Posted on 09/24/2008 2:17:46 AM PDT by Zakeet
As the cost of the credit panic becomes clearer, Americans are furious and have every right to be. The political and financial classes created this mess, and now taxpayers are being asked to save the day. We wish there were a way around this outcome, but the price of doing nothing now is likely to be far higher both for taxpayers and the cause of free markets.
The reality is that last week we had a global panic that included a flight from even basic financial assets like money-market funds and commercial paper. This was not Hank Paulson's invention. Panics are real events. If allowed to become crashes, they can have terrible economic consequences. We were lucky to forestall a crash last week, but the underlying sickness has to be addressed to avoid a recession, perhaps even a deep one.
The core of that sickness is a large capital hole in the financial system, and private capital alone can't fill it. A variety of mortgage securities are underpinned by housing assets that are falling in value. Those losses are real and will have to be written off eventually.
Private capital is vital but won't be forthcoming as long as no one knows what those assets are worth and which firms might fail. Public capital will be needed to refinance the banking system, whether through the FDIC or some other mechanism. Anyone who thinks otherwise doesn't understand the extent of this problem.
Treasury Secretary Paulson's plan would address the core sickness of those toxic securities. The point is to create a market when one doesn't exist, as well as a holding capacity and time to work out the assets.
(Excerpt) Read more at online.wsj.com ...
If you limit risk, guess what else you limit?
Only of those holding these mortgages sell for some reason. Best thing for them to do is sit tight and wait till the values creep back up at their normal rate -in about ten years for some areas, a year or two for others. Some regions aren't experiencing a decline in housing values at all.
This world wide credit crunch isn't just about over inflated housing prices and a the bad loans made on them, however.
How about all those oil companies that vaccumed all the cash off the planet by gouging the world over with high oland gas prices shovel some of that money into that hole and fill it?
http://uk.youtube.com/watch?v=MO6P_yjKFR4
We’re not in panic yet. When gold starts rising several hundreds of dollars a day, that’s a signal of imminent panic. Half the world, especially Arabs and Asians, love the stuff, and they’re sitting on piles of US fiat paper that could become worthless.
I think if we see gold roar past the $2,000 mark, that will be the signal to get out there and flap your arms, scream and panic.
I’d also watch for indications of certain politicians and bankers booking long vacations outside of the US.
funny you should mention that...I found an awesome job opportunity in Poland yesterday...
We are in a tough spot....and this was caused soley by congress. Now we expect congress to solve this problem when in fact they will screw with this..add amendments...pork and anything else you can imagine. %100 of the RATS and %75 of the Republicans in congress should be immediately taken to jail...and have all their properties confiscated.
The point is to create a market when one doesn't exist, as well as a holding capacity and time to work out the assets.
Let's put this in terms those of us on Main St. will instantly recognize:
The point is to force you to buy worthless crap you don't want, letting us live the good life until you forget it is all worthless and go back to watching American Idol and playing World of Warcraft.
As my dear old dad used to say, "Not no but HELL NO!" At most we should cover the direct default on those government backed mortgages, but ONLY in exchange for a pledge of "Never again with our money." Let the holders of the worthless credit default swaps - probably 10X the value of the assets they protect - split the value of the defaulted primary asset. That's right - they get ten cents on the dollar. That is what THEY bought. Then go after the people who sold and valued them for fraud. Wipe them out. Make them work hard labor to repay those defrauded.
Our rallying cry to these bozos who have pulled down the big bucks for so many years and screwed up royally on their watch is a line from Network: "We're mad as hell and aren't going to take it any more."
“How about all those oil companies that vaccumed all the cash “
>>>>>>>>................
yah ,that’s the ticket, blame profitable companies not the
bankrupt ones..LOL what an A hole.
Big oil companies are now mostly all foreign nations. China, Russia, Venezuela. Be careful what you wish for.
You're joking, right?
I’m waiting for a plan that show’s a balanced budget which includes debt retirement, massive spending cuts, and lower taxes. This can be done immediately by focusing on fundementals- national defense and the promotion of commerce.
You’re going to have a long wait. Just servicing the debt we’ve acquired over the last decade takes a ton of money
Excellent editorial. But it still bothers me this is sold as a taxpayer liability because this whole thing could be handled profitably for the US treasury. When you have value of 4 trillion plus literally vanishing into thin air, you could just simply print money and buy almost all of the troubled mortgages without causing inflation. Sure, this is a substantial increase in the base money supply, but with the inverted credit bubble pyramid collapsing, it won’t hurt a bit. This would not cause inflation unless there is another incipient bubble starting after this crisis. But that could be easily taken care of by raising interest rates as credit expansion manias usually occur with cheap credit.
However, one thing different with the current mess. It was the intervention of pandering politicians requiring lenders to make subpar mortgages. Most of these mortgage and were then bought and sold further by Fannie Mae and Freddie Mac with the implicit guarantee of the federal government. This is what got the ball rolling and it’s irritating to see the politicians responsible blaming the rich, greedy capitalist — who, of course, have their share of blame.
And then there was this big push to teach lessons of moral hazard. Big mistake. After the Fed allowed Lehman Brothers to go bankrupt, the whole international credit system started to freeze up because nobody wanted lend to any other institution that might be the object of the next lesson in moral hazard. That’s why Secretary of treasury and the head of Federal Reserve are now asking for a fiscal solution because we are slipsliding to the edge of the debt deflation precipice that caused the great depression and the deep economic freeze that Japan fell into the last 10 years.
To understand why we could just print the money from the “open system” perspective, there is an explanation that I have posted before.
The foremost principle to grasp in order to understand economics and finance is that value is the beginning and end in everything economic, and it exist only in the imagination of the mind. If there were no people on earth, nothing would have value. There is no such thing as intrinsic value. Physicist had yet to discover any attributes peculiar to value in the elements. The underlying problem of today’s economic theories is that hidden, instinctive and automatic assumption that value is automatically inherent in assets.
Assets do not define value, but value defines assets. Assets are only carriers of value and when value is ascribed to assets in the marketplace, it doesn’t matter whether it is a gold nugget found by someone in a mountain stream or a piece of paper with George Washington’s picture on it (dollar bill). What leads to “closed system” thinking is the notion that quantity of value is limited to the quantity of so-called “real” assets.
Another mistaken assumption is that labor is the source of value. Let’s suggest we manufacture the antique electro-mechanical calculator, with input of a lot of labor. Will the marketplace be somehow automatically forced to ascribe value to electromechanical calculator because of labor content? Of course not. So value is not inherent in labor
If value exists only in the imagination of mind, what are the limits? There are none, except to the extent the collective mind wants to ascribe value. Bring garbage to the marketplace and there is no value ascribed, thus there isn’t any increase in the national net worth. The genius of free market economy under the rule of law, with innovations in science and technology, is the constant stream of new and varied products and services brought to the marketplace to which collective mind ascribes value. The asset value of the United States is somewhere above 90 trillion and growing.
Now, you can make the intellectual leap that assets are merely carriers of value and we are ready to deal with our current economic and financial problems.
The problem with the capitalistic free market economy has always been the financial sector with its money supply problem based on fractional reserve banking (animal spirits affected by herd psychology to easily). It is the historical swings of credit expansion and contraction -— the tail that wags the dog. The control of monetary policy through fractional reserve banking, is a historical tradition that multiplies money during credit expansion, but will annihilate money during credit contraction. There is no getting around the liquidity floods and droughts of the credit system (speculative bubbles from cheap credit). During the credit contraction phase both money and value disappears into thin air and leaves behind a lot of non-performing debt that can seriously threaten the financial system and subsequent economic performance.
The reliance of managing money supply on the credit system is becoming unmanageable. It is the old Model T, unsuitable for high-speed technologically advanced economies. (The more that is discovered and invented, the more that can be discovered and invented——with the rate of innovation rising, which is responsible for rising productivity) The money from credit expansion due to the recent housing bubble, stimulated widespread global economic growth. But note this carefully: with very little inflation. What this means is that a higher rate of stimulative economic policies is possible then previously assumed, but you can’t do it by causing bubbles with the credit system.
You do it with created money——no you don’t borrow it, you literally create it, and use it as part of the national budget. This does not add to the deficit and it’s no different than if the US treasury owned a mine with a shaft of solid gold, which it accesses to use as part of the national budget. If you’re still uncomfortable with the idea, those dollars could be buried and then recovered through ritualistic mining if that would make you feel better! Management of liquidity should be shifted away from traditional monetary policy to fiscal policy-— and no, this will not cause inflation even though this greatly increases the base money supply. The fractional reserve credit system is correspondingly restricted in its ability to produce money by real interest rates in the upper level of historical range and increasing reserve requirements for financial institutions.
Money is created when the federal Reserve credits the US treasury’s accounts for the purchase of treasury instruments. This is not creating real debt like as if the Fed borrowed money from somewhere else to purchase these bonds. This is simply the ritualistic process of creating money out of thin air —— tapping the vast pool of value in the imagination of mind to replace the money that vanished into thin air from the collapse of the housing bubble.
Real benefit from this approach is that the increased cash flow through structural deficits into the economy would replace debt on balance sheets and greatly inhibit speculative activities because of the higher cost of debt capital. At the same time it will relieve the private economy part the burden of the public sector. The private economy retains more money for investment and demand
Tight money/loose fiscal policy. It works. (Reaganomics). During the 80s the calamity howlers constantly invoked Reagan’s twin deficits with the dark consequences of economic chaos. Instead inflation came down, economy recovered, the dollar rose in the stock market boomed. So much for conventional wisdom based on “closed system” thinking. It was precisely accurate only in the inverse position.
--Ludwig Von Mises
Taxpayers are not being asked to “save” anything. We are being asked to shovel the remaining viable resources of this country into the black hole that Carter created and Clinton enforced. That’s a BLACK HOLE as in nothing comes out of it and it sucks in all the surrounding resources to extinction.
>> the underlying sickness has to be addressed to avoid a recession, perhaps even a deep one.
That’s the mistake, right there.
Fact is — after the drunken party, this country NEEDS a hangover.
It’s sheer arrogance for American financiers to believe that they are smart enough to ALWAYS stay out of recession.
Hell, they have proven otherwise! They’re not the elite at all — they’re nothing but vulgar greedy jackasses.
Bring it on. Some of us have been responsible with our finances. We can cope.
I've been in the O&G busines for over 30 years and the only idiots that make comments like yours are either die-in-the-wool RATS, Marxists and liberal whiners.
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