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Financial Crisis Overview
By THE NEW YORK TIMES 3-21-2009 -reprint permission
In the fall of 2008, the credit crunch, which had emerged a little more than a year before, ballooned into Wall Street’s biggest crisis since the Great Depression. As hundreds of billions in mortgage-related investments went bad, mighty investment banks that once ruled high finance have crumbled or reinvented themselves as humdrum commercial banks. The nation’s largest insurance company and largest savings and loan both were seized by the government. The channels of credit, the arteries of the global financial system, have been constricted, cutting off crucial funds to consumers and businesses small and large.
In response, the federal government adopted a $700 billion bailout plan meant to reassure the markets and get credit flowing again. But the crisis began to spread to Europe and to emerging markets, with governments scrambling to prop up banks, broaden guarantees for deposits and agree on a coordinated response.
Origins
The roots of the credit crisis stretch back to another notable boom-and-bust: the tech bubble of the late 1990’s. When the stock market began a steep decline in 2000 and the nation slipped into recession the next year, the Federal Reserve sharply lowered interest rates to limit the economic damage.
Lower interest rates make mortgage payments cheaper, and demand for homes began to rise, sending prices up. In addition, millions of homeowners took advantage of the rate drop to refinance their existing mortgages. As the industry ramped up, the quality of the mortgages went down.
And turn sour they did, when home buyers had to leverage themselves to the hilt to make a purchase. Default and delinquency rates began to rise in 2006, but the pace of lending did not slow. Banks and other investors had devised a plethora of complex financial instruments to slice up and resell the mortgage-backed securities and to hedge against any risks — or so they thought.
The Crisis Takes Hold
The first shoe to drop was the collapse in June 2007 of two hedge funds owned by Bear Stearns that had invested heavily in the subprime market. As the year went on, more banks found that securities they thought were safe were tainted with what came to be called toxic mortgages. At the same time, the rising number of foreclosures helped speed the fall of housing prices, and the number of prime mortgages in default began to increase.
The Federal Reserve took unprecedented steps to bolster Wall Street. But still the losses mounted, and in March 2008 the Fed staved off a Bear Stearns bankruptcy by assuming $30 billion in liabilities and engineering a sale to JPMorgan Chase for a price that was less than the worth of Bear’s Manhattan skyscraper.
Sales, Failures and Seizures
In August, government officials began to become concerned as the stock prices of Fannie Mae and Freddie Mac, government-sponsored entities that were linchpins of the housing market, slid sharply. On Sept. 7, the Treasury Department announced it was taking them over.
Events began to move even faster. On Sept. 12, top government and finance officials gathered for talks to fend off bankruptcy for Lehman Brothers. The talks broke down, and the government refused to step in and salvage Lehman as it had for Bear. Lehman’s failure sent shock waves through the global banking system, as became increasingly clear in the following weeks. Merrill Lynch, which had not been previously thought to be in danger, sold itself to the Bank of America to avoid a similar fate.
On Sept. 16, American International Group, an insurance giant on the verge of failure because of its exposure to exotic securities known as credit default swaps, was bailed out by the Fed in an $85 billion deal. Stocks dropped anyway, falling nearly 500 points.
The Government’s Bailout Plan
The bleeding in the stock market stopped only after rumors trickled out about a huge bailout plan being readied by the federal government. On Sept. 18, Treasury Secretary Henry M. Paulson Jr. publicly announced a three-page, $700 billion proposal that would allow the government to buy toxic assets from the nation’s biggest banks, a move aimed at shoring up balance sheets and restoring confidence within the financial system.
Congress eventually amended the plan to add new structures for oversight, limits on executive pay and the option of the government taking a stake in the companies it bails out. Still, many Americans were angered by the idea of a proposal that provided billions of dollars in taxpayer money to Wall Street banks, which many believed had caused the crisis in the first place. Lawmakers with strong beliefs in free markets also opposed the bill, which they said amounted to socialism.
President Bush pleaded with lawmakers to pass the bill, but on Sept. 29, the House rejected the proposal, 228 to 205, with an insurgent group of Republicans leading the opposition. Stocks plunged, with the Standard & Poor’s 500-stock index losing nearly 9 percent, its worst day since Oct. 19, 1987.
Negotiations began anew on Capitol Hill. A series of tax breaks were added to the legislation, among other compromises and earmarks, and the Senate passed a revised version Oct. 1 by a large margin, 74 to 25. On Oct. 3, the House followed suit, by a vote of 263 to 171. When the bill passed, it was still unclear how effective the bailout plan would be in resolving the credit crisis, although many analysts and economists believed it would offer at least a temporary aid. Federal officials promised increased regulation of the financial industry, whose structure was vastly different than it had been just weeks before.
The first reactions were not positive. Banks in England and Europe had invested heavily in mortgage-backed securities offered by Wall Street, and England had gone through a housing boom and bust of its own. Losses from those investments and the effect of the same tightening credit spiral being felt on Wall Street began to put a growing number of European institutions in danger. Over the weekend that followed the bailout’s passage, the German government moved to guarantee all private savings accounts in the country, and bailouts were arranged for a large German lender and a major European financial company.
And even as the United States began to execute its bailout plan, the tactics continued to shift, with the Treasury announcing that it would spend some of the funds to buy commercial paper, a vital form of short-term borrowing for businesses, in an effort to get credit flowing again.
Continued Volatility
When stock markets in the United States, Europe and Asia continued to plunge, the world’s leading central banks on Oct. 8 took the drastic step of a coordinated cut in interest rates, with the Federal Reserve cutting its two main rates by half a point.
And after a week in which stocks declined almost 20 percent on Wall Street, European and American officials announced coordinated actions that included taking equity stakes in major banks, including $250 billion in investments in the United States. The action prompted a worldwide stock rally, with the Dow rising 936 points, or 11 percent, on Oct. 13.
But as the prospect of a severe global recession became more evident, such gains were impossible to sustain. Just two days later, after Ben S. Bernanke, the Federal Reserve chairman, said there would be no quick economic turnaround even with the government’s intervention, the Dow plunged 733 points.
The credit markets, meanwhile, were slow to ease up, as banks used the injection of government funds to strengthen their balance sheets rather than lend. By late October, the Treasury had decided to use its $250 billion investment plan not only to increase banks’ capitalization but also to steer funds to stronger banks to purchase weaker ones, as in the acquisition of National City, a troubled Ohio-based bank, by PNC Financial of Pittsburgh.
The volatility in the stock markets was matched by upheaval in currency trading as investors sought shelter in the yen and the dollar, driving down the currencies of developing countries and even the euro and the British pound. The unwinding of the so-called yen-carry trade, in which investors borrowed money cheaply in Japan and invested it overseas, made Japanese goods more expensive on world markets and precipitated a steep plunge in Tokyo stock trading.
Oil-producing countries were hit by a sudden reversal of fortune, as the record oil prices reached over the summer were cut in half by October because of the world economic outlook. Even an agreement on a production cut by the Organization of the Petroleum Exporting Countries on Oct. 24 failed to stem the price decline.
Stock markets remained in upheaval, with the general downward trend punctuated by events like an 11-percent gain in the Dow on Oct. 28. A day later, the Fed cut its key lending rate again, to a mere 1 percent. In early November, the European Central Bank and the Bank of England followed with sharp reductions of their own.
Federal officials also moved to put together a plan to aid homeowners at risk of foreclosure by shouldering some losses for banks that agree to lower monthly payments. Detroit’s automakers, meanwhile, hard hit by the credit crisis, the growing economic slump and their belated transition away from big vehicles, turned to the government for aid of their own, possibly including help in engineering a merger of General Motors and Chrysler.
The leaders of 20 major countries, meanwhile, agreed to an emergency summit meeting in Washington on Nov. 14 and 15 to discuss coordinated action to deal with the credit crisis. The group agreed to work more closely, but put off thornier questions until next year, in an early challenge for the Obama administration.
The Crisis and the Campaign
The credit crisis emerged as the dominant issue of the presidential campaign in the last two months before the election. On Sept. 24, as polls showed Senator John McCain’s support dropping, he announced that he would suspend his campaign to try to help forge a deal on the bailout plan. The next day, both he and Senator Barack Obama met with Congressional leaders and President Bush at the White House, but their efforts failed to assure passage of the legislation, which went down to defeat in an initial vote on Sept. 29, a week before it ultimately passed.
The weakening stock market and growing credit crisis appeared to benefit Mr. Obama, who tied Mr. McCain to what he called the failed economic policies of President Bush and a Republican culture of deregulation of the financial markets. Polls showed that Mr. Obama’s election on Nov. 4 was partly the fruit of the economic crisis and the belief among many voters that he was more capable of handling the economy than Mr. McCain.
As president-elect, Mr. Obama made confronting the economic crisis the top priority of his transition. Just three days after his election, he convened a meeting of his top economic advisers, including the billionaire investor Warren Buffett; two former Treasury secretaries, Lawrence H. Summers and Robert E. Rubin; Paul A. Volcker, a former Federal Reserve chairman; and Eric E. Schmidt, the chief executive of Google. After their Nov. 7 meeting, he called quick passage of an economic stimulus package, saying it should be taken up by the the lame-duck Congressional session, and that if lawmakers failed to act, it would be his main economic goal after assuming office Jan. 20.
Mr. Obama also faced a host of other demands as president-elect, including calls to bail out the auto industry, particularly General Motors, which warned that it would run out of cash by mid-2009. And some economists and conservatives questioned whether, given the economic crisis, he could still meet some of his pledges from the campaign, like rapidly rolling back the Bush tax cuts, which some felt would hurt demand, and pushing ahead with his planned expansion of health care coverage, which could greatly increase a soaring deficit.
Deeper Problems, Dramatic Measures
With credit markets still locked up and investors getting worried about the big banks, Wall Street marked a grim milestone in late November when stock markets tumbled to their lowest levels in a decade. In all, the slide from the height of the stock markets had wiped out more than $8 trillion in wealth. The markets inched back in the weeks that followed as investors looked forward to a new administration and a huge economic stimulus package, but key indicators of the economy only got worse.
In December, an obscure group of economists confirmed what millions of Americans had suspected for months: the United States was in a recession. The economy had actually slipped into recession a year earlier, a committee of economists said, putting the current downturn on track to be the longest in a generation. Unemployment rose to its highest point in more than 15 years. Trade shrank. Home prices fell farther. As inflation virtually halted, economists began to worry about deflation, the vicious cycle of lower prices, lower wages and economic contraction.
Retailers suffered one of the worst holiday seasons in 30 years as worried consumers cut back, raising the likelihood that dozens more would join stores like Sharper Image, Circuit City and Linens 'n Things in bankruptcy.
On Dec. 16, the Federal Reserve entered uncharted waters of monetary policy by cutting its benchmark interest rate to nearly zero percent and declaring that it would deploy its balance sheet and essentially print money to fight the deepening recession and locked credit markets. Investors cheered, sending the Dow up more than 300 points, but many economists began to worry about the world's appetite for hundreds of billions of dollars in new Treasury debt.
Other countries followed the Fed with rate cuts of their own. Britain’s central bank a wave of refinancing that nevertheless skipped many homeowners.
But as Mr. Obama took office, investors were just as worried as ever, as evidenced by Wall Street’s worst Inauguration Day drop ever. The fourth-quarter corporate earnings season was marked by billion-dollar losses and uncertain outlooks for 2009. The economy showed no sign of turning around. And many lawmakers and analysts began to wonder whether the first $350 billion in bailout money had any effect at all. Banks that received bailout funds sat on their money, rather than lend it out to consumers or home buyers.
And bailout recipients such as Citigroup and Bank of America were forced to step forward for additional lifelines, raising one of the most uncomfortable questions a new president has ever had to address: Would the government nationalize the American banking system?
A New Administration
The initial steps taken by the new Treasury secretary, Timothy F. Geithner, did not venture that far. In formulating the Obama administration’s response to the crisis, he was reported to have prevailed in discussions with presidential aides in opposing tougher conditions on financial institutions, like dictating how banks would spend their rescue money, or replacing bank executives and wiping out shareholders at institutions receiving aid. On Feb. 10, he outlined a sweeping overhaul and expansion of the government’s rescue effort, seeking to marshal as much as $2 trillion from the Treasury, private investors and the Fed.
The plan included a public-private rescue fund, often described as a “bad bank” for holding toxic assets, that would start with $500 billion with a goal of eventually buying up to $1 trillion in assets. There would also be direct capital injections into banks, which would come out of the remaining $350 billion in the Treasury’s rescue program. And the Treasury and Federal Reserve would expand a program aimed at financing consumer loans. The two agencies had originally announced their intention to finance as much as $200 billion in student loans, car loans and credit card debt. Instead the program would be expanded to as much as $1 trillion, and the Fed said it could broaden the plan to include both commercial and residential mortgage-backed securities.
But Mr. Geithner left major questions unanswered about the workings of many components of the new plan, and officials acknowledged that they had yet to decide many of the thorniest issues. So it remained unclear whether the Obama administration would be able to attract the large volume of private investment that Mr. Geithner sketched out in his speech. And the lack of specifics was also blamed for a negative reaction among investors, who sent stocks down nearly 5 percent.
After two weeks of declines on Wall Street marked by rumors of bank nationalization, the Obama administration came back with more details of their plans to perform "stress tests" on 19 of the country's largest banks, to see whether they had a large enough capital cushions to withstand further declines in the economy. Regulators plan to examine how banks will fare if the economy performs close to the consensus views (which are not good) and under a "worst case" scenario, in which the economy shrinks 3.3 percent in 2009 and home values fall an additional 22 percent. Any bank that fails the assessment would have six months to raise additional capital privately, or would have to take it from the government in the form of preferred shares that could be converted to common stock.
With Wall Street's gaze glued to the banks, Mr. Obama shifted his attention back to the housing crisis and unfurled a $275 billion plan to help as many as nine million families refinance their mortgages or avoid foreclosure. The plan, which won praise from consumer advocates, offered incentives to homeowners who are current on their payments and to lenders who lower interest rates on home mortgages. "This plan will not save every home, but it will give millions of families resigned to financial ruin a chance to rebuild," Mr. Obama said in announcing it on Feb. 18.
But analysts cautioned that Mr. Obama's plan would not help millions of homeowners who are "underwater," owing much more than the current value of their homes. And it inspired a populist invective by Rick Santelli of CNBC that encapsulated the frustration of people who believe the government's bailouts are doing little else than rewarding bad behavior by investors and homeowners.
Bail-Out or Economic Savior ?
Educational Editorial by William M Wright BBA MBA updated 11/10/08
The S&P 500 is poised for its worst year since the 1930s after over $700 billion in bank losses froze credit markets and spurred concern the economy will shrink. U.S. equities posted the steepest monthly loss in 21 years in October and $6 trillion was erased from U.S. markets in 2008.
Bear Sterns and Lehman Brothers two of the oldest investment names on Wall Street have failed.
Banks like Indy Mac and Washington Mutual have failed with more forecasted to come. Indy Mac was the largest bank failure in U.S. history until Washington Mutual (WaMu) failed.
Wachovia Bank shareholders get lucky with a new Wells Fargo deal for $7 a share. Citigroup in a week-end deal brokered by the FDIC only wanted to pay around $1. And now Citigroup stock has fallen to under $5 lossing 50% more of its value in November.
National City Bank of Ohio gets taken over by PNC bank for $2.
Franklin Bank of Huston TX and Security Pacific Bank of Los Angeles CA became the 18th and 19th U.S. banks seized this year amid the worst housing crisis since the Great Depression. Both bank stocks are now worthless to shareholders. All deposits are FDIC insured and have been assigned to other local banks.
Shareholders of all those stocks will tell you there is no government bail-out for investors.
Freddie Mac, Fannie Mae and AIG shareholders will tell you there is no bail-out -only a wipe-out of their stock values. All three stocks are now below $2 a share.
Regulators this year have closed the most banks since 1993. The collapses of Washington Mutual Inc. and Indy Mac Bancorp Inc. were among the biggest in history. The housing slump and tight credit led to a $700 billion bank-rescue plan, and the U.S. Treasury is using the fund to buy $250 billion in preferred shares in banks to boost capital.
Worldwide credit losses and write offs linked to the mortgage meltdown have swelled to $688 billion, according to data compiled by Bloomberg.
America and our government were sold the idea that a $700 billion bail-out of Wall-Street was needed to stablize the markets and Main-Street. But the American stock market dropped an astounding 2,500 points or 25% since the passing of the bill.
In November the market was down a record breaking 50% in just 13 months from its high last October 2007. Not since the great depression has the market lost so much -so fast.
Banking regulators should be commended for their seamless transition of WaMu's depositor assets to JP Morgan Chase - averting depositor panic. Expect these week-end Bank closings and depositor transfers to other banks to continue.
The whole financial industry has been pulled down under the massive weight of bad loans, over-leveraging and market panick.
The death-spiral escalated as a poor economy combined with foolish loan practices and easy debt forgiveness for over-leveraged home buyers (with little down payments) resulted in record breaking mortgage defaults.
Over-leveraged financial companies that had benefited during the housing boom were now doomed in the worst real-estate bust in decades. Declining real-estate prices and record-breaking foreclosures combined with “mark-to-market” accounting rules dramatically impacted their business models and asset values.
Now the death-spiral is dramaticly impacting our economy and world stock markets have been colapsing as a global recession in 2009 is forecasted. The Japan market was down over 50% to a 26 year low -last seen in 1985. The China, Korean, Russian, Brazil and India markets where down over 50%.
Housing declines started two years ago. But only a few people considered chronic financial doomsayers, ever imagined it would result in a world-wide financial crisis.
Last year we watched homebuilder and loan orginator stocks tumble -all year long. Hundreds of mortgage loan companies filing bankruptcies (last year) signaled the beginning of a massive credit crunch and this summer’s financial calamity.
Ambac and MBIA –the two largest insurers of credit and default protection lost over 90% of shareholder stock value in the last 12 months as current and future default estimates rose.
A New Market Twice the Size of the U.S. Market -CDS
Now we learn of a $45 trillion dollar market called Credit Default Swaps (CDS) that is twice the size of the USA stock market and more than half the size of the entire global banking market. Most of this market grew in the last four years.
The worlds largest insurance company sold protection on nearly $600 billion on debt assets -including $58 billion of subprime mortgages. Those swaps -swamp the mighty AIG.
Now AIG the world’s largest insurance company and the world’s two largest mortgage lenders Freddie Mac and Fannie Mae have been nationalized -wiping out shareholders. The man who built AIG Hank Greenberg the former CEO lost $6 billion.
Shareholders in all these financial institutions have lost billions maybe trillions with thousands of new job cuts probably coming in the future as a result. Regardless of any new financial government plan to stablize the markets these compainies shareholders were financial wiped-out.
Housing Starts, Car & Retail Sales -Lowest Since WWII
American housing starts are at the lowest level since WWII and new home sales are the slowest in 17 years. Inventory is still high due to unprecedented foreclosures. Jobless claims are now the highest in 7 years with economist now saying we're headed to a 8% unemployment rate.
More people than ever are working two low paying jobs because their one higher paying job moved over-seas during the last decade. Yet, more American millionaires and billionaires have been created over the last decade than at any other time in history.
Over a Decade of Leverging Keep the Music Playing
We’ve consumed more then we’ve built. We’ve spent more then we’ve saved. Main-Street consumers and Wall-Street investors have both been over-leveraging for a long time.
Well intended deregulation and easy low cost money lead to over-leveraging for Main-Street and Wall-Street. Since 2001 the economic music of easy low cost and easy to get money was backed by good intentions. But the music has stopped and now many are scrambling for a stable financial chair.
And it's not just an American problem. This crisis is happening world-wide. Listen to the video "U.K. mortgage lending colapse".
Listen to news reports from around the world.
In a gobal free-trade market more economies are dependent upon each others financial health. Those who believed major world markets were no-longer highly correlated or that commodity stocks are a hedge againest market declines have lost their bet.
The recession of 2001-2002 was lead by a cut in business spending with consumer spending and new home purchases remaining strong fueled by low interest rates. This recession is being lead buy a historic cut in consumer spending and banks now afraid to lend money. The losses many consumers have in home values and investments is massive. This combined with job losses will most certainly reduce consumer spending.
George Soros and Alan Greenspan Are Worried
The length and severity of this financial crisis that broke over global markets last summer has had analysts delving into their history books. George Soros, who was largely responsible for Black Wednesday, the last bout of serious financial turmoil to afflict the UK, believes there has been nothing to match the events of the past nine months since the Great Depression.
The Bad News is we face a World-Wide recession. The Good News is commodity prices like Oil will decline significantly as consumption declines.
Alan Greenspan, the former chairman of the Fed and the man blamed by many for setting off the boom-bust in the US housing market, agrees with the man who broke the Bank of England. Writing in the Financial Times recently, Greenspan said: "The current financial crisis in the US is likely to be judged as the most wrenching since the end of the second world war."
Remembering the last American Financial Crisis
The S&L Crisis of the late 80's and early 90's. The S&L Crisis was called "the largest and costliest venture in public misfeasance, malfeasance and larceny of all time." The American taxpayer spent $124.6 Billion to clean up the mess.
Similar action by the Federal Reserve in 1998 contained the fallout from the collapse of Long Term Capital Management (LTCM), a hedge fund that lost money in the aftermath of the Asian crisis & Russia's decision to default on its debts. By comparison with recent events, LTCM now seems to be a minor market wobble.
Students of the markets say the only recent parallel with the current turmoil is Japan in the 1990s, but other than that they have had to study the 1930s, when 9,000 banks failed, 1907 when JP Morgan help rescued the USA market after a 50% drop in shares, and even to the series of economic and financial upheavals during the final quarter of the 19th century.
The Royal Treasury Secretary Bazooka
Now that Treasury Secretary Henry Paulson’s strategy of having a “Bazooka” in his pants has blown-up he’s asking for a $700 billion taxpayer bail-out or (depending upon your point of view) loan to save the economy.
Many well know critics (Jim Rogers, Peter Boockvar & Nouriel Roubini to name just three) say these Capitalist who in good times want government to stay out of the private sector are quick to turn Socialist when it's in their self-interest. The public wants a "work-Out" not a "Bail-Out".
The public polls show American's do not support this plan.
Yet, even former President Clinton agrees with President Bush
that government involvement and quick action is needed. Even those democrats and republicans against the plan agree action is needed to stabilize Wall-Street for the benefit of Main-Street.
At Window to Wall Street we’ll bring you the story and points of view from around the world -with on-demand video interviews. So, listen and learn. You’ll have to choose sides because I believe everyone involved with this $700 billion plan to stablize the market is well intended.
They say, "The road to hell is paved with good intentions." And many past good intentions of the late 90’s have helped create this financial hell. Listen to the video below on Liberal Government Policies & Subprime Loans.
Let's applaud democrats and republicans for working non-stop to reach a reasonable compromise for the sake of everyone’s best interest –America.
America like American's have saved no money. So, another $700 billion more in debt may or may not be a big deal depending upon your point of view. Unlike Iraq -It's even possible for the U.S. backed plan to break-even or make money for taxpayer's.
The U.S.A. is the Worlds most massive debtor nation in history. In January before this mess, America's CFO in a national TV interview said America is already bankrupt -watch the video in the right-hand column.
Click on these links or the section labeled "Ten Trillion Dollars" and "Perot Charts" to learn the even bigger long term financial crisis America faces from David Walker America's CFO and Ross Perot. Economic View of Professor Roubini's on video. You will find his written views below.
Public losses for private gain
by Economics Professor Nouriel Roubini
Note: Nouriel was a former Clinton administration economics advisor who perdicted this doom early in 2007. We are not endorsing Professor Roubini's views -although many others do.
The effective nationalization of huge sectors of the economy means US taxpayers are picking up the tab for failing banks
With the nationalization of Fannie and Freddie, comrades Bush, Paulson and Bernanke started transforming the US into the USSRA (United Socialist State Republic of America).
This transformation of the US into a country where there is socialism for the rich, the well-connected and Wall Street (i.e., where profits are privatized and losses are socialized) continues today with the nationalization of AIG.
This latest action on AIG follows a variety of many other policy actions that imply a massive – and often flawed – government intervention in the financial markets and the economy: the bail-out of the Bear Stearns creditors; the bail-out of Fannie and Freddie; the use of the Fed balance sheet (hundreds of billions of safe US Treasuries swapped for junk, toxic, illiquid private securities); the use of the other GSEs (the Federal Home Loan Bank system) to provide hundreds of billions of dollars of "liquidity" to distressed, illiquid and insolvent mortgage lenders; the use of the SEC to manipulate the stock market (through restrictions on short sales).
Then there's the use of the US Treasury to manipulate the mortgage market, the creation of a whole host of new bail-out facilities to prop and rescue banks and, for the first time since the Great Depression, to bail out non-bank financial institutions.
This is the biggest and most socialist government intervention in economic affairs since the formation of the Soviet Union and Communist China. So foreign investors are now welcome to the USSRA (the United Socialist State Republic of America) where they can earn fat spreads relative to Treasuries on agency debt and never face any credit risks (not even the subordinated debt-holders who made a fortune yesterday as those claims were also made whole).
Like scores of evangelists and hypocrites and moralists who spew and praise family values and pretend to be holier than thou and are then regularly caught cheating or found to be perverts, these Bush hypocrites who spewed for years the glory of unfettered Wild West laissez-faire jungle capitalism allowed the biggest debt bubble ever to fester without any control, and have caused the biggest financial crisis since the Great Depression.
They are are now forced to perform the biggest government intervention and nationalisations in the recent history of humanity, all for the benefit of the rich and the well connected. So Comrades Bush and Paulson and Bernanke will rightly pass to the history books as a troika of Bolsheviks who turned the USA into the USSRA.
Zealots of any religion are always pests that cause havoc with their inflexible fanaticism – but they usually don't run the biggest economy in the world. These laissez faire voodoo-economics zealots in charge of the USA have now caused the biggest financial crisis since the Great Depression and the nastiest economic crisis in decades.
This article first appeared on Nouriel Roubini's blog and is edited and cross-posted here with the permission of the author. Nicknamed "Dr Doom", Professor Roubini is now widely acknowledged as having accurately predicted the present crises in financial markets
H. Paulson Treasury Plan - Roubini View
by Professor Nouriel Roubini / update 9-24-2008
Note: We are not endorsing Professor Roubini's views -although many others do.
The Treasury plan (even in its current version agreed with Congress) is very poorly conceived and does not contain many of the key elements of a sound and efficient and fair rescue plan.
Like in my 10 step HOME plan many other economists and commentators (Charles Calomiris, Raghu Rajan, Kotlikoff and Mehrling, Luigi Zingales, Martin Wolf, Barry Ritholtz, Chris Whalen and twenty others whose views have been featured this week in the RGE Monitor group blogs) have presented ideas that would have minimized the cost to the US taxpayer of a resolution of this financial crisis.
It is a disgrace that no professional economist was consulted by Congress or invited to present his/her views at the Congressional hearings on the Treasury rescue plan.
Specifically, the Treasury plan does not formally provide senior preferred shares for the government in exchange for the government purchase of the toxic/illiquid assets of the financial institutions; so this rescue plan is a huge and massive bailout of the shareholders and the unsecured creditors of the firms; with $700 billion of taxpayer money the pockets of reckless bankers and investors have been made fatter under the fake argument that bailing out Wall Street was necessary to rescue Main Street from a severe recession. Instead, the restoration of the financial health of distressed financial firms could have been achieved with a cheaper and better use of public money.
Moreover, the plan does not address the need to recapitalize badly undercapitalized financial institutions: this could have been achieved via public injections of preferred shares into these firms; needed matching injections of Tier 1 capital by current shareholders to make sure that such shareholders take first tier loss in the presence of public recapitalization; suspension of dividends payments; conversion of some of the unsecured debt into equity (a debt for equity swap).
The plan also does not explicitly include an HOLC-style program to reduce across the board the debt burden of the distressed household sector; without such a component the debt overhang of the household sector will continue to depress consumption spending and will exacerbate the current economic recession.
Thus, the Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown.
Wall Street & The credit crunch:
Why Should Main-Street Care?
Educational Editorial by William M Wright BBA MBA 9-30-2008
Unless you're fluent in the language of high finance, it's tough to make heads or tails of all the terms being tossed around in the headlines lately like: Interest Rate Spreads, Libor, Collateralized debt obligations and Credit Default Swaps.
So why should Main-Street care about Wall-Street?
Simply put, the meltdown on Wall Street has made it tough for many Americans to get a loan to buy a home, purchase a car, start a business or even send a kid to college. The same is happening for American businesses.
A credit crunch means, even prime consumers and businesses will pay higher loan cost. They may even find it harder to get a loan. This can result in more jobs lost and a deeper recession.
And with all the talk of a credit crunch -- some are even calling it a credit freeze -- it may get even tougher.
Now for those of us who lived within our means and now only earn 2% on our savings we’re not happy the government wants to keep interest rates artificially low for the benefit of spenders -at the expense of savers.
We want noting to do with bailing-out speculators and debt defaulters' -be they individuals or corporations. We say, “it’s about time banks tightened loan standards and raise the cost of spending”. After all, easy low cost money created this mess.
There was even Anti-Bail-Out protesters outside on Wall Street last week chanting, "You Broke It - You Buy It".
Still, if loans to small business or consumers become hard to get -the economy will continue to slow down. And if large employers like GM or American Airlines can not raise capital at reasonable cost then business will slow even more. This will lead to more lay-offs on Main-Street.
If the credit markets should freeze up--which many say is happening and will continue without massive intervention--everyone that borrows money will face a cash crunch. That means companies that take advantage of short-term loans to get by won't be able to buy raw materials or make payroll.
Even businesses that don't need short-term capital may defer purchases to preserve capital.
While the federal reserve has dramaticly lowered interest rates banks are getting back to better underwriting of consumer loans. Banks are also afraid to loan to each other - fearing more bank failures.
If even banks are having a hard time getting money, what does that say for the small and midsize business?
The Wall Street Journal had a story on Monday on how companies like McDonald's may face a squeeze as their franchisees are unable to get loans to purchase or upgrade stores. I suspect that is just one visible example of a growing issue for businesses across the country.
We are stuck trying to move forward with new loans--essentially to keep the economy moving--while dealing with clearly bad ones of the past. While much of the attention has focused on concern over home loans, there are also construction loans, business loans, student loans -at risk of default, risks that grow as those businesses find themselves essentially shut off from getting any new capital, extending the vicious circle.
So, this plan is not about bailing-out Wall-Street it's about keeping Main-Street commerce and jobs alive. But those with an addiction to low interest and easy money will need to suffer from withdrawal pains.
Click on this link for another view on how this financial crisis will impact Main-Street
Zerro interest rate world may lie ahead
By Simon Kennedy and Craig Torres of Bloomberg News
Nov. 7 2008 (Bloomberg) -- The age of free money may be at hand. As major central banks slash interest rates with unexpected speed, benchmark borrowing costs are now below core inflation for the first time since the early 1980s, and policy makers are signaling they will go deeper.
Yesterday's cuts by the Bank of England and European Central Bank, which came with the Federal Reserve and Bank of Japan on the cusp of zero rates, are a bid to shock life back into their recessionary economies and strained money markets. It may be an uphill battle as consumers and businesses show greater interest in saving than spending, and banks hoard capital rather than lend it.
``It's the race to zero,'' said Stewart Robertson, an economist at Aviva Investors Ltd. in London, which manages about $230 billion. ``There's no obstacle to more rate cuts.''
The U.K. central bank led by Governor Mervyn King yesterday axed its benchmark rate to 3 percent, the lowest level since 1955. The reduction of 1.5 percentage points was the biggest in 16 years. The ECB followed with its second half-point cut in a month, to 3.25 percent, and President Jean-Claude Trichet declined to rule out further moves south.
The action in Europe, which extended to reductions in the Czech Republic, Switzerland and Denmark, followed decisions last week by the Fed to drop its key rate to 1 percent, matching the lowest in a half-century, and the Bank of Japan to cut to 0.3 percent in its first paring in seven years. The central bank of South Korea today cut its benchmark for a third time in a month.
Monetary policy is being eased because the 15-month credit crisis is inflicting harsher blows to growth and inflation than central bankers anticipated just two months ago. Yesterday the International Monetary Fund cut its month-old forecast for next year's global expansion to 2.2 percent from 3 percent, and predicted the first contraction in advanced economies since it was created in 1945. It estimated prices would rise just 1.4 percent in rich nations, less than half of this year's pace
The most housing defaults and worst building slump since the great depression is turning into the worst economic recession since 1982.
Educational Editorial by William M Wright BBA MBA 11-10-08
Experts predict were headed for the worst recession since 1981-82. U.S. payrolls plunged by more than half a million the past two months (September and October).
The economy will shrink at a 3.5 percent annual rate in the fourth quarter and at a 2 percent pace in the first quarter of 2009, nearly twice prior estimates, according to Goldman Sachs economists.
That would be the biggest back-to-back contraction since 1982.
The surge in unemployment reflected an economic cave-in in October, when car sales plunged 32 percent, manufacturing contracted the most in 26 years and consumer confidence fell to a record low.
The unemployment report is powerful evidence that the economy is still weakening.
The jobless rate in October rose to 6.5 percent and companies slashed 240,000 jobs, for a total of 1.2 million losses so far this year, the Labor Department said. The 1.5 percentage point gain in unemployment over the prior six months was the fastest since the six months ending in Febuary1982.
The head of the official arbiter for U.S. economic cycles yesterday said there’s no doubt that the economy is in a recession. “The evidence is more than compelling,” Robert Hall, who heads the National Bureau of Economic Research’s panel, said in an interview following the jobs report. “It’s conclusive, in my personal opinion.”
Hall joined fellow panelist and Harvard University Professor Martin Feldstein in calling a recession. The eight-member group will meet at a later date to make an official determination.
Feldstein and other analysts have said the economic slump is likely to be deeper than the past two recessions, in 2001 and 1990-91. Other economists are also lowering their forecasts.
Goldman’s call reflects mounting concern that growing numbers of companies and consumers will lose access to credit as the worst financial crisis in seven decades prompts banks to rein in lending.
Goldman’s GDP contraction calls would mark the steepest recession since the economy shrank 4.9 percent in the fourth quarter of 1981 and 6.4 percent in the first quarter of 1982 after Fed chairman Paul Volcker drove the overnight interbank rate to as high as 20 percent to stem double digit inflation.
But today’s world is different from what Ronald Regan and Paul Volcker faced in 1981-82. Today massive export production capacity from Asia, India and Mexico keeps product prices and inflation low. Unlike the 1981 double digit bank interest rates, todays interest rates are at historic lows and approaching 1%.
And Japan’s interest rates have been below 1% for almost two decades !
China Unveils 4 Trillion Yuan Spending as World Faces Recession
By Li Yanping and Chia-Peck Wong of Bloomberg News
Nov. 10 (Bloomberg) -- China pledged a 4 trillion yuan ($586 billion) stimulus plan to prop up growth in the fourth-largest economy as the world heads toward a recession.
The funds, equivalent to almost a fifth of China's gross domestic product last year, will be used by the end of 2010, the Beijing-based State Council said yesterday on its Web site. Following a weekend meeting in Sao Paulo, finance ministers from the Group of 20 nations, of which China is a member, issued a joint statement saying they are ready to act ``urgently'' to tackle the economic slump.
``If the Chinese use this as a diplomatic initiative, it could be an important step toward a more coordinated response,'' Simon Johnson, a senior fellow at the Peterson Institute for International Economics and former chief economist of the International Monetary Fund, said in Boston.
China is taking steps to bolster its economy, the biggest contributor to global expansion, less than a week before President Hu Jintao goes to Washington for talks with world leaders on ways to revive growth. U.S. President-elect Barack Obama vowed last week to push a package through Congress ``immediately after'' taking office in January if lawmakers and the Bush administration can't agree on one before then.
China accounted for 27 percent of global economic growth last year, more than any other nation, according to IMF estimates. Central bank Governor Zhou Xiaochuan said Nov. 8 that boosting spending at home is the best way China can help avert a prolonged world recession.
Taiwan, which counts China as its largest trading partner, late yesterday cut interest rates for the fourth time in two months after exports dropped in October by the most in three years. The Federal Reserve, the European Central Bank and the Bank of Japan have all lowered their benchmark rates in the last two weeks, as has the People's Bank of China.
``Over the past two months, the global financial crisis has been intensifying daily,'' the State Council said in yesterday's statement. ``In expanding investment, we must be fast and heavy- handed,'' it said, adding that the central bank will pursue a ``moderately loose'' monetary policy.
The stimulus package, of which 100 billion yuan is earmarked for this quarter, will go toward low-rent housing, infrastructure in rural areas, as well as roads, railways and airports, it said.
The government will allow tax deductions for purchases of fixed assets such as machinery to stimulate investment, a move that will reduce companies' costs by an estimated 120 billion yuan.
In addition, grain purchase prices and subsidies for farmers will be raised, as will allowances for low-income urban households. The government also scrapped loan quotas to help boost lending to small businesses.
``We view this as a positive step,'' the U.S. Treasury's Undersecretary for International Affairs David McCormick told Bloomberg in televised interview in Sao Paulo ``This stimulus should help encourage domestic consumption'' in China, he said.
The stimulus plan should give a lift to China's shares, said Ben Simpfendorfer, an economist at Royal Bank of Scotland Group Plc in Hong Kong. The CSI 300 Index has tumbled 69 percent this year, the biggest drop among stock benchmarks in the Asia-Pacific region.
``The package will be positive for the stock market, but again, we need to see results,'' Simpfendorfer said.
``China is well positioned during the recession to boost infrastructure, modernize aging industrial assets and also invest in raw materials production abroad, including energy,'' said Ariel Cohen, a senior fellow at the Heritage Foundation in Washington.
The extra spending may boost the nation's economic growth by 2 percentage points next year, said Xing Ziqiang, an economist at China International Capital Corp. in Beijing. UBS AG and Credit Suisse AG, before yesterday's announcement, forecast GDP would rise no more than 7.5 percent next year, which would be the smallest increase in nearly two decades.
China is trying to stop an economic slowdown from deepening as exports wane, manufacturing cools and a property slump undermines domestic demand. The central bank has already cut interest rates three times in two months, reducing the one-year lending rate to 6.66 percent.
Manufacturing contracted by the most since at least 2004 in October and export orders dropped to their lowest, according to CLSA Asia Pacific Markets. Home sales have plunged in major cities including Beijing and the stockpile of unsold new vehicles was at a four-year high in September.
``The golden years have shuddered to a dramatic halt,'' said Stephen Green, head of China research at Standard Chartered Bank Plc in Shanghai.