Confusion, Tunneling, And Looting
Emerging market crises are marked by an increase in tunneling - i.e., borderline legal/illegal smuggling of value out of businesses. As time horizons become shorter, employees have less incentive to protect shareholder value and are more inclined to help out friends or prepare a soft exit for themselves.
Boris Fyodorov, the late Russian Minister of Finance who struggled for many years against corruption and the abuse of authority, could be blunt. Confusion helps the powerful, he argued. When there are complicated government bailout schemes, multiple exchange rates, or high inflation, it is very hard to keep track of market prices and to protect the value of firms. The result, if taken to an extreme, is looting: the collapse of banks, industrial firms, and other entities because the insiders take the money (or other valuables) and run.
This is the prospect now faced by the United States.
Treasury has made it clear that they will proceed with a "mix-and-match" strategy, as advertized. And people close to the Administration tell me things along the lines of "it will be messy" and "there is no alternative." The people involved are convinced - and hold this almost as an unshakeable ideology - that this is the only way to bring private capital into banks.
This attempt to protect shareholders and insiders in large banks is misguided. Not only have these shareholders already been almost completely wiped out by the actions and inactions of the executives and boards in these banks (why haven't these boards resigned?), but the government's policy is creating toxic financial institutions that no one wants to touch either with equity investments or - increasingly - further credit.
Policy confusion is rampant. Did the government effectively sort-of nationalize Citigroup last Thursday when it said Vikram Pandit will stay on as CEO? If that wasn't a nationalization moment (i.e., an assertion that the government is now the dominant shareholder), what legal authority does the Treasury have to decide who is and is not running a private company?
Will debtholders be forced to take losses and, if so, how much and for whom? As part of last week's Citigroup deal, preferred shareholders - whose claims had debt-like characteristics - were pressed into converting to common stock. You may or may not like forced debt-for-equity swaps, but be aware of what the prospect of these will do to the credit market. Junior subordinated Citigroup debt (securities underlying enhanced trust preferred shares) were yesterday yielding 26%.
Who can explain exactly how AIG has lost so much money? Drip-drip injections of government money are not a proper clean-up; there has been no complete recognition of losses and, almost six months later, that company still cannot move on. Time horizons presumably remain short or are getting shorter for all involved. This points to a bleak future more generally.
What do rapidly widening credit default spreads for nonbank financial entities (such as GE Capital and many insurance companies) signify? Is it something about expected behavior by the insiders or by government, or by some combination of both?
Confusion in policy breeds disorder in companies, and disorder leads to the loss of value. This is the reality of severe crises wherever they unfold; we have not yet reached the worst moment. And, of course, there are many more shocks heading our way - mostly from Europe, but also potentially from Asia.
The course of policy is set. For at least the next 18 months, we know what to expect on the banking front. Now Treasury is committed, the leadership in this area will not deviate from a pro-insider policy for large banks; they are not interested in alternative approaches (I've asked). The result will be further destruction of the private credit system and more recourse to relatively nontransparent actions by the Federal Reserve, with all the risks that entails.
The road to economic hell is paved with good intentions and bad banks.
Theoretically, we already have laws on the books to prevent tunneling and looting...now, whether anyone's going to enforce it, well, it's a bit of a prisoner's dilemma.
For example, in bankruptcy, creditors can avoid (get rid of, or rescind) certain transfers to "insiders" and their friends for a specific time period around the bankruptcy petition date- no questions asked. Of course, there's room for a debtor to maneuver around those dates. and, of course, this only applies to companies filing for bankruptcy.
Most states, in addition, have fraudulent transfer statutes, where transferring money to friends and relatives to avoid paying the creditors is unlawful. Usually, though (and I may be wrong) these are enforced by private lawsuits.
Who has the money (and time) these days to start a lawsuit and wait 2 years to reap the fruits?
March 5, 2009 8:32 AM | Reply | Permalink
Anybody want to comment on why Obama is supporting a policy of rewarding insiders, eliminating transparency, and crippling credit? Surely there's an apologist out there?
March 5, 2009 9:19 AM | Reply | Permalink
Ain't nobody gona apologize. Some of us were screaming to top our lungs when he was making his appointments, that this was going to happen. You can go back and check my blog post on the subject. The people he's bailing out will turn on him in a skinny minute. He's giving them the ammo to undermine his presidency, if they haven't already. At the very least he should have re-regulated their asses before giving them the money.
March 5, 2009 9:55 AM | Reply | Permalink
I send the WH an almost daily message not too kindly getting in Obamas face about this. Some days I am more pissed than others and tell him to go f himself. Ya never know. He might just get tired of listening to it and actually hand out pink slips to all the clowns who caused this. I really think more citizens should get on the WH message thingy and unload on him. All we gotta do is achieve critical mass.
March 5, 2009 10:26 AM | Reply | Permalink
He's carrying on the policies of your beloved George W. Bush. You should be praising him, hypocrite.
March 5, 2009 11:30 AM | Reply | Permalink
Obviously, except to anyone self-blinded to the Bush administration's glaring faults and oligarchical idolatry (cough,shooter,cough), Obama is simply providing continuity with the previous administration, which gave away the store even more blindly and gratuitously, which it saw as its mission.
March 5, 2009 12:22 PM | Reply | Permalink
Pink slips ?? They should be in jail. This was nothing less than a giant PONZI scheme as I have said here.
C
March 5, 2009 10:36 AM | Reply | Permalink
Mr. Johnson,
Thanks very much for your insightful commentaries of late including this one.
Given the difficulties involved in pulling off the bailout and these serious pitfalls regarding looting and failures of insitutions, how does it make any sense at all for our government to be taking the approach it is taking? Why are we not putting them all in receivership right away so that no money or assets of any kind are available to anyone to loot?
I don't understand why the supposedly smart guys in charge are so blithe about ignoring these gigantic risks that needen't be taken. Do they have any concern at all for the interests of the taxpayer or are they so myopic all they are concerned with is the interests of the banks and bankers involved?
March 5, 2009 11:26 AM | Reply | Permalink
The question I would like to see Mr. Johnson address is this:
Would a full-scale intervention by the goverment, making an irrevocable valuation of (possibly worthless) assets and by extension the institutions that hold them, cause a sudden collapse that would require even greater goverment intervetion than we have now?
I by no means intende to act as an apologist for the Summers/Geithner wing of this administration. In their limited defense, though, couldn't they simply be trying to manage an orderly deflation in the value of the toxic assets at the heart of this mess, and in the inevitable deflation of notions of American wealth and our standard of living, rather than a sudden and catastrophic one?
March 5, 2009 11:38 AM | Reply | Permalink
Yeah.
And I'm the Queen of England!
March 5, 2009 12:07 PM | Reply | Permalink
Do you have a point to make?
March 5, 2009 12:13 PM | Reply | Permalink
"Ellen" rarely has a real point to make, just glibertarian scolding and counterintuitive comments for counterintuitive's sake.
March 5, 2009 12:26 PM | Reply | Permalink
"glibertarian". Love it.
March 5, 2009 2:26 PM | Reply | Permalink
You are joking, right? Or else you haven't read many of Ellen's comments.
Ellen's comments are frequently peppered with key facts, insight and useful links.
March 5, 2009 4:12 PM | Reply | Permalink
Agreed. But they're just as often incoherent snark. It's the two faces of Ellen.
March 5, 2009 5:39 PM | Reply | Permalink
I understand where you're coming from. Those are valid and reasonable concerns.
What bothers me is that most of the people that I have seen who appear to have the most experience and are a bit removed fromt the process all seem to suggest that our government is making things worse instead of better, possibly doing to our economy what happened in Japan in the 90's, and is only delaying what seems inevitable which is adopting some form of the Swedish model to get our banking system back on track.
March 5, 2009 12:10 PM | Reply | Permalink
I just worry that Japan's "lost decade" ( now, apparently, in it's 11th year!) is the best we can hope for, and that the administration has a valid argument against Swedish-style intervention baecuse the size and scope of our banking system would require deficit spending that would overwhelm any chances for growth in the near-to-medium term.
March 5, 2009 12:18 PM | Reply | Permalink
Personally, I find the admin's argument against the Swedish model very weak indeed. Look at what they are really saying: there are too many banks and we can't run them all. But that just isn't true. They can if they have to. I think the argument is a red herring since they don't all need to be taken over.
The FDIC knows what it is doing and is capable of taking over the banks that need to be in receivership and setting them straight. And even if they were right that there are too many to take and run, how does it make sense then to simply dump shiploads of money into the biggest insolvent banks instead of doing something productive with the money like refinancing as many of the bad loans as possible so that we eliminate many of the toxic assets via that method and then deal with a smaller mess thab that on our hands now created by the fraudsters and conartists of the financial world.
March 5, 2009 12:37 PM | Reply | Permalink
Actually, brewman, I believe Japan's "lost decade" actually refers to the '90s. So maybe it's two decades now.
Their real estate bubble burst around 1990, and their demographic trends mirror ours, but lead ours by about a decade. We've been overdue for this crash, and so far we're following in Japan's footsteps pretty well, complete with zombie banks, etc.
Can you say "L-shaped recovery".
I'm turning Japanese, I think I'm turning Japanese, I really think so.
-- ARG
March 5, 2009 3:23 PM | Reply | Permalink
But this is not true. The inevitable is not being delayed. Have a look at the S&P over the last month.
What is disturbing is that the current freefall must be thought to be better than some alternative that would arise with restructuring.
What are they afraid of, in particular, and how can this be validated? With what evidence?
March 5, 2009 12:37 PM | Reply | Permalink
I think we're going to find out all too soon whether or not it is inevitable. I think it is, but perhaps not. Time will tell, but if I had to bet, I'd say the hundreds of billions we are spending on trying to save bankrupt banks like Citi is going to do no good and that sooner or later they are going to have to admit they are bankrupt and then go into receivership.
March 5, 2009 12:43 PM | Reply | Permalink
But you suggest the inevitable as if it hasn't already occurred. The S&P is currently trading below 700 on its way to 500. The collapse is already underway.
Citi trades today BELOW $1.00. They already bankrupt and trading as such.
What is this preferable in the mind of Geithner?
I note that Bair has said yesterday that the FDIC is running out of money. Is this the true danger to be avoided?
I just wish we would stop calling these guys idiots and put some serious thought and research into what Summers, et. al., think is worse than what is already happening.
At this point I'd be willing to do the research myself if someone could point me in the right direction. What would I google? What charts should I be analyzing?
March 5, 2009 12:52 PM | Reply | Permalink
You are, I believe, putting far too much trust in these guys. You can't do research and find out what's going on because they aren't saying. It's all the same money so if FDIC needs more I think we're better off giving it to them than to citibank or any of the other houses of fraud that are now suffering the consequences of their lack of ethics.
March 5, 2009 2:20 PM | Reply | Permalink
But isn't it unfair to tag Bernanke, Summers, and Geithner as untrustworthy?
They are certainly readers of, not to say former colleagues of, the economists whose posts we all find compelling.
Why in the world would they ignore their own community?
March 5, 2009 2:34 PM | Reply | Permalink
It is not a tall unfair. Those guys were very much a part of the problem. They did little or nothing to stop the rampant fraud and abusive practices. The businesses they are no helping are run by their buddies. So no, it isn't at all unfair to mistrust these guys who helped pull off this calamity in the first place.
March 5, 2009 2:59 PM | Reply | Permalink
I can answer that sir. For political reasons. If they took over AIG and the banks, the broader market might collapse. All stocks would tumble like a landslide. Now I don't think many, if any in the administration really cars that much about the investors per se. But they (Obama and all) would get the blame for them loosing all their money. Rather like FDR did when he had to close the banks. The fact that the investments and deposits in these institutions have been blown long ago is of not consequence to the investors. All they know is that NOW they have no money.
Wall Street and those that play the market live in a dream world of unreality. The ultimate suckers and pigeons. A WC Fields wet dream, as it were. Just look at how the these jokers are reacting now on CNBC etc. They refuse to accept the reality that they were conned from the get go.
C
March 5, 2009 12:18 PM | Reply | Permalink
"If they took over AIG and the banks, the broader market might collapse."
But how do you come to this conclusion?
What are the triggers that you are assuming in this judgement? The broader market is collapsing. What is this current collapse better than and how would it happen?
Take Citi, for example, what are the specific triggers that a restructuring would set off? Remember, demand is already gone. Pensions are already decimated. What is Geithner worried about such that he refuses to even define it in defense of what appears to be irrational behavior?
March 5, 2009 12:44 PM | Reply | Permalink
Think DOW around 1000. When you can't even give stock away. Your thinking logically and the "Market" has little logic and reacts emotionally. Out of fear or exuberance. Read up on the crash of 29 and the collapse after in the 30s when you could not give stock away at all...at all.
What's interesting is that the "product" may be different but the MO is nearly the same as the the 20s. At that time it was stock itself and margin buying in it's inflated prices that built the house of cards that fell in on itself. Inflated by groups of speculators wanting to make a killing and purposely driving up the value of corporate stock way over what is was actually worth.
When some people got nervous they started selling then word spread and all hell broke loose. The banks that had made the loans were left with worthless stock and little or no cash reserves.
The rest, as they say, is history.
C
March 5, 2009 1:04 PM | Reply | Permalink
Then why is the refusal to restructure the banks such a bad idea and why is Simon Johnson, Paul Krugman, and almost the entire cast of economists against that refusal? Aren't they worried about a 1000 dow as you suggest?
March 5, 2009 1:22 PM | Reply | Permalink
Then why is the refusal to restructure the banks such a bad idea and why is Simon Johnson, Paul Krugman, and almost the entire cast of economists against that refusal? Aren't they worried about a 1000 dow as you suggest?
Because they don't have to face public scrutiny or the electorate.
I had a great, great grandmother who lost everything when FDR had to eventually close the banks. She blamed HIM for this even though her money was most probably toast long before he was elected. FDR closed the banks so it was his fault.
If those who invested in the banks and the market loose their shirts, it's the Democrats fault especially the President. Never mind that the whole thing was a scam, he pulled the switch there for it's his fault.
Now if Obama waits and lets nature take it's course the most probable outcome is this.
Either the economy improves and the real estate market starts to rebound, where in the banks and the stock market improve as the banks holdings increase in value. Thus making the President look good politically and allowing the treasury and FED to step back. (Highly unlikely at this point.)
Or the the slide continues until it hits bottom, with out Obama's or the treasury's fingers directly on it. There by making the wiping out of the investors a moot point since they are already pretty much wiped out. They can now take over the banks with significantly less political fall out.
Just my take on the situation.
C
March 5, 2009 1:45 PM | Reply | Permalink
They are blithe because they don't care. Like Tom and Daisy Buchanan in "The Great Gatsby"...
"They were careless people, Tom and Daisy — they smashed up things and creatures and then retreated back into their money or their vast carelessness, or whatever it was that kept them together, and let other people clean up the mess they had made…"
and behind all this is the Chicago School "Shock Doctrine". And a belief in an elite. We have to face it. Milton Friedman tried to get Nixon on board with this repackaged Feudalism Flim Flam. Couldn't. So he went to Chile and other S. American countries. He then struck some gold with Reagan and Thatcher. With Nancy's $15,000 Inaugural gown, the predator state began in earnest.
But some just got in the car with Tom and Daisy and went along for the ride.
March 5, 2009 12:18 PM | Reply | Permalink
Scary, but accurate!
March 5, 2009 11:34 AM | Reply | Permalink
Yes, yes, and YES!! This is a Soprano-style "Bust Out!" Talk it up my friends, talk it up! Spread the meme!!
http://en.wikipedia.org/wiki/Bust_Out_(The_Sopranos_episode)
March 5, 2009 11:38 AM | Reply | Permalink
Meet the new ideologs, same as the old ideologs.
March 5, 2009 11:55 AM | Reply | Permalink
I have yet to see any *rational* explanation for the ongoing refusal to restructure the banks. Answers given by Bernanke and Geithner have been noticably unresponive.
Calling people like Summers and Geithner fools or currupt simply does not add to the discussion.
What are the *likely* reasons that these informed leaders would continue to act against overwhelming concensus for restructuring, and without any meaninful explanation?
How, more importantly, can this question be researched?
March 5, 2009 11:58 AM | Reply | Permalink
EG, you ask the question (here, and in your replies upthread) that has been on my mind this past week or so.
It's clear to me that it's not for political reasons that Obama et al have so far avoided receivership (aka "nationalization") for the big banks. The wind shifted enough in the past couple of weeks that they could easily do this, politically.
The fact that they are not doing it makes me wonder -- have they looked that option in the face and seen a monster? Is there some reason that this would be worse than the slow death march to the bottom we are on now??
As I said then, I assume that is the case. I don't know why. My only theory is that it must be that these banks are so intricately intertwined that they couldn't be taken over and still re-opened for business over a weekend, as is the usual mode for the FDIC. Perhaps it would take weeks or months. Which means we'd have a true banking crash, a full stop for all business, TEOTWAWKI (the end of the world as we know it).
That's the only thing that makes sense to me. And that's a pretty scary proposition. Which feeds this slower death spiral we're in. This reality is gradually sinking in with everybody else. There is no solution.
-- ARG
March 5, 2009 1:54 PM | Reply | Permalink
And yet Simon Johnson doesn't recognize this risk in his opinion...
Nor do the other public economists.
Any suggestions on links to search for by google?
I had thought to look at:
-FDIC running out of funds.
-Pension plan connection to bank liabilities.
-Foreign and Sovereign Wealth Fund connection to bank liabilities - and from there to the Eastern European banks.
Are these deadends for cause?
I sure wish Mr. Johnson would treat this question.
March 5, 2009 2:17 PM | Reply | Permalink
But isn't that just Bush and Iraq again, applied to the economy now?
If they see a monster, why should they distort things with their selective silences? Maybe the monster is real, or maybe it's merely preying on their biases, a kind of hallucination (like WMDs in Iraq). If it's real, why shouldn't the public know about it? If it's not real, surely the spell under which Geithner is operating should be broken, unless he's doing God's work literally and practically.
Where is the greatness in reporting?
I'm only willing to trust Obama so far, and every speech of empty platitudes destroys my faith so much.
March 5, 2009 5:45 PM | Reply | Permalink
Jeez!
An economist with a moral philosophy. Will wonders never cease!
March 5, 2009 12:00 PM | Reply | Permalink
Looking past the names of the transmission mechanisms (Citi, AIG, BoA, etc.), the Obama administration's policy goal (not much different than Bush's) is to counter the reduction in the money supply -- broadly understood to include all types of credit which pay for expenditures -- by printing money.
The issue is who should get that money. Obama says the banks and their investors. I say the people.
In the end it's a moral rather than an economic issue.
March 5, 2009 1:23 PM | Reply | Permalink
Well that is the first rational explanation I have see as to the motive behind what appears to be an irrational policy.
The problem with this idea is that the ancilliary damage caused by the price uncertainty that attaches to this strategy is killing the world's economy anyway.
So why use these banks? Why not use healthy banks post restructuring if all that is needed is a vehicle? Why not choose a vehicle that actually runs?
March 5, 2009 1:40 PM | Reply | Permalink
Oversimplification alert.
March 5, 2009 1:44 PM | Reply | Permalink
A peep from the oh-so-serious obscurantist gallery.
Keeping peeping away, brewmn, and you'll wind up being Summer's and Geithner's next entree.
March 5, 2009 3:08 PM | Reply | Permalink
"A peep from the oh-so-serious obscurantist gallery."
Praise from the master of obscurantism herself. Thank you.
March 5, 2009 3:26 PM | Reply | Permalink
How about your make your notice RATIONAL, by outlining the key flaws which turn a simply notion into a simplistic failure in this particular?
March 5, 2009 5:51 PM | Reply | Permalink
Look upthread, ed.
March 5, 2009 6:59 PM | Reply | Permalink
I don't know your up from my down, but I only see some vague concern about Japan and some question about soft vs. hard landings.
I guess you don't believe that Lehman shook the irrational hope out of the stock market (and other markets) last fall. What more is left?
I still think you're being simplistic yourself.
March 5, 2009 8:40 PM | Reply | Permalink
I'm just questioning the certainty of some commenters here that the actions of Geithner, et al. are primarily based on a desire to protect their finance industry cronies' billions, and hence "immoral."
I know the arguments on our side (e.g., Krugman, Stiglitz), and generally agree with them. I'm just assuming that there are valid reasons for the cautiousness of the administration other than the venal ones taken for granted in this discussion, and I would like to know what those reasons are.
March 6, 2009 12:03 PM | Reply | Permalink
I agree that "cronyism" is a poor foil re Geithner. It's surely less effective than it was re Paulson even though there are similar ones.
But assuming that there are reasons is not rational, even if it's prudent. To participate rationally, one needs to present plausible reasons for debate.
You could suppose that Geithner sees that the current bankruptcy law, which shields CDS counterparties from having to stand in line to get paid off, could be a huge monster should big companies file for bankruptcy. Then we could ask whether such contracts should be frozen or declared null and void as violations of the public interest.
http://www.talkingpointsmemo.com/archives/2009/03/im_sure_the_knowledgeable_people.php
For example.
March 6, 2009 3:43 PM | Reply | Permalink
Explaining brewmn's snark, above.
He's semantically challenged. Compare the meaning of the term I used, "moral," with his idea that I was charging anyone with conspiring to protect or benefit their "cronies."
Word to brewmn. Look before you snark!
March 6, 2009 3:58 PM | Reply | Permalink
It does seem that he's changed the subject at this point.
March 6, 2009 5:56 PM | Reply | Permalink
I haven't changed the subject at all. I was merely asking for Geithner's side of the story and offering a plausible argument on his behalf, which prompted ellen's "Queen of England" remark.
And the word "moral" is clearly more defined for Ellen than it is for me - pray tell, Ellen, what is "immoral" about being cautious in taking action when you fear that one possible result of said action is an irrevocable collapse of the global financial system?
March 6, 2009 6:13 PM | Reply | Permalink
No, I'm talking about your simplistic remark, and I believe Ellen is too.
You keep changing the subject, maybe one of these days you will find your true self!!
March 6, 2009 9:04 PM | Reply | Permalink
You're incoherence has grown tiresome. We're done here.
March 7, 2009 2:42 AM | Reply | Permalink
Actually the printing of money is being done by the Fed in the form of loans against corporate paper and the like. $2T in loans. Total unknowns are close to that level. The Fed Needs A COP" or we need a way to police the Fed... So corporate paper holders have been getting money, and maybe paying it back.
Thank you for noticing the difference between money and credit. :-)
Part of the contraction of credit is simply the market coming back to reality. Part of it is also fears and uncertainties as to 1) just what the heck is reality, and 2) just how much hidden liabilities are tucked into the assets being used as collateral or held outright?
Is Roubini right (50% of $3.6T)? Is he under, or over? I have to believe that insiders (Treasury and Fed as well as market insiders) have a pretty good handle on this, leveraged or not.
Is it the value of information which seals the lips of Bernanke and Geithner? Would loose lips sink ships here, or merely pop pie in the sky hot air balloons just dying to land?
March 5, 2009 9:18 PM | Reply | Permalink
Thank you for noticing . . . .
I did it just for you, eds.
March 5, 2009 11:31 PM | Reply | Permalink
And I noticed your notice, for you.
Nothing on the topic here?
March 6, 2009 3:45 PM | Reply | Permalink
I agree with that.
Disburse 1 trillion to the people and follow it up with another trillion three months later.
What's the point in pouring money into zombie banks? It's the consumer who will "jump start" the economy. But I'm not an economist so I might be missing something here.
March 5, 2009 10:19 PM | Reply | Permalink
Jump starting the economy (it's a misnomer, the economy is running already) is one thing, dealing with the further losses from past excesses is another.
If every living US citizen taxpayer got $10,000, what would happen? What if there were string attached, such as, you have to pay back mortgage payments first, you have to pay off credit card debt over some fraction of your net worth first, things like that? That is, vouchers.
Who would object and why (both ways)?
March 5, 2009 11:39 PM | Reply | Permalink
Another question for Mr. Johnson:
Why are the masterminds of these massive fraud schemes not being fired and being prosecuted by the hundreds? Say what you will about the homeowners who took out loans they cannot now repay but with the exclusion of those who were speculators, they had no clue what was going on, they were just getting in on what they saw as a good deal. The bankers and financiers on the other hand, knew exactly how risky and fraudulent all these schemes were but went forward thinking that they could reap giant profits from them and nobody would every know they were playing Russian roulette with the money of the investors.
March 5, 2009 12:40 PM | Reply | Permalink
THe achilles heel of the Obama administration. The GOP would be well advised to bide their time, hold their tongues and give Geithner enough rope to hang the Presidency
March 5, 2009 1:00 PM | Reply | Permalink
What I find really interesting is that Bankers - the very people one would think to be the most conservative and suspicious of any "scheme" - appear to be the ones most likely to fall for a scam, if presented in the right way.
C
March 5, 2009 1:09 PM | Reply | Permalink
I wonder whether part of the administration's excessive caution has to do with the way that even individuals' daily lives have for the most part gone cash-free. When FDR declared a bank holiday, people could still get by with cash. Imagine getting by without ATM or credit card for a few months. (Such a scenario wouldn't have to occur if bank restructuring went forward full tilt, but I'm not willing to bet against it.)
March 5, 2009 1:25 PM | Reply | Permalink
Another good point and I had not thought of that. Rarely do I see people, even in the grocery store, pay with cash. Nearly always with plastic or sometimes a check. That would be a cock up and no mistake.
C
March 5, 2009 1:49 PM | Reply | Permalink
That's what I'm thinking, too, paulw. In my reply to EG upthread I mentioned that maybe using the receivership option they might not be able to re-open one (or several) of these bigger banks over the weekend, as is the usual mode for the FDIC.
That would mean that people couldn't get to their money (or use their credit/debit cards) for a period of time (days, weeks, months??). And that would cause a true panic in the streets.
I'm not saying this IS the case. But it might be. And that would explain why they're not eager to use the FDIC now (in the way it was intended to be used).
-- ARG
March 5, 2009 2:00 PM | Reply | Permalink
Re: What would mean that people couldn't get to their money (or use their credit/debit cards) for a period of time
First off, we are not talking about nationalizing (and closing) every bank in the country. Good grief, where is that coming from? We are talking about nationalizing Citibank-- and maybe, possibly, Bank of America, but not at the same time. Secondly, why couldn't debit and credit cards continue to be used? They can be used when banks are closed right now-- holidays, weekends, middle of the night. As long as the computers and modems aren't shut off, they (and the ATMs) would continue to function.
March 5, 2009 8:42 PM | Reply | Permalink
Treasury may not have awakened to reality but the stock market has
Wells Fargo, which spins itself as the Solid Mega Bank....off 15% today to $8 a share
Can't be a happy day for my 60 year old, 30 year employee friend in the CFO's office...Doubt I'll be receiving any more SH relations propaganda re: Wells stellar intl ratings
March 5, 2009 2:00 PM | Reply | Permalink
The S&P is currently trading below 700 on its way to 500. The collapse is already underway.
You've been reading my email!
March 5, 2009 2:02 PM | Reply | Permalink
The economics of booms and busts and what to do about them isn't all that difficult -- certainly not as difficult as the academics, quants, and various assorted DSGEers whose salaries depend upon obscurantism would like to make us think it is.
A bust is nothing more than the contraction of the money supply (that is, the amount of currency and credit circulating and the rate of its circulation). But the economy has -- if it's to continue to operate at its pre-bust level -- fixed costs. And now, there's less "money" to pay for those costs. Two answers:
1) lower the costs; the problem with that response is that many costs (wages, asset values such as homes, etc.) are sticky. It takes a long time and a lot of pain before the adjustment is complete.
2) inflate the supply of money. It's the same result ( wages and asset values become worth less) as in #1 but quicker.
Politically, solution #2 is more palatable (people tend to focus on nominal rather than real prices, at least for a while).
The issue is how to transmit the benefits to the workers rather than to the investor-speculator class.
Any ideas?
March 5, 2009 2:10 PM | Reply | Permalink
The issue is how to transmit the benefits to the workers rather than to the investor-speculator class.
Any ideas?
Take them out and shoot them !
I can't ??? Why not ???
C
March 5, 2009 2:25 PM | Reply | Permalink
Actually yes. I've been fooling with the idea of pumping money, not to the economy in general or even the U.S. (Buy American), but rather to developing second and third world countries whose need for a rise in the standard of living and production is genuine. I would assume this would produce a trickle up effect to the first world economies.
What do you think? Are we throwing the right amount of money in the wrong place?
March 5, 2009 2:27 PM | Reply | Permalink
Interesting.
The problem might be the absence of a transmission mechanism. Emerging markets sell commodities and low value-added manufactures. Demand from the developing countries for these products is plunging.
How would you go about pumping money into emerging market economies?
March 5, 2009 3:01 PM | Reply | Permalink
Couple ideas come to mind but I can't get around the need for a functioning judicial system that can protect property rights. So without some kind of benevolent colonialism or dictotorship I'm stumped. But I used the word "toying" for a reason and I really should not publishing anything without some better clarity on my part.
But this is all OT.
Your assertion seems to be that the reason that the stars of the econ web are ignored by the PTB is that the alterior motive is money inflation.
Is that your final? Really?
March 5, 2009 5:38 PM | Reply | Permalink
I don't know what the PTB are planning, thinking, conspiring ---
What I do know is that all of us have to make a choice; that's what it means to be a democracy. I choose inflation.
And right now, the PTB are tiptoeing around inflation (that is, you can't get inflation by handing money to banks and investors who lock it up in T-Bills).
At the cost of being called a rusty gate, I'll say it again. Give the money to the people -- directly. That's the democratic thing to do.
March 5, 2009 10:04 PM | Reply | Permalink
"The issue is how to transmit the benefits to the workers rather than to the investor-speculator class."
Yes, this is the correct aim to have, just don't try to get there via Monetarism. The thrust of US policy since the '71 destruction of Bretton Woods has been more and more monetarist gimmicks, sucking capital away from investment in productive industry, agriculture and both hard and soft infrastructure, and into the insane "gambling casino-ization" of the US thru various get-rich-quick schemes; the asset-stripping of the 70s and 80s, the union busting, the outsourcing, the rampant speculation that allows the locusts to grow a bubble here, take a profit and invest in another bubble there, the biggest bubble of all at over a quadtrillion dollars - dirivatives, the looting of the former Soviet sector and on and on. The looting has been proceeding apace for many years, Mr. Johnson.
Sorry for the run-on sentence, but there has been so much insanity one can't enumerate easily it in a short post.
The difference between the US and the rest of the world as regards the crux of the issue is this: the US constitution, under which a CREDIT system under sovereign governmental control emits credit for directed investment for truly productive uses, as per the General Welfare Clause (At least that is the ideal. The creation of the Fed and the adoption of monetarism has corroded the founders original conception greatly). China may be a limited exception, but the rest of the world is enslaved to private Central Banks, which can and frequently do over-ride the wishes of "sovereign" govts and peoples, and thereby control them.
Bring back the National Bank of The US.
Hamilton had a crisis on his hands. Massive debts (relatively speaking) of the confederated states, not a true Federal Govt as yet to deal with this. He created a National Bank and monetized the debt as new credit. Read his Report on Manufactures. He knew precisely how to nurture and protect productive enterprises under a federal system that empowered and enriched individuals and the State. He was battling the British Empire and the private empire of the British East India Company. We are today battling an empire that is the genetic offspring of those empires. A global oligarchy that seeks the destruction of national sovereignty, especially the American republic's, and most especially any hint of a Hamilton/Lincoln/FDR impulse arising from Obama in response to the disaster they have wrought.
March 5, 2009 3:31 PM | Reply | Permalink
Step 0: Don't waste time fighting reality, invest in reforming it.
Step 1: Bondholder haircuts with common equity and deferred interest payments combined. Some severe, some modest. Stockholder get wallpaper.
Step 2: Identify true stimulus factors (as opposed to the bullshit in the "stimulus" bill) and apply forward pressure.
Step 3: Feds support states in supporting local community support for rational* homeowner support and law changes to cap and rationalize mortgage rates (say on option ARMs) and paperwork to expedite refi, foreclosure, and/or bankruptcy. Also, lease-option option and transportability of debt.
* no giveaways, haircuts for all parties
March 5, 2009 9:27 PM | Reply | Permalink
btw, a bit ot but is GM the new Amtrack? I mean that as a serious question.
March 5, 2009 2:58 PM | Reply | Permalink
When you have 30+years of laws written and lawyers writing to adjust the $$ flow to the lake where they all fish, you need more than sandbags to redirect.May take all new channels and cannals and non-absorbed flow-tenders to oversee daily direction.
Do not let the idiots who are stealing have any say in this design.They have an addiction and they lie.
We have to get past the image of a suit and tie meaning anything good.Suit and tie more likely = up-to-something but have to dress correctly.
Start questioning all these peoples' motives. Why are they in the position they are in anyway?
Anyone in the bank/finance business the last 30 years has auto-cover-up in their genes.
March 5, 2009 7:58 PM | Reply | Permalink
I suspect the FDIC is about to be insolvent, that linear forward projections would put it significantly underwater within the next 12 months if major banks go under. This is partly because the limits on coverage were raised a huge amount.
$100K x 100M households = $10T coverage at the old limits. Going to higher coverage levels only included a small number of people holding cash or converting assets to cash (aka selling stuff). Larger amounts are business accounts (profit or non-profit) or accounts of very wealthy individuals.
Having driven people to sell stocks and tank up on cash, we're now facing the problem that the cash isn't all real anyway.
March 5, 2009 11:54 PM | Reply | Permalink