Bailing -Out Billionaires?

The NYTimes is reporting that a new far-reaching and financially stupendous rescue plan is being advanced by King Henry at the Treasury and Chairman Bernanke at the Fed--two unelected, appointed officials--to address the systemic exposed by the collapse of Capitalism being played out on Wall Street.

The Dynamic Duo, who hitherto had preferred the quite and isolation of boardrooms to hatch their thievery, have deigned to brief members of the Legislative Branch on their scheme, the details of which have not been announced to the public, and might not have been briefed to the legislators either.

The Times reports that the plan centers around the Treasury, the Federal Government purchasing from private organizations securities that are essentially worthless, and doing this with countless hundreds of billions of taxpayer dollars.

No details have been reported regarding any financial sacrifices these bailed-out private entities will be compelled to endure. But it is clear the taxpaying public will, once again, be compelled to foot the bill for the gross miscalculations of individuals whose annual earnings, perhaps whose monthly earnings, surpass the lifetime earnings of the vast majority of United States citizens.

They ask a question in courtrooms: cui bono? Translated: who benefits?

We are going to be deluged with the usual platitudes: "All of society benefits." "We are saving the system." "Every citizen will be better off by what we propose to do."

That should not be enough this time around.

How much is Bill Gross, who runs the Pacific Investment Management Company (Pimco) going to make off this public handout? His firm manages approximately $162 Billion of credit securities (bonds.) Pimco reportedly saw their net asset value increase by almost 2% immediately following the announcement of the Fannie and Freddie bailouts. Two percent of $162 Billion equals $3,240,000,000. Not a bad day's work, huh? [Please do not misinterpret this as an attack upon Mr. Gross; he's one helluva bond guy who enjoys a stellar reputation as a straight-shooter. I do not know him personally, but have followed his commentaries for years, and have no reason to disagree with the straight-shooter rep he has earned.]

But how many Wall Street and hedge fund already-multimillionaires are going to find their pockets swollen by the Paulson-Bernanke Plan?

AT ALL COSTS, THAT CANNOT BE ALLOWED TO HAPPEN.

The Postmodern Great Depression, Act II

Russia, two days ago, closed their stock market in the face of a two-day decline of of approximately 27%. That market has not yet re-opened for trading.

What can be expected next in the United States?

Today's trading on the New York Stock Exchange saw the Dow Jones Index lose 450 points.

Shares of the venerable and sole-surviving independent investment banks, Morgan Stanley and Goldman Sachs fell as much as 44%(!!!) and 27%, respectively. Morgan is doomed for sure, Goldman, most likely too.

As the logo's in the post below this one indicate, these two firms have plenty of company.

Does the USG dare halt trading? Do they dare call a "bank holiday," as was done during the other Great Depression in the 1930s? Will such actions only exacerbate the problems?

As of now, there has been no indication of a 1930s-style run on the banks taking place. The public, either because of ignorance or blind faith, has yet to line up at their local bank branch and demand their money. Right now, the first priority of the USG is to prevent such a scenario from developing.

One can surmise that the USG in concert with the Federal reserve System has realized that they cannot be the "lender of last resort" to EVERYONE.

The question now is: Who shall be allowed to fail and how can the consequences of these failures be mitigated, if at all?

The Garbage Disposal?

Can they digest Countrywide and Merrill Lynch?

If not, who's gonna pay for BOA's insatiable appetite?

Democrats and the Dow Jones: Is There a Correlation?

With one trading day left to go, the stock market, as measured by the Dow Jones Industrial Average (DJIA), is set to have its worst June since 1930! The Great Depression era.

Today alone, the DJIA lost over 3% of its value, bring June's loss to just under 10%. In 1930 the June loss was over 17%.

If that's not enough excitement for you, consider these other financial events of the day:

Oil hits $140/barrel for the first time.

And Goldman Sachs, the most influential and financial solid firm on The Street, issues a few pronouncements. They recommended the sale of shares of General Motors, sending that stock to its lowest price in 50 years; they recommended not only the sale of Citigroup shares, but went further and recommended selling those shares SHORT!

Why is this happening? The market "analysts" have rounded up the usual suspects to blame, including my namesake at the Fed, consumer retrenchment, runaway oil prices, possible runaway inflation and on and on.

Why post this here at TPM?

Because the Democrats should be able to win the election even if they decide to nominate the San Diego Chicken (in full costume) and run him instead of Obama.

The House of Cards came tumbling down in foreign affairs a long time ago; now we're witnessing the Homeland House of Cards doing the same.


MyBlog: http://ProteanPerspectives.blogspot.com

Commodities are the New Tech-Bubble

The title kind of says it all, but there are far more serious consequences to the price of oil reaching $126/barrel, or wheat, corn, rice, soybeans, copper et al reaching exorbitantly inflated prices than Cisco or Juniper Systems or Yahoo stock behaving similarly, as they did in the late 1990's.

Commodities are things the "real" economy needs and uses to function. Commodities have "use" value. Stocks have only "exchange" value.

Nobody needs to buy Cisco at $90 per share. But people do need to buy oil at $126 per barrel.

I'll try writing further articles on the fungibility of various commodities--e.g., coffee vs. tea--but for now I'll only comment thus: Essential commodities are too important to the literal survival of the world to be treated as if they were common shares of Microsoft, mere vehicles of financial speculation. And these essential raw materials are now being transformed into speculative investment vehicles, probably through the ingenious proliferation of derivatives and the sudden attraction by "investors" to commodities as a better store of value than alternative investments.

Sometimes, most of the time, so-called free markets function quite efficiently. But there are exceptions, as even the most conservative of economists would agree.

We are right at the beginning of what could be a pernicious extension of free market, speculative capitalism into a sphere previously dominated by real-world economic conditions of supply and demand. For example, if suddenly the demand side for corn is radically increased not by more users of corn, but by speculators whose only concern is that the price of corn will rise, the use-market be damned, the risks of creating artificial non supply/demand dislocations to the real economy may have consequences that reach far beyond Forex traders.

This is a topic I'm researching and thinking about. It's very interesting, very complicated and urgently important.

More to come.

War in Iraq, 21st Century Economics...Unpleasant Thoughts

I try to follow the coverage the media, both "mainstream" and "acceptable-alternative," gives various news stories.

Without question the Democrat Primary campaign gets the most ink day after day. And the coverage, as John Edwards' wife so ably pointed out in her NYTimes Op-Ed piece, almost solely concentrates on various tactics, gossip and the candidates' personalities.

So be it.

But here at this modest Blog, the temptation to do otherwise notwithstanding, I am resolved to write about important matters.

The two most important issues facing the United States (and by extension, the democratic, industrialized democracies) are the War in Iraq and the Economics of the 21st Century, particularly the unprecedented transfer of wealth from the aforementioned nations to the nations that produce exportable oil.

These are both complex issues not easily captured in sound bites or snapshots. To report on them, let alone analyze and comment (synthesize) on them, requires deep, sometimes long, thinking. That's not what media is all about. Mass media is about quick and easy; here today, gone tomorrow kind of stuff.

I'm not a media-guy, but neither am I an academic. I use my brain for sure; but I'm not afraid to use my human intuition either. I'm not an "expert" in/on anything. My only credential is the writing I produce.

As I indicated in a recent earlier blog, I am working on the general subject of the inexplicable spike in commodity prices, including without limitation such commodities as oil, corn, wheat, rice, and soybeans.

Concomitant with that work, I am thinking about the insidious transfer of wealth currently taking place, whereby nations such as the USA and Japan, for example, are having their wealth stolen by countries such as Saudi Arabia, Iran and Russia, for example. I have reached one conclusion thus-far:

THIS PHENOMENON IS THE GREATEST NATIONAL SECURITY THREAT CURRENTLY FACING THE INDUSTRIALIZED DEMOCRACIES; AND THE ELECTED LEADERSHIPS OF THESE DEMOCRACIES ARE SITTING WITH THEIR FINGERS UP THEIR COLLECTIVE ASSES WHILE THIS IS HAPPENING.

The War in (not with) Iraq is the other subject I am expending thought upon. The fabulousness of the USG miscalculations is unprecedented in our nation's history. And the relative acquiescence of the American public to this patent and self-destructing fiasco is nothing if not mysterious.

As part of this study, the grotesque suffering of the Iraqi people themselves due to our government's preposterous assumptions that under-girded our invasion is at the forefront of my thinking. For example, Iraq's population is approximately 8.3 per cent of that of the United States (25 million vs. 300 million;) therefore, to adjust Iraq casualty numbers to make them proportional to what those numbers would be in our country if the "war" were being fought on United States home-turf, one must multiply the Iraq citizen casualty numbers by a factor of 12! That means when 60 Iraqis die in a suicide bombing , it would be the equivalent of 720 Americans dying in a suicide bombing on United States soil.

So every time you read about X-number of Iraqis dying, multiply that number by 12 to appreciate the impact that those many deaths would have on us.

More and more to come on these, and other topics.

Capitalism Gets Its Biggest Overhaul Since The Great Depression, And Republicans Are Going To Do It

An article in the (London) Telegraph by its financial editor indicated that the Bush Administration, led by Treasury Secretary Paulson, and the Federal Reserve Bank, led by Chairman Bernanke may soon propose the nationalization of the United States banking system.

Huh? Yep, those free market in the pinstripe suits and power ties are certainly thinking the unthinkable, and very well may act on their thoughts.

THAT'S HOW SERIOUS THE CURRENT FINANCIAL CRISIS IS!

Talk is that the model being considered for emulation is Norway's, when that and other Scandinavian countries found themselves in a financial quagmire produced by private enterprise in the early 1990's. Reportedly, the actions then taken proved efficacious, in contrast to the drip-by-drip approach taken by the Japanese in the 1990's when their economy imploded. That approach still has not brought Japan back to where it was economically before the implosion.

Already here in the US, the Fed has opened its borrowing window to Wall St. "Investment Banking" firms for the first time since the Great Depression, at least; and, perhaps, for the first time ever. The Wall St. firms have not hesitated to that counter and borrow.

The Administration has released initial drafts of new regulatory powers that they propose the Federal Reserve System be given regarding Wall St. This would have been unimaginable even 3 months ago.

In short, while the mass media covers every detail of Hillary's ensemble of the day and Barack's reason for leaving "Barry" in the dust and McCain's confusion regarding four-letter words beginning with an "I" and others starting with the letter "S," the entire centerpiece of our capitalist economic system is about to undergo its most significant--and traumatic--overhaul in 80 years, all with less media coverage than Britney gets if she puts on or takes off a pair of dirty panties.

Finally, the Norway model mentioned earlier ensured that shareholders of the nationalized organizations came away with nothing, zilch, zero, unlike the Bear Stearns bailout,where those responsible still walked off with their pockets bulging, thought the bulge was much smaller than they expected.

My Response to (Another) Salon.com Article

http://www.salon.com/tech/htww/?last_story=/tech/htww/2008/03/27/the_end_of_laissez_faire/


Misunderstanding the Economics Debate


I agree with some of the earlier posters that not only is Keynes always already there when any discussion of macro-economics takes place, we have institutionalized his basic theories into our economic system, so whichever party may dominate in a particular time period, Keynesian economics is what they oversee, whether the are consciously aware of it or not.


Capitalism have proven to be the most effective economic model because it is so good at co-opting the best ideas of competing economic ideologies and subsuming them under the general rubric we still call capitalism.


There is no serious debate any longer between pure laissez- faire capitalism versus economic-totalitarian communism. The debate now, similar to the gun control issue, is simply: What is the optimum amount of regulation?


The latest banking/financial fiasco gives those favoring more regulation of that (and other) industries a nice, fresh supply of ammunition. The esoterica which the banking, lending and "investment banking" sectors (Wall Street) dreamed up to fuel the housing bubble were nothing short of brilliant when things were going well; and being "new," many of the activities were subject to minimal regulation and oversight.


When the worm turned, it was not only those who most benefited from "derivatives"--Wall St. investment banks--who would have to pay the price for the collapse of the very sophisticated pyramid scheme: it was--and is!--society as a whole. The damage, if not contained, will spill over the walls of The Street and impact citizens (in many countries) who could arguably be characterized as innocent bystanders.


The conclusion: There was an inadequate oversight/regulatory apparatus in place to protect the public from over-zealousness in one particular industry, an industry of such importance that the public weal has been put in jeopardy.


No serious person argues for ZERO gun control. And so too, no serious person argues for or believes in pure laissez- faire economics anymore.


It's about defining that optimum in regulation of guns and the economy that people disagree about.

Treasury Secretary Opens His Eyes

http://www.huffingtonpost.com/2008/03/26/paulson-says-new-financia_n_93527.html


This article is must reading for those interested in the current banking/financial world crisis, a topic I have blogged on here.

NYC & Wall Street: Symbiosis

http://www.reuters.com/article/newsOne/idUSN2434786820080325

From Reuters

JP Morgan Acquires Bear, Stearns

JP Morgan Chase Bank today bought the troubled Bear, Stears for $2 per share.

One month ago Bear, Stearns stock price was $80 per share.

Not even the SIF could save them.

(See below for info on SIF.)

The Federal Reserve Open Market Committee held an emergency meeting today which resulted in a cut of 3/4 of a point in the Discount Rate, the rate the Fed charges member banks to borrow from it.

These are actions indicative of the most serious financial crises since the Great Depression, and most of its facets have yet to emerge.

The Bush Administration has shown either a callous lack of concern for what it happening or complete imbecility!

Bear, Stearns Turns to Oil as Its Savior

Rumours swirl that the only entities capable of saving Bear, Stearns (BS) from being ingloriously dumped into the dustbin of Wall Street history are the Sovereign Investment Funds (SIF).

SIF--and their cousins, super-wealthy sheiks, sultans, emirs--have already participated in the mouth-to-mouth resuscitation required by Citigroup, Morgan, Stanley, UBS, Merrill Lynch and who knows how many other mega investment banks in the US and abroad.

The rescues have taken the form of these SIF injecting large amounts (billions of dollars) into the trouble institutions by purchasing equity stakes--ownership stakes--in them.

The parabolic rise in the price of oil has produced an unprecedented and largely insidious transfer of wealth from the consuming to the producing nations of that oh so necessary commodity. The USA is the number one consumer nation; on the other side of the equation stand Saudi Arabia and Putin's Russia as the number one and two producing nations, respectively.

These nations and others such as China, accumulate vast hoards of dollars. In the very recent past the investment of these dollar caches was channeled largely to USGovernment securities. In other words, they lent the money back to us; we agreed to pay them interest on their investment, and guaranteed that their principal would be returned to them at the predetermined end of the loan. The investor nations had bought themselves nothing more than a stake in the continued prosperity of the USA. They owned nothing more than a "promise." And the continued growth of the US economy was as much in their interest as ours.

But now SIF investments are being diversified into vehicles other than USGovernment bonds; and no longer are confined to merely lending money. Now SIF are purchasing assets. In and of itself, these acquisitions of US assets present no particular problem. If a Saudi "prince" wants to buy Rockefeller Center, who cares? If the UAE SIF scoffs up the MGM Grand in Vegas, let 'em.

Would it make a difference, however, if we woke up one morning to discover that Rockwell International was now under the control of KGB-Russia? Or Boeing was owned outright by the House of Saud? The financial industry is as important to US national security as is the arms manufacturing industry.

And what these bailouts of Wall Street's grandest names means is that slowly but surely the ownership of our private financial apparatus is slipping out of the hands of Americans and into the sweaty palms of nation's whose vital interests are not necessarily congruent with those of the USA.

Bear, Stearns and Future Ticking Timebombs

One of Wall Street's most aggressive--and admired--firms got their booties saved today by actions taken by the Federal Reserve System acting in conjunction with JP Morgan Chase Bank.

On the Street, once the other firms lose confidence in a firm's ability to perform on its trading commitments, most of which are made by two people from two firms talking on the telephone--no written contracts--the suspect firm is doomed. Who's going to make deals with a firm they may be out of business before the trade even "settles?" Nobody.

The Street lost confidence in Bear, Stearns (BS) and other firms would no longer trade with them.

BS is BIGTIME, the second largest player in mortgage-backed securities, next to Lehman Brothers. BS could not be allowed to wither up and die, not without a fight.

So the Fed used its most powerful and rarely employed tool--which I won't describe in detail here--to give the boys over at Bear at least a 28-day extension of their existence.

Of course, the poor slob who is about to have his house taken away by foreclosure gets no such individual attention. He either pays-up or gets the boot. He can fail; Bear, Stearns can't.

Yes, the scenario reeks of unfairness. Yet it is justifiable in a macro-economic sense.

The real problems are that the BS-bailout is unlikely to save the firm from extinction, merely to delay it; and that the Fed has found itself in a position of having insufficient data to accurately anticipate what is yet to come from the Depression in the Housing Market.

This Depression has been apparent to those in the real estate biz for quite some time. Yet the Fed could not seem to even see, yet alone connect, the dots that inter-relate the housing market and the explosion in shaky mortgage-backed securities to the rest of the economy.

The Fed believed to problems could be "contained" within the housing market itself, much like Saddam's ambitions to rule the entire Middle East could. The Fed was wrong. The Fed slept as the housing market collapse extended its tentacles to other sectors of the economy.

Now we have Time bombs waiting to explode all over the economy, particularly in the Banking/Finance sector. BS is small change compared to what lies ahead.