need and they open their wallets big time.

Resource dearths cause wars. Wars cause economic growth.

And economic growth creates resources. Rinse, launder, repeat cycle.

I loved Jerome's reference to offshore capital flight. To what shore will the capital fly?

Break time over, back to garden and workshop.

cfm in Gray, ME

"However, e.g., if/when China puts in a margin call and says "you all can't live that way anymore even if it hurts us a little," well, on that day, I would expect something interesting."

Probably to most TODers' surprise, it was Secretary Paulson who recently told the Chinese "YOU all can't live the way we (Americans) do."

"There simply are not enough energy resources to allow the world's entire population, or even the third of it represented by the Chinese, to lead the resource-intensive lifestyle that Americans currently enjoy. A way to support higher incomes while placing less of a burden on resources must be found."

In other words, keep biking and lending us the dollars you earn from your trade surplus, please.

"There simply are not enough energy resources to allow the world's entire population, or even the third of it represented by the Chinese, to lead the resource-intensive lifestyle that Americans currently enjoy... "

"Wars cause economic growth."

Accurately speaking, wars increase aggregate demand. If the level of economic activity is constrained by lack of aggregate demand, as was the case with most recessions up to now (save for those due to the oil shocks), then wars, by increasing demand, increase the level of economic activity, as happened with "the giant public works program that restored full employment, otherwise known as the Second World War". (Personally, I find those Krugman's words disgusting.)

But when economic activity is constrained by lack of resources, as is the case from now on, then wars or any other (and MUCH better) means of increasing aggregate demand will not be able to cause economic growth at all.

An apt analogy is that of a pub. When there's plenty of beer, giving purchasing power to the customers if they do not have it (Eccles' income distribution proposal), or turning heating on to make them thirsty, in case they do have money (Krugman's inflation proposal for Japan) will make the trick of increasing beer sales (demand is the limiting factor). But when beer is running out, neither strategy will increase sales (supply is the limiting factor).

This is "the" key point mainstream economists just can't get. I expanded it a bit in my now frozen blog. A related point is the inadequacy of the Solow model of growth and its replacement by the Ayres-Warr model.

Wars generally damage economies by as a poster said diverting resources from productive uses to war material. However specifically they can increase it. When the US entered WW2 in 1941 it had still not recovered from the depression, so it had a lot of spare capacity. It that case it definitely did boost output.

There is not going to be a big conventional war to boost US coffers like WWI and WWII. WWIII is going to be a short nuclear exchange that destroys the participants.

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.

The root cause of all of this is the mortgage resets and collapses, which are scheduled to continue for 2 more years. $700B would simply take care of Goldman Sachs and Morgan Stanley. The criminals could get their bailout and reordered structure for a new system, and get out before a new Treasury Secretary resets the rules. Then, as mortgages continue to fail and foreclose over the next two years, we will go into a depression. The rolling amounts that would need to be added in order to deal with the continuing collapses of credit card debt, automakers, pension funds, FDIC insured banks, municipalities and even states that are entangled in the $1Quadrillion derivative morass would be astronomical.

The problem is that none of this activity addresses the ongoing problems of the middle class created by 35 years of debt-loading.

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?

The first question from that Ritholtz piece I point to above puts it this way:

You two gentlemen have been wrong about the Housing crisis, missed the leverage problem, and understated the derivative issue. Recall the overuse of the word "Contained." Indeed, you two have been wrong about nearly everything financially related since this crisis began years ago.

Question: Why should we trust your judgment on the largest bailout in American history?

Better question might be "why is Paulson the one making this decision?"

I posted the other day that I viewed this as a coup. I still do even if transparency is included.

The word "bailout" now seems to be the word of the day. But, I have yet to hear how $700B bails out the system. My reading of the economics indicates multi-trillons of dollars are necessary not a paltry $700B - even with the rollover potential.

This will end badly.


It is worth keeping in the back of one's mind NSPD-51 and the fact that an economic crisis can be used as an excuse to invoke martial law. If they get this pushed through - in any form - they achieve the same without the declaration. If they don't, they can say, "We TOLD you it was so serious we had to act NOW, and that kingship I mentioned a few years ago is now necessary because YOU wouldn't make me king voluntarily."


Today I spoke to my sister who lives near Washington D.C. She said that she is now seriously considering emigrating to Canada or another country to escape the financial mess in the USA.

I argued that other countries will also start to have serious problems as real estate values decline (happening now for example in Japan) and the banks are left with the debts after people lose their jobs.

But she insists that the USA is a special case, a unique case and the situation there certainly has her spooked.


The US is a 'special case', in the fact that it consumes twice the energy per capita than anyone else in the world. We are debating the impact here in NZ, exactly how it will effect us we don't know (house values dropping, recession), but I do know, we wont starve, we wont freeze and generally we don't own guns.


We are also a special case in that we exported our last economic collapse worldwide. We can drag everyone down with us and we've done it, too.

The word "bailout" now seems to be the word of the day.

It's the wrong word too. "Ripoff" or "looting" are better.

It's a "bail-out" of crooks from bankruptcy jail.

Because Bush had trouble working with Paul O'Neill? Because it was hard to work with John Snow as well? O'Neill was too honest and Snow was not good as a cheerleader so Bush needed someone else maybe?


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:

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.

Here's a short response to a very long analysis.

Imagine, if this is actually the final great coup of the Bush administration and its high finance cronies, which have managed to loot the treasury and Mother Hubbard cupboard, too. Did they miss the blind mice's cheese?

Can these guys manage to lift another half a trillion out of the treasury during the very last month of power? This is net of the money they need to dribble out to make it look legitimate. The trickle down effect in action!

We'll see how good these crooks really are...

We can't even be sure that this is the last theft before they flee. This may be a second attempt to reorganize the government so that all future presidents are left powerless to erase Cheney's policies. The finance industry is taking over economic policy, and the president can only use Bush's draconian police state powers to detect and punish anyone who objects to those policies.

In gratitude, will Cheney be rewarded with a seat at Goldman Morgan or whatever it will be called? From there he can continue to rule the country, and odds are 50/50 that he will get a president who will be completely dependent on his foreign policy "expertise" too.

And here's mine, Blue Twilight. Some of was adapted from a letter at this website linked below, and I have added and deleted some things. And will even hand deliver your letters for you. Here's what happens when the world economy stops growing and our fiat money system keeps on going--we get massive disconnect. This may be pointless, as the economic system is toast, anyway. Hyperinflation and fiat reset, maybe with relocalized monetary systems. The rape of the American taxpayer will be complete with this bill, and we're even paying for the rape kits.


I am extremely concerned about the moral hazard attached to Secretary
Paulson's proposed bailout. What Sec. Paulson wants you to believe is
that catastrophe is approaching, but it can be averted if only
Congress acts urgently to give him the extraordinary authority he is
requesting. The implication is if you don't give him $700 billion in
borrowing authority within a week, markets will collapse and it will
be all your fault. Not only that, Secretary Paulson wants ongoing,
"rolling," money, in perpetuity. This power grab by the unelected,
former CEO of Goldman Sachs is an appalling overstepping of
constitutional authority.

If insolvency is here now for the big banks, the last thing you want
to do is throw $700 billion of money and probably much more that is
not yours at bailing out the banks who created this disaster. You'll
need every bit of that money to protect the taxpayers and their
deposits in these banks when these financial companies are thrown into
the bankruptcy courts. You'll need that money to make sure consumer
deposits are protected with insurance, and you'll need it to keep the
healthy parts of these banks that deal with consumers and businesses
functioning until they come out of bankruptcy. The US government is
obliged to guarantee bank accounts through FDIC ($1 Trillion, I
believe), and now Money Market Funds (another $5 Trillion).

And forget about comparing Paulson's plan to the RTC. These L3 assets
aren't homes, condos, or commercial real estate that can be easily
sold at the right price. They are bits of paper giving the bond holder
the right to some small portion of thousands of mortgages, a right
that is shared with all the other investors, who are required to agree
on what is done with foreclosed properties in the pool. This is one of
the reasons no one wants to buy this stuff, and no one will for many
years until it is crystal clear what the final losses will be.

Once you give Paulson the authority he seeks, he will buy these
securities at 65 cents/dollar, then quietly auction them off at a
nickel each. It will be "unfortunate but necessary" to revitalize the
banking industry, even though you will discover the banks won't be
lending after this is all over to any but the finest credits. You will
have rewarded the banks for their calamitous decisions, stuffed the
taxpayers with huge losses, squandered your remaining ability to shore
up the FDIC, not prevented the big banks from collapsing anyway, done
nothing to help the community banks that will constitute the new
banking system in this country when these problems are solved, and in
the end made the situation much worse.

If you want to do something practical, require the SEC to go into
these banks, open up their L3 holdings to public scrutiny, auction off
a sampling of these securities, and apply those prices to the L3
portfolios of all the banks. In this way we will know which banks are
insolvent. You won't need to go through this charade of having the
Treasury take ownership of these assets, because the core of the
problem is not that these assets are clogging up bank balances sheets,
as Paulson says (which is tantamount to saying, by the way, that no
one will buy them). The core of the problem is that there is no
transparency about these portfolios and their real worth. Congress
doesn't need $700 billion of our money to create that transparency,
and if it shows as I suspect that many of these banks are insolvent,
that's why we have bankruptcy courts. You can certainly protect the
banks from bank runs while they are in bankruptcy.

Paulson is basically rolling you and the rest of Congress into giving
him unprecedented power to protect his friends on Wall Street. This
decision you are making is probably as momentous as the Iraq War
resolution. Don't fall for this bailout disguised as the only way to
prevent Armageddon. Armageddon is already here - at least for the big
banks - and it needs an entirely different solution. Spend our money
protecting us, by ensuring the FDIC is properly funded, by throwing
these too-big-to-fail banks into bankruptcy if they truly are
insolvent, by preserving the healthy parts of these banks while in
bankruptcy, and bringing them back out again so they function under
much better safety and soundness regulations. We've had airlines
functioning properly and safely for years while in bankruptcy, and
there is no reason we can't do the same with banks. If you do not stop
the bailouts right here and right now, we wlll go on to bail out the
automakers, the credit card companies, and foreign central banks.
These moves are not authorized by the Constitution and are inherently
hyperinflationary. A yes vote on the proposed bailout would set us on
the road to a failed currency and Zimbabwe banana-republic status.

Please, please, do not fall for some useless compromise or bipartisan
agreement that gives these unelected principles and their fat cat
friends what they want in the end. Kill this proposal here and now,
protect us from this bailout, and deal with the real problem - the
insolvency of the major banks, not the paper that is supposedly
blocking their lending capabilities.

Thank you for your time, and I hope you consider the ramifications of
this bailout carefully before you vote.

Excellent letter!

I must admit to being quite radical with this "crisis" for a variety of reasons. I'd very much like to see the private banking system and the FED disappear to be replaced by a system of federal, state and local government banks whose leaders are democraticly elected for a 2-6 year term. There's more to the idea and very good reasons for implementation.

Since the USA's birth, the common folk have often wished and at times tried to bring down the "Money Power." Now through its own greed and hubris it teeters on the edge of its grave. Millions of us will rejoice at its being pushed over the edge into the abyss its made for itself.

The United States is #26 of 198 nations (UN) in terms of government Debt/GDP, this figure may not include state debt, thus the situation may be worse than it appears to be. As the nation moves to the top, you get closer to Zimbabwe where inflation was running close to 66000% earlier this year.

Bush told the nation and the world that due to an emergency he needed to invade Iraq. He blew out the budget and has since exceeded the debt ceiling. Now there is a real emergency. He does not want questions only the a blank check to do with as he pleases. No way. His ponzi scheme of greater and greater deficits is not sustainable. We need some sort of assurance this money will not be delivered to wealthy political supporters and placed in the trunks of their cars.

If the banks are allowed to fail, the subsequent failure of derivatives would cause a cascading effect through the financial industry resulting in a stock market crash. That crash started to happen last week when Lehman Brothers failed and AIG was bailed out. The government stepped in with short term measures to stop it. Credit default swaps are like insurance policies for bond and securities holders. If the companies issuing the CDS's fail due to the subprime junk, the risk for the entire financial sector would increase causing the stock market to go crazy. Since a crash would make unemployment rise, one should address what to do rather than trivialize the very real possibility as a scare tactic. Paulson's scare tactic is the rushed assertion that there is no other plan possible and the assumption that a crash is the worst possible event. I disagree. Bankruptcy for the banks and derivative industry, and a stock market crash for Wall Street are needed to wash away the mess. I do not think the U.S. Treasury can borrow enough money to pay off all of the CDS's that will be triggered by the failed mortgages and purchases of the securities.

Ben Stein: Everything You Wanted to Know About the Credit Crisis But Were Afraid to Ask, Sept. 22, 2008

So I went to my congressman's website, and the front page is:

Your Voice on Economic Recovery

The unprecedented outpouring of emotion and advice from Oregonians about our financial crisis has been the silver lining on a dark cloud. If anything, the responses are more intense and widespread than those to the war in Iraq, or to any of the myriad calamities and momentous developments in the dozen-plus years I have been in Congress.


People are, without exception, outraged at getting a three-page proposal from the Bush administration in the dead of night that would concentrate all power, with no checks and balances, in the hands of the Secretary of the Treasury -- the same Secretary who refused to bail out Lehman Brothers and thought that the economy was fundamentally on track. Finally, and most importantly, people think that we ought to know what’s involved, and we ought to understand the details before we put taxpayers’ money at risk. If it takes an extra day, an extra week, an extra month to get this right — that’s just fine.


One of mine, Senator Jon Kyl (R-AZ), appears to be in favor of the bailout because he writes favorably about the Treasury buying MBS's and selling them for profit while ignoring the derivative market.

Stabilizing the Economy, Sept. 22, 2008

I expect Hooley, OR-5, to go against, as she's been against BushCo from the start.

Kyl is bought and paid for, unfortuantely; he'd sell his mother if he was told to.

One email or phone call isn't enough. Contact them daily. This time citizens have leverage because the election's so close. Last night, Bush called it "his plan," so we know it's no good for the average citizen. I highly suggest visiting Bernie Sanders' petition site to read his proposal. Now I don't want one penny to go to Wall Street, but if a deal must be done let it look like his.

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.

... get stakes in the companies ...

Imagine if Paulson & Friends were handing out money to engineers instead of to their own, instead of to their "buddies" in the investment banking world.

What would they do?

Why they would set up a Venture Capital (VC) firm.

Why they would make every engineer dance & beg for the pot of money.
Why they would make the beggars submit detailed "Business Plans":
--providing full background on the management team of the start up,
--proposing new and innovative ways of making a profit,
--under realization that they are "competing" with other start ups for the limited pot of booty;
--and that the VC's would sit on the Board of the start up to watch how every penny is spent
--and that the VC's would expect to cash out of the venture in short time and at a high ROI
--and the VC's would pick & choose among the many proposals, leaving many by the wayside as suckers who did all that work, all that "innovating" and business planning for free, for merely the chance of being considered.

Is that how Paulson & Friends are handing out the money to their "buddies" in the investment banking world?

Why no.

Investment bank friends and family get special fair & balanced treatments.
They don't have to grovel and beg.
They don't have to create new innovative, ground up start ups.
They stay as they are and get the money with no strings attached, no review by a court or any other judge as to how they got the booty and how they spent it and how they provided maximum ROI for them (taxpayers) who invested in them. That's how friends and family get treated.

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.

MBS,it does not matter if you like it or lump it,we are in the process of being raped right now.

I am changing my belief from a relatively slow,moderated disintegration with many stops and hold points to a more catastrophic sort of financial collapse.I think along the lines of soviet....but steeper,with less recovery.

Many many people are about to have the most horrible surprise imaginable.They thought they were "comfortable".They are poor.

There are a lot of folks who think they are "wealthy".These people wont even know what hit them.They are also poor.

Then there is a lot of people who figured out it was a rigged game from the start...who never cared much about getting a big stash,but know how to garden,and live low on the hog,and are living the "possum life".A couple of acres,"shotgun,rifle and 4wheel drive/countryboy can survive"types.They are comfortable.And will remain so...

Spoken like somebody with the full use of his body and able to get by the same way Ted Kazinski did, in a little cabin in the woods. ('cept for the 4x4. You're gonna CRAWL like everybody else 'cause there's no money left to pump the oil out of the ground.)

Guess what?

I ain't in either the mood or the physical condition to go and hie my hiney off to a little cabin in but-f*ck Montana. I worked hard all my life and I have got a lot more to contribute.

Slap yourself out of it.

Kazinski was living on a small veterans disability pension will doing his woodworking projects. There are alot of those redneck "self-sufficient types" who rely on government support of themselves or close family members.

"shotgun,rifle and 4wheel drive/countryboy can survive"types.They are comfortable.And will remain so...


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.


Wealth and power don't count for much if you get shot at every time you step out of your gated community. Was is Plato that said inequality is the biggest risk to the republic? The fragile promise of wealth for anyone who plays by the rules will be smashed and that will mean being wealthy, means being loathed not a comfortable condition


Wealth and power don't count for much if you get shot at every time you step out of your gated community.

The crumbling economic situation will engender a new phenomenon -- the "all-inclusive" gated community, in which members will not have to do any "stepping out" except when absolutely necessary, probably with the presence of armed guards.

See The Shock Doctrine by Naomi Klein for a description of a world of gated Green Zones in a sea of violent chaos. It's a 'must read'.

IMO eventually Iraq will turn out to be the model for society in the US, because demographic factions rhyme quite well.

Exactly if we crash like I think we will the formation of enclaves are inevitable. But this natural occurrence says nothing about the nature or dynamics of these enclaves and relationship with the surrounding populations. Its fairly clear that the wealthiest people recognize this and wish to rule at least some of them. If your a multi-trillionaire your gated community could be as large as a fair sized country.

On another note people are so used to fiat currencies that they fail to understand true wealth and power.
It control of the means of production and resources and has absolutely nothing to do with relative pricing of fiat currencies. A good deep water port will always have a high value regardless of the above ground situation. This is why this asset sweep scares the bejezuus out of me these people are already in control they rule our current world now they have decided its toast and have every intention on transferring this power to the post peak world.

And finally like in a war situation the destruction of the village in order to save it is acceptable what they care about most is the location of the village not the infrastructure. Infrastructure can be rebuilt if needed. Given the nature of the situation the difference between what they would like to keep and what they must control and maintain is important.

Are you still bullish on oil? Or do you think a collapsing global economy will make oil cheap again?
what do you think the average price will be next year?

I'm still very bullish on oil. If you think about it most of the oil is used for daily living. Driving to work moving food and goods around etc. Most of this crash is about defaulting debt. This effect primarily future growth not the core economy. So demand will go down only slowly. Also no one seems to consider that the growing world population will continue to put pressure on fuel supplies intrinsic per capita demand is not static and esp not static in the producing nations. China and India have a long way to go to move from expansion at a frantic pace to declining economies for example.

In general for most people their fuel usage is fairly constant until they simply don't have a job to go to.

Main Street will keep plugging along growth will will slow and finally reverse. So yes I'm still bullish on oil the only thing stopping us from using more is simply that it gets to expensive.

A gated country maybe ...

Pres. Bush buys 100,000 acre ranch in Paraguay

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:

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.


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:

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!

Welcome to the Weimar States of America, my friends.

Pull up a chair and sit by this fire-barrel we are all throwing our valuable greenbacks into to stay warm.

We may see hyperinflation in the long term, but we have to live through debt deflation first. Desperate double-or-nothing gambles can only postpone the inevitable (very) temporarily, at the cost of making the crisis worse. $700 billion cannot backstop a derivatives market that is a thousand times larger and global. All it can do is allow a few insiders to cash out ahead of the stampede, while consolidating power to an unprecedented extent. This is the mother of all power grabs.

It is not possible to inject liquidity into an economy where a cash-hoarding mentality has taken hold. Inputs simply disappear into a black hole of credit destruction, the velocity of money falls dramatically and we find ourselves in the liquidity trap. That precipitates a further rash of defaults, bankruptcies and foreclosures, which further devalues leveraged bets on the underlying assets.

This is a positive feedback loop, and as such may begin slowly but picks up momentum until a cascade begins. By its very nature it cannot play out as a slow crash. I think we are close to the cascade point where all attempts to stave off the inevitable are overtaken by events. Debt deflation can happen far more quickly than anyone can 'print money' - think Enron, as the dynamic is the same.

I'm no fan of the dollar in the long term, but in the short term (after the current pullback is over) I think the dollar will spike on a flight to safety. After that, relative currency valuations may well become chaotic, as many countries attempt beggar-thy-neighbour devaluations by whatever means. Even if the US did succeed in devaluing the dollar, however, this would in no way counterbalance the effects of debt deflation.

The vast majority of the effective money supply - perhaps 99% - is credit (ie virtual money), and credit is merely an excess of claims on a very much smaller underlying real wealth base. In a credit collapse, those excess claims are extinguished very rapidly as the wealth they lay claim to never really existed.

Perhaps it's time to run this again ;)

Excellent analysis Stoneleigh.

So far we've had a deflationary scare last summer followed by an inflationary scare this past winter and now we're back to another deflationary banking crisis accompanied by chaotic markets as the people in charge arbitrarily change the rules.

As you say, the immediate concern is a deflationary deleveraging of paper assets which would make actual dollars more valuable while the longer term doesn't look good for the dollar relative to globally fungible commodities.

With such an outlook I think we can offer the TOD audience two kinds of advice. The longer term advice that has been a staple of TOD includes:

  • get out of debt
  • live in a community where you aren't dependent on cars
  • develop a network of friends that can support eachother through hard times
  • grow more of your own food
  • etc.

My own shorter term advice (Do it now!) would include:

  • reduce the amount of paper assets in your portfolio if at all possible (stocks,bonds,mutual funds)
  • keep a couple thousand dollars around in cash (at least for the next few months)
  • buy some physical gold and silver

I realize that this advice doesn't address the longer term consequences of Peak Oil. Rather it is intended to give one the peace of mind and stability during any current financial crises to work toward those longer term goals.

Best of luck to all in these most interesting times,

-- Jon

I essentially agree with your prescription, although I would take it further and say to cash out NOW (ie sell stocks, most bonds, mutual funds, real estate, commodities, collectibles etc). After paying off debt, I would suggest holding liquid assets (cash and short term treasuries), but carefully, as neither the banking system nor the FDIC are to be trusted. If you have enough money to do so, then I would buy at least some hard assets, of the kind that increase your control over the essentials of your own existence, as a hedge against severe economic disruption. If you still have money looking for a home then I would consider precious metals, bearing in mind however that ownership may be banned, they may be confiscated without compensation, you may need to hold them for a very long time, and that using them in very turbulent times is physically risky.

How far down the list people get depends on how much money they have. Working with others at the small community level allows resources to be pooled so that people can collectively be better prepared than they possibly could be alone.

I think everyone on TOD knows I'm a real doomer and better prepared than most. But frankly, I am scared shitless by what I see coming down. I see nothing less than a worst case. In that vein, we are going to vastly increase our stored food and tangibles such as chainsaw bar oil and chains, work boots, etc.

My view is that I will get, not only to survive, but also a better ROI buying stuff that I will use whether the world collapses or not. I believe PMs are absolutely not the way to go.

Time is of the essence!!


Convert cash to stuff you can use is my strategy also Todd.

Second and third your comments Todd.

Everyone pay attention.

Lehmans non-electric catalogue for hand powered appliances and many homesteading stuff.

Your window of opportunity to act is rapidly closing.

Isn't it a contradiction to both live in a community not car dependent and still have enough land to grow your own food? Not very many pieces of property with several acres of garden space and a subway station next door.

Only at first blush. Obviously opportunities will vary and each person has to balance the different goals as much as possible, but not being car dependent includes a lot of things besides living near a subway or even a bus stop. For one thing, it doesn't have to include going from 100% to 0% car usage overnight. Finding ways to reduce vehicle dependency is a powerful step towards *eventually* eliminating it. Stoneleigh alludes to car pooling up above, as well, but what I think he's getting at is larger community-based efforts to become more resilient. At the individual level, pursuing both car independence and local food sufficiency in North America may seem contradictory, but it's not nearly so at the neighbourhood and community level. It's important, I think, not to expect 100% success overnight but instead realize that there are very substantial gains to be made in that direction, over time.
Published on 22 Jul 2004 by San Francisco Chronicle. Archived on 25 Apr 2005.
Berkeley: Urban farmers produce nearly all their food with a sustainable garden in their backyard

Grow more of your own food isn't the same as grow all of your own food. Gardening is good for your mental and physical health and helps to build local community. And, even though it doesn't replace food from the grocery store, it can have some small impact on your food budget.

Not next door, but there is a 17 acre wheat field for sale, about a mile from a light rail station in Portland. Never mind that they are only growing wheat until the market is right to sell it to become a subdivision, and so it isn't priced like a wheat field, but still...

If it was me, I'd lease it in 3 or 4 sections to farmers to grow CSA vegetables on it, cause wheat is kind of low value per acre, and CSA vegetables yield around $10k-20k/acre, but it was probably easier for the owner to do a single wheat crop with a single sharecropper than have 4 labor intensive tenants hanging around all the time...

Debt deflation (which is happening) is by no means the same as deflation. The former is desirable, the second is not.

Folks, as Bernanke has said, there is an invention called a printing press and they have one.

I don't think inflation above 20% is particularly likely either for any length of time.

I posted the following chart in today's Drumbeat but it should be here also.

Here's the CPI from 1929 to the end of 1933. Prices fell a lot. (one third)

That is what I regard as extremely unlikely. Could we have periods of mild deflation like in Japan? Sure. That's not a huge deal.

But early '30's deflation? Not a chance.

Stoneleigh wrote:

It is not possible to inject liquidity into an economy where a cash-hoarding mentality has taken hold.

Yes, it is actually. You give money to the people most likely to spend it. ie. lower income folks for instance. Or you print money to pay government workers and to hire unemployed people for infrastructure projects. Just like in the best of times there are people who save, similarly in the worst of times there are still spendthrifts. You give those people lots of money.

As I said to Leanan once, "In the midst of a crisis, give a bank $1000 and it may sit in a vault. But give it to a drunk hobo and believe me you ain't pushing on no string."

You give money to the people most likely to spend it. ie. lower income folks for instance. Or you print money to pay government workers and to hire unemployed people for infrastructure projects.

And the odds of this happening are...

Actually pretty high. In the Great Depression, once they got their asses in gear it happened then too. But they were years late.

There was some explicit effort in the spring to tailor the stimulus package so that it would go to those who would spend it. If deflationary pressure builds, that will become an overriding necessity.

But it would, of course, never actually take the form of handing wads of cash to beggars on the street. They would find other ways no very different from the usual fare such as pumping money into state and local governments who simply can't afford to hoard.

People say Paulson and Bernanke are out of ammo! That's nuts. They are only out of ammo if they don't want to cause more inflation. But at the slightest hint of deflation they are given plenty of ammo automatically.

One thing that is sure to come, in my view, is a federal car loan program for purchase of fuel efficient vehicles and EV's. The interest rates will be generous. And, if deflation looks to be real problem, the government will pay for part of the vehicle up front on behalf of the purchaser with newly printed money.

Deflation will completely overwhelm attempts to defeat it, both in terms of magnitude and timescale. It can be postponed for a short time, at the cost of making the inevitable crisis worse, but it cannot be prevented. Every credit bubble implodes eventually, with the aftermath roughly proportional to the scale of the preceding excesses. This has been the largest bubble ever by a wide margin.

The last time a comparable bubble burst - the South Sea Bubble of the 1720s - the result was decades of economic turmoil culminating in a spate of revolutions. The bubble of the Roaring Twenties was considerably smaller. Back then the economy was nowhere near as hollowed out, resources were plentiful, expectations were much lower, farmland had not been sacrificed to suburbia, and the much smaller population was both far more endowed with practical skills and far more self-sufficient. Think about the implications of the changes we have seen in those parameters.

The 'little guy' isn't going to be handed money on a plate. A credit hyperexpansion differs from inflation in that instead of dividing the real wealth pie into ever smaller pieces, it creates multiple and mutually exclusive claims to the same piece of pie through leverage. As the bubble implodes, the excess claims are extinguished very rapidly. The chances of the 'little guy' winning in the fight to determine which claims succeed and which fail are absolutely nil. 'Little guys' are far more likely to end up as a slum-dwelling proletariate, in indentured servitude or as cannon-fodder.

For the big picture see The Resurgence of Risk - A Primer on the Developing Credit Crunch - a TOD post from August 2007. For daily updates see The Automatic Earth (link on my profile page).

So if someone is still paying their mortgage, are you saying that the bank could call the loan in anyway, to get the house before its value sinks further?

Are mortgages callable or only some depending on the bank or locality?

Just could be one just loses their job or their salary is reduced, I think that would do it. If you can still pay the mortgage I guess you would not have a problem other than you might be paying large on something that might have lost most of it's value.

Hey hey Stoneleigh,

For the big picture see The Resurgence of Risk - A Primer on the Developing Credit Crunch - a TOD post from August 2007. For daily updates see The Automatic Earth (link on my profile page).

You need to add that link to the homepage at TAE. The new comers need a primer to get their heads around the issue. You also might need a frequent questions and answers section. It would save you and Ilargi a great deal of time and hassle.

Also, you might want to think about Google adds. Your readership must be skyrocketing right now.

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!

Except that the money must be appropriated through legislation he has no real control over other than the fear rhetoric being employed. Plus, millions of citizens are contacting their reps and demanding not one penney be spent on Wall Street. It's very close to elections, and this pressure is real important as any challenger can sieze on how the incumbent votes on this. I'm emailing my reps every day to keep the pressure on, as eveyone ought.

I heard on the radio that the $700 billion dollar bailout will cost every man, woman, child, even the infants, $2303. a piece. They are already the proud owners of tens of thousands of dollars of debt. Too bad they were not connected enough to get the government to take over payments on their bad mortgages. The government only does that for Wall Street investment banks. These are not commericial banks, these were securities trading people who were operating at levels above their pay grades.

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..

I disagree. If the proposed "bailout" fails to be approved, as it should, then the recourse is to normal bankruptcy procedures. To me, the obvious question is, Why do Bernanke and Paulson want to avoid bankruptcy procedings? Is it because the legacy of massive criminality that generated this "crisis" in the first place will be unmasked? Is it because such a failure of the system could cause it to be comepletly retooled along the democratic lines I've suggested, thus killing Wall Street's Golden Goose--Finally?

Some have hinted at it, I will say it--Bailing out the rich in this and the other previuos efforts is open Class Warfare. One of the reasons the Great Depression wasn't too violent is the lack of overt class warfare preceding it; whereas in today's case, there's been 28 years of overt class warfare.

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

Everything is coupled together.
Understanding oil depletion is trivial in comparison to understanding the economic upheaval we are apparently going through.

Paulson's action will have an effect on oil and gas. As a matter of fact it has already started. Chesapeake has cut back on gas production and most likely exploration. Weaken the dollar and see what happens to oil markets.

This action reaches into every industry on this planet so it is worth to be discussed here.

Lets also remember that Paulson is NOT a humble public servant. Check his bio and you will see that he is more like Mr. Goldman Sachs.

Here is a part of his Wiki description

As an environmental leader and philanthropist, Paulson while at Goldman Sachs, oversaw the corporate donation of 680,000 forested acres on the Chilean side of Tierra del Fuego, which led to criticisms from Goldman shareholder groups [13]. He further donated US$100 million of assets from his wealth to conservancy causes. He pledged his entire fortune for the same purpose at death. [14] He has also been considered someone who can influence world and business leaders to think beyond the bottom line.

Nice guy

PS: Wiki has an entry that Paulson's bio may have "weasel words" :-) How funny !!!!

Weasel words are small phrases attached to the beginning of a statement, such as "some argue that..." or "critics say...", etc. A serious problem with weasel-worded statements is that their implication is misleading or too vague to substantiate. Even if an author intended to buttress an argument with an estimate of support, weasel words dilute meaning or make sentences open to multiple interpretations.

This is the topic. Oil and energy are tied tightly to money - our current crisis could never have happened without the cheap energy boom, and it is not accident that it is happening just as energy supplies tighten and fall out of the price range of many of the world's (and the US's) poor.

I've been arguing for years that the problems will not show themselves primarily (or at least initially) as energy problems, but as money problems - we won't do a massive build out of new renewables because we can't afford it. The lights will go out in most houses not because the grid crashes, but because an increasing number of us will be shut off by our utility companies for non-payment. I don't see any reason to think I was wrong in the current situation.

Unfortunately, for some of the people who read this site who have been fairly powerful and affluent all their lives, it is easier to imagine apocalyptic style grid-crash and empty gas stations than it is the shift to becoming someone who can't afford gas or electricity. Poverty is the ultimate taboo and one of our deepest fears - unfortunately, it is the most likely outcome as well.


Excellent comment, Sharon.

Upthread, Khebab muses on the course events will take when peak oil arrives in several years. I think he is advancing a mistaken notion of peak oil as a kind of singular event in which liquified energy goes into a permanent decline. In my view this notion describes one element of a multi-dimensional event that began somewhere around the beginning of this millenium. Peak net energy and peak net exports are two other elements, and there are more.

A massive build out of renewables is still possible, although I'm not sure that the US, or for that matter any of the 'anglo-saxon' countries, possess the leadership and social solidarity that is required for its accomplishment, since at this stage of peak oil we already require a large willingness to defer gratification in order to accumulate the necessary capital.

My definition of renewables begins with the renewable conservation that is effected when rail replaces road, meat consumption is reduced, and buildings are made more efficient through insulation and increased occupation.

Energy drives the economy. The economy is energy, first and foremost, because energy is needed before any other activity can occur. Physics ensures that, regardless of your opinion to the contrary.

Hello TODers,

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

Watched the movie "Fast Food Nation" last night. Can't say I am unhappy that McDonald's is having trouble expanding. Cut back on meat and the grains to produce the meat and help conserve NPK stocks.

I dont think anyone can argue that it doesnt taste good though. A juicy Double Whooper and big french fries, not many people turn that down!

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.

This is my understanding as well.

Initially Bernanke suggested he would conduct "reverse auctions" but under questioning it became apparent that his mechanic only looked like a reverse auction. Instead, the Fed would buy assets at whatever they deemed was "fair market" price without regard to actual market price.

Then, having bought these assets, the Fed would turn around and resell them. If they lost money on the sale, well, too bad.

The $700 billion is the CAP on the total assets that the Fed and Treasury can hold at any one time but after having flushed the current pool of assets out (even at a loss), they can refill the pool with yet another $700 billion of assets. Please also note that under the text of the proposal submitted by Bernanke and Paulson that any profits from this process first would go towards "administrative fees" paid to those agents acting on behalf of the Federal government - Goldman Sachs and Morgan Stanley!! Under such a system, while there appears to be a $700 billion limit, the real upper limit is infinite. In other words, this is a money laundering scheme to allow Goldman and Morgan Stanley to clean up their bad assets and make a profit on them at the same time.

The entire thing is a crock, an open attempt at extortion and theft under an umbrella of despotism. To hell with them all, I say.

There is a sunset clause that halts purchases after 2 years preventing the amount from being infinite. Purchasing $700 billion of toxic assets every business day for 2 years and selling them for trivial amounts could make the limit about $350 trillion.

Sec. 9. Termination of Authority.

The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act.

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.

All of the defaulting debt may be causing some contraction or at least slower growth of the money supply.

Perhaps the issue should be stated, "Paulson now has no options left which would not be perceived to be very inflationary." I don't think the recent slower growth offsets this perception.

Jim Kunstler said that the GOP should now be referred to as "The party that wrecked America."

WT, What is GOP? gross output?

I keep hearing UK politicians saying nobody could see this coming, referring to both 100 dollar plus oil and the credit crunch.
Whilst it was not necessarily predictable, several suggested it was the very likely outcome and they include JHK and R Heinberg. Heinberg suggested we would bob in and out of recession as oil price rose, causing demand to fall and price to fall again - next cycle ditto. He was a little optimistic!
The politicians should be forced to watch The End Of suburbia, which saw this comming 5 years hence.

Grand Old Party. Nickname for Republicans.

These shadowstats are important since they show that this crisis is just at its very beginning.
We already have the Feds attempting to create a despotic situation. Imagine what things will be like in 2-3 years after we have seen a significant contraction. The Feds know full well that this situation will simply take time to play out and most of the pain is still in the future. God only knows the outrages that will be coming down the pipeline.

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.

It seems to me that regulation is the cause of this problem.

Yes it is, the regulation was changed so as to regulate less. Here is some info on this

There are regulations and then there are regulations. Not all of them are good, or bad, and some of them might be bad at times and good at others. Some might become obsolete over time, and some new ones might be needed. It appears that some of the regulations that were lacking in 1929, then in place during the sustained boom of the postwar era, and then removed in the '90s, happened to be the good ones.

So why do we use the noun "regulation" instead of the plural "regulations"? We treat it as a monolith of evil instead of a pharmacopeia of possibilities and dangers.

Yes of course you are right there are good regulations and bad regulations. I didn't mean to say all regulations are bad, although I can see how my original post could be interpreted that way.

Regarding the repeal of the Glass-Steagall act, again I agree this was a bad idea, and that it contributed to the current problem.

But really it seems to me that Glass-Steagall is just lipstick on a pig. The root cause of the 1929 crash was similar to the root cause of the current crash. A policy of easy money (low interest rates) by the Federal Reserve. Frankly Bernanke admitted as much in his eulogy to Milton Friedman when he said "Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve System. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.". Well it seems they have done it again.

As I said earlier personally I don't believe more regulations are the solution. Instead less are. The problem is "The Killers Are with the Patient"

People are looking to the Fed and the Treasury to save them now, but really they are the problem. Many are asking for a continuation of low interest rates, and more stimulus packages to help those suffering mortgage distress but no one wants the high inflation that they inevitably bring.

Maybe have a look at if you have not already. Personally I think there's a lot of good stuff there, and I've certainly learned a lot by reading it.

Maybe I should clarify further. I don't like the idea of more regulations regarding banking. I regard fractional reserve banking as a form of counterfeiting. As counterfeiting is illegal so is fractional reserve banking.

Do we really need any other regulations regarding fractional reserve banking?

My grandfather helped to see the Bank of New Hampshire through the Depression. I was googling to see if there was anything to learn from that and I came upon this abstract:

Bank Supervision, Regulation, and Instability During the Great Depression by KRIS JAMES MITCHENER in The Journal of Economic History (2005), 65 : 152-185:;jsessionid=7CDE8686...


Even after controlling for local economic conditions, differences in supervision and regulation help explain the large variation in state bank suspension rates across U.S. counties during the Great Depression. More stringent capital requirements lowered suspension rates whereas laws prohibiting branch banking and imposing high reserve requirements raised them. States whose bank supervisors could liquidate banks minimized contagion and credit-channel dislocations and experienced lower suspension rates. Those that gave their supervisors sole authority to issue bank charters and granted their supervisors long terms strengthened the incentives for bank lobbyists to influence supervisory decisions and consequently experienced higher rates of suspension.


This is kind of Mish's position (which I disagree with).

"This is kind of Mish's position"

I don't read Mish regularly. But I believe it's also the position of Ron Paul, and anyone who subscribes to the Austrian School of economics ( As well as many people who are not openly Austrian's but who understand the financial system very well such as Jim 'Abolish the Fed' Rogers.

"(which I disagree with)."

Why is that? May I ask are you familiar with the Austrian theory of the Credit cycle and Malinvestment? I wonder if you are aware of it and have consciously chosen to reject this theory, or whether you simply haven't had time to study it yet.

My gut reaction is that this crisis is the result of lax enforcement of existing regulations, but thank you for the link; I'd be happy to read it and expand my limited knowledge.

Part of this is also due to over-regulation. For example, until the last couple decades, ratings agencies did ratings on firms without being paid by those firms. Instead they were paid by the shareholder who was thinking of buying. Thus they had a vested interest in being as tough as possible on firms.

Along comes the SEC and tries to make an "official" rating system, blesses only the ratings agencies they choose, and then allows those ratings agencies to charge the firms whom they rate fees to rate them. Can you see what inevitably happens next? Being in bed with whom they rate, they softened ratings. Did you know that Lehman was still rated A even after declaring bankruptcy? So break up the ratings cartel that the government created.

Yes, the government needs to regulate and enforce regulations but largely their most pressing issues should be (a) enforcing transparency in any company that wants to be publicly traded and (b) prosecuting fraud at any level at which it occurs. Those actions alone, if done vigorously, remove the need for most regulations.

However... in that environment, the status quo is always subject to change so the older firms lobby for regulation in order to further entrench themselves against any newcomers. Yet that is exactly the point of capitalism! Like evolution in the natural, a real capitalist economy appears to cull failures. What is going on right now is the inverse of that, an attempt to support the failures despite their failings.

Thank you for the replies.

About the links a problem with is there is a lot to read, and it's quite dry reading.

Currently I'm listening to the latest Peter Schiff weekly show, it's pretty interesting for an economics and investment show, kind of has a revolutionary quality about it. But it can be a little intense for me.

Ideally I wish more mellow Jim Rogers had a weekly or monthly show, his advise for the last 10 years has been astonishingly good. His longer term track record has been excellent as well.

I think these are both guys who have Austrian economic views.

Thanks for that explanation, Greyzone.

deleted for inadvertent double post

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?

no, we are facing the prospect of an old fashion and long depression and Bernanke knows this (what the MSM is calling lightly a "deep recession").

When I was in college I used to randomly read at the library in between classes. I read through a number of OLD economic texts, and came to the conclusion that the word "recession" was a euphemism. The word did not appear before the 1930s. Small "d" depression was the standard word. Then we got the Great Depression. So I guess the "d-word" became four lettered so to speak, and the word recession came into vogue to replace it.

I think we're going to need a new word soon.

Could it be much ado about nothing? Gross of PIMCOP thinks this is a great deal for mainstreet...We're going to profit hansomely!! I heard this guy say on TV a while ago that his firm would price the toxic paper for free if others would help.

And if we're going to have a collapse, when is it supposed to start? I'd like to know so I can make some decisions. Monday if no deal is made by Friday? Tuesday at 1:04 PM? Any help would be appreciated.

Gross -

Reuters on Gross -

we're going to need a new word soon

.... FUBAR

First class window seat on the road from TARFU to FUBAR.

BOHICA ... Bend Over, Here It Comes Again!

whaleoil said,
"I think we're going to need a new word soon."

I think we already have it. Isn't "deleveraging" one of the greatest euphemisms in history? :-)



DEFINITION - when someone jumps off the other side of the teeter totter when you are up in the air.

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. “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.” “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.



Great first post.

The press was once considered the guardian of the public trust, the fifth estate that asked the difficult questions, and told "it just like it is, Mam". Whether it ever really stood up to the challenges that such a mandate inspires is an open question but at least on the surface it tried.

Later the press morphed into infotainment and became a PR funnel for the powers that be.

Thank you for drawing our attention to some of the more critical pieces. It is refreshing to see the press starting to make waves... always bearing in mind who signs their paycheques.

You can simply call it fascism. Saves a lot of words.

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.

"Follow the money...."

yes, exactly. the money trail says that the doors to the treasury are open for some.

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.

I hope this isn't considered off topic, but I think the timing of this event is somewhat suspect. I have confirmed this information on Army Times web site as well, although the following information is more detailed and was not from the Army Times web site:

It looks like they are deploying the Army on American soil, primarily south Georgia for starters, though this could change as "situations" develop. The 2 most interesting points to me were,
1. They are here to handle domestic unrest
2. they are trained in constructing road blocks, felling trees and managing check points.

this sounds like they want to minimize free travel, which could be aided by slowly choking off the gasoline supplies, which seems to be an ongoing phenomenon. If they are looting the treasury, then this would be the support measure they would need to ensure the plan works. I think the price of gasoline could double or triple in such a scenario, watch for increased presence of the military on the border, if they want to quell widespread emmigration.

Saturday, 20 September 2008
Brigade Homeland Tour Begins Oct. 1
via CLG
Brigade homeland tours start Oct. 1 for deployment during 'civil unrest,' 'horrific scenarios' [The 'horrific scenario' of the 2nd American Revolution after a third stolen 'election?']. The 3rd Infantry Division’s 1st Brigade Combat Team has spent 35 of the last 60 months in Iraq patrolling in full battle rattle.

Now they’re training for the same mission -- with a twist -- at home.

Beginning Oct. 1 for 12 months, the 1st BCT will be under the day-to-day control of U.S. Army North, the Army service component of Northern Command, as an on-call federal response force for natural or man(Bush)-made emergencies and disasters, including terrorist attacks.

This new mission marks the first time an active unit has been given a dedicated assignment to NorthCom. They may be called upon to help with civil unrest and crowd control or to deal with potentially horrific scenarios such as massive poisoning and chaos in response to a chemical, biological, radiological, nuclear or high-yield explosive, or CBRNE, attack.

Brigade homeland tours start Oct. 1

3rd Infantry’s 1st BCT trains for a new dwell-time mission. Helping ‘people at home’ may become a permanent part of the active Army
By Gina Cavallaro - Staff writer

The 3rd Infantry Division’s 1st Brigade Combat Team has spent 35 of the last 60 months in Iraq patrolling in full battle rattle, helping restore essential services and escorting supply convoys.
Now they’re training for the same mission — with a twist — at home.

Beginning Oct. 1 for 12 months, the 1st BCT will be under the day-to-day control of U.S. Army North, the Army service component of Northern Command, as an on-call federal response force for natural or manmade emergencies and disasters, including terrorist attacks.

It is not the first time an active-duty unit has been tapped to help at home. In August 2005, for example, when Hurricane Katrina unleashed hell in Mississippi and Louisiana, several active-duty units were pulled from various posts and mobilized to those areas.

But this new mission marks the first time an active unit has been given a dedicated assignment to NorthCom, a joint command established in 2002 to provide command and control for federal homeland defense efforts and coordinate defense support of civil authorities.

After 1st BCT finishes its dwell-time mission, expectations are that another, as yet unnamed, active-duty brigade will take over and that the mission will be a permanent one.

* “Right now, the response force requirement will be an enduring mission. How the [Defense Department] chooses to source that and whether or not they continue to assign them to NorthCom, that could change in the future,” said Army Col. Louis Vogler, chief of NorthCom future operations. “Now, the plan is to assign a force every year.”

The command is at Peterson Air Force Base in Colorado Springs, Colo., but the soldiers with 1st BCT, who returned in April after 15 months in Iraq, will operate out of their home post at Fort Stewart, Ga., where they’ll be able to go to school, spend time with their families and train for their new homeland mission as well as the counterinsurgency mission in the war zones.

Stop-loss will not be in effect, so soldiers will be able to leave the Army or move to new assignments during the mission, and the operational tempo will be variable.

Don’t look for any extra time off, though. The at-home mission does not take the place of scheduled combat-zone deployments and will take place during the so-called dwell time a unit gets to reset and regenerate after a deployment.

The 1st of the 3rd is still scheduled to deploy to either Iraq or Afghanistan in early 2010, which means the soldiers will have been home a minimum of 20 months by the time they ship out.

In the meantime, they’ll learn new skills, use some of the ones they acquired in the war zone and more than likely will not be shot at while doing any of it.

They may be called upon to help with civil unrest and crowd control or to deal with potentially horrific scenarios such as massive poisoning and chaos in response to a chemical, biological, radiological, nuclear or high-yield explosive, or CBRNE, attack.

Training for homeland scenarios has already begun at Fort Stewart and includes specialty tasks such as knowing how to use the “jaws of life” to extract a person from a mangled vehicle; extra medical training for a CBRNE incident; and working with U.S. Forestry Service experts on how to go in with chainsaws and cut and clear trees to clear a road or area.

The 1st BCT’s soldiers also will learn how to use “the first ever nonlethal package that the Army has fielded,” 1st BCT commander Col. Roger Cloutier said, referring to crowd and traffic control equipment and nonlethal weapons designed to subdue unruly or dangerous individuals without killing them.

* “It’s a new modular package of nonlethal capabilities that they’re fielding. They’ve been using pieces of it in Iraq, but this is the first time that these modules were consolidated and this package fielded, and because of this mission we’re undertaking we were the first to get it.”

The package includes equipment to stand up a hasty road block; spike strips for slowing, stopping or controlling traffic; shields and batons; and, beanbag bullets.

* “I was the first guy in the brigade to get Tasered,” said Cloutier, describing the experience as “your worst muscle cramp ever — times 10 throughout your whole body.

* “I’m not a small guy, I weigh 230 pounds ... it put me on my knees in seconds.”

The brigade will not change its name, but the force will be known for the next year as a CBRNE Consequence Management Response Force, or CCMRF (pronounced “sea-smurf”).

* “I can’t think of a more noble mission than this,” said Cloutier, who took command in July. “We’ve been all over the world during this time of conflict, but now our mission is to take care of citizens at home ... and depending on where an event occurred, you’re going home to take care of your home town, your loved ones.”

While soldiers’ combat training is applicable, he said, some nuances don’t apply.

* “If we go in, we’re going in to help American citizens on American soil, to save lives, provide critical life support, help clear debris, restore normalcy and support whatever local agencies need us to do, so it’s kind of a different role,” said Cloutier, who, as the division operations officer on the last rotation, learned of the homeland mission a few months ago while they were still in Iraq.

Some brigade elements will be on call around the clock, during which time they’ll do their regular marksmanship, gunnery and other deployment training. That’s because the unit will continue to train and reset for the next deployment, even as it serves in its CCMRF mission.

Should personnel be needed at an earthquake in California, for example, all or part of the brigade could be scrambled there, depending on the extent of the need and the specialties involved.

Other branches included

The active Army’s new dwell-time mission is part of a NorthCom and DOD response package.

Active-duty soldiers will be part of a force that includes elements from other military branches and dedicated National Guard Weapons of Mass Destruction-Civil Support Teams.

A final mission rehearsal exercise is scheduled for mid-September at Fort Stewart and will be run by Joint Task Force Civil Support, a unit based out of Fort Monroe, Va., that will coordinate and evaluate the interservice event.

In addition to 1st BCT, other Army units will take part in the two-week training exercise, including elements of the 1st Medical Brigade out of Fort Hood, Texas, and the 82nd Combat Aviation Brigade from Fort Bragg, N.C.

There also will be Air Force engineer and medical units, the Marine Corps Chemical, Biological Initial Reaction Force, a Navy weather team and members of the Defense Logistics Agency and the Defense Threat Reduction Agency.

One of the things Vogler said they’ll be looking at is communications capabilities between the services.

* “It is a concern, and we’re trying to check that and one of the ways we do that is by having these sorts of exercises. Leading up to this, we are going to rehearse and set up some of the communications systems to make sure we have interoperability,” he said.

* “I don’t know what America’s overall plan is — I just know that 24 hours a day, seven days a week, there are soldiers, sailors, airmen and Marines that are standing by to come and help if they’re called,” Cloutier said. “It makes me feel good as an American to know that my country has dedicated a force to come in and help the people at home.”

In violation of the 1878 Posse Comitatus Act we might add.

Why should congress be any less asleep-at-the-wheel about this than they were about banking regulation.

-- Jon

memmel posted this stuff a day or two ago. Looks like NSPD-51 is not going to end up being as innocuous as they tried to make us believe it would be.


I guess they can't wait to test their new toy (Active Denial System):

I want $700 Billion now!

payed by tax-payers money of course.

"(Active Denial System)"

Isn't that what TV is?

Maybe thats just a mobile satTV dish. ;-)

It's interesting to notice how this "bailout" might fit together with this action by the US Army to prepare for possible crisis on US soil by slowly mentally preparing people for "breakdown" and "total wipeout of economy" etc.

The progression has been slow---the bailouts of Bear, the Fannie/Freddie thing, etc.

But with this 700 billion request, the govt has managed to inject the word "economic collapse" into the picture in a totally natural way. Putting out there the idea "you may lose your job, your lifestyle, etc."

The transition to this kind of crisis talk is not unintended I think. They are trying to instill in people's minds, in a slow, progressive way, that "the end of the world as we know it" is on the way.

I don't know what they are intending, if anything, but it does have a planned and managed feel to it. Some kind of mental preparation, some kind of massaging of the public consciousness.

If other posters are correct about the deviousness of this scheme, then things don't look very good!

To that, add a dash of this:

and now you're really on to something!

(Note: Ignore that this is from Alex Jones -- or else...)

Westexas, I'm not totally sure if I think this is right. I think it depends on the context and speed with which the shift would happen. Despite the fact that outer suburban housing did take a hit as gas prices rose, it is worth noting that very few people at all have even begun to use major mitigation strategies for gas prices - it is perfectly possible to mitigate one's distances - you live in the 'burbs, and most people commute to two or three locations where most of the businesses are. Assuming they still have jobs (big assumption, I know), there really is no reason that the effective gas price can't be 6.50 a gallon divided by four or five riders, which is pretty affordable. Cut out tae kwon do and ballet for the kids, start using some of the enormous house to store food so that grocery store visits are monthly, shop for clothes once or twice a year instead of every time you feel sad, and grow a garden on those big lawns and the cost of exurban living may well be lower than the cost of urban living, which will, after all, have to pay the shipping tariff of those 6.50 on every single good and bite of food. The value of homegrown then starts shooting way, way up, and the cost of living falling down. People start wondering if a little bit of dirt might not be a good thing...

Again, I don't claim this is inevitable, but I think that in an economic shift, I think the announcements of the death of suburbia have been far too premature. The other feature of this is the credit crisis - most people know that they can't sell their houses now - and if they can stay in their current one, their credit card issues and other economic problems may well make it impossible for them to ever buy another one. I think the functional inertia of staying put will be fairly substantial, for those who can avoid being in the early waves of foreclosures (at some point, I think that the waves will stop simply because they may have dragged the banks under first).


This implies the life style of suburbs inhabitants change drastically. A number of people may decide they don't want living in a suburb anymore if their life style has to be changed that way. This is a reduction in the demand for suburb houses, enough to collapse the price.

Selling the house is not he only option to get out of a suburb. People may decide it is cheaper to default and rent something than pay the mortgage all the way.

The scenario you describe is also a reduction of economic activity. Tae Kwon Do and ballet teachers and clothes sales persons will have a hard time paying their mortgages in your scenario.

All true, and some outer suburb residents probably will leave - while others probably move out, as wealthier people move in and gentrify poor neighborhoods in now-desirable parts of the city near public transportation. My point is that the death knell we constantly sound for the suburbs is premature, at best. I agree completely with Kunstler about the "greatest misallocation of resources in history" bit - but having allocated them thus, I think it unlikely that most will be abandoned or turn into slums. I think new uses, some of them not even bad, will be found for them in a lower energy, lower income society. The tae kwon do teachers and clothes sales people are going to be hosed no matter where they live - I don't see this primarily as a problem of the suburbs. In fact, in some senses, I think the suburbs are more viable - it is possible to grow some food, some heating fuel, etc... on a suburban lot, while also changing one's lifestyle to keep an urban job, commuting in tightly packed cars. It is not possible to do those things on any scale in many cities - which means that city dwellers without jobs or with inadequate ones are truly screwed. There will be more jobs in cities, of course, but then again, there are more people, and fewer ways of mitigating economic problems.

My point isn't that all the cities are doomed (not likely) or that all the suburbs are doomed - my point is that we tend to assume that one or another place is going to just diappear. My guess is that they will be used differently, but they will be used.


It does't take $6.50 per gallon to start the ball rolling.
PDF warning

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.

Paulson is said to be worth around 700 million dollars, I have not confirmed this. His former employer Goldman Sachs, would be a prime beneficiary of his policies, the prohibition of short selling of financial stocks was primarily aimed at aiding Goldman. Goldman is now a commercial bank, as of last friday, under an emergency arrangement with the Fed, that means they can now acquire other commercial banks. This sets them up to be a huge beneficiary of any bank closures, as they will be able to acquire their assets for pennies on the dollar, also they will be eligible for FDIC insured accounts, etc, etc.

This scheme stinks on so many levels, and now the Bush Admin is defending it saying it was well thought out and planned months in advance, which makes it even more scary/stinky because of the huge loopholes like the 32 words in section 8:

Section 8: 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.

Something fishy is going on here, this looks like fraud. The fact that they want it passed in a panic rush, and don't want any investigation before it passes, and then the bailout specifically disallows any review or investigation, means this is a huge coverup.

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...

King Henry Paulson's power grab is about extorting the actual deposits from thousands of smaller US banks and putting them into the vaults of the larger ones, pure and simple, to cover their gambling debts and to recollateralize the FED balance sheet, which is dangerously depleted (only about 200bn left out of 800bn)

The toxic sludge the FED took as collateral from the Big Banks these past 12 months in return for Treasury securities was a LOAN to the Big Boyz, not a GIFT and has to be PAYED BACK, with INTEREST.

Big Problem, Hank the Wank and the Cheney/Bush Crime Family would have to explain to the Public and Investors that the US Central Bank (FED) is about pretty much insolvent from taking toilet paper from Wall St. 'Titans of Capital'.

The Big Bankster Boyz know that the only untapped source of cash left in the US is deposits in small to medium banks. And they are going to 'stick'em up'. Problemo solved in their eyes.

Hmm, quite the rock and the hard place.

The Treasury could print more dough for the FED but then, the whole world is watching, and a Giant Ass Run On The Dollar would commence, couldn't have that before the election.

This bill is extortion at it's core. It is something that gangsters and hoodlums and punks have done throughout history.

It is the legacy of the Neo Con's, their greatest Grift to humanity.

OWTH (off with their heads)

losthorizon - You may be right but I do think the point that Jerome's friend does still hold water.

You are correct that the money used to date is a loan not a gift but it doesn't change the fact that Fed is out of money. Also, the Fed is taking a lot of risk right now because if those companies default on the loan then the Fed is stuck with worthless "assets".

What this scheme does is recapitalize the Fed by moving the bad assets to the government (taxpayers). This is done by the companies selling bad debt which is currently used as collateral in these loans by the Fed to the taxpayers. The companies would then have to pay off the Fed as they sold the assets currently in hock. The Fed ends up with the coffers full, the taxpayer holding the bad debt and companies bailed out. Seems to help everyone (except us taxpayers).

I agree, Todd, that the "bailout" is a euphemism for perpetual funding of the Fed with our children's taxes.

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.




The staffers might have just been fatigued from all the calls they're getting today. Besides, they had to get to all the other blinking lights on those phones.

"...I would change my party affiliation to the Democrat party and never ever vote again for a Republican candidate from my state of Kentucky."

Oh, oh, your taking big chances, uncle McConnell will not be happy...anyway, I thought they should have taken our girl Anne Northrup as McCain's VP pick, she is Sarah Palin's ideological twin, except that Anne already has years of experience in Washington. I guess she just doesn't have them shootin' credentials that a VP must have now days, you know, Sarah shoots moose, Chaney shoots a huntin' buddy...a good professional VP has to be fast with a gun...:-)

(by the way, I bailed out on the Repubs years ago, but couldn't bring myself to go over to the "command style" economics of the Democrats...irony that one, it's now the Repubs who have come up with the mother of command style economies! :-)



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.

I agree izzy. I'm sure both of them understand the economy better than 99% of the rest of us. And I suspect their intentions, though somewhat mixed, are to help the US economy first. What I do dislike greatly is their unwillingness to state the cause (IMHO) for the situation: allowing convention banks to enter the high risk investment market and forcing Fannie/Freddie to stimulate the economy by issuing mortgages to high risk home buyers. But to state these causes would automaticly point the finger at the Federal gov't (both R and D....both Congress and Whitehouse). Kinda tough to piss on the folks who sign your paycheck, eh?

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

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:

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


Ah... here's *a* link. Don't know if it's *the* link.


Then I somehow managed not to include it... must get to bed.


Here is a short video showing the HUGE lines outside one branch in Hongkong.
Take a look, the lines are longer than Northern Rock / Indymac.

I am pleased that I invested my last unused(& not needed!) cash in Krugerrands today.
It is simply true that every money(!) went down the drain at some point (silver and base metal money was debased times and times again all the way through history and even gold coins were produced in lesser fineness in ancient times if there was no choice).

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.

...sounds like Gold is going up in both scenarios...


The US has the obligation to bail out depositers in FDIC insured banks up to $100,000. It is not obligated by law to bail out investment houses who made bad investments and are near bankruptcy, no matter how many checks their PACs sent to the Republican National Committee. If you give a bad investor more money, the investor might lose that money too. They cannot auction them off on the open market because they could not get enough money that way, they try to lobby the federal government for all they can get.

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:

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.


MDsolar -Why have so few looked at the problem from the reverse. As the US has between 8,000 - 10,000 foreclosures every week or is it every day, the partial answer would be to stop these house coming onto the market as distress sales. Use your $700 billion to purchase the property at whatever the local market rate is less a generous discount - bank takes a loss - but do not eject the ex-mortgagee but keep him/her in the house as a tenant. An occupied house keeps more value. The goverment takes a rent, some return. Upgrade the house and then over time release them back to the market or sell it Thatcher like back to the tenant.

This give the market a floor, the banks know the value of the debt, but the US helps the majority of its citizens rather than the minority. Since you have nationalised banks nationalising some housing cannot be that hard.

Yes, I think this does set a value to the paper that is the problem. But, most of all, it gets a green collar sector going right away with the energy upgrades. The next owners of those homes won't have energy bills. That way we are creating both value and an example just like USDA demonstration farms which where so responsible for the green revolution in the US. Architecture 2030 demonstration homes spread throughout neighborhoods would help to show people how to move forward to energy self-sufficiency.

It could be that to those who have a central bank, everything looks like a cash injection nail so that one only thinks of large fund transfers rather than a piece-by-piece approach.


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.

I'm 100% on board for the death penalty for certain white collar crimes. Their intentional actions have, do, and will cause many deaths.

And while you're at it, since corporations are considered 'individuals' in the eyes of the law, the guilty among them should also get 'capital punishment'. That includes the chief financial officers of said guilty corporations.

Thanks for fleshing out the ongoing Class War I refer to upthread.

Drudge Report Headline:

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

It is possible the worm has turned-it looks like the sheeple have woken from their slumber and bared their fangs at their regionally elected grifters. Interesting, but I will still put my $5 on the Super Grifter at this point.

What amazes me is that no-one is actually calling him out as the liar and thief he clearly is.
Unfortunately, the only reason I can see for that is that all the members of Congress and the Senate are too complicit in this grab, that campaign contributions and so-on have totally undermined the possibility of action.

It seems to me that what they are actually doing is going through the motions so that they can present themselves as standing up for the rights of the common man, with a bit of ineffective oversight of a totally corrupt plan, and nominal and easily circumvented caps on the bonuses of executives.

Anyone who was prepared to stand up and be counted would surely have done so when Paulson blatently lied about the clause giving him untrammelled and unreviewable power.
The power and the money grab will be real, the checks and balances fake.

The public is calling him out in great numbers-the elected grifters cower in fear of his power. What is on public display is how weak and hollow the USA federal government has become, when a grifter like this can give ultimatums and orders with impunity.

You are right Brian. I expressed myself poorly.
What I meant was that none of the leaders at the hearing charged with assessing his plan had the guts to call him a liar when it was quite clear that that was what he was doing.

Incidentally, something you may not have heard through the media in the States,Paulson is also putting heavy handed and arrogant pressure on the other IMF members to join the bail-out.
He has told the British Prime Minister that he is 'too busy' to meet him when he is in New York this weekend - OK, Britain may have sunk down in the World rankings, but the hubris of the man is astonishing.

This reminds me so much of the dying days of the Republic in Rome, when the powerful were arrogating power.
Cheney, Rumsfield and Paulson - our Triumvirate!

It is so convenient that they can have an amiable nonentity to front for them - they are so reptilian and repulsive as to be incapable of even faking any semblance of humanity for long in the public gaze.

> It is so convenient that they can have an amiable
> nonentity to front for them - they are so
> reptilian and repulsive as to be incapable of even
> faking any semblance of humanity for long in the
> public gaze.

The precise intent from the very beginning. George W. Bush is incapable of being more than a shift supervisor at a car wash - but he is sincere and amiable in a "plain old American" kind of way. And that's why he was chosen by the PTB as their front man. He's no more responsible for the last 8 years than the man in the moon. Same thing with Ronald Reagan - chosen for the same reasons, and no more capable than Dubya. The real powers are and were Cheney and Poppy - both part of the true "loop" that runs this world.

Ron Paul called him out. So have a few others. But the MSM is not covering those remarks. You have to dig deeper to see who is standing on at least some principles.

No wonder Head Criminal Bush hits the TV tonight.

Have you ever wiki'ed Keating five? Look who comes up! Another crook!

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:

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,
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.

Warren Buffett didn't put 5 billion dollars in GS because he thinks it is a well run company-he wasn't chomping at the bit to give these grifters a penny until they secured the pipeline to the taxpayers' pocket.

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)

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.

Godspeed to you Checkerboard.

Looks like you're not alone on this. Despite reassuring words by Bernanke, Paulson and now Bush, Congress is feeling the heat from the public.

Keep up the pressure.

To quote Peter Finch from the movie, Network, "I'm mad as hell, and I'm not going to take it anymore."


"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?"


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.


Ain't Google a fine thing! Found you!
Lots of silent tragedies for sure, even in those of our more advanced economies in Europe (e.g. Scandanavia)with better social indicators.
UK reflects many of the same dependencies on dysfunctional lifestyles and economic circumstances (dire chronic ill health in middle age being one result) even with our access to lower cost 'socialized' medicine.
Does your picture of the US outback give you hope for the future? And this is the quiet point still at the top of the tide?

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.

Phil, thanks for the reply...and to your interesting question:

"Does your picture of the US outback give you hope for the future? And this is the quiet point still at the top of the tide?

I don't know. I just feel safer being out in the middle of the country. The population density is far less per acre, the people are already used to living poorer, there are lots of streams and rivers for fresh water, lots of agriculture and gardening. We didn't boom upwards in the big "housing boom" so we have less distance to fall in the downturn. My view is that like a lot of the middle aged folks individually, the developed nations are stalling for time, waiting for new technology such as the plug hybrid cars or full electric cars, and solar to get cheaper. The folks who are paying attention know we have to change, we are at the age that we need it to be a "soft landing" sort of change. The thing that worries me and many of us is the danger of civil disturbances. We can live poor but we are getting too old to fight! :-)


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.

Perhaps you'll get what you deserve, then. Too much unsound business activities and this is what you get: proper (hopefully) regulation.

Not that I imply that Europe is perfect, it doesn't, but c'mmon!!

The US already has a lot of European business regulation. All those goods with the rounded CE mark! Any goods sold in Europe have to meet standards laid down by the EU and by default its becoming a worldwide standard.

Pity there were no EU standards on the financial sector!

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.

I think the comment goes something like "For a fat girl you don't smell very bad."

Since the money is not enough, the plan is simply to fix things, and the minor changes threaten the whole deal, which had to be done yesterday if not before (to fix a plan which had it's roots some ten years ago, but Bush just found out about it) it is doomed to fail. It is just a matter of getting the fingers pointing in the "Right" direction.

Actually, while it sounds tedious, I see no reason why the "securitized" packages cannot be broken down into individual loans, repackaged and sold as performing or non-performing loan packages. If a loan is current and had reasonable terms in the first place, it is performing, and should be safe. Otherwise, it is junk. My own fear is that these packages will be bought by the government at "__%" of face valuation, and be totallly junk while the decent packages will be retained by the sellers. With all of the financial computer power out there today, the repackaging will be simple, while the servicing of the loans will be tedious, and will require that the administrative costs built into these packages be spent administering the loans and not just continue to be the gravy train / mailbox money stream for the original lenders.

A question for those more knowledgeable of macroeconomics:

A key argument offered for the bailout is to generate greater lending abilities by the banks. Critical to a growing economy at anytime but much more so at the moment. Last night I heard the following commentary: under current regs banks are allowed to loan 10X their current assets. Current SEC regs require banks to value their real estate holding at their CURRENT ESTIMATED VALUE. Not the value of the cash flow being generated by the loans and not by expected future value of those real estate properties. This is the “marked for market” term being thrown around as I understand it. The commentator made the point: the SEC, with just a stroke of a pen, without approval of Congress or the Whitehouse, can change the valuation method to the estimated future value of the properties. Granted, this is just an accounting trick. But so are the current regs. One can argue which is more valid. But that's not the point. Changing the measure doesn't change the ultimate value of the properties. It just allow the banks to borrow more money from the Feds which is then made available to the public. If the rule change jumps the banks’ collective assets by, let’s say, $30 billion then the increase in credit available from the bank would jump $300 billion. Thus the commentator’s point: if one of the primary goals of the $700 billion bail out is to generate more lending ability it can be accomplished at zero cost to the tax payer and be done over night. Additionally, perhaps for loosening up the regs the Feds can demand the banks adjust those high mortgage rates to more affordable levels.

Clarifications please.

Your method does not get rid of the garbage by selling it to the taxpayer. If you had the choice as the CEO of a bank, would you prefer to sell garbage to the taxpayer or revalue said garbage which would also allow more leverage. In the first case,risk is lowered dramatically-in the second case, it increases through leverage. No one wants to label this as what it clearly is-fraud.

So far as I can tell, what we are being asked to buy is the worthlessness of some of the paper that has been issued out of Cayman Islands special purpose vehicles similar to those used by Enron. We are being asked to buy paper whose value is the continuing payment of mortgage obligations when the mortgages have already failed or are about to fail.

I am thinking that if we do buy this stuff, that will encourge more foreclosures since the big cost of foreclosure, the loss of regular interest payments, will disappear for the banks. They got rid of their risk except some of their parners are still holding the risk.

If we take another course and support the housing market by taking some houses off the market for a while, then this paper will end up less junky and can have some clear value so that liquidity will return.


If I understand your point Brian, the garbage (bad loans) never goes away. It's still owned by the banks and they still take the loss on the bad loans. But allowing to banks to make good loans (with money they borrow from the Feds as usual) to valid business enterprises has always been the fuel of our economic growth. Again, I may not understand it correctly, but the banks are unable to borrow significant additional monies from the Feds (to make good loans) because of the current account regs. Changing the regs won't get rid of the bad loans but it would allow the banks to make profits off of the new good loans and thus help deal with their current losses. And this won’t cost the tax payers one dollar. It doesn't hurt any American (except for the share holders) for the banks to loose some money. It hurts Americans if our business can't get the needed capital to expand.

This is how the banks are holding us hostage IMO: keep us solvent or we won't be able to act as a pass through for capital needed to grow the economy. But, in truth, the big banks can fail but their deposits will go to other banks which can then make new loans. Thanks to gov't insurance, almost no one (except the share holders) will loose money if all the big banks fail. But that is how the market place is supposed to work: make risky investments to make high returns and you accept the possibility of a loss. Those deposits will just be shifted to other banks. And those banks can borrow the same money from the Feds and reissue it to businesses and life goes on.

Again, banking regs are not my thing so I look for the more knowledgeable to comment.

Rockman: IMO you understand the whole situation clearly-it is what it is. Gigantic power grab and money grab-what the public isn't being told loudly is that the Secretary of the Treasury/Dictator will be able to funnel taxpayer funds to favored banks to the competitive detriment of non-favored banks. GS is right at the top of the list, which is why Buffett jumped in-Warren has always had a soft spot for non-competitive businesses (far more profitable). IMO the final bill will be breathtaking-my guesstimate right now would be 7 trillion taken from the taxpayers before the whole thing is finally stopped (10 times the initial estimate).

What you have plain and simple TREASON from the President and a large number of unelected people in Washington. Deal with it or they will deal with you. Call it what it is..

No, nobody here has anything good to say about this plan.

1) It is the definition of moral hazard.

2) It does nothing to stabilize housing prices, and the financial sector will experience more losses until housing prices stabilize.

3) It does not create transparency or confidence. Banks aren't lending to each other because nobody knows what toxic debt the others hold. The bailout doesn't change the filing requirements to allow us to see what assets a bank holds. And, having the Treasury 'set' a price only lets the bank book it at that price, they can't sell it at that price to anyone except the Treasury. If it stays on their books then it stays toxic.

4) It does not create accountability or security. The Credit Default Swap market is still opaque and under collateralized. If an institution goes bankrupt and becomes unable to make good on the CDS then other institutions face losses. The same sort of cascading failure that forced the AIG bailout still exists.

5) Poor track records. If Paulson or Bernarke had any understanding of the seriousness of the situation at any point in the last two years then we wouldn't be in this mess. But now we are supposed to trust that they know what is really going on and how to deal with it? Yeah, right.

6) It doesn't pass the smell test. It appears to be a huge power grab. The same administration that brought us the war in Iraq is asking for another blank check or there will be horrible consequences. How does the saying go?

fool me once, shame on - shame on you. Fool me - you can't get fooled again.

Also, at least to my rather dense self, nobody has articulated the precise mechanisms which will cause widespread failure. I am not yet convinced that the result of doing nothing is worse than that of doing this.

This notion that the DOW reflects the health of the nation is to some degree flawed. A couple of weeks ago I saw the DOW shoot up when FRM and FMC were nationalized. Obviously this was a bleak day for America and a black day for taxpayers, yet the market said "Yippee!".

I understand that collapse of high finance can freeze mortgage-based bond markets, but don't FRM and FMC create those? What happens if they hold new loans for a while? $700B would cover a LOT, especially if these new, better loans are actually profitable.

What happens if GS and ML go bankrupt? It seems to me that many of the risk swaps and other complex obligations need to be collapsed, and trades unwound until it's comprehensible and manageable.

Why not start with improved regs? Having the same companies offer banking, investment, and financial instrument creation seems critically flawed. How can I trust my investment bank to invest my money "optimally" while also looking to optimize it's own investments? Why wouldn't they steer me into stuff they wanted to exit? Or at least have swaps with like-minded peers? I fear that the real purpose of the bail-out is to spin all bad investments to taxpayers and little investors, leaving them with the gold. I am not sure what it would take to disabuse me of this assumption.

I can see that relaxing capital ratios would help get credit flowing, too, but that would just make a bad situation worse. Why did all of these firms run their businesses up against the rails, such that a few percent of equity losses would put them into gridlock? Are there no "solvent" companies that could be better trusted with our dollars? I don't borrow 10x my net worth make investments -- why should these companies?

Yes-if you started with 700 billion dollars and your intent was to immediately and permanently improve the USA economy this scam wouldn't be on anyone's top 100 list, except for the grifters directly benefitting from it-the whole thing is pretty transparent to almost the entire country at this point.

"I understand that collapse of high finance can freeze mortgage-based bond markets"
It's not only mortgage-based markets that are freezing, the banks are basically reluctant to lend to all businesses, people and banks for any purpose.

"It seems to me that many of the risk swaps and other complex obligations need to be collapsed, and trades unwound until it's comprehensible and manageable."

We are beginning to see a downturn in the notional volumes of credit derivatives, primarily by tearing up economically offsetting transactions. Whilst huge numbers are bandied about the net numbers are much lower (but still huge). Total notional amount outstanding of $531.2 trillion as of June 30, credit exposure after netting, but before collateral, is estimated to be $2.7 trillion.

Could be a wild ride today now that McCain seems to have held up the new deal and the Fed has bust WaMu to ratchet up the pressure, it looks like Morgan Stanley could be the next to go after losing a third of its assets over the last week (allegedly!). Central banks are pumping in billions including 3-4 month loans here in the UK.

You might have that backwards about the pressure. Washington Mutual has been in the news for some time as troubled and thus is likely to be part of the motivation to do something big. I do see a problem that it was sold to a competitor with out review of antitrust issues. JPMorgan Chase plans to shut down Washington Mutual branches where they compete. Going for the FDIC claim instead would have put more pressure on Congress but might have been better policy on preserving competition. The consolidation that is occuring now may be the longest lasting harm from this whole Greenspan mess.


Chris, you may be right about having the pressure the backwards, I have no contacts with the Feds so it's just my opinion! I know that WaMU have been in trouble for some time. Note though that in this instance the trigger was not pulled over the weekend but on Thursday night.

A retorical question, how much of the WaMU stuff taken on by JPM will be eligible for the bailout?

Re branches, of course they will shut down some nearby branches but the main thing is that they will acquire many branches where they have none. As one company even if they left the branches open they would not be competing.

I suppose it could be looked at as giving JP Morgan Chase the wherewithal to compete with the other consolidated entities. We end up with a few too-big-to-fail operations and that is it.

If that is how things end up, I can see all the venture capital chasing the same rabbit and many potentially profitable innovations never even getting started. We'll likely need to replace that functionality of the private markets with public methods. But then, who owns the new profitable business? If it is publically owned, then it isn't really competing because the public also sets the rules for competition. This is also a problem with the equity share that some in Congress want as part of the bailout. If we both own and regulate, we won't know what we are doing.

And, there is perception: Now that I own 80% of AIG, do I really want to continue my policies with State Farm? Wouldn't I do better with AIG since I'll be paying myself? Won't AIG advertise now that it can't fail to pay on a claim? Won't it be right?


I know that business credit is tightening as well, but banks that are not also high-finance investors would seem to make that decision based on general fear, not specific debt regulations. I would think there would be options to decrease that level of fear while not bailing out the big boys.

Once a complex derivative is sold a few times (netting commissions for bankers at each turn?), I can see little reason to NOT collapse a chain of trades even from the banks' perspective unless there is some sort of carrying-fee revenue associated with each. In any case, getting back down to your $2.7T mark would seem to make a lot of sense. Why don't we do that first, and then see what needs saving?

I don't think it's just McCain holding up the deal. With 90% of the populace against the bail-out plan, there must be much angst among our elected officials, especially junior congressmen. I know I have voice my displeasure to my congress people. I fail to believe there is only 1 possible resolution to the crisis, and I cannot in good conscience support that 1 being from those at the core of the problem. Was there earlier debate in banking circles about other plans? Surely there are ROIs to be weighed for other uses of $700B, including not spending it at all?

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.