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108 responses to “TARP watch: bailout FAILOUT”

  1. Mr Denmore

    Well that was an expesive act of brinkmanship. Some $6 trillion in wealth evaporated.And that’s just in the US. That’s our retirement money folks. Reminds me of the scene in Blazing Saddles when the black cowboy, approached by an an angry lynch mob, sticks a gun to his own head and yells ‘one step closer and the n*gg*r gets it.’

  2. charles

    Well we are going to find out if it was a bluff aren’t we. Unfortunately those that believe in free markets are going to have to be beaten to a pulp by the markets before they shut up and allow bank refinancing. It was this sort of behavior that turned 1929 from a recession into a depression. Enjoy the ride.

  3. Colin Campbell

    I find it astonishing that those masters of corporate welfare and pork would play political games like this. All this moral high ground about opposing socialist bale outs. Can’t see this helping John McCain, since he staked so much prestige on this. Is he going to suspend his campaign again? It also makes BushCo look even worse than they already do. How could that happen? How low can they go?

  4. tigtog

    This result is certainly not going to help McCain’s credibility: he suspended his campaign allegedly to ensure that House Republicans passed this bill, and they’ve basically given him the finger. John Aravosis:

    McCain returned to Washington to get a deal and get House Republicans on board. We got the deal, even though McCain stayed home and then went to dinner with Lieberman instead of joining the actual negotiators on the Hill, and then when the vote came up today, the majority of Republicans voted against the bill and killed it. The majority of Democrats voted for the bill. Had the majority of Republicans done the same, it would have passed. John McCain supported this bill, then why was he unsuccessful in getting House Republicans to join? Why? Because they hate him. All the Republicans hate McCain. McCain isn’t a maverick as much as he’s a loner. People don’t like him. And the canard that he was going to somehow bring everyone together in a bipartisan manner was, well, just that, a joke. And today we saw the extent of McCain’s great powers to bring people together. McCain crash landed into Washington and blew up the talks. Then he failed to deliver when he promised he could get his party on board. John McCain was just tested, and failed.

  5. Spiros

    We’re all about to learn a very harsh lesson. There’s one thing worse that an arrogant, powerful, hubristic United States. That thing is a defeated, broken United States. This could get very bad, very bad indeed.

  6. Robert Merkel

    I I was feeling particularly cynical, I’d be looking fairly closely at stock purchases by family and associates of Congresscritters over the next couple of days.

    The stockmarket will undoubtedly bounce on the back of a bailout bill passing; additional delays will undoubtedly make it fall more.

    Just sayin’…

  7. Katz

    As I suggested on another thread, it is quite difficult to tease out the principled and self-interested motives of these Republican Party rebels.

    It is true that elections are a little over a month away. Republican politicians were subject to a vigorous campaign to pressure them into opposition. Perhaps many of them believed that their political careers depended on voting the TARP Bill down.

    On the other hand, perhaps they would have done it anyway, acting on neoliberal principle.

    No doubt, there will be another attempt to draft a Bill that can achieve a congressional majority. Concessions to these Republican rebels may well erode support from Democrats. I’m guessing that these Republicans will prove to be more intransigent than Democrat supporters of the failed Bill.

    Certainly, many of these Republican rebels appear to be firmly opposed to anything that smacks of nationalisation or “socialism”. Thus, they appear to be against any proposals that may give the Executive the power it needs to do what it thinks is necessary to “save” the US economy.

    This appears to be the end of consensus politics in the US, as 1968 was, though in very different ways.

    America and American politics appear to be careering off into uncharted waters.

    (In 1968, the counterculture wasn’t interested in the fate of its superannuation.)

  8. Robert Merkel

    Katz: but surely the moneyed classes that fund those conservative Republican holdouts are starting to get a little bit concerned about their mutual fund holdings?

    I would think some fairly strong pressure in the other direction will build soon on those holdouts.

  9. tigtog

    Anatole Kaletsky at The Times claims a bailout of some sort will still happen and blames the need for one at all entirely on Paulson.

    What made it necessary was a three-stage sequence of blunders. The first began when Mr Paulson decided, for largely political reasons, to wipe out the private shareholders in Fannie Mae and Freddie Mac, two businesses which he and many Republican politicians regarded as crypto-socialist incubi in the American body politic. The enormous – and unnecessary – losses suffered by shareholders of Fannie Mae triggered the first stage of the financial crisis, starting on September 8.

  10. Katz

    Maybe Robert. Time will tell.

    I can’t believe that the “moneyed classes” have been merely swizzling their manhattans during the last several days.

    Look at the timing: the primaries are over, the nominations are looked and loaded. At this moment rusted-on Republican voters — the base — hold the whip hand.

    If this crisis had blown up during the Republican primaries, then your scenario of the power of “moneyed classes” may have been more realistic.

  11. tigtog

    From our ABC: a summary of the various finger-pointing as to who’s to blame on the Hill, plus a few quotes regarding local implications from Rudd, Swan and Turnbull.

    It ends with this:

    In futures trade locally, the Share Price Index 200 has shed 7 per cent or 339 points.

    The Australian dollar has also dropped against the US currency.

    About 7:45am AEST it was buying 80.1 US cents.

  12. Thomas Paine

    The biggest short selling excercise in history.

  13. glen

    some more links on the free market crisis:

    douglas rushkoff @ boing boing: http://www.boingboing.net/2008/09/29/bail-in-or-bail-out.html

    dollars & sense blog:
    http://dollarsandsense.org/blog/

  14. Mark

    Peter Martin:

    http://petermartin.blogspot.com/2008/09/weve-become-banana-republic-with-nukes.html

    Quoting Paul Krugman – “We’ve become a banana republic with nukes”.

  15. Mark

    Ian Welsh at Firedoglake sees Wall Street blackmailing Congress into passing a bad bill:

    http://firedoglake.com/2008/09/29/the-danger-of-wall-street-blackmailing-us-back-into-a-bad-bill/

  16. Cal

    Interesting article from Alan Kohler about why $US700 billion may have no effect.

    Last paragraph hits the nail on the head.

    Meanwhile Bloomberg is carrying a story this morning putting the new fiscal burden into context. It starts off: “Wall Street’s five biggest firms paid more than $3 billion in the last five years to their top executives, while they presided over the packaging and sale of loans that helped bring down the investment-banking system.”

    We haven’t heard the end of that.

  17. Mark
  18. Mark

    House Republicans voted it down because Nancy Pelosi hurt their feelings, according to Crooks & Liars:

    http://www.crooksandliars.com/2008/09/29/shorter-house-gop-we-killed-the-bailout-bill-because-pelosi-hurt-our-feelings/

  19. Mark

    FiveThirtyEight.com finds a close correlation between no votes and congressional seats vulnerable in the election:

    http://www.fivethirtyeight.com/2008/09/swing-district-congressmen-doomed.html

  20. Mark

    Firedoglake:

    Fed to Congress: We’ll Just Print 630 billion dollars K? Thx Bye.

    http://firedoglake.com/2008/09/29/fed-to-congress-well-just-print-630-billion-dollars-k-thx-bye/

  21. Paul Burns

    I think this might be one of those occasions where I’m almost speechless. I mean is this American suicide or trying to save the little guy from the behaviour of greedy bankers. Or, the utter stupidity, fear of Socialism? Since nationalisation might be the only thing that works here, the Yanks better get over their paranoia very fast. Or, to put it another way, what Al-Qaeda couldn’t do, the Americans are doing to themselves.

  22. Geoff Robinson

    American conservatism is now a sub-sub-prime stock, the most hyperpartisan conservative President ever is now reduced to begging liberal Democrats to pass his legislation, while conservative intellectuals go to war among themselves. Conservatives have been mugged by reality.

  23. Mark

    AP:

    In the end, the financial markets didn’t stand a chance against voter antipathy, partisanship and election year politics.

    The defeat of the extraordinary $700 billion financial rescue package represented a perfect collision of the forces of modern politics — a fast-moving Internet campaign, vulnerable incumbents, a weakened and unpopular president, and a roiling presidential campaign — all working against the so-called Titans of the Universe.

    Polls showed widespread public opposition to the plan — the biggest federal intervention in financial markets since the Depression — and many Republicans saw such an enormous set-aside of taxpayer money as an unnecessary intrusion into free markets. Of the 19 most-endangered House incumbents, 13 voted no.

    http://ap.google.com/article/ALeqM5i9VdejtNZSNIl0Jhij4P5UfAzzyAD93GMP500

  24. Robert Merkel

    One of the things that’s slightly frustratrating is the apparent newly-sprung zeal to punish the “fat cats” who’ve been making out like thieves over the past few years, while the average American hasn’t got much at all.

    It seems like rather ill-directed anger. It’s not that the bank CEOs haven’t been ripping off the system for years, it’s that there’s a much broader class of people who have been enriching themselves disproportionately; bank CEOs are just a convenient target to lash out at.

    Picking on bank CEOs might placate that well-justified anger, but will do nothing to attack the real, long-term issue, which can only be tackled by reforming of the tax system to increase the tax take from the rich and reduce it from the less well-off, a more equitable healthcare system, and possibly more labour regulation.

    Hopefully, a President Obama and a new Congress might try and implement some of those more systematic measures, rather than just the feel-good smack at bank bosses.

  25. Peterc

    It seems that quite a few Republicans were not prepared to embrace socialising the debt of Wall St executives. I can understand why – rewarding behaviour encourages it. The measures (amendments) that were supposed to address this issue clearly were not rigorous enough for a majority of Congress.

    Its a pickle. Do you prop up the house of cards, or let it fall over? We are looking at a 30’s type of event, but I think there is more resilience in the system now. Let’s face it, house values are grossly inflated; here and in the US – based on what people think they are worth (or will be worth), rather than on any intrinsic value.

    Maybe it’s now time for a Henry George’s argument that the economic rent of land should be shared by society rather than falling into private hands.

    And the corporate executives responsible for all the dodgy loans and financial instruments should go directly to jail.

  26. Another Kim

    Mark, the Democrats have a majority.

    It could have been passed if they wanted it.

  27. tigtog

    Rafe Champion’s take over at Troppo

    The drying up of the grease that keeps the economy’s cogs whirring – without lines of credit available, many major and minor companies won’t have access to funds to meet their payroll obligations: LIBOR – the real danger in the credit crisis from Pam’s House Blend

  28. Katz

    the Democrats have a majority.

    It could have been passed if they wanted it.

    The Dems are as internally fissured as the Republicans.

    Why impose a greater implied burden on them to support a Republican administration?

    Mark’s reporting of the high correlation between marginal seats and “nay” voting is telling.

    It suggests at least two things:

    1. Marginal seats may tend to be places where the local political culture is especially vibrant.

    2. The internet and blog-based campaign was particularly well targetted, frightening congresspersons into compliance in the jaws of the forthcoing election.

  29. Mr Denmore

    A Macquarie economist’s view:

    “With central bank liquidity injections proving insufficient to unfreeze interbank lending markets, it is increasingly clear that a systemic support package is necessary to address the systemic nature of the problem. Successful passage of the bill would have given the Treasury the latitude it needs to remove toxic mortgages and other bad assets from the US financial system. This would be a powerful mechanism for stabilising asset prices, limiting future write-downs and boosting confidence. In terms of the real economy, this would have kept credit flowing, with significant implications for growth. Failure of the plan risks turning renewed weakness in the US economy into something very nasty.”

  30. Another Kim

    I did hear there was a 80 to 1 ratio in calls and emails to Congress against it, Katz.

    And the election is what, 35 days away?

    Interesting times indeed.

    If anyone says they have a clue where things are headed at this point, they’re fooling themselves.

    Literally almost anything could happen.

  31. Robert Merkel

    Hmmm. If a big US multinational company or two fails to make its payroll – as tigtog’s second link @27 suggests – that might scare Congress and the public into line.

    The widespread public opposition to any bailout seems very much like an exercise in cutting one’s nose off to spite one’s face.

  32. Mark

    Mark, the Democrats have a majority.

    It could have been passed if they wanted it.

    AK, agree, but I think – reading between the lines from what’s been said – both sides were playing the game of “allow members who need to vote against to save their seats to vote against it” – but with the GOP members, the leadership couldn’t and/or wouldn’t deliver enough votes.

    Also, obviously, since the whole thing stinks politically, the Democrats wanted some cover.

  33. Peterc

    I think this sums up the situation well, LOL [[link]

    AN AMERICAN CORPORATION
    You have two cows.
    You sell one, and force the other to produce the milk of four cows.
    Later, you hire a consultant to analyse why the cow has dropped dead.

    ENRON VENTURE CAPITALISM
    You have two cows.
    You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows.
    The milk rights of the six cows are transferred via an intermediary to a Cayman Island Company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company.
    The annual report says the company owns eight cows, with an option on one more.
    You sell one cow to buy a new president of the United States, leaving you with nine cows.
    No balance sheet provided with the release.
    The public then buys your bull.

  34. glen

    economic apocalypse talk, author equates it to the feeling post 9/11: http://www.dollarsandsense.org/blog/2008/09/time-to-start-worrying.html

    Hmmm…

  35. Mark

    Or to put it another way – jeremy at scatterplot:

    i do not want to sound like an alarmist about the financial crisis

    But the apocalypse is here. I am arranging to receive my next paycheck from Northwestern in gold. I am going to teach my class tomorrow, and then come back to my apartment and start building a fort.

    http://scatter.wordpress.com/2008/09/29/i-do-not-want-to-sound-like-an-alarmist-about-the-financial-crisis/

  36. epicene

    Is not the point of the bail-out and, in the meantime, the massive liquidity injections from Reserve Banks from Ireland to Japan, soley about enabling the CREDIT system to keep chugging along. As much as I loathe agreeing with Hilda Roberts, a family must live within its budget. So a country, so an howeverso globalised economic system. It was once known, and condemmed, as usury – since no credit is given free.
    Imagine as Lennon didn’t sing, there’s no credit, no usury or interest, buying what you can afford, making do or doing without if you can’t.
    Old fashioned I know but look at how well the exciting new fangled thing works.

    Grandma was right, neither borrower nor lender be. Then we

  37. glen

    epicene, moralise much? This is a crisis of overproduction, not credit.

  38. Mark

    Guy Rundle on the political and cultural crisis of capitalism:

    http://www.crikey.com.au/US-Election/20080930-Rundle-08-Black-Monday-turns-grey.html

  39. Bernice
  40. Evan

    Looking at some of the linked Blogs, the primary concern with the bail-out package seems to have been the lack of accountability or provision for oversight in its administration, rather than some feral desire to Get Even With Gekko.

    Sure, people want to see some of the kleptocrats on Wall Street get their come-uppance. Who wouldn’t? But I don’t think that thats what stopped it.

    What killed it was extreme reluctance to hand Paulson nearly a trillion dollars of the public’s money without being permitted a say in how it was spent. After being bombarded with negative emails and calls, Congress just wasn’t prepared to swallow that.

    This gives me hope. After years of handing power and money to the likes of GWB and his cronies with nary a peep, it seems the US public has finally woken-up. They want some accountability. They’re no longer prepared to ladle-out buckets of dosh to the Executive without being told how, exactly, their money is going to be spent.

    And about time, too.

  41. Mark

    I’m struck by the point in the article to which Bernice linked that there was no guarentee that the banks would use the funds for recapitalisation rather than maximising their own profits and share price. If that’s true, it really was a give away rather than a rational response.

  42. allan

    Seems a little bit ironic that the ads on this page (and on a few other blogs I’ve been reading today about this financial problem) are all about applying for the latest Amex or some other credit card! Let’s just borrow even more, folks!

  43. Bingo Bango Boingo

    glen, right on! Aggregate demand relative to supply has been very low in the West for a long time now, which is why inflation has been so l… oh, wait. Well aggregate demand has arisen from household savings rates that are very h… ah, damn. But anyway a link between credit growth and growth in consumption is just voodoo eco… sh*t.

    What was that about overproduction again? Was that Keynes or Marx? I think I’m a Keynesian but then I do get them mixed up from time to time.

    BBB

  44. glen

    BBB, you shy?

    I’m a marxist. But I am not an economist in the contemporary sense, so feel free to point out where I am wrong.

    Credit needs to be understood as another commodity, not in some simplistic sense as referring to personal consumption. The US was very good at producing it. It seems as if it is the nation’s primary industry.

    Capitalist countries have been in a constant state of overproduction (‘growth’) and waste of all commodities for decades. I certainly welcome a turn to sustainable economic relations after this ‘crisis’.

  45. Adrien

    We’re fucked.

  46. Adrien

    BBB – That was Marx. When that happens says he we go to war. I think he might have a point about that. Perhaps we’ll be invading Venezuala next.

  47. Bingo Bango Boingo

    Fair enough glen. We seem to be on the same page so far as the production of credit-as-commodity is concerned, although it isn’t only the US’ indulgence for which we now are all paying. I do fear, however, that you are downplaying the link between the production of credit and the production/consumption patterns that you call ‘overproduction’, which is why I think the ‘this is a crisis of overproduction, not credit’ line is wrong, or at least incomplete and therefore misleading. Having said, don’t come to me for proper answers. I am not an economist in any sense, contemporary or otherwise!

    Cheers
    BBB

  48. Marlon

    It’s all the fault of the Greens and the Unions.

  49. Bingo Bango Boingo

    Don’t forget the affordable housing lobby!

    BBB

  50. Graham Bell

    Everyone:

    This has been a great victory for the American people and for what was left of their democracy.

    It’s only a temporary victory though because the same crooks and scounrels will counter-attack with even more devious plots to plunder the American people over and over again.

    The road ahead is going to be very rock indeed and we had all better get ready to do a lot of suffering. As Mr. Denmore said right back at post [1]

    “That’s our retirement money folks”.

    but at least now, the United States, as a coherent sovereign nation, stands a fighting chance of surviving. Had the Free-Gifts-To-Robbers Bill gone through, the break up of the United States would have been far more chaotic than the break up of the Soviet Union and the bloodshed would have been far worse than when Yugoslavia disintegrated.

  51. OldSkeptic

    It was a bad plan that should never have got up. A last ditch effort to preserve the bonuses of a few Wall St operators.

    I called it a “speedhump on a cliff face”, Steve Keen (debtdeflation.com) called it “giving thimbles to the first class passengers on the Titanic and telling them to bail”.

    A bad plan will make things worse than an outright total crash. A good plan can aleviate things, a bit like Hari Selden, fix some of the fundementals, shorten the period of pain and set the scene for a recovery in the future.

    Nothing can stop a Depression for the US (or the UK) and, at least, a very bad recession for Australia (EU, India, Asia, Japan, China, et al), nothing. All that can be done is minimise the damage and shorten the time to recovery.

    Oz is in a very bad situation, the only things we have over the Yanks and Poms is our Govt debt is low and our super money. This gives an opportunity to use that to alleviate the pain, rebuild our ponzi economy into somehting productive and get back to recovery faster than most other places.

    But will it be done? Nah I have 100% total faith in Oz politicians and our ‘elite’ to completely stuff it up and make sure we suffer just as bad (or even worse) than our cousins. Strangely enough I have slightly more faith (about 0.001%) that Turnbull could do it, than Dudd. He’s more of a maverick, with a more flexible mind. Dudd will spend more time pontificating about ‘economic responsibility’ than doing anything, the idiot will probably try to maintain a Govt surplus through all this.

    Read a little history of what Oz did during the ’29 Depression, it will, well, depress you.

  52. Mr Denmore

    Australia has more than the budget surplus and compulsory super going for us.

    We also have a 7% cash rate, which gives our central bank significantly more ammunition when
    the sh*t hits the fan. The Fed, by contrast, is already at 2%.

    Our other advantage, given our trade linkages and export composition, is Asia and China in particular. Yes, the Chinese are heavily dependent on external demand, but they have momentum (and rather a lot of liquidity) on their side.

    Finally, Australia had its banking crisis in 1990-91 with the collapse of two state banks, three merchant banks, a building society, mortgage trust and a major credit union.

    While the US had the Savings and Loans, our regulators actually learnt from our crisis.

  53. Katz

    Australian systemic stress

    Japan’s overnight call loan rate rose to 0.6 percent, the highest in more than six weeks, and the three-month interbank offered dollar rate in Singapore jumped 11 basis points, or 0.11 percentage point, to an eight-month high of 3.90 percent as banks hoarded cash. Australian funding costs surged by the most since July.

    “Counterparty fear in the banking sector is at a new extreme,” said Greg Gibbs, director of currency strategy at ABN Amro Holdings Bank NV in Sydney. “Credit conditions are as tight as a drum. Unless this settles down, central banks would need to cut rates globally to bring funding costs down.”…

    The three-month interbank offered rate in Hong Kong rose by the most in nearly a week to 3.664 percent. The difference between the rate Australian banks charge each other for three- month loans and the overnight indexed swap rate jumped 14 basis points to 98 points, close to a six-month high. The gap has averaged 45 basis points this year.

    “This crisis is not driven by corporate defaults but by a systematic failure of the banks themselves,” said Anita Yadav, head of credit and hybrid research at UBS AG in Sydney. “It’s no longer about just paying higher borrowing costs, but also about being able to get the money from the market at all.”

  54. Adrien

    Well you may say that this today
    Was vict’ry for democracy
    I’m sure you’re right but now I play
    Before they take my yacht from me
    .
    We bankers are the best y’see
    Pluckin’ feathers off the ducks
    Sprite ‘way with rainday cash in our SUVs
    And the rest of you: Get fucked!!

  55. Peter Kemp

    There’s one thing worse that an arrogant, powerful, hubristic United States. That thing is a defeated, broken United States.

    Dunno Spiros, but as they say, the price of hubris is often nemesis.

    OTOH, if McCain gets up and croaks shortly after, there’ll be a rerun of “Being There” as that cross between Pauline Hansen and Chauncey Gardiner takes the economic reins: I can see it now–

    Treasury Sec:”President Palin, do you agree with Ben, or do you think that we can stimulate growth through temporary incentives?”
    [Long pause]
    POTUS: “As long as the roots are not severed, all is well. And all will be well in the garden.”
    Treasury Sec:”And how should we snowjob Congress into giving the extra trillions needed for the bailout of Wall Street now that the $700 billion was used up in the first two months?’
    POTUS: “Yes! I do have experience in snowjobs, I come from Alaska you know!”

  56. Marlon

    “POTUS: “Yes! I do have experience in snowjobs, I come from Alaska you know!””

    Is the above a spelling mistake?

  57. Adrien

    Here’s a plan: bail out the little guys and round up the Wall St sharks and send ’em to the LA County Pen. A few weeks of laissez-faire competitin with the Westside Crips oughta be good for ’em. 🙂

  58. Mark

    Michael Berube surveys the blame game in a post with the best title of today so far:

    http://www.michaelberube.com/index.php/weblog/all_your_zomg_epic_fail_are_belong_to_us/

  59. Peter Kemp.

    Rep. Dennis Kucinich:
    http://www.counterpunch.org/whitney09292008.html

    “The $700 bailout bill is being driven by fear not fact. This is too much money, in too short of time, going to too few people, while too many questions remain unanswered. Why aren’t we having hearings…Why aren’t we considering any other alternatives other than giving $700 billion to Wall Street? Why aren’t we passing new laws to stop the speculation which triggered this? Why aren’t we putting up new regulatory structures to protect the investors? Why aren’t we directly helping homeowners with their debt burdens? Why aren’t we helping American families faced with bankruptcy? Isn’t [it] time for fundamental change to our debt-based monetary system so we can free ourselves from the manipulation of the Federal Reserve and the banks? Is this the US Congress or the Board of Directors of Goldman Sachs?”

    Sounds like some sensible questions there.

  60. Brendon

    What does the bailout mean?

    What are they getting for their money. If the US taxpayer knew they would be even less keen then they are now. This is what Paulson will be buying on behalf of the taxpayer:

    an institution like a bank of some sort buys up a group of mortgages, say from california that all originated in june of 2006

    This is how they do it: now it doesn’t make much sense just to sell them off as is, you don’t have any leverage so you don’t make any profit, so instead what you do is pool them together into one mass then chop it up into 100 pieces called “tranches”………you then separate the tranches based on risk, the more risk the more yield they give in return. Then you sell these tranches in groups, and if you are really clever you take those 100 tranches and do it again and chop them up even further. But it doesn’t end there, the people you sell these to often want insurance against default. This is where the credit default swaps and credit default obligations come in, they are nothing more than side bets that are completely unregulated and they typically trigger when a security defaults. Often times people will have BOTH sides of the bet as a hedge. You also have companies like AIG that got into the business of offering insurance on this madness, and they got burned for it.

    What this did was open up a whole new realm of things to bet on in this giant casino which is the market. The players can actually bet on securities thru CDS’s and CDO’s without owning securities at all! Now, when this stuff goes bad you have to trace the paper trail all the way back to the people that made the security then trace all the side bets made on it to figure who gets paid and how much. The total US mortgages covered by freddie and fannie are something like 5 trillion and change, but the side bets on this stuff is up around 60 trillion dollars.

    So what this means is if an investment bank owns tranches which are going bad that they might be able to cover on face value, chances are when the CDS’s and CDO’s on them kick in they will get crushed. This is counter party risk and it dwarfs the risk from the securities themselves.

    This what Paulson is asking the American public to buy up.

    As far as banks are concerned from the markets perception of it, the market only sees the total risk vs the capital the bank has in reserve, you can’t just cover the securities with some $$ and make it all better, you have to buy up or nullify all the side bets as well. This is why the bailout plan fails, it won’t even make a dent. They need many trillions of dollars here. This isn’t a matter of just buying loans, they are buying securities with thousands of owners and side bets involved.

    Paulson will inherit the rest of the side bets and that’s where the problem starts getting worse………Paulson won’t know what he has bought until everything is unraveled and the way things are going in the end he will get hosed and have to pay much more than what its worth. Since all this is nothing more than legalized gambling and the market has basically put really low values on this stuff now Paulson will face the same issue as the banks in that he won’t be able to sell them again without giving them away or just taking the loss. He can’t hold on to them, there’s just too much of it. If he just puts up tax payer dollars or treasuries borrowed and covers them, then the currency gets hit big time because that is direct inflation of the money supply on a massive scale.

  61. Kim

    Best and worst case scenarios, according to Tyler Cowan:

    http://www.marginalrevolution.com/marginalrevolution/2008/09/the-best-and-wo.html

  62. Kim

    Michael Berube suspended his blog retirement to deal with the crisis! 😉

    http://www.michaelberube.com/index.php/site/positive_thinking/#When:12:04:00Z

  63. Mark

    BBB @ 47, from the pov of Marxist economics, this is a crisis of overproduction and underconsumption.

    What that means is that the productive capacity of industrial capital exceeds demand in the domestic markets in which the production occurs (ie China etc). So there’s underconsumption there – looking at the domestic economy as a whole – but there’s also underconsumption in the US because in the technical sense the purchasing power of labour is insufficient to fund its needs (it doesn’t matter in this sense whether we’re talking about SUVs or food or healthcare) because wages are too low. So consumption rests on credit. That credit has been extended largely (and this has been the case since at least the US recession of 2001) by finance and sovereign capital in the countries where the production takes place, but what’s produced in the US is literally fictitious capital which we now know isn’t even able to be liquidated for money in any real sense and is literally secured by nothing of realisable value.

    The way capital solves these problems – crises of accumulation – is through its self destruction. That’s what we’re seeing at the moment and that’s what the bailout is supposed to forestall (by recapitalisation – the exchange of state provided money for fictitious assets).

    Schumpeterian macro-economics looks at these issues from a very similar perspective – hence the notion of “creative destruction”.

    So, interestingly, we get many of the hard right libertarian types (like the wingnut who was on Lateline tonight) arguing in terms very similar to those of Marxist economics – certain capitals have to be left alone to implode so the process of capital accumulation can restart and the state is an obstacle (through rewarding rentseeking and creating a moral hazard) to this.

    They don’t put it quite like that, but maybe you get the picture.

    They also want to see deflation because they perceive (correctly) that the way the US state is acting is to try to inflate its way out of trouble. So the Fed literally prints hundreds of billions of dollars (aside from the bailout) because it’s authorised by the extension of the US sovereign debt ceiling to over 1 trillion dollars in order to try to provide liquidity. It can do this by right of seigniorage – the fact that the USD is the reserve currency – but only insofar as other actors remain willing to fund the twin balance of payment and sovereign deficits and maintain the position of the US dollar. Their fear is that this is unsustainable now even in the very short term.

    There are a lot of problems with Marxist economics – you can’t really use it for micro-economic analyses or to derive a theory of the firm for example – but, leaving aside all the controversies over the labour theory of value and so on, it is a very useful instrument for analysing the big picture stuff – like this – whether or not you agree with a Marxist politics.

    It certainly does a lot more in terms of sense making than most of the guff we hear from “market economists” on the teev.

  64. Mark

    Ps – Guy Rundle was using this sort of analysis in his Crikey piece:

    http://www.crikey.com.au/US-Election/20080930-Rundle-08-Black-Monday-turns-grey.html

    I disagree with the political conclusions, but he’s spot on about what’s been sustaining the legitimacy of the US state and the American way of life economically.

    I might have more to say about it soonish in a post.

  65. Graham Bell

    Everyone:

    As the social and economic turmoil in the United States gets worse, get ready to say ‘goodbye’ to Uncle Sam’s Nuclear Umbrella …. it was very handy for Australia all the decades it lasted …. and get ready to be forced to pay up very heavily for our own comprehensive system of defence [which has nothing whatsoever to do with the sqandering of huge sums of our money on ridiculously inefficient war-toys and other “defence procurement”].

    Another Kim [30]:

    G’day. You said

    If anyone says they have a clue where things are headed at this point, they’re fooling themselves.

    Literally almost anything could happen.

    Not quite. There are several likely scenarios …. some of them very nasty indeed; none of them pleasant …. so let’s hope that the ones that do happen include the survivsl of the United States itself.

    Mr Denman [52]:

    What gives you the idea that the Chinese will simply steam along as they have for the past decade or more? They might decide that now is a really opportune time to go to war; it is certainly now more in their interests to do so than not [which would put Australia in an interesting position: are we China’s ally or not?].

  66. Evan

    GB thinks the Chinese might consider now “a really opportune time to go to war”

    Really? With whom? The US? Taiwan? Australia? The Dutchy of Grand Fenwick?

    I know, you’ve gotta watch them damn Chinese Commos, they’ll go to war with anyone on the merest pretext. They’ve been doing it for years, now haven’t they?

  67. Katz

    but what’s produced in the US is literally fictitious capital which we now know isn’t even able to be liquidated for money in any real sense and is literally secured by nothing of realisable value.

    I’m not sure this is correct.

    The commercial paper that Bush wants to mop up has been generated by previous consumption decisions of American consumers. If American consumers were willing and able to continue to service the debts that this paper represents, then there would be no threat of collapse.

    Thus the problem is one not of underconsumption, but of overconsumption.

    A counterfactual:

    Let us presume that Americans had resolved to live strictly within their means. This decision would have had ramifying effects right along the chain of production and capitial accuumlation. In simple terms, China would not have developed as rapidly and Chinese banks would not have accumulated vast amounts of capital looking for a productive place to be invested.

    The decisions that made this counterfactual fanciful were:

    1. Willingness of American consumers to continue to endebt themselves.
    2. Willingness of domestic American creditors to take on more and more credit risk.
    3. Willingness of Chinese creditors to allow American creditors to encourage an amplification of this credit risk even after it became clear that American consumers could not afford to service their debts.

    The Chinese creditors had and still have alternative uses for their credit. Yet for their own reasons they decided not to ration credit to American consumers.

    Marxism speaks of “iron laws”, as if actors have no choices. Yet, I believe it is clear that at each stage this crisis was exacerbated by deliberate, voluntary choices.

  68. Mark

    Thus the problem is one not of underconsumption, but of overconsumption.

    But, Katz, go back to the point I made. From the Marxist pov when wages are not sufficient to afford what is demanded, you have underconsumption in the sense that credit fills the gap. It’s probably the terminology that’s misleading more than anything else.

    Marxism speaks of “iron laws”, as if actors have no choices. Yet, I believe it is clear that at each stage this crisis was exacerbated by deliberate, voluntary choices.

    Fair point.

    Except – I’m not really aware of any macro-economic theory that doesn’t make presumptions about behaviour that are derived theoretically rather than from empirical observation (even if subsequently tested against empirical evidence – but that’s not quite the same thing as inductively derived theory).

    We’ve got a version of the classical sociological problem of structure and agency operating here. When almost all American consumers make identical choices (in the broad sense) – to live beyond their means, how much sense does it make to talk about individual choices as the independent variable?

    Real US household savings went negative in 2005. There might be (and no doubt is) a minority of US households that have positive savings, but it hardly affects what’s occurring, does it?

    Re – China – yes, but I noted that there was something in it for the Chinese because of the limited size of their domestic market. Given that the US domestic situation has probably now become unsustainable and demand will inevitably fall, that shifts the incentive structure. It also makes sense for capital to chase returns (though sovereign wealth funds can afford – perhaps – to act contrary to this incentive at least some of the time) and it’s hard to see where the returns are in the US now.

  69. Katz

    When almost all American consumers make identical choices (in the broad sense) – to live beyond their means, how much sense does it make to talk about individual choices as the independent variable?

    But this proposition can be tested empicically, and proven to be incorrect. It is true that a threateningly large number of Americans are living beyond their means (which for the present purposes my be defined as being unable to service their debts). But these Americans comprise only a small percentage of American households.

    From a world systems perspective I agree that Chinese productive capacity outstripped the capacity of Americans to consume the stuff that the Chinese manufactured (overproduction/underconsumption). But it can equally be said that Americans failed to produce products that Chinese wanted to buy (underproduction/overconsumption).

    The question arises why it is only the United States and American borrowers that found themselves in this unsustainable relationship with Chinese capital. Why not Brazil, Russia, UK, Japan? Is their structural relationship with China so very different in kind from that of the US and its households? I don’t think that argument can be sustained.

    Given that this argument cannot be sustained then we look for alternative explanations in the peculiar nature of American culture.

    Culture, not structure, seems to be determinative in this case.

  70. Paulus

    But it can equally be said that Americans failed to produce products that Chinese wanted to buy (underproduction/overconsumption).

    It has been argued that the products America generated, which the Chinese did indeed want to buy, were its financial instruments — shares in American companies, T-bills, and so on.

    They fulfilled the Chinese desire — both on a basic cultural level and as government policy — to build up savings in stable locations. Until the recent crisis, the US offered the best combination of stability, value, legal protection, and ease of moving capital in or out.

    One might well argue there was nothing untoward or unhealthy in this relationship. The Chinese were producing goods American consumers wanted to consume, and Americans in return were providing a safe harbour for Chinese investment.

    The only ones being shafted were the ordinary Chinese. Their’s was the real ‘underconsumption’, as their factories’ goods were shipped off-shore rather than being enjoyed at home. Still, don’t blame Uncle Sam for that — address your complaints to Mr Hu Jintao, Beijing, who’s been underpinning all this by keeping the exchange rate artificially low.

  71. Katz

    They fulfilled the Chinese desire — both on a basic cultural level and as government policy — to build up savings in stable locations. Until the recent crisis, the US offered the best combination of stability, value, legal protection, and ease of moving capital in or out.

    But this formulation assumes that the crisis is some sort of externality.

    Certainly, this relationship began as something mutually beneficial to the contractual parties you mentioned.

    But without changing its structural nature in any way, this contractual relationship became toxic and unsustainable.

    The crisis wasn’t an externality, it inhered in the peculiar relationship between lender and borrower.

    Moreover, the peculiar nature of Chinese manipulation of its currency was well known, as was suppression of Chinese domestic consumption. No one can say that these were hidden features of China’s relationships with the entire world, not only the United States.

    Therefore the question remains: why was the US the only economy that drove itself deep into a debt and liquidity crisis?

  72. Paulus

    From the Marxist pov when wages are not sufficient to afford what is demanded, you have underconsumption in the sense that credit fills the gap.

    Hmmm. Dunno about that. The very opposite process may be true, in that higher wages lead to even higher demand for consumption, which leads to greater demand for household credit.

    Also, with high income, there is easier access to credit, and often lower interest rates available.

    As of May this year:

    Analysis of data also reveals exposure to debt increases with income levels.

    While 18% per cent of Australians with a gross household gross income of less than $40 000 spent 35% or more of their income on debt, this proportion rises to 21% of Australians with household incomes between $40 000 and $70 000.

    But 27% per cent of Australian households earning a household income of more than $90 000 are currently spending 35% or more of their income repaying debt.

    http://www.vedaadvantage.com/latest_news/aussie_debt_burden_continues.aspx

  73. Paulus

    But without changing its structural nature in any way, this contractual relationship became toxic and unsustainable.

    Why do you say that? The US-Chinese economic relationship may, perhaps, be a casualty of the current crisis, but no one is saying it is a cause.

    What did China have to do with bad household mortgages being written in the US? Or with strange, complicated structured finance gizmos, like the CDOs, being constructed around those bad mortgages? Or with US investment banks playing funny buggers with their balance sheets to disguise their non-performing assets and solvency issues?

  74. Katz

    What did China have to do with bad household mortgages being written in the US? Or with strange, complicated structured finance gizmos, like the CDOs, being constructed around those bad mortgages?

    Not only China but also other lenders, both sovereign and otherwise, continued to supply capital for these schemes long after many voices were raised calling thier prudence into question. At the very least, one might have thought that risk premiums may have been raised in the shape of interest rates.

    Or with US investment banks playing funny buggers with their balance sheets to disguise their non-performing assets and solvency issues?

    Outright fraud, by definition, fools everyone for a while. The Chinese can’t be blamed for not knowing that this was happening.

    Therfore, through inattention, the relationship became toxic. A little bit of poison in your fugu makes it palatable. Too much fugu poison will kill you.

  75. adrian

    Two ‘leading’ economists on Lateline last night, both appeared quite mad.

    One took the conventional line that the bailout is necessary and if it will be passed everything will be fine, don’t worry, nothing much to see here, as long as the bailout is passed.

    The other economist said that the best possible thing to happen would be for the bailout to be rejected, and for the US to face up to the crisis and basically stop living beyond its means. State funded subsidies to Wall Street will only make matters worse.
    He also claimed that the rest of the world will benefit if America enters a deep recession/depression, because American debt is holding back the rest of the world, not as is conventionally thought, driving growth.

    No wonder we’re all so confused!

    Of course ABC news later quoted the conventionial economist. No surprise there.

  76. wizofaus

    The second guy would have a point, as long as the rest of the world can solve the problem of their banks collapsing and being unwilling to lend to one another.

    Further, the economy was far less global in 1929, and yet what started as a crash on Wall St quickly lead to a near-global depression. It would hardly be surprising for the same to happen today.

  77. Katz

    Actually, the Stock Market Crash of 1929 merely exacerbated a pre-existing financial problem.

    United States banks and finance houses were the global financiers of the 1920s. They invested in short and long term private and public projects worldwide. To be operated sustainably these projects needed a steady and predictable flow of finance.

    However, in late 1927 and throughout 1928 and 1929, the Wall Street bull market roared. It became apparent t US financiers that much higher returns on capital could be had on Wall Street than investing in (let us say) Australian government debt. Yet Australian governments and many other borrowers were committed to long-term borrowing programs. these borrowers were forced to choose betweem being forced to pay higher interest rates or to put their pojects on hold.

    Australian governments essentially stopped borrowing US funds by the beginning of 1929. This credit squeeze flattened economic activity even before the Wall Street Crash. The Australian experience was repeated around the world.

    And when the Wall Street Crash occurred in Oct 1929, this destroyed much capital that had been drawn to the market by the prospect of high returns, making the situation worldwide even worse.

  78. Graham Bell

    Katz, Mark and Paulus:

    You’ve each made very good points and IMHO, you are not actually disagreeing with each other but seeing things from different perspectives.

    Katz [71], you asked

    “Therefore the question remains: why was the US the only economy that drove itself deep into a debt and liquidity crisis?”

    It’s only early days yet and, despite all our structural protections, I think it likely that we will be very deep in trouble too. Slightly different sorts of trouble but serious trouble nonetheless. The thing that really does frighten me is that Australia will react to the challenges with the same old traditional tools used in the same old way and expect thereby to get the same old results. Sending thousands of men with rifles and bayonets to charge against barbed wire and entrenched machine-guns didn’t work for the befuddled generals in the First World War …. and slashing the exchange rate of the Australian dollar and slashing bank rates to ridiculous levels like 2% is not going to work in the present situation. What is needed is a completely fresh approach to running the entire economy [and no, that is not an invitation for all the Leninists out there to leap out of the woodwork – I said ‘a completely fresh approach’].

    Evan [66]:

    Wakey-wakey; the Cold War has been over for years and we aren’t due for a new one just yet.

    China has c-h-a-n-g-e-d!! Better get used to it. War where? Literally anywhere that suits them. War failed to revitalize the American economy – and even contributed in a way to its current mess – but war would give a tremendous boost to the Chinese economy and propel them into superpower status a generation early. The opportunity is there while the U.S. is so distracted by all its internal troubles.
    When King Frederick the Great of Prussia was asked why he attacked Maria-Theresa and her Holy Roman Empire he replied that it was because of his lively disposition and his full treasury …. and the same thing applies to a dynamic, ambitious, rich China right now. [There – and I didn’t mention “communism’ even once].

  79. Paul Burns

    A lot of people appearing on Lateline are quite mad.

  80. Mark

    Also, with high income, there is easier access to credit, and often lower interest rates available.

    The problem in the US was that people with low incomes and declining real incomes had easier access to credit, Paulus.

    It is true that a threateningly large number of Americans are living beyond their means (which for the present purposes my be defined as being unable to service their debts). But these Americans comprise only a small percentage of American households.

    Maybe that’s true with reference to subprime mortgages, Katz, but it’s false with reference to American households as a whole, I’d suggest. Middle class incomes have been in decline throughout the Bush era (and in the longer term since the 70s with a slight blip under Clinton) while things like healthcare and college tuition have been rising in price a lot.

    For household saving to have gone negative in the last three years, it can’t be a small minority of households.

  81. Mark

    Ps – I was using structure and culture synomymously.

  82. Mark
  83. Katz

    I don’t know that middle class American incomes have fallen in the past 30 years. However, let it be admitted that they have fallen.

    Be that as it may, “living beyond one’s means” and “real incomes” measure different things. My test for sustainability was the ability of Americans to service their debts. Persons can do this even if their real incomes do fall.

    Again, falling savings do not necessarily reflect “living beyond one’s means”. During a period of low interest rates (a notorious fact of American life since 2001), it is rational to borrow not merely to consume but also to invest. Millions of Americans did indeed invest in real estate — foolishly as it turns out. But such investment decisions necessarily reduce the propensity of Americans to save, even as investment increases.

    I concede that “culture” and “structure” share overlapping characteristics, but I don’t concede that they are identical.

  84. Mark

    No, I’m not saying they’re identical – just that culture is a structural variable, if you like, not a property of individuals. By definition, obvs.

    Just chasing up some stats on US household income.

  85. Mark

    Ok, if we look at median income from wages, in real terms, it was effectively stagnant from 1972 to 1987, when it began to decline, until an upturn in 1996, after which it’s bounced around with declines from 2004-6. See the table on page 46 of this Census bureau report:

    http://www.census.gov/prod/2008pubs/p60-235.pdf

    Household income for the median quintile follows a very similar trend, though I couldn’t find figures on that quickly from later than 2004.

    That’s separate from income inequality of course which has been on the increase since the 70s:

    http://www.npr.org/templates/story/story.php?storyId=7180618

  86. Adrien

    Graham Bell –

    They might decide that now is a really opportune time to go to war; it is certainly now more in their interests to do so than not

    No it isn’t.
    .
    The Chinese need America – it’s their main market. If they want to destroy the States’ hegemony that’s easy. All they have to do is ask the US to repay its loans in Euros.

    Australia in an interesting position: are we China’s ally or not?

    Mmmm. Indeed. That will be interesting. One of the reasons that, barring a total panic, Australia is not likely to go down the toilet is because of our trading relationship with China. If America does melt down then the Chinese will become even more important to us. In the not too unlikely event that the US and the PRC are embroiled in a spot of bother years hence what will we do?
    .
    And viz Australia taking responsibility for its own defense – hear fuckin’ hear. My researches into geopolitics, particularly of the utterly vile policies of the Bush and Blair governments, is making me almost poisonously misanthorpic. I want nothing more to do with them.
    .
    Trouble is: the PRC is even worse. An alliance of middle powers? I’d pick South Korea but their history is one of being China’s vassal. And most Koreans I’ve spoken to favour the PRC over Japan. Funny that.

  87. Adrien

    Mark and Katz you’re both using the wrong word. The word you’re looking for is econosociostructuro-anthopogenicadiscursivemultilaterlisticness.

  88. Adrien

    Sorry that’s obviously an outdated term, it’s more properly designated neo-econosociostructuro-anthopogenicadiscursivemultilaterlisticnessism. Apologies.

  89. Down and Out of Sài Gòn

    Stuff Congress – the Senate will vote on the bailout first.

  90. Graham Bell

    Adrien [86]:

    Why would China want to attack the United States right now? They’ve got a Christmas-hold on the American economy and besides, the United States might be a handy satellite/client state as time goes by.

    No. I meant that China is now in an excellent position to relieve the United States of its onerous job as the World’s Policeman and to show the whole world what wonderful fellows they are.

    Though I do not expect that either Sudan or Iran will be their enemies in the first couple of wars they become involved in. Now, Somalia is quite another kettle-of-fish; piracy. internal disorder, easy access by air and by sea, great country for tank and airborne operations, absolutely no risk of world-wide condemnation if they go in there …. and, well, what do you know, a country in which the greatest super-power, the United states itself failed ….

  91. Graham Bell

    Tigtog and All:

    It is indeed vital that a sounder package than the “bailout” be hammered out.

    I personally feel that such measures must include exceedingly harsh punishments against the main players who caused this disaster. This is quite apart from the immorality of rewarding crooks for their crimes; that’s an entirely separate moral issue. I’m talking about the economic issue alone.

    America still has the death penalty. America has shown the whole world that nowadays it can and will override any national or international law or covenant for whatever political purposes it likes. America can and must show no less ruthlessness towards those responsible for these gigantic crimes against the American people. The Congress united could take a swift and terrible never-to-be-repeated bold action to save the United States itself. Doing so would need steely courage and iron-hard determination in the face of wild clamour and condemnation..

    If this means the public execution of as many of the culprits as were Imperial Japanese war criminals executed after the Second World War then so be it. Doing so would horrify the whole world – but it would quickly restore confidence in the United States.

    Not as a deterrent – because crooks who plunder the public will never never be deterred by a death penalty – but to show the whole world, as nothing else could, that the United States is absolutely determined to rescue its economy …. and that the U.S.A. is back in business.

  92. Adrien

    Graham –

    No. I meant that China is now in an excellent position to relieve the United States of its onerous job as the World’s Policeman and to show the whole world what wonderful fellows they are.

    Something about frying pan and fire comes to mind here. The US has been behaving pretty obnoxiously since WWII and very obnoxiously for the last 16 years but the PRC running the world? God no!!!!
    .
    Or Russia?
    .
    Do they sell real estate on Mars?

  93. Adrien

    but it would quickly restore confidence in the United States.

    Not as a deterrent – because crooks who plunder the public will never never be deterred by a death penalty – but to show the whole world, as nothing else could, that the United States is absolutely determined to rescue its economy …. and that the U.S.A. is back in business.

    It won’t happen. Following on Chris Hitchens’ The Trial of Henry Kissinger (hope hope) there’s a new book out: The Trial of Donald Rumsfeld the basis for this trial by literature is Rumsfeld’s advocacy of torture. It won’t happen. Neither will American hegemony be rolled back by civilized means I fear. I believe we’re watching something like the processes that took place in Rome in the first century BCE leading to the collapse of the republic.
    .
    I also fear we’re looking at a repeat of what happened to the League of Nations. And we all know what happened next.
    .
    I’m still waiting for Henry Kissinger’s latest memoir: I Deserve to Burn in Hell For Ever.

  94. Brendon

    Adrien:
    And viz Australia taking responsibility for its own defense – hear fuckin’ hear. My researches into geopolitics, particularly of the utterly vile policies of the Bush and Blair governments, is making me almost poisonously misanthorpic. I want nothing more to do with them.

    Adrien, all we need is a set of nuclear tipped ICBMs aimed at the eyeballs of each of the leaders of the major military powers. Only maybe a dozen or so. Guaranteed we will never be attacked. My policy is heavily dependant on the cowadice of political leaders. I’m sure GWB would cack himself. It couldn’t take that long to build them.

    ——————————————————————————–
    Tim Dunlop off to smell a few roses »« Open Garnaut Review report thread
    ——————————————————————————–

    And viz Australia taking responsibility for its own defense – hear fuckin’ hear. My researches into geopolitics, particularly of the utterly vile policies of the Bush and Blair governments, is making me almost poisonously misanthorpic. I want nothing more to do with them.

  95. Adrien

    Brednon – Pragmatically I can’t argue. But I hate nukes. Still I reckon the whole world’s gonna go nuke and then there’ll be peace because either a. Every state has a rational hegemony (snark) or b. Black crusty crater planets are actually quite peaceful. 🙂

  96. Mark

    Here’s something interesting I just came across in my reading – from David Harvey writing in 2003:

    Some 20 per cent of GDP growth in the United States in 2002 was attributable to consumers refinancing their mortgage debt on the inflated values of their housing and using the extra money they gained for immediate consumption… British consumers borrowed $19 billion in the third quarter alone of 2002 against the value of their mortgages to finance their consumption. What happens if and when this property bubble bursts is a matter for serious concern.

    So it’s not just subprime. It’s a generalised devaluation of housing values which were being used to obtain credit for consumption.

  97. Boy from Flynn

    [email protected],

    I can offer some anecdotes of income equality or at least redistribution in the US vs Australia and Canada.

    I was in the United States last year, before for the current debacle came onto the radar and when everything was considered to be in great shape. I recieved a rather SEVERE culture shock. The kind of homelessness and general poverty that you can witness here and there in Sydney or Melbourne was in very much greater abundance in American cities. LA consisted of little islands of great wealth floating in a sea of general crap. Dirty, run-down and most of all – homeless people and beggars absolutely everywhere we went. The parks, sidewalks and uderpasses were swarming with them. Inequality was gross compared with Australia. It was also largely absent from cities in Canada – a country often derided in the US as “soft”, “wet”, or “pinko”.

    We found it appalling that a rich, modern nation could let so many of it’s people simply rot in the gutter – literally.

    As I said, it is only my personal observation but I can assure people that if incomes have been rising in the US, they have not been rising in the lower stratas.

  98. Adrien

    That is interesting Mark. Another excellent indicator of Gross Domestic Product as a reliable indice of just how well things are going.

  99. Down and Out of Sài Gòn

    I believe we’re watching something like the processes that took place in Rome in the first century BCE leading to the collapse of the republic.

    Interesting that you mention that, Adrian. Robert Farley makes the same comparison. It’s not just a few bad apples – it’s massive political and institutional failure in the United States.

    Ezra Klein and Hilzoy (linked to by Robert) are also worth reading.

  100. Mark

    Indeed, Adrien.

    BFF – yep, I’ve heard similar from friends who’ve been to the States.

  101. wizofaus

    While I have been the US recently at witnessed the inequalities first hand, you don’t actually need to go there: it’s pretty visible even in plenty of fairly mainstream Hollywood movies and TV shows, especially those of the Law & Order variety. But what really shocked me is the shoddy state of the infrastucture – AFAICT, almost all roads even in the wealthier parts of major cities are in pretty shocking condition, airports are invariably run-down, public playgrounds completely neglected, and power-outs common. I can only assume it’s been a gradual change that the public just somehow haven’t noticed…

  102. Boy from Flynn

    Yep, that’s the other thing I noticed wizofaus. The general RUN-DOWN appearence of many places there. As we expected, places like Annaheim, Beverly Hills, Rodeo Drive, Orange County etc were clean, well-maintained looking and almost completely free of homeless people (police must keep them out of the upmarket areas or something) while a great many other places have a distinct third-worldish look about them. Lots of money is obviously funnelled into select spots while the rest is largely neglected. I bet public money furnishes the areas lived in and frequented by the rich who pay little or no tax themselves.

    Surprisingly, Hollywood and the walk of fame are among the crappier places. Not far from Maralyn Monroe’s star in the pavement, I saw a guy offering to work for food. How fucked is that?

    Driving past the Bronx, our tour guide pointed out a tiny, run-down cottage on the edge of a sprawling slum and told us that it had recently sold for US$3 million – an omen of things to come.

    Yeah, it’s pretty shocking that the (self -declared) centre of the free world should come to be in such a state. I think though, in accordance with their culture, it would be hard to find a better example of a lumpen proletariat. They must be the most individualistic and self-centred people I have come accross. They appear driven on one hand by a fervent belief that in America, anyone can become mega-rich if they are prepared to work hard enough, and on the other by an almost pathalogical suspicion of government – raising taxes, even if it is to be spent on hospitals, schools, roads etc seems to be regarded as an attack on the American way of life. It’s more like a collection of self-centred individuals than a society as such.

    No wonder they’re stewing in their own sour brew.

  103. Graham Bell

    Adrien [93 – and re my post 91] You said

    “I believe we’re watching something like the processes that took place in Rome in the first century BCE leading to the collapse of the republic”.

    “Great minds think alike” perhaps?

    I did originally think of posting a suggestion of using a modern-day version of the Proscriptio of Lucius Cornelius Sulla but changed my mind when I actually posted and instead suggested the public execution of a symbolic few. Bumping off large numbers of the culprits would delight the victims, of course, but if the U.S. economy is to make anything other than a temporary imaginary recovery then it will need thousands of contrite, rigidly-controlled former finance industry workers to implement the painful, necessary, long-overdue radical reforms. [Those former finance workers undergoing Restitution-&-Rehabilitation work can be taken back to their prison camps each night and given a full day off each Christmas or Rosh-Hashanah].

    [and post 92]:

    China as superpower? Yes, just what is the going price for “waterview” property in the Columbia Hills on Mars?

    Boy from Flynn [97]:

    It was the incredible gap between poverty and ostentatious riches that really shocked me when I was in the U.S. in the ‘Eighties …. and I had a lot of contact with Americans for many years before I went there! Things have got a lot worse since then.

  104. charles

    Boy from Flynn, I’ve spent months and months in the place and I would be happy if I never have to go back. I think you have pretty much nailed it, and to think there a people that want to turn Australia into the same sad and sorry state.

  105. Katz

    The world may be staring into the hollow eyes sockets of teh.biggest.crisis.eva.

    But that’s no reason to spurn the toy arrow lobby:

    From the latest draft of the TARP:

    SEC. 503. EXEMPTION FROM EXCISE TAX FOR CERTAIN WOODEN ARROWS DESIGNED FOR USE BY CHILDREN.

    ‘(B) EXEMPTION FOR CERTAIN WOODEN ARROW SHAFTS.-Subparagraph (A) shall not apply to any shaft consisting of all natural wood with no laminations or artificial means of enhancing the spine of such shaft (whether sold separately or incorporated as part of a finished or unfinished product) of a type used in the manufacture of any arrow which after its assembly- ‘‘(i) measures 5?16 of an inch or less in diameter, and ‘‘(ii) is not suitable for use with a bow described in paragraph (1)(A).”.

    Paulson’s TARP began life as a three-pager. It now has hundreds of sections of the lardiest pork just like the one above.

    I guess some Congress folks are really, really concerned about the future of the world.

    “I shot an arrow into the air, It fell to earth, I knew not where”

  106. adrian

    There are some interesting blogs describing the urban decay and disintegration in many major American cities.

    Detroit appears to be one of the worst hit cities, but it has spawned this wonderful blog :DetroitBlog.
    The blogger combines the gifts of a natural writer with a deep respect for the city and its sometimes desperate and eccentric inhabitants.
    Trawling through the archives is a fascinating experience, giving an outsider a rare insight into the nature of a city in seemingly terminal decline.

    Originally found through the wonderful Australian blog, barista.

  107. wizofaus

    Some background on the “wooden arrow” provision here:

    http://www.bloomberg.com/apps/news?pid=20601103&sid=aKd0vyGN8L2k&refer=us

    Although I also read that it was part of a bill that was already passed by Senate the week prior, and the bills were simply appended for passage through the House, something that occurs fairly commonly apparently.

  108. Kim

    Libertarians worry that the bailout plan is quite similar to The Communist Manifesto!

    http://network.nationalpost.com/np/blogs/fpcomment/archive/2008/09/29/bailout-marks-karl-marx-s-comeback.aspx