TCS Daily


Government Announcements Lead to Falling Stocks

By Larry Kudlow - March 2, 2009 12:00 AM

Stocks plunged again today, following the latest episode in the Treasury bailout of insurance company AIG. The Dow closed down about 300 points.

There's a pattern here. Stocks fell last Friday following the latest bailout chapter for Citigroup. And stocks fell last Thursday after the release of Obama's budget, with its breathtaking expansion of government and its war on entrepreneurs, investors, banks, and so on. Stocks also fell after Obama's address to Congress, and they collapsed after Tim Geithner's misbegotten financial speech. So you don't have to be Sherlock Holmes to see a pattern of government announcements leading to falling stocks.

The AIG business is just as weird as the Citigroup deal. In return for another $30 billion or so — the third rescue in five months — AIG sort of has a restructuring plan. But there are no specific performance measures, no specific targets, and absolutely no clarity as to how AIG will pay off taxpayers or when it will get off the government dole.

There are ideas about AIG getting rid of some its operations, but nothing specific. And as is the case with Citigroup, the taxpayers get a worse deal today than they had yesterday. Since the AIG common stock doesn't pay a dividend, the taxpayer loans are not even serviced properly. Considering that the Citigroup deal had even fewer specifics than the AIG plan, it's clear that the government is driving a soft bargain rather than a hard one.

Actually, even the GM bailout is looking better to me in relation to the Citi and AIG deals. At least the carmaker has specific items it is working on, such as union benefits, the debt swap, and the VEBA healthcare trust. None of these are binding. And GM will probably get a lot more money from Uncle Sam, whether it meets its targets or not. But at least the carmaker has a more specific gameplan than either Citi or AIG.

Another point worth noting today is that there is some relatively decent economic news, and it seems to be going unnoticed by the stock market. Consumer spending and income went up in January. In fact, after tax, inflation-adjusted income has risen for five straight months as a result of the energy plunge and the inflation tax-cut effect. Plus, the ISM manufacturing index was basically stable in February — just a few points above December — with the production component now above the fourth-quarter level.

We are still in a tough manufacturing downturn, but at least there may be some stabilization occurring.

Meanwhile, the G-20, in its report prepared in advance of the April summit, says "Neither monetary nor fiscal policies will work unless and until the blockages in the supply of credit are resolved." In other words, until Treasury man Geithner can muster up a credible plan to relieve the financial system of its toxic assets, markets may not ever buy into a recovery scenario. But then you have to ask this: If there is agreement on the need to relieve the toxic-asset problem, why is President Obama raising taxes on the very private investment funds that are expected to buy the toxic assets in the first place?

Huh?


This article first appeared on Kudlow's Money Politic$.
Categories:

124 Comments

Choices
I know you're all waiting on the edge of your seats to read MY analysis of what's going wrong. So I hope I don't disappoint.

IMO it's not the "pattern of government announcements" that's leading to falling stock prices. It's events beyond anyone's control.

The last drop looked a lot like a plummet with no floor in sight. In fact, a bottom feeder would probably want to hold out a while longer before he started picking up bargains in the market. And it was not precipitated by any government announcement. What triggered it was AIG's fourth quarter earnings announcement.

Here's the scenario. An insuror of last resort, a giant underwriting some immense amount in funny paper (is it sixty trillion? or six hundred trillion? I forget) announces record losses. And the government is quick to apply a bandaid.. in the princely sum of thirty billion dollars. That doesn't even cover the postage on the kinds of wealth that are disappearing almost daily.

Anyone looking at all this can be forgiven for having a "lack of confidence" in the markets right now. The markets, let us never forget, that were created by zealots whose passion was deregulation at all costs.

Well, we're paying those costs right now. And out of Obama's full range of choices, would you..

A. Do nothing, and watch what's left of the whole ball of wax collapse..
B. Throw another $30 billion at it every couple of weeks, hoping that at some point confidence will be restored.. or
C. Just underwrite the full $600 trillion?

Give is your choice.. and convince us it's better than the one Obama's choosing.

Convince me you aren't a zombie
Who the hell is "US"? Your fellow travellers are gone, perhaps smugly enjoying the prospects of the oncoming socialist hell or perhaps to friendly echo-chambers of left-wing drivel.

Roy to answer your main point nobody waits on you-we know you'll post inane crap. Your thought "process" continually on display here is the 21st century version of a freak show. We are fascinated by your mental deformities-which for some curious reason (Barnum's freaks were paid) you seem eager to have disassembled or abused. It must be tragic to be that desperate for attention. Oh well, let me feed your pathetic narcissism a bit more...

Consider this recuurent theme of "deregulation". It appears that your knowledge of financial regulation is as absymal as your knowledge of just about any other pecuniary matter. I refer readers to your inane drivel on the concept of depreciation again...

THERE WAS NO DEREGULATION. FDICIA was passed in 1991 and never repealed, in fact it was expanded by Sarbox. But the facts be damned. I actually was on a bank audit. They did not 1 but 2 internal control asessments (because although similar, they weren't identical). The bank? Taken over, and the acquirer has now been acquired by a foreign bank.
Has FDICIA or SOX preserved the integrity of capital markets? No. Were they repealed? No! but you'll keep putting your fingers in your ears and yell "deregulation".

Look, we know the man is hell-bent on creating the United Socialist States of America, creating more dependency, more pavlovian-conditioned idiots like you.

He just announced that projects are going to have an emblem on them. Very simple application of the law of conspicuous benefits, but not that we'd expect a zombie like you to question anything Der Fuhrer does...I do think that it will be poetic justice when his medical commissar decides a third round of cancer treatments for you is just to much of a social burden, maybe about the same time NO COST is too much to preserve Obama from the effects of his smoking..

Correct Attribution
I posted "Convince me you aren't a zombie" and I sure as hell approve of it-Superheater

Corrected correction
Now I recognize you. You're Racon-- an early conversational program, now so old I can't even find you in Google. You're short for "raconteur" and were created back in the ancient 1980s, to provide a rough facsimile of conversation.

You were created to key into words and provide syntactically correct responses.. ones, however, that needn't make sense. Your vocabulary was rotated randomly, so that when someone asked "How's the weather", for example, you might reply "Weather balloons can never beat an ostrich on a level playing field."

You're still as much fun to play as you were then.

I know why
The author asks why the new messiah wants to raise taxes.
The reasn is the same as usual, the government thinks it's better that they spend the people's money than the people themselves. If what they consider stupid people spent their own money on what they actually want(the basis of a free economy), then the government would have less power, and control, and prestige and perks, etc. Governments don't like free economies.

Projecting?
No matter how clever you think you are-and there's plenty of posts that take you appart like a cheap happy meal toy.

Face it Roy, the internet grants you a forum but not the respect which you crave.

It's worse than we thought...it's worse than we said...
At every stage of this process of decline into an enduring deflationary recession...that might just feed on itself in a nauseating cannibalistic sense...the common thread has been "This is much worse than anyone imagined." and then "We don't know how much worse this might become...or perhaps we could already be at the bottom. One of those. We really don't know what to tell you."

"The economy cannot turn up until confidence returns. Therefore, we must fix this economy so that confidence will be restored." Eric Cantor just said exactly that 10 minutes ago...and he's the Republican Whip! He also said that the Obama Administration has not yet told us what is in those Stimulus and Recovery Plans that Congress just approved...and supposedly read. Whether he voted for it or not...the Congressman should be able to read. Of course, the TARP mess...no one really knows much about all that money.

The markets don't enjoy this sort of thing. Whenever the government comes out with another crisis to underwrite in $100 billion chunks...the market in justifiably shaken "Well, as bad as it is...this could clearly get much worse."

We cannot point to anything that we are currently doing with the words "Stay the course" as President Reagan could while he pounded the Stagflation out of our economy by literally forcing the 1982 recession. What he was doing was to summarily stop the Keynesian policies that were only making things worse.

Now, things are getting worse all on their own and there is nothing that we can simply stop doing...in order to fix it. What we are indeed doing will surely not do the trick. We don't know what to do. Of course, the markets are tanking.

Blame President Obama if that will make you feel any better. Blame President Bush, President Clinton and President Bush again too. But that won't change anything...because we don't really know what they did wrong...do we?

Deregulation and tax breaks felt so right. So Libertarian and free.

You don't know what went wrong? The Wharton grad/CEO?
The short answer is government.

BTW, WHAT deregulation? Freddie and Fannie, government agencies, guaranteed bad mortgages.

Don't know what went wrong?

We don't know??
Maybe you're the last guy in the world that doesn't know. Many other people do, and many people also predicted it.
Newsflash; the US hasn't been, and never has been 'libertarian' since maybe the days before the whiskey taxes or whatever. It's also not free, but is massivley manipulated on all levels by the rotten hands of all the administrations.
There's reams of materials out there describing all this stuff, but it seems you are unfamiliar with any of it.
For a person who doesn't understand economics there are some popularizers like John Stossel who writes for the common man. You might want to start there then work your way up to Rothbard, Hazlitt, v.Hayek, etc.

Emblem?
Do you mean what I not-so-lovingly refer to as The Obama Swastika?

Sample:

http://bizbox.slate.com/blog/ObamaLogo.jpg


Just like Roy
"What he was doing was to summarily stop the Keynesian policies that were only making things worse....Now, things are getting worse all on their own and there is nothing that we can simply stop doing."

Oh yeah, lets start up the same Keynesian policies again to make things worse.

Capital Goes On Strike
Guess Obama won't be soaking all those rich folks after all:

==========================================================

Capital, bluntly put, has gone on strike. Those who own wealth are pushing it to the sidelines, as a young and inexperienced president tries to jam through the most sweeping economic changes in over 70 years.

The prospect of these changes becoming law has already radically altered our nation's economy. Entrepreneurs and CEOs who once created new products, new services, jobs and trillions in wealth for America's workers and retirees now find themselves vilified and punished for their success.

ABC News reported this week that many upper-income taxpayers already are planning to cut back on work and investments to stay under $250,000 in income — the point where Obama's punitive taxes kick in. No one wins from this, yet Obama seems oblivious.

Full article: http://www.ibdeditorials.com/IBDArticles.aspx?id=320892987513114

Aw now...don't be too harsh on Roy, Superheater.
"Face it Roy, the internet grants you a forum but not the respect which you crave."

At least Roy doesn't say, "I went to Wharton, suck my d---." as the only answer and final answer as to why he thinks he's right.

We don't all agree what the problem is...
With Stagflation it was clear to everyone what the problem was. It was inflation that was hedged...leading to speculation instead of investment...and more inflation. Crippling inflation. That was indeed the problem when Ronald Reagan took office and everyone agreed about that.

According to Keynesian theory moderate rates of inflation should have been consistent with economic expansion as capitalists would have exploited incremental opportunities. So the government prior to the Reagan Administration actually encouraged further inflation so that the stimulated economy might grow us out of trouble. Of course, we now understand that the economy was too mature for this and the entrepreneurs who should have been investing were making too much money with the real estate bubble...instead.

Therefore, when Reagan crushed the life out of real estate development and took the legs out from under inflation...many people suffered and some lost everything...but everyone knew that he was going after the underlying problem.

Now...it is confidence..it is banking...it is real estate...it is foreclosures...it is jobs. It is outsourcing...it is deflation...it might be inflation...it is the GDP. It is taxes...it is toxic assets...it is deficit spending...it is the TARP...it is a Stimulus Plan that is mostly useless "pork".

No one seems to agree what the problem actually is. So we cannot all agree what might be done about it. For the Democrats this creates a political dead-zone where they simply throw money at the problem to reduce its pain.

What we need is a capable Republican President with no sense of humor.

Consensus?
You claim to be an economics expert but depend upon consensus?

The Austrians have data to support their theory, but it is not politically palatable so you can't accept reality?

I think "forestbaker" is Roy....
Deregulation and tax breaks felt so right. So Libertarian and free.

If "tax cuts" were so bad, its because they had as a principle result, increased deficits. Obama calls (fourfold) increases in deficits a "stimulus" so its sounds like more of the same to me.

Now as for markets. Anybody who (claims to) have attended Wharton should know markets are forward-looking and should understand the sunk cost fallacy-in short markets are now reacting to the diminished prospects for the future. Me, I've actually made money in my retirement accounts since June '08, because I saw the Obamaphiles pushing their fuhrer into office. I moved everything into GIC's and I'll take my 1% every quarter, and I'm not alone. There were people that made a kill on covered calls in the last two quarters.

Now lets just dispose of that deregulation crap...AGAIN. This is just the top 20 of the endless mountain of laws and regulations since 1933.

1. The Securities Act of 1933
2. The Securities Exchange Act of 1934
3. The Public Utility Holding Company Act of 1935
4. The Trust Indenture Act of 1939
5. The Investment Company Act of 1940
6. The Investment Advisers Act of 1940
7. The Securities Investor Protection Act of 1970
8. Fair Credit Reporting Act (FCRA) 1970
9. Currency and Foreign Transactions Reporting Act 1970
10. Employee Retirement Income Security Act (ERISA) 1974
11. Home Mortgage Disclosure Act (HMDA) of 1975
12. Community Reinvestment Act (CRA) 1977
13. Foreign Corrupt Practices Act of 1977
14. Depository Institutions Deregulation and Monetary Control Act 1980
(despite the name, it increased Federal Control over Banks)
15. Expedited Funds Availability Act (EFA or EFAA) 1987
16. Federal Deposit Insurance Corporation Improvement Act (FDICIA) 1991
17. Truth in Savings Act 1991
18. National Securities Markets Improvement Act 1996
19. Regulation FD 2000
20. The Sarbanes-Oxley Act 2002




I think "forestbaker" is Roy....
Deregulation and tax breaks felt so right. So Libertarian and free.

If "tax cuts" were so bad, its because they had as a principle result, increased deficits. Obama calls (fourfold) increases in deficits a "stimulus" so its sounds like more of the same to me.

Now as for markets. Anybody who (claims to) have attended Wharton should know markets are forward-looking and should understand the sunk cost fallacy-in short markets are now reacting to the diminished prospects for the future. Me, I've actually made money in my retirement accounts since June '08, because I saw the Obamaphiles pushing their fuhrer into office. I moved everything into GIC's and I'll take my 1% every quarter, and I'm not alone. There were people that made a kill on covered calls in the last two quarters.

Now lets just dispose of that deregulation crap...AGAIN. This is just the top 20 of the endless mountain of laws and regulations since 1933.

1. The Securities Act of 1933
2. The Securities Exchange Act of 1934
3. The Public Utility Holding Company Act of 1935
4. The Trust Indenture Act of 1939
5. The Investment Company Act of 1940
6. The Investment Advisers Act of 1940
7. The Securities Investor Protection Act of 1970
8. Fair Credit Reporting Act (FCRA) 1970
9. Currency and Foreign Transactions Reporting Act 1970
10. Employee Retirement Income Security Act (ERISA) 1974
11. Home Mortgage Disclosure Act (HMDA) of 1975
12. Community Reinvestment Act (CRA) 1977
13. Foreign Corrupt Practices Act of 1977
14. Depository Institutions Deregulation and Monetary Control Act 1980
(despite the name, it increased Federal Control over Banks)
15. Expedited Funds Availability Act (EFA or EFAA) 1987
16. Federal Deposit Insurance Corporation Improvement Act (FDICIA) 1991
17. Truth in Savings Act 1991
18. National Securities Markets Improvement Act 1996
19. Regulation FD 2000
20. The Sarbanes-Oxley Act 2002




But what's worse?
Roy says he has no education in monetary matters so he's broadly educated..

What Obama is doing certainly won't make things better...
The President did not declare that he thinks his current package will solve the financial crisis...although such a position might have been implied. What he said was that we have a crisis and that unless we do this thing then we risk a catastrophe.

In a fundamental way the government is "cooking the books" with something like an additional 3% of the GDP...as direct government spending and as tax rebates that should flush through...for the next 6 Quarters to get us up to the next election cycle.

We are in such trouble that this spending will only drop into the hole and make it smaller. This amount of money is not enough to cause inflation and we already know that Keynesian stimulation cannot result in sustainable expansion in a mature economy such as ours. So that cannot possibly happen. In any case, the US economy is entirely too large for such government spending...more or less...to move it very much one way or the other.

This is a deflationary recession we are in now that has been caused by a breakdown in banking. Financial capitalism cannot function at all without healthy banks and until that problem is fixed our economy must continue into a deeper decline. When the banks are indeed fixed...then we might recover to 1-2% sustainable growth. But we won't like that and it will not be enough to pay our bills once outstanding Treasuries must be rolled-over at higher interest rates than we are paying today.

We need a Republican to take our capitalism by the financial shorthairs and make it behave.

Do I really sound like Roy? Is that his real name, do you think? Is Zyndryl your real name, actually?

Don't touch me...
I am not talking to you any more...you really hurt my feelings. I am very sensitive. Fragile, even.

Right.
I made a CEO from Wharton cry? You are supposed to be tough.

Republicans had a chance with Mit, a successful venture capitalist.
Too bad they wanted to reach across the aisle and be bipartisan and be just like democrats.

"can't possibly happen"
Where did you get these ideas from like printing all that fiat currency won't lead to inflation? Maybe Paul Krugman or somebody like that, or maybe from Roy. That's why they say you sound like him because of your wacky economics.

You know who I am...
We had exactly this same conversation more than a year ago when you were pretending that you knew the Penn campus...remember? Smoky Joe's? Or was it some other loud-mouthed moron back then?

Regardless, you were definitely around pimping me at that time and we settled all of this back then.

You a smart boy. So let's talk.

Just because Congress writes a lot of laws...that is their job, isn't it?...doesn't mean such rules get to the heart of the matter and doesn't mean that the Administration will actually enforce those laws.

Any way you look at this the bankers went crazy and the investment houses went wild. Do you think that the Invisible Hand of the market did this to us...or do you believe instead that the government actually "made" those people get stupid and destroy their own banks?

Not much light between these two possibilites if you are a dogmatic Libertarian, there Super.

Wait...
When we spend deficit dollars we borrow those funds on the open market by issuing interest-bearing Treasury debt-instruments. We do not print dollars.

Quite the opposite. What we do is to suck up pre-existing liquidity that would otherwise be available to go into corporate bonds, for example...and contribute to the creation of wealth. Instead, the government spends those funds and the money is mostly consumed.

Replacement funds to underwrite Balance Sheet working capital must, therefore, come from the banks...and the banks are not lending, just now. They are holding onto their cash in an effort to survive what the government has already made clear will be done to them before this is all over.

For certain those funds borrowed in the open market by the government could not have actually come into the system as a result of incremental lending to anyone by any bank...explicitely to purchase Treasuries...because the yield on government paper is below the bank lending rate...with the possible exception of some Japanese banks dealing with some of their industrial clients...but that is not happening either. Those funds go into the "carry trade" and the interest burden gets stepped on a couple of times.

The point is that all this government spending has exactly the opposite impact "printing money" might have. All our deficit spending actually consumes and eliminates global liquidity. It focuses those funds on the US economy in the short term...but it prevents potential earnings from being generated elsewhere in the system over long term.

The fed increased MO by 341% last October
And MO increases is what causes true inflation. That is the real money -- the rest is MO plus various forms of credit (savings accounts are glorified IOUs that the bank owes you...they are credit, not money). The fractional reserve increases in the debt made possible by the skyrocketing M0 will amplify the base money velocity.

http://www.garynorth.com/public/4178print.cfm

Not Sure
I only heard his lubriciousness speak of on a radio clip, I did not attempt to dare cast my eyes on it, until the one gave permission to seek the image.

Lets not Jump on that Bandwagon Yet
Mitt rode that unholy aberration of MANDATORY insurance in Massachusetts and its an affront to personal economic liberty and its not working well.

He's got some 'splainin' to do on that one.

Notice
How this was supposed to achieve magical results, without consequence?

Yeah...
I am familiar with the argument that these bad mortgages are the underlying "bad assets" that have destroyed the banking system. And this seems intuitive.

However, the problem was the CDO and the fact that these AAA rated instruments were purposefully made so confusing that one could not be judged to be any different from any other...such that they would all be treated equally by the financial markets, no matter what mix of debts were chopped up into each of them. In their lust...some of the CDO issuers could not help themselves. They constructed many of those supposedly homogenized CDO bundles out of really high risk paper and then sold them as good.

Kind of like mixing gold-plated lead bricks into a room full of gold bullion. You know that there are some bad ones...but you don't know how many there are in there or which. So the entire vault is suspect.

If it was just the lousy mortgages that needed to be foreclosed then the real estate itself would have served as adequate collateral. Insofar as some sub-prime households could have managed to scrape together the monthly mortgage payments and thereby achieve the American dream...then that would have been a good thing.

However, no one told the mortgage brokers to sell Adjustable Rate Mortgages that had time-bomb clauses built right in. I saw some of those documents and they were astoundingly dangerous. If a refinance deal could not be made before such ARMs reset then, for certain, the mortgage payments could never be covered. Foreclosure was a certainty.

Nevertheless, if those families did get into houses...they never would have otherwise had any hope of owning...only to have them taken away after a few years, then the damage to the economy would have been limited. However, loading up CDOs with unknown amounts of such debts that must certainly default? This is the greater sin. We have probably destroyed our 20 largest banks, some large foreign banks and myriad non-banking financial institutions along with them.

The government knew...or should have known. Guilty.

Henry Cisneros...
You said "Henry Cisneros started setting "goals" for banks to meet in lending to people without enough income/collateral to qualify."

He was Secretary of Housing and Urban Development from 1993 to 1997.

You said..."For different reasons, but with the same result Bush was obsessed with home ownership rates as well."

George Bush was inaugurated in 2001. I know that it seems convenient to you to blame all of this on a program launched by a socialist Democrat. But it was a program that was only harmful when it was administered by a libertarian Republican and it was during the past 8 years that all of the damage was done. This had absolutely nothing to do with Secretary Cisneros and his social programs. It had everything in the world to do with Alan Greenspan and his laissez-faire view of capitalism...run riot under George Bush.


Laissez Faire? Pachycephalic Moron
This is why you are like Roy.. facts be damned.

Clinton didn't launch the program of CRA, he just beefed it up. But the CRA in its original form was a product of Carter so yes I do blame a "socialist democrat". I have no great love of Clinton, but his leftist tendencies were muted, especially after losing Congress and I can't call him a "socialist" in the way Carter or BHO are socialists. I give him credit where its due, such as signing off on welfare reform, even if he was dragged kicking and triangulating.

Get it it through your thick head. GWB was left of center on economics and enthusiastically gave us steel tariffs and Sarbox.. that's hardly L-F.

Greenspan's association with Rand aside, he was assumed a position of unaccountable power for a long time and everybody called him Maestro. Suppressing interest rates to delay a mild recession is hardly laissez faire.

Now go to sleep and stop embarrassing yourself and Upenn.

The Government Knew
The government knew...or should have known. Guilty.

It participated.. ever see how much money flowed to Johnson, Franklin Raines and Jaime Gorelick? How about Rubin's part time "consulting fees" ..

But you think its lassez faire capitalism run amock when its government bureacrats in an indistinguishable mess between government and banking..oh but now we have BHO's crack squad of tax cheats on the job-everything will be better. Geinther runs the IRS but can't figure out a Schedule SE any small town CPA can do in his/her sleep...

You are A JOKE.

You still can't deny his successes in business and with the Olympics.

Who is 'we' destroying the banks?
If you mean the 'government' we of bad regulation, I might agree.
But the banks are not innocent, especially when there were supposed to be so many 'smart' people running them.

They seem to be just as 'smart' as you.

Keynsian problem
It is precisely the discredited Keynsianism that has caused the problem in the first place. See, you didn't bother studying anything about economics since I mentioned some beginner sources to you.

waiting for (godot?)
Wrong again. The government has no money on its own, it can only do one of three things; steal from its citizens(via the threat of deadly force, taxes), or borrow from people(mostly foreigners like the Chinese), or print fiat currency(which it's doing in massive amounts). It's starts to get worse when foreigners lose faith in the fiat currency and reduce its share, and that's happening now too.

Pointing to the obvious
Thank you for at least returning us to the point of the article. You say "..the government thinks it's better that they spend the people's money than the people themselves. If what they consider stupid people spent their own money on what they actually want(the basis of a free economy), then the government would have less power, and control, and prestige and perks, etc. Governments don't like free economies."

But we've just been there. For the past eight years we've taken the capitalists at their word, that they alone know how to spend our money better than the government. And they decided what they liked best was collecting rents on it.

So much of the money went into consumer credit, where it might earn as much as 32.99 percent interest on poor, hopelessly indebted credit addicts.. in a business very much akin to dope pushing.

But they still had more money to "invest". So it went into home mortgages. Only one problem: after everyone in the country could afford to buy a home already had one, they still had lots of money left over.

The solution was then to invest money on selling homes to people who COULDN'T afford them.. opening up a whole new market in subprimes.

But how could anyone make money lending it out to people who couldn't afford to pay it back? Piece of cake. In the newly deregulated environment, sell "mortgage-backed securities" to banks and pension funds who could afford to pay big bucks for sophisticated investment strategies, but who had no experience in evaluating loans. Naturally, the ratings agencies had to be complicit for the scam to work.

That brought us to this point. With the financial structure of the entire globe at risk, and no major bank on earth showing a plus-side balance sheet. (Although they all avoid marking their portfolios down to reflect this reality.)

In this environment, I prefer to have someone new and bright to try running this economy. The last kids we gave the keys to wrecked the family car.

You might want to use language more precisely
"BTW, WHAT deregulation? Freddie and Fannie, government agencies, guaranteed bad mortgages."

The two have nothing to do with one another. If you want to talk about deregulatory activities that led directly to the present mess, try explaining what happened to Glass-Steagall.

Fannie and Freddie also contributed. But they are neither regulatory nor deregulatory. They are underwriting agencies that were created by the federal government but are not run by the federal government. And there was insufficient oversight into their activities-- which went badly astray. That is a serious breach of fiduciary trust on the part of government.

Now when did this happen? I want you to answer this one yourself, employing your search engine. Bill Clinton was in charge during 1993-2000. George Bush was in charge during 2001-2008. Find the chart that shows you exactly when those subprime loans started crashing down.

The default rate began increasing abruptly during a certain year. For $64, tell us that year. THEN for extra credit you can explain why it was NOT because the cops were told not to patrol the area any more.

"What we need is a capable Republican President with no sense of humor."
The Hon. David M. Walker would be the obvious candidate.

Have you noticed that we're the only people here trying to provide content supported by rational argument? Everybody else is trying to fill the breach with theoretical dogma unsupported by observation, and bon mots that aren't always that bon.

When that approach fails, the next level (apparently the only remaining one available to them) is swiftboating.

It can be tiring, casting pearls before the swine. One would at least hope for a spirited, rational response from time to time, buoyed up by factual material.

Influence beyond the grave
"It is precisely the discredited Keynsianism that has caused the problem in the first place."

But the economy hasn't been run by Keynesians since Jimmy Carter was in office. What did they do, plant some bomb with a 28-year delayed-action fuse?

Every vestige of Keynesian programs was thoroughly dismantled under Ron Reagan, and replaced with trickle-down voodoo. I think you should be looking for another scapegoat.

What's in a name?
"Do I really sound like Roy? Is that his real name, do you think?"

Actually my real name is Iamblichus.. but I never use it. Sounds too fakey.

I do have an observation to make, concerning your search for a Republican savior. Those guys no longer exist, so don't hold your breath.

We used to have sensible, nonsmiling northern Republicans. Cal Coolidge types, who could be relied on to keep the dollar strong. But the party has been taken over by southern Christians and wack jobs, and a rigid, dogmatic party line enforced. Today there are only three remaining Rs that are not on the team. Four, if you count McCain.

Those brilliant thinkers who uphold the old true fiscal conservative approach you incline toward are not in politics. Walker, who I like, wouldn't touch it with a ten foot pole. Kevin Phillips is too old. And so forth. They are more properly thinkers and writers, not glad handers willing to pose pompously while subverting their ideas for party solidarity. They are like the old Greek chorus, in the wings reminding the heros of the folly of their actions.

The root of tragedy, you might recall, is when the future is revealed but the outcome is inevitable. One sees the approaching train and the bus stalled on the track, but cannot reach the signal in time.

Talk to our backers about that
I guess I wandered off the resrvation there for a moment. What I meant to do was respond to your comment.

The blowout, I agree, is far too big for the injection of a few paltry hundreds of billions to result in inflationary pressure. Right now the patient has flatlined.. and BP is likely to remain at zero for quite some time, even with the paddles going full force.

What the Misians and Rothbardites (IMO) omit from their calculations is that we actually NEED all that fiat money. We need it to run the Empire. Look at a chart of the growth of M3, for instance. All the time M3 has been expanding without constraint, price inflation has been well under control.

We use that money to run the Imperium. And our vassals love us for it! In fact they help us maintain it.

I like to follow the Treasury auctions to read the news that doesn't get in the news. And Obama's program is being given the green light by our backers, China, etc. They follow the path that says that someone has to do something, that Obama is a bright and honest fellow, and we might as well follow him as follow anyone else.

That's not to say that everyone's in lock step. Just that they're putting THEIR money where HIS mouth is.. by underwriting the effort.

BTW they're hardly a bunch of dummies. If you want a fascinating look into the Asian Mind, pick up a copy of Asia Times.

http://atimes.com

Damaged goods
Joanie.. with all due respects, I'll want to modify your comment in a key fashion:

"This mortgage mess started when the government put pressure upon lenders to be politically correct and to give mortgages to people who were poor credit risks."

No coercion was involved. There were never any penalties for not expanding lending in that area. What happened was that Fannie and Freddie were allowed, disastrously, to relax their standards. That move alone guaranteed that new loan originations would be getting shakier and shakier. And, of course, gred took over.

Here's your article's theme:

"Fannie May, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stockholders to maintain its phenomenal growth in profits."

There you have the whole thing. Clinton policy was an enabling act, but not a policy with teeth. Laxity on the part of FNMA was encouraged, that's all. Greed took care of the rest.

The whole thing was very likely done under pressure from the major investment houses. They had already placed all the loans possible under existing guidelines. But they still had unspent money in their pockets.. and so they needed more blood. Remember, at the time the Treasury was being run by Bob Rubin, a spawn of Wall Street.

"I assume you've heard of "no doc" mortgages?"

To initiate a loan without verification is quite clearly crossing a line. Bankers are supposed to be prudent before anything else. So the blame is equally shared.. between a perverted FNMA that accepted such shoddy loans as worthy of being backed, and the mortgage companies that originated those loans.

I would prosecute both for wilful fraud. No mortgage firm would ever consider keeping such loans in their own portfolio. So the moment they put no-doc loans on the market they became culpable in an enterprise committing fraud. It's akin to selling a "flood car" after a hurricane, without disclosing the fact of the hidden damage.

Look at the scope of the problem
I believe I've mentioned that in order to be effective, relief must be targeted?

It does no good to give money out to just everyone. If they have a job they already have money. So an untargeted stimulus is like dropping seed from an airplane.. most of it ends up on lawns, streets, roofs, etc. Only a small fraction ends up on open, prepared ground.

The unemployment rolls are swollen now with five million applicants. Each is out of a job worth, let's say, $35K a year. And the money they can't spend on purchases, mortgages, cars, etc is causing a chain reaction among those vendors who live off their business.

What would it cost to correct this condition fully? My calculator is giving me $175 billion, just in the first year, just targeted toward families unemployed through no fault of their own.

Look over the actual parameters of the stimulus plan. I don't see anything like that. So that is one problem that will only be partially mitigated, through assistance to the states to refill their empty unemployment coffers.

As for the other problems, namely the ones in the banking and insurance industry, that's far larger. It's a bottomless pit. The stimulus won't fill more than a small fraction of that hole. Just comping dumb investors by buying up the bad mortgages they bought would come to something north of $1.5 trillion, by my guesstimate (at a low of 10 million mortgages x $150K). And no one's going to do that. So any way you cut it, there'll still be a mountain of bad paper out there.

But it's a step they should take. We are in such a deflationary mode right now that the injection of another $1.5 trillion, targeted exactly toward buying up failed mortgages, wouldn't come near reversing the trend and pushing us over toward price inflation. It would merely restore demand to a level something like what we've come to consider normal.

Plus, our backers (those central banks buying up our Treasury offerings) are proving themselves more than willing to advance us the money at virutally zero interest. Their own savings are at risk so of course, they're going with the plan.

True, it would apply a perverse incentive (moral hazard) unless it were accompanied by regulation designed to prevent any future recurrence of this kind of scam. But one would trust that a sensible government would recognize that and make it a strong rule that future generations could heed. Shoddy investments of any kind (that is, investments that a prudent man would find fault with) can not enter the markets without criminal penalties. Period.

Such a set of rules would be easy to write.

So simple
So you're saying that if we just swept away what remains of those twenty regulatory acts and did away with all federal enforcement acitivities, the gamblers would be flocking to the tables again?

Wachovia press release summarizes problem
"First Union Capital Markets Corp. and Bear, Stearns & Co. Inc. have priced a $384.6 million offering of securities backed by Community Reinvestment Act (CRA) loans - marking the industry's first public securitization of CRA loans."

CRA 'backed' loans?

"The $384.6 million in senior certificates are guaranteed by Freddie Mac and have an implied "AAA" rating. '

Implied AAA rating.

""Securitizing assets enables First Union to continue to grow its loan portfolio, while at the same time generate additional fee income," Simpson said. "We also have been very successful in providing innovative asset finance services to clients. We believe there is opportunity to expand our CRA loan securitization capabilities to other companies in the market."'

Bank makes money.


"First Union's community reinvestment activity averages $3.5 billion per year. First Union offers a broad range of financial products and services to low and moderate income communities, including affordable housing mortgages, home improvement loans, consumer loans, secured credit cards, small business loans, small farm loans, micro-lending and Low Income Housing Tax Credits."

Politically correct.

http://www.wachovia.com/inside/page/textonly/0,,134_307%5E306,00.html


Resolution Trust Corporation
I have heard Bob Brinker promote the Resolution Trust Corp. to sell of the bad debt.

Not a peep from the government about this.

So far people can vote with their money.
But then again they vote billions of times every day around the world.

Government Sponsored Enterprises.
What do you mean they have nothing to do with each other? They are both government 'corporations'.

Wachovia securitized the first batch of mortgages in '97 as a response to CRA and an implicit government guarantee (***** and Freddie).

TCS Daily Archives