The people with ready capital have no incentive to invest it either way, bailout or not. As more institutions collapse assets will be sold off at more favorable rates as well. No need to risk it now in tough negatiations at all.

I think they need to fail because the system stands a chance of getting fixed if they do. If the impact of their extremely poor and in many cases unethical business practices is lessened then the political will will not exist to make the needed regulatory changes.

The bail out, I am afraid, is the last desparate attempt by the Reaganomics standard bearers to stave off the meaningful regulation that needs to take place.

People are getting tired of the insanity of our Corporate pay strucutures. The CEO of WAMU worked for 3 weeks and will receieve total compensation of $18.5 million. CRAZY.

So what is Rogoff's take on what happened last week, then? I have heard many traders and finance guys say this week that the capital market almost completely "froze up" and there was a situation of sheer panic about money market funds "breaking the buck". That was before the proposed bailout, so how does Rogoff's theory about the liquidity crisis being due entirely to the promise of a bailout account for that panic?

Does this mean John McCain's blowing up the bailout deal with his suspension stunt was actually the best move for the economy?

Mr. Magoo caused some accidents along the way, but he always got to his destination. Is McGoo a mad genius? (I hope not.)

http://www.youtube.com/watch?v=plyWxrHLE14

I meant not saving the gamblers reckless skins

Sure, but it's not good that people on Wall Street are losing their jobs, it's comeuppance. How many jobs have investment bankers cost people by agitating for fee-generating mergers that leave both workers and shareholders poorer in the end?

Heck, one reason why any public bailout by the government should include an equity stake is that the government, as a shareholder would then help to direct the activities of those banks -- to make sure they operate in a way that's better for society.

This is a one drug cures all ailments crisis. The Repubs needed something to cause an atmosphere of fear so voters will go for the old fart with the experience and not the young upstart. The Repubs in Congress need a campaign issue - if they can con the Democrats into passing this terrible piece of legislation, at Bush's bidding, they will all vote against it, and run on the issue that the Dems gave away the treasury to Wall Street. If the Democrats don't pass something similar to the Bush request, they can run against the Democrats for failing to make any effort to save the nation in a time of crisis. It is pretty easy to understand, I think.

I doubt that the crisis is real. Businesses may fail, and several banks have now done so, but so what? Businesses need to fail when they make such bad mistakes. Meanwhile all of those dollars are still floating in the international market and some use needs to be made of them. So, they will continue to be available as loans, probably just with higher interest rates.

Let's throw out another "Is This Crisis Real?" gambit.

Everyone talks about the huge TED spread -- the difference between the T-bill 3 month rate and the LIBOR -- as proof that there's a desperate credit crunch going on.

But there's nothing particularly sacrosanct or credible about LIBOR or any particular agreement about what it means.

For example -- and in contradiction of how the media describes it -- LIBOR tells us nothing about what rate banks will loan to each other. Why? Firstly, it's not based on actual loans, and second, it's based on what somebody in each of the sixteen or less London contributor banks estimates her bank would have to pay if it were to borrow that day shortly before 1100 GMT.

From the British Bankers' Assn. definition:

A. An individual BBA LIBOR Contributor Panel Bank will contribute the rate at which it could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size just prior to 1100.

Now, if you were a bank (presumably, half the "contributor" banks are American and Paulson promised to bail out foreign banks, anyway) which was looking forward to being bailed out by the taxpayers, it seems to me you'd have an interest in making the TED spread as large as possible to encourage the sense of panic.

Easily done. Just report your "best estimate" of what your cost of borrowings would be if you were to borrow and make it as high as you think you can get away with.

Notes: 1) Banks "contribute" the daily rate even though they may have no intention of borrowing, didn't borrow, and didn't get turned down at a rate lower than they report.

2)Since you didn't actually borrow, your rate "estimate" can't be challenged by a rate generated by a real transaction-- and you won't go to jail.

Thanks Professor. Interesting but not surprising news. I have thought throughout that since even little folk like me were aware of the fraud and conjob the Banks and Wall Street were perpetrating that it was unlikely to unravel the nation's economic system. They knew what they were doing and they know how big it was and when it was likely to start crashing down around them. Lo and behold it did!

They should pay for their malfeasance. If the financial industry needs help we'll know it when the time comes. I see no need for precipitous action. Curious that the Dems are the ones so eager to service Wall Street's needs isn't it?

This attempted heist of the Federal treasury has always struck me as one last giant robbery before Bush heads out the door on behalf of one of his favorite constituencies before they lose power.

What I see:

This crisis developed around the time it became clear McCain's bounce was not going to last.

Congress has only managed to come together and agree on a few substantial things, like transferring a trillion of taxpayer dollars to defense contractors for an unnecessary war and wasting billions of taxpayer dollars each year for unnecessary earmarks. (They've done absolutely nothing substantial with taxpayer money to resolve basics like education, renewable energy, infrastructure, healthcare,etc.) None of the previous transfers of taxpayer money has delivered anything meaningful to the taxpayers. So it would be silliness to assume this "rescue" is an about face that has anything to do with the well being of Americans.

And--surprise!-- now even Obama is saying he won't be able to really do all the things he promised due to this bailout. He plans to vote for this excuse to not deliver, in a manner that is precisely the opposite of what he's been speaking against (lack of transparency; more fear, more rushing, more lies--no change in the the way washington works; no real leadership or truth on this issue; no seat for Americans at the table when a trillion are given away).

Common sense says that in a rough economic time, a rash transfer of another trillion of the taxpayers is foolish.

The only hopeful aspect of this fiasco is that the the American voters are awake, watching, and this time they just aren't buying. The phones in Congress are completely tied up with angry voters, so the way this is handled is informative.

And once again, the MSM outlets and "experts" are taking (or providing) dictation from Bush, the Congressional leadership and other interested parties. They are asking no hard questions and unabashadly rushed to accept and straightaway framed this as a "crisis" that necessitates a fast, trillion dollar "rescue." They skipped right over any real debate about whether this is really a crisis, whether a bailout is a rational solution, what other options might be worth looking at, and went on to HOW this bail out is going to be done.

Maybe this evisceration of whatever credibility the media and Congress has left is just what the voters need to mobilize support for new leadership in Congress and publicly funded campaigns.

During the debates, both Obama and McCain let wall street know they are on board with the rush-job by telling voters this is the greatest crisis since the great depression. They both promised to vote for the hasty bailout, without even knowing what the details would be, as it's still in progress. McCain then quickly moved on to talk angrily about a 3 Miliion dollar earmark to study the DNA of bears as though he's the best steward of the taxpayer money and didn't just commit to rush through a trillion dollar bailout. Obama went on to talk about how McCain is planning to cut 300 Billion dollars in corporate taxes as if he's a good steward of the taxpayer money and didn't just commit to rushing through a trillion dollar bailout.

The language in clause 8 of Paulson's proposal---that would give an unelected, head administrator a billion with no accountability or judicial review--was revealing, too. That the clause was ever written implied Bush, Paulson and BOTH parties are on the same unconstitutional page and the author knows that something is so wrong with this that oversight would lead to trouble. If they were confident this was a crisis that required a free-for-all bailout, they would not be worried about judicial oversight. And iss there any chance that Republicans or Democrats would even consider allowing Paulson to dole out a tril if they were not convinced this windfall was going to please the donors they each favor? This really blurs the line between the parties and makes the partisanship look like a big show and excuse just used when it comes to getting anything done for the people, since they can get it together and agree to deliver when it comes to war, earmarks and bailouts.

Bruce Marks of NACA and many others are also saying this is not a real crisis.

I found the panel discussion frustratingly unfocussed and digressive, and it simply didn’t answer the key questions I have. I am trying to conceptualize the issues along these lines:

1. What should we do in the next week or two to stabilize the financial markets, and make sure that the crisis of confidence and jitters does not turn into a panicky deflationary selloff or a calamitous freeze-up of capital markets that ends up rippling massively throughout the economy, destroying wealth and jobs as it ripples?

2. What should we do in the months after that to re-regulate the financial services sector, and address some fundamental root problems in the housing and mortgage market, and help homeowners rework mortgages and stay in their homes – if they want to?

3. What should we do in the next administration to effect more systematic economic restructuring?

The immediate term question 1 is the most urgent, but I don’t feel like I’m any closer to knowing the answer to that question after seeing the panel discussion.

Rogoff's idea seems to be that the financial services sector is bloated and needs to contract, and so we need to take a sort of tough "let them fail" attitude with these struggling financial institutions. Obviously that will lead to a lot of job loss and dislocation in that sector, but he presumably thinks the losses will be confined to that sector as economic efficiency makes it leaner and meaner. And he apparently thinks there is no real liquidity “crisis”, just a somewhat chaotic and rough reorganization.

I’m not convinced. Is there really plenty of capital available “on the sidelines” which will start to flow after a few days, or is there a genuine liquidity crisis that is going to destroy many perfectly healthy businesses and jobs when they can’t meet their operating costs? I have heard people argue the issue both ways, but the arguments are very anecdotal: “I have a friend who says ...” etc. etc.

Merton emphasized that real value is being lost. At the bottom of the whole mess, as I understand it, is the fact that home values are falling. At the same time we have a terrible exchange rate, and the costs of other essential goods are increasing as we ship wealth overseas making it harder and harder for people to pay their mortgages, etc. People can’t sell their homes or refinance to keep up. And the multiply sliced and diced securities financial firms own have such a confusing relation to the real values of the homes that underpin their value, that nobody knows how to value these assets in the market.

I am not reassured that I should stop worrying and learn to love the financial chaos. It still smells like a crisis to me.

There is an interesting tension here, which we have seen on the Democratic side for years, between those who focus on consumer issues vs. those who focus on labor issues. (e.g. Walmat: good for consumers, but bad for labor.) Professor Warren sees these issues, I believe, from the standpoint of the consumer. Nathan Newman focuses more on jobs. Personally, I’m not worried about my mortgage right now, or even so much about the falling market value of my home. I’m worried about my job.

So far I agree with all of the above, post and comments. I have not yet watched the panel discussion but I do agree there is plenty of money looking for a place to go.

I spent a few hours yesterday reading up on the overnight repo markets to see how it may have changed in the past 25 years - the last time I channeled some investors money through it myself. Apparently it hasn't changed that much.
The following comments are just me trying to work out what is going on. It is probably much more complicated but I think the fundamental problem of too much money with too few places to go is accurate.

Most state pension funds and other institutional investors (IIs) like AIG are required by their charter or bylaws to invest excess cash (over FDIC limits) in short-term U.S. Treasuries or equivalents. Fannie, Freddie and Ginnie were formerly their preferred equivalents although some high-rated municipals also qualified. As the amount of excess cash grew in recent years, the list of equivalents expanded to include at least some of the "safer" alphabits of securitized debt. Investment in overnight repurchase">http://en.wikipedia.org/wiki/Repurchase_agreement”>repurchase agreements of these securities provide the shortest of terms and so the most liquidity. I would guess that hedge funds and others like China have adopted the same guidelines for their excess cash in US banks.

When the housing market began to collapse and foreclosures increased, IIs retreated back to the more traditional equivalents letting what repos they had in the newer securities unwind leaving investment banks stuck with assets specifically designed for a limited market that no longer wanted them. They may not be actually toxic or even worthless but they definitely have no current market value. Then the questionable solvency of investment banks left holding the "toxic" assets caused IIs to let their more traditional repos with those banks unwind and tranfers the money to safer havens. Voila, an investment bank run.

Problems at Fannie and Freddie probably triggered a similar retreat by IIs to Treasury repos driving interest rates down. Then Lehmann's collapse triggered a flight of cash from money markets into T-Bills and their rate went to zero and beyond.

Everything the government has done so far, expanding FDIC coverage and limits, the takeovers of Fannie and Freddie and even AIG, provides a place for IIs to hold cash that keeps them in compliance with their charters and bylaws and in US Treasuries, banks and money markets. If they find a safer haven, our interest rates will skyrocket. Maybe $700 billion to untangle some institutional funds is worth it. After all, charters and bylaws can be changed.

Actually, after giving this post some thought, I think we do have somewhat of a crisis on our hands. Part of it is a political crisis. Economically, it maybe is not as bad as the Treasury Secretary tried to make it out to be, but our economy is in serious peril. We have been through 6 other crisis' related to excessive mortgage lending creativity. This is the biggest. We should have seen it coming because we've been through it so many times before.

Instead, Obama received the second largest amount of campaign contributions from Fannie Mae and Freddie Mac, and Senator Dodd was deeply involved as well, among other Democrats. While McCain tried to get legislation passed to stop the corporate welfare going to these organizations, Obama and Dodd were profiting from the "affordable housing" push - driving Fannie and Freddie to insolvency.

It was a Democratic agenda to increase "affordable housing" by loosening lending standards for those who couldn't afford to buy homes without those loosened standards. Meaning they couldn't afford to buy the homes and needed excessive loans to get into them. Yet, the Democrats are now blaming the Republicans. This is outrageous, taking advantage of the poor for political gain. It never helps anyone with financial problems to give them a loan. It only gets them deeper in debt. This is on par with payday loans and rent-to-own. They need larger incomes and less inflation, not loans. You can't solve a debt problem with more debt - it is like giving an alcoholic a drink to help him. This is pure greed for power in Washington, on the backs of the poor and middle class - while they propose that they are standing up for the middle class and poor. Sorry, that won't fly anymore with me!

I am neither a Republican or a Democrat, so I have no allegiance to either party. What I see sickens me. Political corruption is accepted now, and even hidden by the liberal media. I hope this gets out as a news story before the election, and the truth told by a conservative news reporter. I'd rather not see Democrats continuing this charade. We need to throw them out!!! (at least those who played a part in this political profiteering with Fannie and Freddie - especially Obama and Dodd, and the others.)