Tuesday, September 30, 2008


Craig Crawford, CQ - How did anyone think the public would get behind something sold as a bailout of Wall Street multi-millionaires? Make it a bailout of homeowners, and you would have something that could pass in Congress. But to do that, the Bush administration needs to put something in the package that might actually help homeowners -- like giving bankruptcy judges the power to order modifications of usurious loans. Or maybe some protections against exorbitant credit card interest. If this bailout ends up as a better deal for average homeowners in crisis, Monday's turmoil in Congress will have been a very good thing.

David Korten, Yes Magazine
- Rather than seeking to restore the health of Wall Street’s predatory private institutions, a proper plan would seek to rid Wall Street of its purely predatory elements while dismantling and reassembling its useable institutions to create a new system accountable to the needs of Main Street. Here are some of the basics.

Hedge funds and private equity funds pose great risks to society while performing no beneficial function. They should be dismantled. . .

It is time to revive anti-trust to break up all excessive concentrations of corporate power and particularly the banking conglomerates that have been fueling speculation in global financial markets. To meet the financial needs of Main Street create a system of federally regulated, community banks that fulfill the classic textbook function of acting as intermediaries between local people looking for a secure place for their savings and local people who need a loan to buy a home or finance a business.

Proceeds from taxes on the ill-gotten gains of those who created the financial mess can be used to make whole the pensioners, home owners, and credit card holders the system victimized.

Perhaps the most important of all the needed reform measures is to make money creation a public function and strip private banks of their ability to create money out of nothing by issuing loans at interest against unsecured demand deposits.

John Gray, The Observer, UK - Our gaze might be on the markets melting down, but the upheaval we are experiencing is more than a financial crisis, however large. Here is a historic geopolitical shift, in which the balance of power in the world is being altered irrevocably. The era of American global leadership, reaching back to the Second World War, is over.

You can see it in the way America's dominion has slipped away in its own backyard, with Venezuelan President Hugo Chavez taunting and ridiculing the superpower with impunity. Yet the setback of America's standing at the global level is even more striking. With the nationalization of crucial parts of the financial system, the American free-market creed has self-destructed while countries that retained overall control of markets have been vindicated. In a change as far-reaching in its implications as the fall of the Soviet Union, an entire model of government and the economy has collapsed.

Ever since the end of the Cold War, successive American administrations have lectured other countries on the necessity of sound finance. Indonesia, Thailand, Argentina and several African states endured severe cuts in spending and deep recessions as the price of aid from the International Monetary Fund, which enforced the American orthodoxy. China in particular was hectored relentlessly on the weakness of its banking system. But China's success has been based on its consistent contempt for Western advice and it is not Chinese banks that are currently going bust. How symbolic that Chinese astronauts take a spacewalk while the US Treasury Secretary is on his knees.

Despite incessantly urging other countries to adopt its way of doing business, America has always had one economic policy for itself and another for the rest of the world. Throughout the years in which the US was punishing countries that departed from fiscal prudence, it was borrowing on a colossal scale to finance tax cuts and fund its over-stretched military commitments. Now, with federal finances critically dependent on continuing large inflows of foreign capital, it will be the countries that spurned the American model of capitalism that will shape America's economic future. . .

Meltdowns on the scale we are seeing are not slow-motion events. They are swift and chaotic, with rapidly spreading side-effects. . .

Having created the conditions that produced history's biggest bubble, America's political leaders appear unable to grasp the magnitude of the dangers the country now faces. Mired in their rancorous culture wars and squabbling among themselves, they seem oblivious to the fact that American global leadership is fast ebbing away. A new world is coming into being almost unnoticed, where America is only one of several great powers, facing an uncertain future it can no longer shape.

Dan La Botz, Monthly Review - Whatever the ultimate bailout plan, the financial situation could well continue to unravel, curtail credit, and shrink the broader economy, leading to a deep recession or depression. The U.S. Congress, both Democrats and Republicans, might then be forced -- despite their deep aversion to any form of government ownership -- to not only bail out the banks but to buy them. The increasingly popular sentiment that the bankers should be made to pay for the crisis opens the door to the notion of nationalization of the banks. What would it mean to have the government own the banks?

Historically the Populists, various labor parties, and the Socialist and Communist left have raised the slogan of nationalization of the banks as part of a process of bringing about socialism. Their argument has been that if the banks were owned by the government, and the government were controlled by the people, we could democratically plan an economy to meet the needs of all. . .

In recent history governments have nationalized banks when the pressures of internationalized financial markets and international competition have made it difficult for them to control and stabilize their finances and currency. During the last couple of decades, countries as different as Mexico, France, Sweden, and Japan carried out partial or more or less complete bank nationalizations to regain control of the financial situation.

Japan's experience more than a decade ago was much like that of the United States in many ways. After a period of great productivity and prosperity in the 1980s, in the early 1990s, Japan's housing bubble burst, leaving Japanese banks holding sheaves of bad loans. The Japanese housing boom collapsed just as China began to become an export competitor. After neglecting the problem for some time the Japanese government intervened, spending $440 billion dollars of its taxpayers' money to nationalize the weakest banks, infuse capital into the stronger banks, and to protect depositors. Japanese banks were required to create a Business Revitalization Plan, at the center of which was a capital/asset ratio. Some economists and journalists have suggested that Japan's solution -- partial nationalization and partial financial support for private banks -- could provide a model for the United States in the current crisis.

Sweden handled its financial crisis of the early 1990s through a quasi-nationalization. The Swedish Social Democrats -- not the conservatives -- had deregulated the banks in the 1980s. But in the early 1990s Swedish real estate values began to fall and banks were left holding bad loans. Sweden spent $11.7 billion to rescue its banks but in return received warrants, that is, paper granting the government the right to buy stock in the banks whenever it wished. This constituted a quasi-nationalization of the banks restoring public confidence. As part of the Swedish deal, banks had to write down their losses, sell their distressed assets, and later the government sold the shares it held in the banks. The government's temporary control allowed the financial situation to stabilize, and the re-privatized banks reentered the national and global financial markets strengthened, though still subject to the ongoing, worldwide crisis of capitalism.

Both Mexico and France nationalized their banks in the 1980s in response to international financial pressures and international competition. In Mexico, the government of President Lopez Portillo raised the banner of the Mexican Revolution as he nationalized the banks in an attempt to regain control of finances and to stop capital flight abroad. In France, the Socialist and Communist parties and the middle class Radical party had adopted in 1972 the Common Program of the Left, which called for the nationalization of the banks. But in France too it was the new international character of finance which led the government to nationalize the banks in large part to get control of the expanding money supply. . .

We can note some similarities in the experience of nationalization of the banks. First, an important sector of bankers resisted nationalization and, when finally forced by the government to relent, fought for higher compensation for their property than originally offered . . . and usually won. Second, in none of these cases was bank nationalization complete, with some domestic and foreign banks usually excluded. Third, where banks were more completely nationalized, the bankers opened new financial institutions which tended to engage in banking functions and significantly drained off capital. In general, bank nationalization tended to contribute to the centralization and modernization of the banking industry as a whole. In all cases after a few years the nationalized banks were reprivatized, usually to many of the same financiers who had previously owned them.

The nationalization of banks does not necessarily represent a progressive measure, nor is it a logical next step toward socialism. Government ownership of banks, at least partial ownership and sometimes complete ownership, is quite common around the world. Many capitalist nations -- both developed and developing ones -- have nationalized their banks during the twentieth century. A 2002 study of banks found that around a third of all banks were government-owned, though such bank ownership was more common in the developing world. In capitalist societies governments engage in the nationalization of banks to reestablish financial stability and improve their economic position in the international market, not to advance the common good.

Reuters - Fannie Mae and Freddie Mac, the U.S. mortgage finance giants that were taken over by the government this month, said on Monday they were subpoenaed for documents as part of a federal grand jury investigation into their accounting. . . The FBI said it was expanding its probe of possible corporate fraud related to the U.S. mortgage market collapse to include Fannie Mae, Freddie Mac, Lehman Brothers Holdings Inc and insurer American International Group. The allegations would deal with misstatements of assets, FBI Director Robert Mueller told Congress earlier this month.

Dean Baker, Prospect -
On January 3, 2001 the NASDAQ jumped more than 14 percent. What was the basis of this euphoria? Alan Greenspan had lowered the federal funds rate by a full percentage point in a rare special meeting. Investors were convinced that this meant that the fed would prevent a recession. Two months later the economy began losing jobs and entered a recession. It didn't begin adding jobs again until the fall of 2003. The moral of this story is that financial markets should not be viewed as the embodiments of wisdom about the economy. The big actors in the financial markets are subjects to bouts of fear and panic just like the rest of us. In fact, they might even be more subject to irrational mood swings because they sit around talking to each other all day. The conventional wisdom in the media was that the economy would collapse in the absence of the bailout. I know of few, if any, economists who shared this view, even among those who supported the bailout. However, the disaster view undoubtedly permeated Wall Street just as the euphoria view permeated Wall Street in January of 2001.

David Weigel, Reason -
The big mystery on the floor was why so many Democrats went against Pelosi. . . . A sample of the different takes:

Donna Edwards, a Maryland Democrat elected this year (in a primary then a special election) on the backs of bloggers and the SEIU. One of the majority of black caucus members who couldn't go back home and argue for welfare for Wall Street: "This bill was vague and contained more dressing than substance for working Americans. It gave the Secretary of the Treasury unparalleled purchasing power of any financial instrument without adequate, enforceable oversight. There were no guidelines in this bill directing the Secretary as to how or which troubled assets to buy. The bill did not address how or when the government would sell the purchased assets back in the market. Despite the positive provisions of this bill that help tenants, the provisions to help homeowners were not mandatory; they were discretionary. Finally, the ECONOMIC STIMULUS bill which passed the House and included real benefits to working Americans such as extending unemployment benefits, providing additional food stamp assistance, and investing in infrastructure to create good-paying jobs is effectively dead.

Tom Udall, a New Mexico Democrat who's running for Senate (and expected to win): "Any plan that puts taxpayer money at risk must ensure that taxpayers get paid back before shareholders, bondholders or executives-so that corporate CEOs do not get a golden parachute while taxpayers are left to pay the bill. Additionally, Congress should act further to keep Americans in their homes by addressing the crisis in the mortgage industry as well as the one in the financial sector. Any economic package that allows tens of thousands of Americans to lose their homes is simply inadequate."

Dennis Kucinich: "Why aren't we helping homeowners directly with their debt burden? Why aren't we helping American families faced with bankruptcy. Why aren't we reducing debt for Main Street instead of Wall Street? Isn't it time for fundamental change in our debt based monetary system, so we can free ourselves from the manipulation of the Federal Reserve and the banks? Is this the United States Congress or the board of directors of Goldman Sachs? Wall Street is a place of bears and bulls. It is not smart to force taxpayers to dance with bears or to follow closely behind the bulls."

Redding News Review - Many black lawmakers released a deluge of negative statements explaining their votes on a $700 billion bailout bill for troubled financial companies. The statements came as 21 of the 42-members of the Black Congressional Caucus votes were key to defeating the measure in the House by a margin of 228-205. Rep. Barbara Lee, who voted against the plan, said that she is "convinced that this bailout plan is not the solution to this mess." . . . "First, it does little to address the underlying problem - the foreclosure crisis," the California Democrat said. "We need a moratorium on foreclosures and bankruptcy reform to help people stay in their homes. Second, this bill should be paid for by the high-flying industry that created this problem.$700 billion should not be given to Wall Street and the Bush Administration unless those who cause this mess pay for it. . . And third, we need an economic stimulus package to deal with the crushing reality of the recession that is hitting people hard and growing every day.

C. Gopinath, Hindu Business Online
- My recommendation is that after the dust settles, the government must call for a Truth and Reconciliation Commission to find out what happened and why. We would have an interesting cast of characters. Among others, Mr Alan Greenspan, who headed the central bank from 1987 to 2006 may have to explain how he created an environment that allowed sub-prime mortgages to thrive and brought us to this state. Mr Henry Paulson may have to be witness for the prosecution (he is the current Secretary of the Treasury) and for the defense (he was head of Goldman Sachs, an investment bank, for many years). Mr Robert Rubin, former Secretary of the Treasury under the Clinton administration, also an alumnus of Goldman Sachs, in whose time the Glass-Steagall Act was repealed, should also be an invitee. Mr Warren Buffet, the successful investor and head of Berkshire Hathaway, may like to come forward and say, ‘I told you so a long time ago’ for he has been one who has been warning everyone who would listen about the dollar slide, and consequences for the economy.

Baron's - 1997: Federal Reserve Chairman Alan Greenspan's famous "irrational exuberance" speech in 1996 was somehow ignored by, um, Fed Chairman Greenspan. The Fed missed the opportunity to change margin requirements. Had the Fed acted, the bubble would not have inflated as much, and the subsequent crash would not have been as severe.

1998: Long Term Capital Management was undercapitalized, used enormous amounts of leverage to purchase all manner of thinly traded, hard-to-value paper. It failed, and under the authority of the Federal Reserve a "private-sector" rescue plan was cobbled together. Had these bankers suffered big losses from LTCM, they might have thought twice before jumping into the exact same business model of undercapitalized, overleveraged, thinly traded, hard-to-value paper. Instead, they reaffirmed Benjamin Disraeli's famous aphorism: "What we learn from history is that we do not learn from history."

1999: The Financial Services Modernization Act repealed Glass-Steagall, a law that had separated the commercial-banking industry from Wall Street, and the two industries, plus insurance, came together again. Banks became bigger, clumsier, and hard to manage. Apparently, risk-management became all but impossible, even as banks had greater access to larger pools of capital.

2000: The Commodities Futures Modernization Act defined financial commodities such as "interest rates, currency prices, and stock indexes" as "excluded commodities." They could trade off the futures exchanges, with minimal oversight by the Commodity Futures Trading Commission. Neither the Securities and Exchange Commission, nor the Federal Reserve, nor any state insurance regulators had the ability to supervise or regulate the writing of credit-default swaps by hedge funds, investment banks or insurance companies.

2001-03: Alan Greenspan's Fed dropped federal-fund rates to 1%. Lulled into a false belief that inflation was not a problem, the Fed then kept rates at 1% for more than a year. This set off an inflationary spiral in housing, and a desperate hunt for yield by fixed-income managers.

2003-07: The Federal Reserve failed to use its supervisory and regulatory authority over banks, mortgage underwriters and other lenders, who abandoned such standards as employment history, income, down payments, credit rating, assets, property loan-to-value ratio and debt-servicing ability. The borrower's ability to repay these mortgages was replaced with the lender's ability to securitize and repackage them.

2004: The SEC waived its leverage rules. Previously, broker/dealer net-capital rules limited firms to a maximum debt-to-net-capital ratio of 12 to 1. This 2004 exemption allowed them to exceed this leverage rule. Only five firms -- Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns and Morgan Stanley -- were granted this exemption; they promptly levered up 20, 30 and even 40 to 1.

2005-07: Unscrupulous home appraisers found that they could attract more business by inflating appraisals. Intrinsic value was ignored, so referrals kept coming in. This helped borrowers obtain financing at prices that were increasingly unsupportable. When honest appraisers petitioned both Congress and the bureaucracy to intervene in the widespread fraud, neither branch of government acted.


At September 30, 2008 6:58 PM, Anonymous What then should be done? said...

"What then should be done?

Here I would like to turn to a proposal by a man I have met and respect. His name is Darrell Castle, and he is the 2008 candidate for vice-president of the Constitution Party. Castle has spent the last year traveling around the country meeting people on Main Street and listening to what they have to say.

This is what Castle proposes in the Constitution Party's latest newsletter:

“The Federal Reserve Banks should be seized by Congress under Article 1 Section 8 of the Constitution. The FED banks could survive as clearinghouse banks, but the Federal Reserve that has robbed the American people for 100 years would cease to exist. The debt owed by the American people to the FED banks would be discharged in bankruptcy. Congress would take monetary policy from the FED and would simply stand in place of the FED through a monetary board. The FED credit computers would be transferred to Congress who would issue new credit (money), because under our present system 97% of all money originates as credit. This new credit would keep the system going and prevent collapse. It could all be done without interest and without debt. The backs of the international banking cartel would be broken forever, and the American people through their elected representatives would control monetary policy; i.e. money in circulation, interest rates, and credit availability.”

Pearlstein, Bush, Paulson, Pelosi, et.al., along with Obama and McCain, should also read the U.S. Constitution. Then they would see that the problem stems from the fact that in 1913 Congress privatized our money supply by turning it over to the private banks that own the Federal Reserve System. This is also why we have lived under the mass delusion that a healthy financial sector leads to a healthy producing economy.

Actually it’s the other way around. The financial sector should support the producing economy, not bleed it dry through interest, fees, commissions, and the destruction that arises from financial profit-seeking.

There is also the fact that while the producing economy has been hammered by job outsourcing and bled white by financial parasitism, it is still a powerful machine that can produce the goods and services people need. We are a strong, capable nation. And we are blessed with the resources we require for a decent standard of living, though not necessarily at a rate of consumption that forever outpaces the rest of the world. But what is wrong with that? The underlying strength of the producing economy was on display this morning, when the Dow-Jones defied the doomsayers by coming back strongly the day after the bailout was defeated.

We now need to do what Darrell Castle of the Constitution Party recommends: Use the power of the money supply to rebuild the producing economy that we have given away and rebuild it from the bottom up: from Main Street.

Unfortunately the fat cats and their political and media apologists “just don’t get it.” But the American people and the members of congress who voted the right way yesterday do."


Post a Comment

<< Home