William Greider outlines a solution given by Jane D'Arista, an
economist and retired professor in a piece from the Nation.

It sounds good but this last part has bothered me.

But where does the Fed find the money to
make all these transactions? Essentially,
it creates the money. That is basically
what occurs routinely whenever the central
bank decides to inject new reserves into
the banking system. It is accomplished
with a computer keystroke crediting the
money to the private bank's account (and
money is extinguished whenever the Fed
withdraws reserves). The mystery of money
creation defies common reason, but it
works because people believe in the
results. The money supply relies on the
"full faith and credit" of the society at
large--pure credit from the people who use
the currency. The public's faith can be
enlisted in the national recovery, a far
better option than spending the
hard-earned money that comes from
taxpayers.

Sounds too much like Peter Pan. You know the part where
he asks the audience to Believe in Tinkerbell to save her.
If not she will simply fade away to nothing. Isn't Magical
thinking part of what got us into this mess ?
 
Well our economy is fading away to nothing and I really, seriously
doubt that anything I or anyone else believes is going to change
that.

C

The Formual that killed Wall Street.

A year ago, it was hardly unthinkable that
a math wizard like David X. Li might
someday earn a Nobel Prize. After all,
financial economists-even Wall Street
quants-have received the Nobel in economics
before, and Li's work on measuring risk has
had more impact, more quickly, than
previous Nobel Prize-winning contributions
to the field. Today, though, as dazed
bankers, politicians, regulators, and
investors survey the wreckage of the
biggest financial meltdown since the Great
Depression, Li is probably thankful he
still has a job in finance at all. Not that
his achievement should be dismissed. He
took a notoriously tough nut-determining
correlation, or how seemingly disparate
events are related-and cracked it wide open
with a simple and elegant mathematical
formula, one that would become ubiquitous
in finance worldwide.

For five years, Li's formula, known as a
Gaussian copula function, looked like an
unambiguously positive breakthrough, a
piece of financial technology that allowed
hugely complex risks to be modeled with
more ease and accuracy than ever before.
With his brilliant spark of mathematical
legerdemain, Li made it possible for
traders to sell vast quantities of new
securities, expanding financial markets to
unimaginable levels.

His method was adopted by everybody from
bond investors and Wall Street banks to
ratings agencies and regulators. And it
became so deeply entrenched-and was making
people so much money-that warnings about
its limitations were largely ignored.

Then the model fell apart. Cracks started
appearing early on, when financial markets
began behaving in ways that users of Li's
formula hadn't expected. The cracks became
full-fledged canyons in 2008-when ruptures
in the financial system's foundation
swallowed up trillions of dollars and put
the survival of the global banking system
in serious peril.

Very interesting explanation. I highly recommend it.

C

Robert Kuttner gives his perspective on the financial collapse.
He list three reasons why he thinks this worse than 1929.

Finance: A Doomsday Machine. The financial system
is in far worse shape than it was when the stock
market crashed in October 1929. In the 1920s, we had
a stock market bubble, mainly because people could
play the market "on margin," borrowing to invest in
stocks. There were also scams like the original Mr. Ponzi's.
Like the present decade, the Federal Reserve helped to enable
the game, with low interest rates and few rules.

Collapsing Wealth, Dwindling Demand.
The economy now bears all the hallmarks of a depression.
Between the housing collapse and the stock market crash,
American households are out several trillion dollars (in the
1920s, there were no 401 (k) plans and less than 2 percent of
Americans owned stock).

When people are suddenly out a lot of money, they spend less.
Weak demand in one sector cascades into other sectors. People
spend less on autos, air travel, hotels, restaurants, clothing -- any
optional purchase. Business sales and profits are down, which
causes other layoffs, and the cycle deepens.

A Debtor Nation. America in 1929 was a major international
creditor. Today, we are the world's biggest debtor. The financial
bubble of the past decade, puffed up by foreign borrowing,
created the illusion of prosperity.

During the bubble years, the borrowing from overseas
disguised domestic weaknesses, such as ourmuch diminished
manufacturing sector and the fact that wages for most Americans
were not keeping up with inflation. Households, like Wall Street,
became overly reliant on debt. For now, foreigners are still willing
to lend us vast sums, but that may not continue indefinitely as
nations like China invest more in their own internal development.

In 1933, we could go off the gold standard, not hold the dollar
hostage to international currency trading, and concentrate on
domestic recovery. If foreign currency traders feared that deficits
would cause a drop in the value of the dollar, they didn't matter
because we didn't owe them anything. This time, we have to
worry about keeping their confidence. (The only reason why
the dollar is holding its value is that the euro, for now, looks
even shakier, and the Japanese and Chinese are resisting
letting their currencies appreciate -- but that could also change.)

He offers a solution that we have heard time and again
but the administration refuses to look at.

All of these economic calamities have solutions, but each
is more radical than what's currently on offer. The
government will have to temporarily nationalize major
banks, sort out good assets from bad ones, and then
return banks to responsible private ownership. To cure
the housing collapse, government should directly
refinance mortgages, rather thantrying to bribe banks to
ease terms.

Deficits will have to be a lot larger before they can get smaller.
That should not require a war; this is just as grave a national
emergency. Those deficits could purchase much broader
prosperity, just as the World War II deficits did. If foreign
borrowing dries up, we may need to sell massive amounts
of recovery bonds to Americans, just as we relied on war
bonds rather than borrowing from abroad
during World War II.

But neither Obama or congress or his treasury secretary
will look at any of these solutions. Just another case of common
sense being trumped by politics and ideology......Stupid.

Oh and read the whole article. It is really quite good.


Addendum: I just got through watching the end of NOW
on PBS and Kenneth Rogoff a Harvard economics professor,
says just about the same thing.
 
C

The one thing that keeps rearing it's head these days is
the comparison between what's happening now and the
1930s onward. I will admit that I am even guilty of this but
in good company as a number of economists have been
doing as well.

There a number of differences between the two most of
which have been gone over significantly already. The most
important one, though is the specific cause and the long
term effect. Especially on the stock market and the banking
industry.

One needs to be reminded that the wounds suffered by the
stock market were entirely self inflected.  The abrupt rise
and subsequent fall was due entirely to stock manipulation.
Systematic driving of stock prices far above anything reasonable
by small groups of investors for the sole purpose of reaping their
own personal rewards. Nearly all the stock owned by individuals
was purchased on margin. That is loans, not just from investment
banks but from commercial bans as well. Everybody wanted to get
in on what appeared to be a good thing. When the crash of 29 came,
as inevitable as a winter snow storm, followed the the nearly complete
collapse in the early 30s - almost everyone lost everything that
they had invested and even owned. Stock became nearly worthless.

The banks that had been financing this orgy were left, as we all know,
with little or no capital. People lost their life savings, even their current
pay checks.

The societal and psychological effect of this was two fold and lasted
for generations. The small investor fled the market not to return in
any number for a very, very long time. Wall Street was inhabited
almost exclusively by large institutional and corporate investors
who tended to be very conservative and long term. The private,
small investor fled to savings bonds and municipal bonds if they
invested in anything. If one looks at the market performance from
the late 40s through the 60s you will see what appears to be
modest growth when actually, RCA, GM, Westinghouse and
the steal industries were doing very well indeed. Home appliances
were dominated by RCA and its subsidiary Whirlpool and GM
was leaving the competition in the dust.  

The banks and consumers became very conservative as well.  The
era of anything goes was over.  Banks became more cautious in
their lending and the consumer became more cautious in their
borrowing.  And nearly all loans and mortgages were through
small local banks, savings and loans and credit unions.

Now don't get me wrong. I do not see anything bad about this
at all. In fact a more conservative and responsible approach
to finance is a good thing and the regulation that occurred after
FDR was elected is need now as well. Maybe more so.

I just wanted to point out that the two events are similar in
nature but quite different in specifics.

C

 

This bit of wisdom from Jack Welch.

Jack Welch, who is regarded as father of
the "shareholder value" movement, has said
the obsession with short-term profits and
share price gains that has dominated the
corporate world for over 20 years was "a
dumb idea".

In an interview for the Financial Times'
series on the future of capitalism, the
former General Electric (NYSE: GE - News)
chief said the emphasis by executives and
investors on shareholder value since he
spelt it out in a speech in 1981 was
misplaced.

Mr Welch, whose stellar record in his two
decades at GE helped make shareholder
value popular, said that it was wrong for
managers and investors to set consistent
earnings growth and steady share price
increases as their overarching goal.

"On the face of it, shareholder value is
the dumbest idea in the world," he said.
"Shareholder value is a result, not a
strategy...your main constituencies are
your employees, your customers and your
products."

Mr Welch spoke at the weekend, before
Thursday's news that GE, which he left in
2001, had been downgraded by Standard &
Poor's, losing the pristine triple A
rating it had held since 1956.

I'm...I'm...utterly speechless...Ya think ??? Now I'm no
business tycoon type by a long shot. But it seems to me
that if your products suck, your employees are pissed off
and the consumers want to cover you with syrup and lock
you in a greenhouse full of wasps - your company is not
in good shape no matter what the current stock price is.

Apparently this concept has not been grasped by corporate
America for quite some time. And seemingly Wall Street
has been equally clueless about this as well.

No wonder we are in the shape we currently are in.

C
 

I sure am glad that I don't have any Credit Cards.

During these tough economic times,
national credit card companies have
decided to make the lives of consumers
even tougher. Cardholders are receiving
junk-mail-looking letters in the mail
warning them of an interest rate hike
coupled with an "opt out" clause. The
interest rate increase is substantial. For
example a woman in Iowa reported an
increase from 13% to 25%, a Chase card
customer received notice her interest rate
would increase from 4.24% APR to 9.24% and
a Capital One cardholder with a current
interest rate of 5.37% has been told her
rate will increase to 13.9% on purchases
and 24.9% on cash advances.

The "opt out" portion of the notice makes
for an even more stressful decision. In
some cases, the cardholder will have to
pay off the balance of the credit card
within the 30 days and then close the
account.

Since credit card companies are targeting
customers with already low interest rates,
more than likely the cardholder won't go
anywhere.

Janes Brain of the Daily Kos, a victim of
this new scheme investigated further:

   1. They're raising the interest rate on
      my current balance & future payments
      to 22.85%.

   2. They're reducing my payment cycle to
      23 days.

   3. They're increasing the delinquency
      rate to 26.99%.

   4. If an account's finance charge is
      less than $1.00, they're increasing
      it to $1.00.

   5. Interest will now be compounded on a
      daily basis, rather than monthly.

   6. They may contact you using any
      number you've ever provided them and
      that includes being contacted by a
      pre-recorded voice, even if you are
      charged for the call under your
      phone plan.

Yep..real sweat hearts, every one. Just because the default
rate is rising, the economy is in the toilet and about to be
flushed - no reason not to sock it to the consumer.

C

I for one tend to be rather suspicious of these types of occurrences.
Especially if there is no really good reason. The only thing I come
away with is maybe the Market is saying. "See..we'll be good..Honest..
Oh please don't regulate us. We're really OK."  

Kind of like the kid pleading with his mother not to ground him by
all of a sudden acting like a little angle.

My response...Uh-hu...BS !

C

Apparently at least one GOP rep is for it. However the House
Dems are not.  Now give me some time on this one.....Am I on
Candid Camera ??? Or is this whole thing some sort of sick
Rod Serling script ? After Steel's GQ interview, one has to
wonder.


C

So what else is new. But this will not bode well for the
banks.

"Are these ... large investments and loans
to foreign entities among the kind of
transactions American taxpayers should be
supporting with TARP monies when we face
significant credit problems here at
home?," Kucinich asked. "How does a
multibillion [dollar] financing deal to
Dubai ease the liquidity crisis in the
USA?"

But Neel Kashkari, Treasury's interim
assistant secretary for financial
stability, argued the government should
not micromanage bailout funds.

The goal of TARP, he said, is to
strengthen banks so they increase lending
and are in a better position to reimburse
taxpayers.

"However well-intended, government
officials are not positioned to make
better commercial decisions than lenders
in our communities," Kashkari said. "The
government must not attempt to force banks
to make loans whose risks they are not
comfortable with, or attempt to direct
lending from Washington."

And, while Treasury would prefer that
investments remained in the United States,
Kashkari noted that many of the largest
TARP recipients are global institutions.
Without these foreign investments, banks
"would have seen their profits lowered and
they may have needed more taxpayer
dollars," he said.

A lack of strict and detailed reporting
guidelines makes it more difficult to
monitor foreign transactions, lawmakers
said.

The obvious reasons for more transparency have been dealt with
ad infinitum. So I will not go in to them here. But there is one
other reason the treasury and the banks need to be more
cooperative with congress - the more pissed off congress gets,
the more restrictive the regulations will become. One would
think the the financial community would realize by now that
they are NOT the flavor of the month. In fact the term pariah
comes to mind.

C

I don't flippin believe this. Who's brilliant idea was this any way ?

Even growers who only sell only
fruit and/or vegetables at
farmers markets would not only
have to register, but they would
be subject inspections by federal
agents of their property and all
records related to food
production. The frequency of
these inspections will be
determined by the whim of the
Food Safety Administration.
Mandatory "safety" records would
have to be kept. Anyone who fails
to register and comply with all
of this nonsense could be facing
a fine of up to $1,000,000 per
violation.

This is just pain stupid. I hope someone kills this thing but
quick. I used to live up in Ohio and we go would get a lot
of our fruit and veggies from small road side stands. Never,
ever had a problem.

It's not the small farmers that cause the problem. It's the
big corporate greed heads and processing plants that are
destroying the food.

C 

After reading parts of Tim Geithner's interview on Charlie Rose,
one part struck me.

[CR] Is there a risk we'll slide into
something as severe as a great
depression?

[TG] Charlie, we're going to be very
aggressive. You've seen this
administration work at a pace unlike
you've ever seen before in history,
moving very quickly to put in place
this very powerful economic recovery
act, to lay out a budget that makes
some very powerful investments in
things critical to our economic future,
things that are going to make the
economy grow more rapidly in the future
by improving education, addressing
healthcare costs, moving us to a clean
energy economy, all in a framework
that's fiscally responsible framework.
We're moving to fix the housing crisis.
The president laid out very quickly a
comprehensive strategy to help bring
interest rates down. Allow Americans to
refinance, take advantage of lower
rates. And again, help millions of
Americans stay in their hopes with some
meaningful reduction in monthly
payments. We're also moving very
quickly to get credit markets flowing
again and help strengthen and save
lives, the banking system. And those
things are all critically important.
You're going to see him lead and
ambitious agenda to try to get the
world moving with us so that the global
economy is firing on all cylinders,
those four things: getting recovery
back on track with aggressive stimulus
here, fixing the housing crisis,
helping get credit flowing again,
making our financial system work with
recovery rather than against recovery.
And getting the world to move with us
are the necessary and critical -- they
have to happen together for them to
work.

As you can see he totally avoids Charlie's question. But to
be fair, that does sound a little like one of those "When did
you stop beating your wife ?" type questions. Any answer
would have been the wrong answer.

He adds at then end "I think capitalism will be different, and
the financial system will be dramatically different. It's already
dramatically different."

Well capitalism has been different for quite some time, around
30 years. Let me explain...I am of the "Baby Boomer" generation
and I remember when people, even company owners, had an
appreciation for what people did and how well they did them.
And for people themselves. America did at one time build
good cars, electronics, houses, furniture...you name it. Stuff
worked and lasted a long time. But starting with my peers and
after, we as a country...as a society...became more and more
interested in quantity and less and less interested in quality.

Bigger, faster, cheaper, etc. but not better.  And industry just
gave consumers what they thought the consumers wanted.
We had plastic toys, plastic clothes, eat plastic food and started
living in plastic houses while we drove our plastic cars. If it broke,
and even if it didn't, we replaced it. Generating tons and tons of
plastic garbage.

What we are looking at is the economic manifestation of our
attitudes. An attitude that is, at least partially, responsible for
the housing bubble and tech bubble before it. A me first and
the devil take the hind most outlook.  In order for Obama's
vision to take hold and work, this attitude will have to change.
This will be the most difficult part. Far more difficult to change
than the economic dynamics. 
 
America has to start making things again and start appreciating
what we make and those who make them. If one was considered
a "Master Craftsman" this was something to be proud of. I see
little of this today and even less of those who would aspire to it.

Right now you would be hard pressed to find anything in my
domicile that is made in this country. Except for a few pieces
of electronic test equipment and those things I made from scratch
myself, nearly everything else is made over seas somewhere
by over seas companies. Not because I am necessarily enamored
of the companies but because the American versions are simply
not to be had or prohibitively expensive.

I would like to see this change and I believe it must for our country
to regain anything in the way of prestige.

C

At least not in his state.

South Carolina Gov. Mark Sanford
plans to ask President Obama for
permission to use part of his
state's stimulus money to pay down
its debt, not on new spending,
according to a letter he sent state
legislators Tuesday.

A longtime opponent of the
president's nearly $800 billion
stimulus package, the Republican
governor told his state's lawmakers
that spending approximately $700
million in money coming from the
federal government would only make
the state's financial situation
worse in the long term.

"[W]hen one is in a hole, the first
order of business is to stop
digging," Sanford wrote in the
letter obtained by CNN Tuesday.

Instead of spending the $700
million, Sanford plans to ask Obama
for a waiver that would allow the
state to use the funds to pay down
"our very sizable state debt and
contingent liabilities," Stanford
wrote Tuesday.

"In the unfortunate case that the
President would deny our request, I
will not seek the funds, as I
believe doing so would not help our
current economic problems and would
do real harm to our future
financial picture."

God forbid that any republican would ever do anything for
anyone except themselves and their own political ambitions.
Especially one from the south.

What a flaming a$$ hole.

C

It would seem AIG is in a whole lot more dodo than was
first thought.

Ground zero for AIG's spectacular
implosion, which has soaked up more
federal bailout money than any other
entity, appears to have been a small
London branch office that may have
lost nearly half a trillion dollars
in bad deals.

Britain's serious fraud office and
U.S. regulators are combing through
the records of AIG's Financial
Products Group, formerly located on
the fifth floor of an office building
in London's Mayfair section.

The unit's small group of traders
risked nearly half a trillion dollars
to insure U.S. mortgages and other
debt using complex financial products
called credit default swaps,
according to recent congressional
testimony.

"AIG financial products was the core,
the hottest point of the global
financial crisis," freelance
investigative reporter Peter Koenig
told "Good Morning America" today.
"It was the epicenter."

I love the earthquake analogy.

"For about a decade it went OK,"
Koenig said. "And then, when the U.S.
housing market fell out instead, they
suddenly realized they had to come up
with a half a trillion dollars and
all they had was a couple of million
in the bank."

Ooops. And we're bailing these guys out ??

The collapse became so severe that
AIG warned the U.S. Treasury
Department last month that if it
wasn't given more federal aid, its
failure "could potentially bankrupt
or bring down the entire system."

Potentially ?? Have you looked at CITI's or BoA's or
JPMorgan Chase's balance sheets ? 

AIG admits that Cassano's unit nearly
destroyed the insurance giant.

"It was clear that this small unit
engaged in trades that nearly brought
down the company and it's still sound
insurance business," AIG told ABC
News in a statement.

AIG said it is in the process of
winding down the group.

Cassano, who has homes in London and
Connecticut, was forced to retire
from AIG on March 31. Critics say
despite the fact that the company is
hemorrhaging money and being kept
alive with taxpayer cash, Cassano has
been allowed to keep his windfall.

In addition, according to Cassano's
signed retirement agreement obtained
by ABC News, he was to be paid $1
million a month by AIG for
"consulting services" through the end
of last year.

The insurance arm of AIG is believed
to be in good shape, but the fallout
from AIG's financial products arm is
still rippling through the U.S.
economy and around the world.

As Jim Rockford was so fond of saying, "It just keeps
getting better and better." I'm not sure who was more stupid
and greedy. These folks or the ones who bought into their
little scam.


C

And Bernanke finally admits it.

The government over the past year
has been forced to rescue major
financial companies so interwoven
with other players and the global
financial system that their
collapse would put the entire
economy in danger. The bailouts
of insurance giant American
International Group Inc.,
Citigroup Inc., Bank of America
Corp., and mortgage finance
companies Fannie Mae and Freddie
Mac have put billions of
taxpayers' dollars at risk and
angered the American public.

"Government rescues of too-big-to
fail firms can be costly to
taxpayers, as we have seen
recently," Bernanke said. "Indeed
in the present crisis, the
too-big-to-fail issue has emerged
as an enormous problem."

Hey Ben...figured that all out by yourself did you. I have
an idea...bust them all up so that none of these institutions
are, as is said too big to fail. Bring on the trust busters.

C

I find this both amusing and very scary at the same time.

With some skepticism, they gave him
a spot on a Friday panel of
grassroots activists. But Jonathan,
an experienced child actor, rocked
the house with a three-minute
speech, which was remarkable not so
much for what he said, but his
electrifying delivery. The speech
was part pep talk, part book
promotion. By Saturday morning, an
archdeacon of the movement was
saying, "I'm Bill Bennett:
I used to work for Ronald Reagan and
now I'm a colleague of Jonathan
Krohn's!"

And every bit his emotional and intellectual equal as well.
The GOP enamored of the wisdom of a 14 year old. Typical of
a party that consists of immature,  self involved juveniles with
a simplistic view of the world.

C

AIG is now asking for the fourth time for more $$$ from the
FED and the treasury. I know this is not news, but the
following is just too much.

"What happens to AIG has the
potential to trigger a cascading
set of further failures which
cannot be stopped except by
extraordinary means," said the
presentation by New York- based
AIG. "Insurance is the oxygen of
the free enterprise system.
Without the promise of protection
against life's adversities, the
fundamentals of capitalism are
undermined."

Does this include self inflected wounds ? Just asking...

Regulators revised AIG's bailout
last week to ease loan terms and
extend $30 billion in fresh
capital after the firm posted a
$61.7 billion fourth-quarter
loss, the worst in U.S. corporate
history. Lawmakers are reluctant
to give more support beyond the
package already in place, worth
about $160 billion, because they
say regulators haven't given
enough detail about how the funds
are being used or when the
bailouts will end.

The Fed is "asking for an
open-ended check" and is "not
going to get" it, Senator Robert
Menendez, a New Jersey Democrat,
said last week in Congressional
hearings.

I have a feeling that is is going to come to an end pretty shortly.
Congress's constituents on both sides of the aisle are not going
to stand for this much longer and the pressure will build, if it has
not already done so, to just let the whole thing collapse.

C

Josh brings up a point that needs to be made and I think
the republicans totally miss. Quoting Shelby.

Said Shelby: "I don't want to
nationalize them, I think we need
to close them. Close them down,
get them out of business. If
they're dead, they ought to be
buried. We bury the small banks;
we've got to bury some big ones
and send a strong message to the
market. And I believe that people
will start investing [again] in
banks."

The point being that they a looking at these banks and
other financial institutions as entities unto themselves
with few or no financial ties and obligations to other large
institutions.

If that were the case, shutting them down would be a
piece of cake. Unfortunately they are not. Aye and there
be the rub. If you close down CITI or AIG or BoA you risk
the financial integrity of other large institutions and more
than a few smaller ones at the same time. Both here and
abroad. This is the problem. Until the financial obligations
of these Zombie Banks are cleared, we simply cannot just
close them down with out risking a global melt down. With
dozens, if not hundreds, of other institutions going into
default. 

C