Bailout News

[BrooklynCatholic]

I just spoke with a friend of mine who is a stock analyst for the tech industry, his take was that the taxpayer will actually pull a profit off this bailout in the long run (meaning he thinks it'll basically work) but he is of course worried about it being a big step towards socialism.

[rbjmartin]

I just spoke with a friend of mine who is a stock analyst for the tech industry, his take was that the taxpayer will actually pull a profit off this bailout in the long run (meaning he thinks it'll basically work) but he is of course worried about it being a big step towards socialism.

I don't think taxpayers are going to profit.  Bernanke-Paulson are proposing to buy off those bad debts at inflated prices (i.e. far above their current market value), which will prop up the current credit bubble.  The problem is that the credit bubble is just that: a bubble, which will inevitably pop.  There's too much liquidity in the system, and real estate is over-valued as a result.  Buying up those bad debts isn't going to turn a profit, because the market dictates their value in the end, and the market has already shown us that the mortgages are over-valued.  That is the crux of the problem.  Market forces will ultimately decide the value of those mortgages, and the price-fixing efforts of Bernanke-Paulson will only delay their eminent devaluation.  The money to prop up those prices has to come from somewhere, and it's going to be the American people through taxes and devaluation of our currency.

[werdegast]

I've been thnking this over and it appears to be an anti-sacrament fashioned similar to Confirmation.
We re-affirm the Wall Street Wizards (Luciferan high priests) through the crooked politicians (minor priests) by giving them the money on the proposition that they know what is best for this world (lucifer's domain). I'm still thinking. It appears to be the follow up to the anti-sacrament of abortion as baptism, and un-holy communion as contraception by pharma or mutilitation.

I like your way of thinking.

[Joel23]

The problem is a lack of capital - and there's no solution

By MoneyWeek Editor Merryn Somerset Webb Sep 23, 2008
 
Lehman: won't be the last to go bust

If you are one of the remaining stock market bulls looking for a sign of the bottom, you have been spoilt for choice this week.

Monday brought news of the Lehman bankruptcy. Tuesday brought the nationalisation of the world's biggest insurer AIG. Wednesday brought the merger between HBOS and Lloyds TSB. Thursday brought rumours of Morgan Stanley being in desperate merger negotiations with the hardly untroubled Wachovia. And Friday came with news that Hank Paulson, US Treasury secretary, was working out a "comprehensive" plan to save the US financial system.

Unfortunately none of these events, extraordinary as each one is and as mad as each one would have seemed a year ago, tells us that the end of our crisis is in sight. It isn't.

We might get a period of relative calm – which would be nice. But no number of mergers, takeovers, bankruptcies, nationalisations and 'comprehensive plans' can really solve the core problem the big banks of the West are grappling with – a lack of capital.

They have all had a good go at raising capital so far but they just haven't got enough, not when the quality of their asset bases just keeps deteriorating. US house prices are still falling, as are house prices in the UK and across Europe.

With all eyes on the horrors on Wall Street, let's not forget that anyone who has been lending into, say, the Spanish or the Irish property markets can hardly be sitting comfortably. Will Paulson be including them in his plan? Can't see it. Expect more mergers and more bailouts.

But even when these peter out, don't expect the troubles to be over. Global banks will still be low on capital. So they'll still be unable to lend. And that's the real problem.

I don't care much about the disappearance of the odd 'iconic' Wall Street or Scottish banking brand. And I don't care much about a few thousand bankers suddenly discovering that borrowing against bonuses paid in unvestable options to take out mortgages eight times your nominal salary isn't a very good idea. But I do care – as does everyone else – about recession. And a shortage of credit is the kind of thing that can produce a really bad one in a hurry.

Without us being able to borrow to keep small businesses going, to start new businesses, to shop and to buy houses, economic growth grinds to a halt.

In the UK, we are already producing all sorts of shockingly bad economic numbers. House prices – one of the main drivers of consumer confidence – are still falling fast. Unemployment is at its highest for a decade and rising at its fastest for 16 years. If many more bankers lose their jobs, said a friend this week, we'll be able to use Canary Wharf as the Olympic Village.

Consumer confidence is near historic lows and retailers are dreading, rather than relishing, the Christmas selling season. Nasty, isn't it? And that was before the credit markets seized up again this week. There is worse to come.

There's no way out of this. The government has no money. The banks have no money and the consumer has no money. So there's less lending and less spending ahead.

The financial world has a magic number – 18. At every turn in this crisis, from the first signs of subprime cracks early last year to this week, I've been told that after a tricky 18 months, all will turn out well.

It's proving to be a very long 18 months. And, even as a good part of the financial community languishes in denial, I suspect it's going to get a lot longer.

So what do you do? Not much. Follow all the rules about not having too much cash in any one account or if not that, shovel it all into the government's bank, Northern Rock. Getting a 100% guarantee on up to £250,000 plus a chart-topping 6% return on your money seems too good a deal to pass up. And don't worry about the administration. Dealing with Northern Rock isn't like dealing with other state-sponsored organisations. When I set up my account this week, it took me all of 10 minutes to do it online and the account was up and running in 24 hours.

And don't forget gold. I've been getting a hard time from readers over the past few months as the gold price slumped but I don't hold it in the expectation of massive price rises (I did when I bought it at $250, but not any more).

Instead, I hold it as insurance against all the terrible things that can happen when credit bubbles burst. And I'm very glad I do: this week the price of an ounce moved from around $770 to nearly $900. And even after the extraordinary rise in the stock markets yesterday, that's better than owning bank shares, isn't it?

_____________

We must always remember: this is a process not an event. It ain't over until its over.

[rbjmartin]

Actually, the problem has been too much credit with nothing of value to back it up.  The excess of credit led to an artificial explosion in house prices (not reflective of the true market value of housing).  Remember that house prices are largely dictated by the availability of credit (since no one pays for houses up front).

Listen to Mark Faber's analysis:

[ggreg]

CBO’s Orszag: Bailout Could Deepen Crisis

Frank Ahrens
Washington Post
September 25, 2008

The director of the Congressional Budget Office said yesterday that the proposed Wall Street bailout could actually worsen the current financial crisis.

During testimony before the House Budget Committee, Peter R. Orszag — Congress’s top bookkeeper — said the bailout could expose the way companies are stowing toxic assets on their books, leading to greater problems.

“Ironically, the intervention could even trigger additional failures of large institutions, because some institutions may be carrying troubled assets on their books at inflated values,” Orszag said in his testimony. “Establishing clearer prices might reveal those institutions to be insolvent.”

In an interview later yesterday, Orszag explained using the following example: Suppose a company has Asset X, whose value is recorded on the books as $100. Because of the current economic decline, Asset X’s real value has dropped to $50. If the company takes part in the government bailout and sells Asset X for $50, the company has to report a $50 loss on its books. On a scale of millions of dollars, such write-downs could ruin a company.

[StevusMagnus]

Trad Analysis of what's happening:

http://www.cfnews.org/PhantomAssests.htm

The Fall of the Phantom Assets:
Economic Autumn 2008

By Peter Chojnowski, Ph.D.

Editor Note: We are indebted to Dr. Peter Chojnowski who gives a brief, comprehensive treatment of the seemingly impenetrable complexity of the current economic chaos.

“When business in the United States underwent a mild contraction…the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. The 'Fed' succeeded….but it nearly destroyed the economies the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market --- triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in breaking the boom. But it was too late….the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed” — Alan Greenspan

 

It is very difficult to directly quote Alan Greenspan and, thereby, clarify for the reader what the former chairman meant to convey. He is the one known for the statement, “If I have made myself clear, than you have misunderstood me.

            It is rather disconcerting to read Alan Greenspan, grand economic Maestro — as he was referred to by his fellows[1] — and the man most responsible  for the American engagement in Operation Enduring Bubble, speak of “excess credit which the Fed pumped into the economy,” resulting, finally, in an American economic collapse. The collapse which Greenspan wrote of was, of course, the Great Depression beginning in 1929 and extending, mostly, until 1941. This judgment which Greenspan makes about the “excess credit” that directly brought about the Great Depression was made in a 1966 article in Ayn Rand’s Objectivist magazine and subsequently republished in Rand’s Capitalism: The Unknown Ideal.[2]

            What is so disconcerting about the above quoted statement is that Alan Greenspan’s words apply as aptly to current economic conditions as they did to the Roaring 20s, but with one major difference. The difference is that as Federal Reserve chairman between 1987 and 2006, Greenspan acted even more irresponsibly than the Fed officials he was criticizing. Rather than, “sopping up the excess reserves,” Greenspan added even more, transforming a stock market bubble into a housing and consumer spending bubble of historic and unprecedented proportions.[3] It is these “bubbles” that have fed the speculative financial “bubble” that we see deflating at a faster and faster pace every day in the news.

            If it is our task to analyze this speculative bubble of financial instruments that threaten to implode the financial system upon which the Liberal Democratic world depends, we should first mention the radical liberal capitalist ideology which seemingly justified Alan Greenspan’s attempt to facilitate the emergence of a “New Economy” that would complete capitalism by banishing “risk.”[4]

 

Clink link above for more...

[Joel23]

The perverbial thing is going to hit the fan and soon.


ECRI Weekly Leading Index

Updated:	9/26/2008 10:40 AM
Actual:	122.2
Analyst:	Patrick Armstrong in West Chester
First Take The ECRI Weekly Leading Index (WLI) decreased to 122.2 for the week ending September 19 from a revised 125 (previously 125.1). The smoothed, annualized growth rate fell to a new cycle low of -12.3% from an unrevised -11.5%. The sharp decline in the index last week indicates the extent to which the turmoil in financial markets will affect the real economy.

Of course most of you don't know what this all means. Let me interpet this for you. Back in 1980 the WLI went to a low of below -10. We are now at -12.3. The base number which is used to calculate the WLI via a smoothing correlation has dropped from 125 to 122.2 in just one week. This is a huge drop. I am estimating if this continues the WLI will end up at -15 which means at least a very hard recession like 1980 or worse. Look for some very serious economic repercussions by Christmas time or sooner.

The DJIA should be below 10000 shortly.

[DaveC]

It's funny how they can openly admit that they create these problems and then absolve themselves with a simple 'oops'.

[loyola38]

I am poor and in 'relatively' more secure Western Europe, but if I were an American citizen and could afford it, I would buy some gold to trade with, emergency rations, canned water and canned food, and start planning evacuation to family members on the rural lands of e.g. Kansas, in case you happen in a large urban area, which after the Economic Crash might become hellish due to gangs going around stealing all there is left.....

They already brought a Corps from the US Army into the Northern American Sector of military defence, for use against civil unrest in the USA.

I believe that the forces lent to Northern Command amount to one brigade combat team, i.e. about a third of a division.  In the American Army, a Corps is three divisions.  I don't think that the Army and Marine Corps together could scrape together such a force at this time.