Financial Meltdown: The Day After
I have been awoken from my dogmatic slumber (credit goes to the spouse). Let's suppose that the worst happens and the financial system freezes up and none of us can use our credit cards or ATMs. This is truly an awful situation that we should absolutely try to prevent.
However, if we get here, the world does not stop. The Fed and Treasury will have to step in and take over the banks. There would be no alternative.
This is exactly what many economists argue should happen anyhow (I'd put myself in that boat, with some qualifications). So the outcome of the worst case scenario is a really frightening day in which the whole world financial system is shaken to its core, followed by a government takeover of the banks. Eventually the government straightens out the books and sells them off again. But the real threat here is not to the economy, it is to the banks.
Yes. One of the reasons we have a government, after all, is to look after things like this. If Citigroup fails me, my government can and should step in.
But let's face it -- the system will not seize anyway. JP Morgan is in good enough shape that it can probably take over a few more. Long before the government is forced to step in Jamie Dimon is going to wind up the big winner in all of this.
September 28, 2008 12:59 PM | Reply | Permalink
If Citigroup fails me, my government can and should step in.
Step in with what Destor? It's magic money machine?
September 28, 2008 3:46 PM | Reply | Permalink
Nationalize it, seize the assets and unilaterally cancel any liabilities that might hinder getting the bank working immediately for its depositors.
September 28, 2008 5:58 PM | Reply | Permalink
What kinds of liabilities do you have in mind, Destor? Most a a bank's liabilities are its deposits. How can the bank work for its depositors if the government unilaterally cancels the debts that bank owes to others? Wouldn't that immediately tell the whole world that said bank is a shitty bank with which to do business?
US banks are not third world institutions whose debt can be written off by the big boys in a readjustment so they can start from scratch. US banks are core institutions of the engine of global capitalism. If they start canceling their liabilities, the biggest player in the field suddenly becomes a poorer credit risk. That can bring the whole system down, and isn't at all good for the bank's remaining depositors.
September 28, 2008 9:01 PM | Reply | Permalink
Very good, clear analysis Mr. Baker.
What amazes me is that everyone is so eager to patch up and gloss over how really bad our system is. Government takeover right now is a damn sight better than plummeting the nation into an even more staggering debt than we have already incurred only to have to take over the banks eventually anyway. Has no one but me noticed that despite all this talk of "bailout" that no one is willing to say that the great trillion dollar heist will do anything to prevent an ongoing economic meltdown? The whole absurd notion that this ransom money shold be forked over on the idea that we have to do it or the sky will fall has been apparent from day one.
September 28, 2008 1:12 PM | Reply | Permalink
So far we have not seen panic at the local branch level and concerns about local and some regional banks. The panic seems to occur in financial markets and in banks closely tied to those markets. (Money market funds also seem to be at risk.) Perhaps I'm wrong but, so far, that's what it looks like. So, a question is "which banks and why?"
It is a panic that would trigger a major crisis. Institutions like the FDIC may not have the capacity to handle a massive number of failures. I do not know what the magic number of weekly failures that can be handled is but they can shutdown a bank on Friday and ensure that depositors have access to at least their insured funds on Monday. They have a lot in place to ensure that they can do this.
My point/question here has to do with the lack of clarity about the specific institutions and credit mechanisms that are extremely fragile. This was a known problem and those who have the responsibility to act and to inquire seriously about solutions waited until all hell started breaking loose. Specifics may be available or it may be that they are just starting to look for them instead of making up bedtime stories for themselves and others.
To repeat the point/question in the first paragraph in a different way, so far this primarily seems to be a problem related to highly visible banks closely tied to Wall Street and the exchanges. I do not want to downplay the significance of large, New York banks but I suspect that the small banks in my area are in good shape as are some of the larger regional banks.
To what extent have they glued sound and stable banking operations to unsound and unstable ones. The "glue" can be "real" in the sense of bad paper or simply "perceptual" in terms of obfuscation.
It's panic due to lack of trust that will cause a disaster and the potential for panic has been exacerbated by the way that Congress, the Fed and the Treasury has been dealing with this. These committees technically did not have to wait to dig deeper and instead seemed to play chicken. Maybe that is all they can do so I'm not ready to condemn their inaction.
September 28, 2008 1:15 PM | Reply | Permalink
Call some of them up tomorrow and ask them if they'll give you a car loan with a 720 credit score. What does "good shape" mean? Being able to cover a run is not really the same as being actively engaged in the banking business. Don't fool yourself, everything is already basically frozen right now. If you haven't gotten the notice from your credit cards that your limits have been cut, you will.
September 28, 2008 4:04 PM | Reply | Permalink
You have a very good point but I really did mean the extreme case of people withdrawing their balance in a panic, i.e., a classic run on the bank or employers can't make payroll.
I have never relied on credit that much so I'm not worried about car loans and credit card limits. That's just disclosure. I'm neither rich, particularly frugal, etc. I always thought the rates offered were really bad. I often been surprised that they kept raising limits and going out of their way to offer me loans.
You should seriously consider that they have been getting people to depend on credit cards and, more importantly, failing to pay adequate wages, etc.
I'm not denying that there is a serious problem. I'm just not buying how its being handled and I know enough based on education, experience and watching the evolution to justify a great deal of skepticism about what is going on and I'd like to have a better sense that they are doing something that will not make it worse or just forestall the inevitable.
If the economy is being kept afloat by credit cards, that's not viable. Apparently, that is the case. People have way too much consumer debt. That's a structural problem. This is not going to solve it.
Please note: I am not thinking ill of anyone who has had to rely on consumer debt to survive. If that is the case, then that kind of necessity is a big part of the problem.
I'm not bullet proof but I'm very skeptical of the constant use of fear to manipulate everyone and they have not convinced me the world is coming to an end.
September 28, 2008 5:20 PM | Reply | Permalink
And have you noticed how quickly the MSM has accepted the premise that now all other spending must be frozen? How dare anyone bring up health care when we're bailing out the banks. This is what we get when Democrats have no agenda but reacting to the other side and the disasters they create.
September 28, 2008 1:16 PM | Reply | Permalink
Exactly. Hell, maybe the Democrats should be saying "We've gone forever without fixing healthcare, so the banking system can wait too."
Or, hell, no Wall Street bailout without universal healthcare. If we can afford one we can afford the other.
September 28, 2008 1:25 PM | Reply | Permalink
It's just the same sort of pronouncement we heard when 9/11 happened in preparation for the implementation of the very police state actions Bush had already impelemented bu kept secret and which he would then institute openly in the coming months/years. We have seen this same pattern of PR orchestration repeatedly in the past 10 years. The fingerprints are too glaring not t recognize in my opinion.
Remember how the first tower hadn't even collapsed the morning of the attacks in 2001 and the talking heads on cable and broadcast tv were already solemnly declaring that it would necessarily mean the surrender or restriction of some of our liberties? I recognized that immediately upon hearing it as the bullshit it was adn so did many others, but this sort of propaganda push is an integral part of the hoax required to get the people to accept this trillion dollar wealth transfer. Remember, legitimacy is the sine qua non of political power and is thus required to maintain the credibility of governmental authority to take action and to implement it's plans. It is almost a requirement that this sort of approach be used for staging this kind of ill-advised and illegitimate activity because the founders wisely put in place a system that naturally thwarts quick, intemperate decisions. The one thing that all such flim flams require to succeed in our system is a circumvention of normal processes thus an emergency must necessarily be declared and is the predicate for all subsequent illegitimate and ill-advised action to be considered legitimate. Afterward, when the scam becomes obvious to everyone the usual excuses are served up: "we made our decision based on the data/intelligence/reports/best advice available at the time" and/or "no one could have foreseen or predicted" what was obvious for all to see, etc...
This very same, hustling tactic was first tried on a grand scale (albeit unsuccessfully) when the Lewinsky "issue" blew up (pardon the pun) on Clinton back in the 90's. It was actually an attempted coup of sorts in my opinion. The way things played out so perfectly for those who wanted to get rid of Clinton is what makes their effort so easily recognizable to those willing to view it honestly and yes, the vast right wing conspiracy is what I'm talking about in this case. Many of the very same extremely powerful interests are involved in all of the precipitous and ill-advised policies and decisions of the past 8 years.
You may recall, the at the start of the Lewinsky affair, the "revelation" that the Presiden had gotten blowjobs from this previously unknown young tart came to light on a Wednesday evening or Thursday morning. The media clamor for Clinton's resignation started right on cue---within minutes. By mid-morning on Friday the media solemnly announced that a Clinton resignation was "expected" over the weekend. Only one thing upset this well organized and orchestrated plan (remember, it almost worked) and that was whoever the hero was inside the Clinton camp that made the decision to close down the White House switchboard, go incommunicado and dig in over that crucial weekend. Throughout Satruday and Sunday the media din calling for Clinton's dick on a platter and his resignation with it continued feverishly and with ever increasing volume and ferocity. By Monday morning, the putsch havng apparently failed, it looked as though the White House was simply refusing to give in and that despite the mighty, orchestrated effort the scheme was in full collapse. Time was the only antidote to the force and relentlessness of the attempt to push Clinton out of office.
Time also was the remedy (discarded quickly) hen it came to the most important and most disasterous laws and policies of the Bush years such as the Iraq war authorization, the Patriot Act, the FISA revisions, etc... Time is also the sunlight that had the potential to disinfect the current plan to steal nearly a trillion dollars from the treasurty for the benefit of a handul of powerful, wealthy interests. What little delay that actually occured improved dramatically the shape and content of the theivery so that there are now at least some minimal protections in place for taxpayers assuming they are enforced.
September 28, 2008 1:54 PM | Reply | Permalink
The way "we" are correcting the bank problem is to make sure we really do have to take over and absorb all losses later. JP Morgan is probably too big now to allow it to fail. As it absorbs still more banks, it just makes it impossible to even contemplate JPMorgan failing. That gives them carte blanche to go wild with ever risky, but potentially high yielding investiments. There is no down side to doing so. It will not be possible to allow such investments to fail, so we, the taxpayers, will assume all of the risks for them. It's nice work if you can get it.
September 28, 2008 3:02 PM | Reply | Permalink
The risk being assumed by taxpayers is absurd. We are going to be handed a ton of bad debt while Wall Street investment houses and banks keep the cream. They'll make a ton of money and we'll lose our asses. The risk was taken on by them, let them solve it among themselves. If they fail so what. Their failure won't affect regular wage earners. It'll only really affect the big players. All the risk was concentrated among high rollers. If their institutions fail it makes almost no difference to Main Street. We are simply bailing out firms or individuals who took high yield, high risk positions that didn't work out. That isn't our responsibility.
September 28, 2008 3:21 PM | Reply | Permalink
I somewhat understand the rationale for this bailout. What worries me is the consolidation of financial institutions that is taking place under the buyouts that are occurring at the same time. It seems that we are going to end up with just a few (at the most) of these banking conglomerates. How then will a bailout work since the power will be in the hands of two or three players? Won't they be calling the tune? It seems that this is a well coordinated move to the finalization of a fascist America.
September 28, 2008 3:22 PM | Reply | Permalink
Thank you for explaining the worst case scenario. In all of my readings, yours is the best and most understandable.
But the real threat here is not to the economy, it is to the banks.
Can you expand some more on the threat to the banks? Like, would the gov't take over just the federal banks or would state chartered banks be included, even if they are not in trouble? (I hope that's not a stupid question.)
September 28, 2008 3:36 PM | Reply | Permalink
Eventually the government straightens out the books and sells them off again. But the real threat here is not to the economy, it is to the banks.
Mr. Baker, what happens during the period between the day the government takes over the banks and the later day when it sells them off again after "straightening out the books"? Remember, you are positing a day of sheer panic that sets this off. Does the government then freeze bank withdrawals to prevent a massive run on the banks so that it has something left to straighten out? If so, what happens to our economy when people have zero money to spend? Do they pay for everything on credit? Will their credit cards continue to be accepted by the businesses who will no doubt be worrying about how good all this credit really is? And if it allows the massive withdrawals. then how does it re-finance the straightening out? Does it print money by the truckloads? Does it borrow everything from China and Europe?
I'm sorry, but this is madness. I'm finding that lage sectors of the lefty blogosphere have gone absolutely, totally, freakishly nuts. Off their rockers. Bonkers. Mass delusion and mob mentality, with the inmates running the asylum. Moire and more we hear the lefty version of "let it crash" shock treatment advanced as serious policy, by people who should know better, the latter apparently spooked or intoxicated by the torrent of fevered discourse from an army of pitchfork-wielding keyboard yahoos. Lefty apocalyptic shock treatment is just as unhinged and extremist as the most radical Norquistian wingers with their fiscal train wreck ideas about destroying the government by destroying its balance sheet.
What does this plan amount to? Let's fuck around with depression brinkmanship so that, if everything goes juuuuust right, and we don't crash the economy into Great Depression II, we can engineer a government takeover? Count me out. This is insanity.
You're the economist, so prove me wrong. But from where I sit you've lost it. You sound like an utter hysteric, Mr. Baker. What has happened to you? You are now on the lunatic fringe. Tell your wife to go back to sleep and stop disturbing your balance with her apocalyptic fantasies.
September 28, 2008 3:44 PM | Reply | Permalink
Yep. They've absolutely taken leave of their senses. We keep lurching around, from discussion of various options to deal with this crisis (fine), to "Let 'Em Crash" (really frigging unfine.) And Baker's stuff just enables those who're lost in the fog to keep on ranting.
I mean, ok, we nationalize all the banks. Cool. I'm in. But, ummmm, we're a nation afloat on foreign cash. Doncha think that'd be sending just the tiniest negative signal to the Chinese, Japanese, Russians & OPEC holders of trillions? Sure, they can buy T-Bills. At 0%.
My God. The largest bank failure in history, AIG, largest bankruptcy, 5 investment banks gone, T-Bills hitting 0%, TED run wild, $5 trillion in housing taken-over, 107 banks on the watch list, FDIC outta cash, deficits through the roof, $700 billion trade deficit, trillions of $ held overseas, unemployment going up, consumer savings at nada and credit card/auto-loan pressures rising, oil/food/commodities whipsawing, currency flying up and down.... Crisis? What crisis? What risk to the real economy?
Baker. Keep feeding the nonsense talk out here and the ONLY credit you're gonna see is from your wife.
September 28, 2008 6:12 PM | Reply | Permalink
Amen.
September 28, 2008 6:25 PM | Reply | Permalink
P.S.
Obama says financial bailout necessary
10 hours ago
WASHINGTON (AP)
In a statement Sunday, the Democratic presidential nominee said, "regardless of how we got here, a failure to deal with the current crisis would have devastating consequences for our economy, costing millions of Americans their jobs and retirement security."
http://ap.google.com/article/ALeqM5hShKYdJ4cp-nC99ZBCXe1yCypUXgD93FNC780
September 28, 2008 6:32 PM | Reply | Permalink
Your list of horribles bound to occur if we nationalize insolvent banks (not "all the banks," quinn esq) is not supported by the history of Sweden's 1992 responses to its financial crisis.
Can you explain the apparent contradiction?
September 28, 2008 8:33 PM | Reply | Permalink
For starters, Sweden's GDP = $455 Billion. USA's GDP = $13,840. That's 30X larger. Size of our banks vs theirs? Likely a larger ratio. More important, Sweden has long stood as the symbol of "polite socialism" in the West. The USA? A little different. Places money could go if Sweden was tied up? Quite a few. Places it can go if the US seizes? I donno. Maybe if we were into terraforming Jupiter.
Truth is, maybe it could be done. But boy, that's a big big roll of the dice. Nationalize the most powerful moneymen at the center of the most powerful Empire? That's not lacking in ambition, I'll say that much.
As for "all" vs "some," not sure the difference is real important anymore. 107 on the watch list. Some big puppies already down, the rest wounded, and the chain - if this thing seizes up much more - would likely collect 'em all. But I donno, the Tulsa Branch of the Oral Roberts S&L, and maybe the Wasilla Foreleg of Wolf Credit Union might make it. No ATM's, mind you, but prayer & a good rifle might see you through to some cash.
September 28, 2008 9:00 PM | Reply | Permalink
Whether nationalization of certain banks is a viable option is one question. But answering that question doesn't speak to the utter craziness of Dean Baker's post at the top of the thread. The whole point of a government bailout or takeover - whether through the purchase of assets or an actual takeover of the banks - is, I take it, to increase confidence and restore liquidity in shaky and dubious institutions.
If you wait until there has already been a massive run on the nation's banks, meaning confidence has collapsed society-wide, it's too late. I have trouble believing that after a day of sheer panic, when people across the country suddenly find their credit cards and ATM cards don't work and banks won't give them their money, the government can just nationalize the banks overnight, and then the next day convince all those panic-stricken Americans who tried on the previous day to take their money out of their failing banks to just sit tight and leave their money where it is.
Baker's point was, seemingly, that we can take a risk on no bailout because the worst-case scenario of a total freeze-up and run on the banks is not that bad. But it seems to me that it is very, very, very bad indeed.
September 28, 2008 9:29 PM | Reply | Permalink
The American People just got punked by the top 1%. You were robbed folks and you won't even realize it until the spending cuts hit.
September 28, 2008 4:27 PM | Reply | Permalink
the problem with this premise is the Federal Reserve is a PRIVATE BANK. They are one of the biggest private corporations in the world, owned by uber-wealthy East Coast blue-bloods. They have been in charge of our currency and running up our debt since the Reserve Act of 1913. Many of them turn around and own large chunks of the JP Morgans and Citibanks as well. Asking the Federal Reserve to take over other banks is a fox in the henhouse scenario.
If Dean really wants to get to the root of the problem -- he would be advoacating a complete overhaul of the Federal Reserve system.
September 28, 2008 4:32 PM | Reply | Permalink
Does any one here in our community know what was the Con of establishing the Federal Reserve?
Is it possible that in it's arrogance, the crisis of failure was not necessarily the collapse of government but rather the exposing of the failures of the Federal Reserve System.
Price leadership is an observation made of oligopic business behavior in which one company, usually the dominant competitor among several, leads the way in determining prices, the others soon following. In the long run price leadership could have a negative impact on the dominant firm. Over time, as the supply from the fringe (smaller) competitors in the market increases the residual demand of the dominant firm decreases. In such a scenario, if the dominant firm intends to continue as the price leader in the market, it can do so only at the cost of decreasing its supply to the market, consequently sacrificing its market share. Unheeded to, the gradual loss in market share could see the once dominant player lose its position of dominance in the market.
September 28, 2008 9:06 PM | Reply | Permalink
Omigod--no one could survive for a single day without their ATM card? If you're worried about it, take $20 out of the bank, put it in the drawer and then leave it there. You'll make it through, really. But I do wonder just a tiny bit when Dean's spouse wakes him up to discuss this with her/him on Sunday morning...
September 28, 2008 5:20 PM | Reply | Permalink
Paulson was just on 60 Minutes, he said;
We need to do this bailout to restore confidence in the economy and the market, there will be turbulance but we need the time to get the market to regain its footing and get on track.
OH MY GOD, ITS SURGE II !!!!!!
September 28, 2008 7:22 PM | Reply | Permalink
September 27 2008 (LPAC)--Lyndon LaRouche today reiterated that the trillion dollar taxpayers bailout scheme, being peddled by Hank Paulson, Barney Frank, Chris Dodd, et al. is doomed to fail. ``If the bailout is passed, this will not solve anything. It will trigger Weimar hyperinflation immediately, will bring down the whole banking system, and, contrary to Gordon Brown's fantasies, will not save the hopelessly bankrupt British banking system.''
LaRouche emphasized, ``However, as many people inside Washington and on Wall Street perfectly well know, there is a Plan B. Plan B is my three-step solution, which begins with bankruptcy reorganization, rather than hyperinflationary bailout. First, pass my Homeowners and Bank Protection Act (HBPA). This viable proposal has been out there since Sept. 2007, and everyone serious, who has studied it, knows it will work. Had Congress shown the guts to pass my HBPA in 2007, this crisis would have been averted, and we would have already been on the road to a new, viable international financial order.
``Second, Congress, in coordination with the Fed, must establish a two-tiered credit system. The Fed must immediately increase short-term rates to 4 percent, to send a clear signal that the U.S. government is behind a strong dollar. At the same time, Congress, using its Constitutional authority, must issue trillions of dollars in low-interest credit for earmarked infrastructure projects, in the vital interest of the nation. We need high-speed rail and maglev, nuclear power, water management, new hospitals, repairs on our bridges and roads. These kinds of projects should be financed through capital budgeting, authorized by Congress at 1-2 percent interest.''
LaRouche said, ``And at the same time, the United States, Russia, China and India must take the lead in convening a treaty conference to establish a new international financial system, based on fixed exchange rates, along the conceptual lines of what Franklin Roosevelt did in 1944 with the original Bretton Woods System. We can and must put the bankrupt current international financial system through bankruptcy reorganization, and launch, on a global scale, what I have proposed with the domestic capital investment in massive infrastructure.''
LaRouche noted that prominent Italian officials have voiced their support for the convening of such a New Bretton Woods conference, and Russian leaders, including President Medvedev and Prime Minister Putin, have voiced similar support, particularly if the United States takes the lead.
``So no one in good faith,'' LaRouche concluded, "can honestly claim that the current bailout scheme on the table of Paulson, Frank and Dodd is the only option. It is not the only option. It is the option of a dark age for civilization. My Plan B is available, is viable, and can and must be acted upon now. This week.''
Lyndon LaRouche emphasized that the actual breakdown which he had forecast on July 25, 2007 has already occurred, and as of now, there will be no return to the system that existed prior to September 2008. Only a new design of a system echoing the intentions of Franklin Roosevelt at the 1944 Bretton Woods conference could rescue the world's physical economy under present, post-August 2008 conditions.
To this end, LaRouche specified four necessary steps:
Step #1: Put the present international monetary system into bankruptcy reorganization.
Step #2: Create a new system, a credit system, rather than a monetary system, in the form of an appropriately modern version of President Franklin Roosevelt's intention for a Bretton Woods system.
Step #3: Organize the new system on the basis of an extended form of the 1648 Peace of Westphalia system, rather than a conflict-system. The IMF must be replaced by a treaty organization among participating sovereign nation-states with complementary long-term economic missions of scientific and related progress per-capita and per-square kilometer of territory.
Step #4: Define a common, long-term mission-orientation of two or more generations' span for increase of the productive powers of labor among nations generally.
September 28, 2008 7:52 PM | Reply | Permalink