As Churchill said during another time of great public anxiety, “This is not the end, this is not even the beginning of the end. But it is the end of the beginning.” At this time of possibly the greatest American economic crisis since 1929, I think that description applies to today’s news that both the legislative and executive branches of the U.S. government are determined to deal with the guts of the sub-prime problem.
To date they were only supplying bandages and graves for the wounded and dead victims of the sub-primes. Assuming the government does follow through - as I think it must - and forms some sort of RTC-like entity to actually buy up the paper and then deal with the home-owners in a mutually constructive manner, I think the risks can be contained. Further spreading of the financial contagion from new mortgages going into foreclosure can be reduced if not eliminated, and the great fear spreading throughout the market that by itself can cause the most damage to the real economy may evaporate.
Does it mean that the low point in the stock market decline has been reached? That is not necessarily the case. I suspect the real economy will still go into recession. And even with good intentions, the task before the government will be full of challenges. It could be botched. But this does mean, I think, that the great fear of an unstoppable infection in American financial institutions that risked spreading to all investment banks and great companies like General Electric (GE) is likely to be dissipated. At least unless and until the government proves itself un-equal to the task.
Most importantly, it is likely that the growing reluctance of many U.S. trading partners to take dollars and work toward growing the trading relationship may now turn around. What the world needs more than anything is confidence that the U.S. is not going to become an increasingly toxic economy. The willingness of the U.S. government now to directly address the underlying sickness in its economy, the sub-prime mortgage debacle, is the best sign the world could have of a pending recovery.
In view of this change, I have put back into place a good percentage of the long positions that I had previously liquidated. While many stocks are still not cheap, some have become very cheap, I think. Chemical & Mining Co. of Chile (SQM), which I once thought could fall to 35 actually reached 21 today. It will probably earn $1.50 this year and is still growing strongly. TBS International (TBSI) is still forecast to to earn over $7 this year and has fallen from over $70 per share to under $20. One of the largest wire cable makers, Fushi Copperweld, which supplies many rapidly growing electric utility markets and is expected to earn $2 had fallen from over $20 (where I once thought it was cheap) to nearly $8.
Diffusing the sub-prime time bomb by direct government action is vital. But it will also exacerbate an even larger but longer term explosive problem: the growing federal budget imbalance and national debt. That problem is only growing worse through the steps the government is now taking to solve this crisis. If the budget is not put into order, it is likely that the federal treasury will not be strong enough to step in to solve the next crisis. As long as politicians can run for office by promising “no new taxes” and get elected on that platform, there will be no solution. Unless America is ready to roll back its social safety net - and not extend it to universal health insurance as many people want - then the need is for higher taxes. If we do not have the maturity to recognize that need and instead continue to live in the fairy tale world of massive deficit spending, today’s crisis will look pale beside tomorrow’s.
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This article has 35 comments:
- Mr.G
- 104 Comments
Sep 19 06:08 AM- Mr.G
- 104 Comments
Sep 19 06:20 AM- User 180612
- 2 Comments
Sep 19 08:22 AM- venividivici
- 304 Comments
Sep 19 09:18 AM- notsosmart
- 1086 Comments
Sep 19 10:22 AM- jegan ;-)
- 701 Comments
Sep 19 11:58 AMConsider the frantic actions in Afghanistan right now. It was leaked that Bush wants Bin Laden's head before the election. Couple that with our embarrassing bombing raids across the border into Pakistan. Gates was over there yesterday apologising for the bombing deaths of several dozen civilians, and the next column noted a new strike with the same results.
Bush's administration is desperate to pull a rabbit or two out of his hat before the election in an effort to look good for the history books and give a push to the Republican effort to elect McCain.
The Bush administration allowed Bin Ladin to run around Afghanistan and Pakistan until it was politically convenient to locate him. In the same fashion, our financial framework was allowed to collapse until it to was close enough to the election to be 'saved'.
Unfortunately, in both cases, we were thrown to the wolves to score political points. So sad.
jegan ;-(
- anarchist
- 121 Comments
Sep 19 12:36 PM- torres
- 1 Comment
Sep 19 01:41 PM- OldLimey
- 146 Comments
Sep 19 01:50 PMHowever, chances are the Wall Street crowd will get away with it for now. Which leads me to wonder how they're going to make this thing work. I'm no Secretary of the Treasury, so these are probably dumb questions. I'll ask them anyway and should somebody have the answers - thanks in advance.
1. How is the toxic garbage going to be priced? As I recall, RTC1 took relatively worthwhile assets from FAILED S&Ls, but that is very different from today's situation. The banks passing off their waste to RTC2 are going concerns that will need to get a hefty price for a lot of stuff that is largely worthless in order for there to be a meaningful impact on their balance sheets; yet RTC2 surely cannot go around handing out taxpayers' money at implausibly high cents in the dollar rates without the public caring. How does this circle get squared?
2. Assuming a bank has already written off a piece of garbage, will it now be able to sell it to RTC2 and write-back the proceeds? Sounds good for bonuses.
3. Where do foreign banks sit in all of this? UBS has written off north of $40 billion. If for the sake of argument we assume a 10 cent payback (and much less will be perceived as pretty meaningless in the greater scheme of bank balance sheets), I somehow can't see the US taxpayer happily handing $4 billion to the gnomes. (To which the answer might be 'let the SNB pay them'; that ain't gonna happen - yet this is a global system and a global crisis which will only respond, if at all, to a global solution.)
My gut tells me this as much about giving the boomers a pre-election present as saving the system, and that any save will only be temporary. But my gut's been wrong before. In the meantime, could somebody please educate me? Thanks.
- Kelly Lieberman
- 219 Comments
My Website
Sep 19 02:21 PMSomething doesn't smell right here. As more people put this simple picture together they will move their money out of banks and stocks and into gold and silver.
- WAKEUP
- 468 Comments
Sep 19 02:58 PM- notsosmart
- 1086 Comments
Sep 19 04:19 PM- Eagle-Chief
- 72 Comments
Sep 19 05:29 PMIt's all of us poor American taxpayers that will suffer and our children will be enslaved with debt. And when America finally does declare itself BANKRUPT, what foreign nation will be foolish enough to lend us even one penny? Hey, Jim Jubak said today on MSN that there is a chance that U.S. debt (US bonds) could be downgraded from their AAA status.
This is as Nouriel Roubini has said, welfare for the rich at the expense of the taxpayers. Our government is taking OUR MONEY AND BAILING OUT COMPANIES that were GREEDY and FINANCIALLY IRRESPONSIBLE. We might as well DECLARE AMERICA a COMMUNIST COUNTRY. We must LET THESE COMPANIES FAIL OR BECOME FINANCIALLY RESPONSIBLE.
Last of all, give me a break! Raising taxes? This is Marxism!!! How about returning America to a responsible government which SPENDS LESS and DOES NOT BAIL OUT FOOLISH IRRESPONSIBLE MORONS WHO GET PAID MILLIONS OF DOLLARS FOR BANKRUPTING THEIR COMPANIES AND BANKRUPTING AMERICA.
- Rokjok777
- 59 Comments
Sep 19 06:21 PMThe Chinese government are very astute, very capable guys who know perfectly well that all this USA debt is just a scam.
It is a part of a certain mindset to think that the Chinese government cares much about that debt; as if financial quantities mattered more than the real economy. A very American mindset.
The Chinese government cares about the real economy, cares about jobs being created, about exports being robust.
When they lose all the paper wealth they have accumulated and lent back to the USA, knowing full well it meant losing a large chunk of it, their country will still have all the factories, all the know how, all the roads, all the ports, all the buildings, all the real, productive assets that the gullible Americans have built for them in China rather than Ohio or Oregon.
Who cares about a few hundred billions of paper money when a lot of your country has almost gone from being Sudan to being Korea in a generation?
By doing “vendor financing” on a massive scale, keeping their currency low and the dollar high, the Chinese have not only created in effect import tariffs and export subsidies without breaking the letter of WTO rules, they have also subsidized the transfer of a very large chunk of the productive part of the USA economy to themselves, by making it more profitable for the infinitely greedy executives of USA corporations to dismantle or close down their USA productive assets and move them or create new shiny ones in China under the control of the Chinese government.
By playing the bonus mindgame with USA executives, they have incentivized those executives to have a very short term time horizon, and to sell their country’s economy and their own company’s future down the river.
As to the USA, let them eat MBSes — let them have the challenge of turning 3 million empty homes in the California and Arizona desert into productive assets, after they shipped their factories to Guangdong to earn a better ROI for their elites.
- jmkeynes
- 21 Comments
Sep 19 07:28 PMAs for the banking crisis, as I see it there are three options for dealing with institutions that are thought to be too big to fail:
1) a free market approach that lets failing banks fail,
2) a socialism for the rich approach that bails banks out but then lets them go back to their high risk behavior, which leads to future bailouts, and
3) a plain old socialism approach that nationalizes institutions that are deemed to be too big to fail and turns them into highly regulated government agencies.
The Resolution Trust Approach is a variant on option (2).
Most business journalists argue about whether option (1) or (2) is better, but they don’t give option (3) any coverage.
The critical long term issue is whether you want the CEO’s (and other high ranking executives) of these firms to be high paid, high rollers who earn their eight digit paychecks by taking big risks.
If so, then the taxpayers will rebel when they’re left holding the bag on bad investments.
Alternatively, do you want bank managers to be competent (but rather boring) functionaries who simply follow the script set forth in regulation. If this is what you want, then the taxpayers should be more willing to fund bank bailouts. But, don’t expect much innovative behavior from banks if this is the way we want them to operate.
You can’t really have it both ways.
So, if a majority of Americans really want an innovative, high risk banking system, then we need to be willing to let banks fail and suffer the consequences.
On the other hand, if the majority of Americans want a safe, reliable, but unexciting banking system, if we think banks are inherently too to fail, then I say we move banking to the public sector.
In any event, if we look at the current crisis as "merely" a problem of socializing a few hundred billion dollars worth of bad debts, then we’re missing the forest for the trees.
Those who obsess over the credit crisis generally make three faulty assumptions:
(1) they assume that since US economy is consumer driven it has to be that way going forward,
(2) they think the only way to prop up consumer demand is to re-inflate the housing bubble, and
(3) they conclude from (1) and (2) that to avoid another Great Depression the US has to bail out the banks.
We need to examine how these three faulty assumptions are part of a larger story.
To see the larger picture one needs to understand the link between America’s energy policy, its chronic trade deficit, and asset bubbles induced both by the Fed’s easy money policy and America’s need to borrow from abroad to finance its trade deficit.
America’s energy policy has been entangled with our military policy for many years. Even Alan Greenspan admits that the war in Iraq was and is largely about oil.
Unfortunately, those opposed to the war have not insisted that Americans must at least pay for the war by imposing a tax on oil consumption. Since the cost of the war is not included in the price of oil, America is subsidizing its consumption of oil.
Taxing oil would help bring down the trade deficit and it would encourage investments in alternative energy. But, instead, America borrows money from abroad to pay for the war.
The Chinese, Japanese, Germans, Saudis, and others have been all too willing to loan American money to help stimulate their own trade surpluses. In fact, their surpluses are so large, and America’s deficit is so big, that America is allowed to borrow still more to pay for “investments” in housing - hence the housing bubble.
If America could redirect investment spending away from housing and toward alternative energy we might be able to make a dent in our trade deficit.
According to T. Boone Pickens, America needs to invest around one trillion dollars in windmills and another 200 billion dollars in an expanded electricity grid to bring power to the coastal states.
In short, we need to make massive investments in alternative energy. Given the need for massive investment spending, a slowdown in consumer demand may actually be a blessing in disguise.
But politicians cannot get elected by telling voters the country needs to take some bad tasting medicine to regain its economic health.
Instead, politicians tell voters what they want to hear. Both the Republicans and Democrats push for cutting oil taxes and income tax rebates to encourage consumption spending even though both policies will exacerbate the trade deficit.
Of course, in an economic downturn it does make sense to borrow money (from abroad if need be) to stimulate aggregate demand. But, the government can and should stimulate demand by investing in alternative energy infrastructure.
Windmills help bring down the trade deficit, but more consumer spending simply drives up imports.
Finally, to top it all off, politicians seek to capture the home owner vote by insisting that their party has the best plan to re-inflate the housing bubble.
Unfortunately, politicians, voters, and some economic journalists have come to believe that the US economy must continue to depend on consumer spending.
What is worse, “free market” economists argue that government shouldn’t make (or even try to promote) investments in alternative energy because this would be industrial policy. And, according to free market buffs, industrial policy is yet another futile attempt by government to “pick winners.”
Oddly, these same “free market” economists don’t see the war in Iraq (a war Greenspan admits is largely about oil) as energy policy or industrial policy. They see war as “military policy” so therefore picking winners in this instance is OK according to the Ayn Rand and Milton Friedman guidebook on what governments should and should not do.
So, America borrows money from abroad and lets the Fed run the printing presses to send out tax rebates, bailout banks, and jack up home prices.
These policies may be “good tasting” but they’re not good medicine, they’re poison.
The medicine America needs to take won’t taste good, but there may still be time to save the patient.
America needs to nationalized the banking system. We need to work off our trade deficit. And, we need to kick both our oil and our house-as-investment habits.
- investor88
- 602 Comments
Sep 19 09:42 PM- the social scientist.
- 15 Comments
Sep 19 11:14 PMWill they succeed? They might succeed in turning a depression into a protracted recession. Prospects for growth in this economy are dim, because those that need to borrow (and I'm talking consumers) can't afford to or won't qualify, even if there is money to borrow. Even if consumption can be increased, then resource costs (oil) will rise and kill it. In 3 years time the boomers will start retiring, reducing consumption, and withdrawing money from equities and from their retirement accounts (I retired when I was 54 and have been doing exactly that). It's going to be tough to make unearned money from here on people.
So quit bitching about the morality or ideological purity of the government's actions. Bernanke and Paulson are much smarter than us. If they avert depression people will give them hell. If they fail people will give them hell. But there is no doubt in my mind that they are doing their best, and their strategy has the best chance of succeeding without nationalizing the financial institutions of this country. And again, inflation would be a good thing.
I've always been a Democrat, by the way. If you want to cast blame, blame Reagan and his Keynesian economics, and blame Greenspan for compounding the problem. Remember when he told Congress it would be ok to could cut taxes?
- notrichrepublicn
- 9 Comments
Sep 20 06:38 AM- notrichrepublicn
- 9 Comments
Sep 20 06:38 AM- Gaucho
- 128 Comments
Sep 20 09:06 AMKeep propagating the fairy tale that the entitlement programs are the problem.
Tax cuts for the wealthy are the problem.
Tax breaks for the Corporations are the problem
Tax breaks for those oil/timber companies that eat our resources are the problem
Propaganda from the media and your disinformation is the problem.
The republicans have run up 9.5 trillion of the 10 trillion in the total
federal debt. Reagan had 3 trillion and Bush senior had 1.5 trillion and this Bush will have 5 trillion by the end of his term. LOOK UP THE NUMBERS The game of the uber wealthy is to drive the budget into the ground so that any social welfare programs cannot get funded.
Trickle down was a lie except if you think of the middle and lowers classes as peons. The top 1% are 50% wealthier since Reagan began his tax cuts and the bottom 25% are 20% poorer. LOOK it up, these are Heritage foundation numbers.
Enforcement of the tax laws are not being applied to the uber wealthy. The poor schmuck that has a salaried job carries the entire burden. He has no 6 figured salaried accountants and lawyers to keep him from paying his taxes.
The tax breaks have force the use of our social security to be spent on those uber wealthy tax breaks. Now that they have ripped all of the money out of the system to increase their wealth by 50% then they say you must cut Medicare and Medicaid and social security and by the way I want my social security check. This is even though social security taxes for the wealthy peaked at about 80K income after that they do not need to pat any more Social Security.
Welfare represents about 3% of the federal budget.
This time they were not able to pass this disaster off to the next Democratic president. This system of corruption and no federal enforcement of the banking and SEC laws have resulted in a collapse of the system. Bears bulls and pigs. The Wealthy been bad little piggy’s and they are using mouth pieces like yourself and the corporate owned media to blame it on the folks who got screwed by this disaster.
- oldgoldbug
- 87 Comments
Sep 20 10:56 AMWe did make it out of the RTC mess so maybe these rescue efforts have a chance to work.
When the Treasury sells T-bills to the Fed so they can perform their rescues, isn't that inflationary? Doesn't the Fed create new money to pay for them? Will the Fed have to create billions/trillions of dollars to fund all the rescues? Just wondering.
- icandoitdon
- 371 Comments
Sep 20 11:24 AM"investing" in this invironment is an oxymoron. a casino offers a better chance of return. i have hedged every significant position i have going into this week and i intend to remain hedged. i will make little money at best...but i will lose little as well. if i get lucky (and i thought i would going into this week) i will pick up some great stocks at bargain basement prices by having puts assigned.
i am starting to think that the collapse will come only when and if countries like china/japan/russia/sau... arabia stop supporting the u.s. ponzi scheme of selling it's increasingly worthless currency. i understand the argument made by rokjok 777 that the chinese can afford to absorb the currency hit when their economy is growing gangbusters but that game eventually ends. ponzi schemes always fail and that's what the u.s. treasury is running.
the inmates are in charge of the asylum in this country and that isn't going to change with the election.
- H-Bomb
- 40 Comments
Sep 20 11:59 AM"invironment ". Really?
- H-Bomb
- 40 Comments
Sep 20 12:06 PMFor all of those that rail against what has been done to our country, ask yourself what you have done for this country, even your own community, to make it a better place. How much of your money and time have you invested in anything other than feathering your own nest? I can honestly say I can't tell you what I have added to my community other than paying the same taxes the rest of you cogs pay.
- gramps2
- 108 Comments
Sep 20 12:11 PMLots of people have pointed out for years that GE gets the bulk of its earnings from financing operations -- in other words, it is a bank.
Yes, GE makes aircraft engines and plastic and TV shows -- but that isn't where its big profits came from. For the last 10-20 years, GE made at least half of its money from finance (GE Capital, GE Investments, GE Life Insurance, GE Financial Assurance, and what is now Genworth Financial). GE made far more money financing jet aircraft engines than it did making/servicing them
Unfortunately, this is true for many many U.S. companies. GM might be listed as a automobile manufacturer -- but they lose money making cars. ALL of GM's profits come from GMAC and Dietech. Ford Motor, Caterpiller, IBM, AT&T -- most of the Dow Industrials have financing divisions that make up very significant percentages of their profits, and sometimes the majority of their profits.
Debt financed growth is not the same thing as real economic growth. The U.S. has become absolutely addicted to debt. Democrats and Republicans are great scapegoats, but George Bush, John Kerry, Hillary Clinton and John McCain together did not make Joe Consumer go out and max his credit card. Joe Consumer did that all by himself. Not only that, but Joe Consumer went to the voting booth and demanded that government give him unlimited benefits and "entitlements&quo... without charging him higher taxes. Unfortunately, we have the government we voted for.
It doesnt matter which idiot we put in the White House (or Congress) this coming November. If the U.S. doesn't live within our means, we will be passing a third world country on to our children.
- golfersteve
- 1 Comment
Sep 20 02:55 PMIs the bottom line we now face the following....is this truly a damned if we do, or damned if we don't situation ?...does that describe our situation fairly ? Immediate financial armageddon v. a slow death by a thousand cuts via inflating away our currency, losing our AAA status, and likened to the frog boiling in hot water ?
- icandoitdon
- 371 Comments
Sep 20 03:21 PMi bet you never made a typo did you? damn, that takes smarts.
one of the supposed benefits of capitalism and democracy is the ability to "feather your nest" and that's why we've been a beacon to countries throughout the world...until now at least. it's called economic opportunity.
if you don't think that opportunity has been threatened, which is the cause of this righteous anger, you either haven't been paying attention or don't understand the depth of the problems and their root cause. or maybe you're just a do gooder who believes in "from each according to his ability to each according to his needs." if so, you're in the wrong country.
get a clue.
- icandoitdon
- 371 Comments
Sep 20 03:22 PM- fran
- 165 Comments
Sep 20 08:03 PM- User 218984
- 7 Comments
Sep 21 01:33 AM- LobsterM
- 332 Comments
Sep 21 02:30 AM(BA) are getting ? Go find out and after that you may want to ask: "Why the hell you still want to Strike for ?"
- gksmar
- 11 Comments
Sep 21 10:59 PMPeople taking mortgages beyond their mean trying to make a quick buck getting bailout ? What does this teach to responsible citizens ? Become irresponsible ?
I even here people who can very well pay their mortgages wanting to walk away from their homes because their values are lower than they paid. Even home owners very well knew the risks involved while taking a loan.
We are not even in a recession leave alone depression. I think this way too soon for any bailout.
I think Paulson is only trying to help wall street come out of this mess (I work for a wall street firm) by banning short selling, bailout what not.
And dumb politicians both Republicans and democrats are opportunist, all they are thinking is about the coming elections. Voting against any of these bailout bills will back fire in this elections.
I am just rambling my thoughts ...
- Danny/The Digger
- 22 Comments
Sep 23 09:48 PMI agree with your observations. Unfortunately most citizens and corporations want to keep deluding themselves via debt. This country has to go thru tough times again for us to learn (once again) that it isn't wise to take on "unnecessary"... debt.
Living beyond one's means (in debt) isn't just "immoral"; it's also economically impractical. Perhaps a society that does away with debtors prisons, almshouses for the indigent and much of the stigma for either personal or corporate bankruptcy, deserves a taste of depression.
- einstein p fleet
- 96 Comments
My Website
Sep 28 12:55 PMBoth sides of the aisle have done a very bad job of "selling" the bail out package to the American people. Most people do not understand that companies, large and small, need to borrow money to meet payrolls, pay rent, and make purchases that allow the day to day businesses to function. Why? Most of these companies have to give their customers terms of net 30 days or more to pay for goods and services. Simply put, we are not operating on a COD basis ---- with the exception of pizza parlors.
We need to see less bickering between the two parties and more solidarity in order to instill confidence in our