Money vs. Credit

[Aberlour10]

The german state-owned National Bank of Reconstruction and Development, KfW "burned" in 1 sec more than 350 000 000 Euro public money, they transfered it on accounts of Lehman Brothers already after it became known about its bankruptcy, 2 councillors of directors KfW are dismissed.

 

Robert

[hrothgar]

It gets better. Now the US governments is asking other countries to help them pay this package... I would hope the politicians here will not go weak and pay even 1 cent.

I see absolutely nothing wrong with the US government asking - even expecting - other governments to contribute to whatever package eventually gets put in place.

 

I think that folks need to step back on carefully consider why a bailout is being proposed. There are no reputable claims that the Wall Street bailout is being put into place to cover speculative losses in the market. If the effects of the meltdown were limited to Wall Street I'd have no problem letting investment bank after investment bank crash and burn.

 

Unfortunately, what we are seeing right now is very severe short term liquidity crisis. Its one that has a very real change of rippling out from the Financial Sector and trashing the "real" economy, and thats going to effect all of us. Regardless of whether we're living in the US, Germany, or Thailand.

 

The bailout is an attempt to restore both liquidity and investor confidence. Sadly, it's something that's very necessary. I think that there is a lot of room to quibble about the details of how this plan gets put together. For example, I think that Paul Krugman raises some very real concerns about Paulson's plan.

 

However, I think that its ridiculous to argue that something like this isn't necessary.

 

I think that its morally repugnant (and quite short sighted) to argue that other governments don't have an interest restoring stablity to the financial markets. As I understand matters, most of the bailout packages that are being discussed are designed such that any bank is able to dump its "toxic waste". This applies to Deutsche Bank, just as much as Lehman Brothers.

 

If non US banks are going to be able to enjoy the benefits of this type of fund, than its right and proper that non US governments contribute to to its creation and maintenance.

 

One of the primary reasons that the Great Depression was so severe was the extreme impact on international trade. All sorts of countries (including the US) started errecting all sorts of protectionist measures. I'd hate to see us making the same sorts of mistakes now by failing to view this as a global crisis.

[Al_U_Card]

Hi Richard

 

I agree with all of your statement but I have one question. Since this "lending" subterfuge created the liquidity crisis, would not a cash infusion reverse it? Not making more credit available (loans at interest) but just making more money available. So the Federal Reserve gets out of the "loaning to get out of a borrowing hole" and the US government gets back into the "printing money to make money available" business. (Put some in the hands of taxpayers and make the rest available for infrastructure renewal and new business development.)

 

I realize that inflation might rear its ugly head but we have survived high inflation before and no banks or financial systems crumbled during those times. Seems to me that we are curing the burn by applying a flame.

 

I appreciate your reasoned approach to the situation, as always.

[Aberlour10]

It gets better. Now the US governments is asking other countries to help them pay this package... I would hope the politicians here will not go weak and pay even 1 cent.

I see absolutely nothing wrong with the US government asking - even expecting - other governments to contribute to whatever package eventually gets put in place.

 

The german goverment has strictly refused financial support for such activities today.

 

Billions of €-tax money has already been lost there due to this financial crises in last months, so all politicans are afraid in which way these losses will affect on important elections this and next year.

 

Robert

[hrothgar]

It gets better. Now the US governments is asking other countries to help them pay this package... I would hope the politicians here will not go weak and pay even 1 cent.

I see absolutely nothing wrong with the US government asking - even expecting - other governments to contribute to whatever package eventually gets put in place.

 

The german goverment has strictly refused financial support for such activities today.

 

Billions of €-tax money has already been lost there due to this financial crises in last months, so all politicans are afraid in which way these losses will affect on important elections this and next year.

 

Robert

The following is a day old, however, it has some good perspective on some on the issues involved

 

http://www.nytimes.com/2008/09/22/business...tDUJMmr57PDwkIw

[pclayton]

A few things I'm not clear about:

 

1. Is the Treasury purchasing the mortgages (or, mortgage-backed securities) at 100% of their value?

 

2. Investment banks stand to get a huge influx of new cash in exchange for this toxic debt. Are there any conditions that this capital has to be made available for new loans, or do people expect this capital to say on the sidelines for now?

[hrothgar]

A few things I'm not clear about:

 

1. Is the Treasury purchasing the mortgages (or, mortgage-backed securities) at 100% of their value?

 

2. Investment banks stand to get a huge influx of new cash in exchange for this toxic debt. Are there any conditions that this capital has to be made available for new loans, or do people expect this capital to say on the sidelines for now?

Who knows???? (As I mentioned in an earlier post, the Devil is in the details. Paulson seems to be saying "Give me $700 Billion. Trust me, it will all turn out OK". A number of other folks are insisting that some accountability gets built into the system. For example:

 

Krugman is arguing that things need to be spelled out in a lot more detail

Barney Frank is arguing that any bank that accepts cash needs to agree to some pretty stringent regulation governing (amongst other things) executive compensation.

 

In answer to your specific questions:

 

1. As I understand matters, the Treasury would be purchasing waste at 100% of the face value. Unfortunately, one of the key issues right now is that no one is quite sure what the toxic waste is worth. The market for waste is VERY thin. No one is willing to pruchase the stuff. All of the assets need to be valued at the price of the last trade, which destroyed the balance sheets of anyone holding it.

 

A number of folks are suggesting that the Treasury might - eventually - be able to make a decent profit on this transaction. (They are essentially saying that the market overshot on the way down, the book value of the waste is too low, and that this is a good buying opportunity)

 

The Wall Street Journal had some good commentary over the past couple days about making sure that the whatever process the Treasury used to dispose of the waste has lots of transparency built in. As I recall, they recommended establishing an auction based system to sell off random blocks of the stuff which seems quite reasonable.

 

2. Lots of debate on this one. Some folks are arguing that the money should be injected higher (or lower) in the food chain

[Gerben42]

Who knows???? (As I mentioned in an earlier post, the Devil is in the details. Paulson seems to be saying "Give me $700 Billion. Trust me, it will all turn out OK". A number of other folks are insisting that some accountability gets built into the system. For example:

 

It feels kinda sick that some banks get that much money rather than the people who need it most. Imagine what good $2000 per citizen would bring to many families.

[pclayton]

Who knows???? (As I mentioned in an earlier post, the Devil is in the details. Paulson seems to be saying "Give me $700 Billion. Trust me, it will all turn out OK". A number of other folks are insisting that some accountability gets built into the system. For example:

 

It feels kinda sick that some banks get that much money rather than the people who need it most. Imagine what good $2000 per citizen would bring to many families.

Not much more than a memory, I'm afraid. I'll bet you 8 out of 10 can't even remember what they did with the stimulus checks we received in June.

[mike777]

Not sure I understand this whole rescue package.

 

It seems the government spends 700 billion on bad mortgages. Merrill Lynch recently sold them at 22 cents on the dollar. I guess that means 2.8 trillion to 3.5 trillion face value at that price.

 

Not sure what a bad mortgage is but I assume that means people not paying on it.

 

 

As a result does the government foreclose on 3 trillion bucks worth of homes in an election year or do the people get to keep their homes mortgage free?

[Al_U_Card]

I heard that it is their intention to only foreclose on those that bought on "spec" ....the "real" home-owners will be given the means to maintain their homes.

 

Yeah right.

 

So the reasonable, solvent homeowners continue to pay their bills while the profligate wastrels get better terms????? The glut on the market from the "spec" houses will keep prices way down for a long time to come, further punishing the sensible and further benefitting the ne'erdowells.

 

AND they don't want to divulge too much info, just give the money and shut up (like good little tax-payers always do....right King Georges III )?

 

Boston tea party? What was that?! (700 billion of taxation without representations..)

[kenberg]

With no doubt whatsoever there is a lot about this that is sickening. I don't much feel like paying off someone's mortgage that should never been given and I sure as hell don't feel like helping some banker hold onto his yacht. Still, I accept that there is a real crisis and we must act. I hope "we" includes Europeans, Canadians, Japanese, and so on. I understand that some of the usual bandits will once again make out like bandits. I favor preventing that where possible but I don't favor letting resentment paralyze us.

 

Lamenting greed is pointless, and for that matter lamenting stupidity is pointless. Attempting to build structures that keep the fallout from greed and stupidity from sinking the rest of us is the game and those who have the responsibility for doing this have not exactly distinguished themselves.

 

"Spic and span little man, where were you when the ***** hit the fan?" We might ask this of those who seek our votes this fall.

[Al_U_Card]

I guess the last question will then be: "Who is(are) the Judas goat?

 

Will no one accept blame or be punished (except the faithful taxpayer) for these transgressions? Who must pay the price? How should they be punished? How can we define the nature of the deed? (As we must to avoid its future occurance.)

 

Surely the billion dollar profits of the banks can be garnisheed? (They would have no compunctions about doing the same to you or me for profiting from misdeeds and defaulting on our obligations.) Might we just make an attempt at changing the status quo so that they are unable to come forth with another even more devious device?

 

A PRICE MUST BE EXACTED. IF NOT, THEN WE, THE SHEOPLE, DESERVE TO BE REPEATEDLY FLEECED.

[mike777]

"A PRICE MUST BE EXACTED. IF NOT, THEN WE, THE SHEOPLE, DESERVE TO BE REPEATEDLY FLEECED. "

 

 

:)

 

 

Not sure what new regulations everyone is calling for so I guess I will try and jump start the discussion. :)

 

 

 

 

1) If a ceo makes a bad loan they go to jail.

2) if a ceo makes a subprime loan they go to jail.

3) if a ceo makes a bad investment they go to jail

4) A ceo can have a little leverage on the books but too much leverage and they go to jail and whoever loaned them the money for too much leverage goes to jail.

5) anyone who speculates or gambles/shortsells/etc with anything borrowed and those who lent money to gamble or speculate goes to jail.

[PassedOut]

...they go to jail.

Jails cost money too. Maybe the "price" should be other than jail.

[Al_U_Card]

Gee! How about the bank that gives out the "speculative" instrument is held liable for its maintenance......they can pursue the other party but in the mean time THEY are left holding the bag....they might just toe the line then.

[DrTodd13]

I wish people would stop blaming this on the "free market." We don't have a free market in this country. We have a regulated, monopolized and mandated market. Here's the quick summary for you. The US spends way more than it gets in revenues. The solution? The FED buys the debt with money created out of thin air. All this new money coursing through the system has to go somewhere and so one business segment or another will be viewed as "hot." Chaos theory probably applies here but once people see an area become warm they want to join in on the profits so they invest and the area becomes hot and then everyone invests and the area becomes red hot. At some point, it becomes clear that this area didn't need or require that much investment and then everyone runs scared and everything comes crashing down. Tech bubble or real-estate, the problem is malinvestment triggered by excess money creation.

 

Our market isn't free because in a free market, no one would have a monopoly on the creation of money. At some point, the government REGULATED the use of red-lining which had the effect of many people getting homes that wouldn't have previously based on their poor credit. This regulation contributed greatly to the next bubble being a real-estate bubble. The government's solution? Let's create a trillion more dollars and trigger another wave of malinvestment. The problem is whack-a-mole...you can try to regulate the last two areas that happened to fail but this money will flow somewhere new and create another bubble. It is inevitable and cannot be regulated out of existence. The beatings will continue until moral improves.

[cherdano]

Yeah if we didn't have money, there wouldn't be a financial crisis.

[DrTodd13]

Yeah if we didn't have money, there wouldn't be a financial crisis.

It is the rapid increase in the supply of money that is the problem, not the existence of money.

[mike777]

If the main point is the Fed kept rates too low for too long creating too much easy credit,I agree.

 

Easy credit caused inst. to be willing to make/want bigger loans on lower standards, I agree.

 

Politicians pushed for more "affordable housing" so FNMA took on roughly 600 billion in subprime loans in the last few years. No one forced these people to borrow but everyone encouraged more affordable housing.

 

Investment banks took on short term loans/leverage from roughly 12 bucks for every buck of capital to roughly 40-60 times for every buck of capital. They asked for the loans and inst. gave it to them.

 

To be fair to the Fed it always overshoots/undershoots on the issues of creating credit. I do think it tries to act in good faith.

[kenberg]

Not having the relevant training, I am not prepared to argue whether rates were or were not too low. That argument seems to me to be along the lines of "It's the other guy's fault". My views are far more primitive. At least for the last ten years I have noticed that people whom I wouldn't lend ten bucks to are able to get credit cards (plural) with $20,000 limits. Then, a few years ago, these same people or their close cousins could get loans to buy $300,000 houses with little or no money down and no particular job history. Now I said "Duh, I think this isn't going to work". Not being in the banking industry, I could not understand why on earth the banks would be making these idiotic loans. Now we know. They were making the loans, dumping them on someone who then dumped them on someone else and hid the manipulations as best they could.

 

Now someone, I nominate our elected representatives and the agents that they choose, was supposed to be keeping a close enough eye on banking business so that the greedy SOBs could not get away with such crap. That's what it means to be on, say, the Senate Banking Committee or at least it is what it should mean.

 

Bankers have been thoroughly exposed as being at least greedy fools (not illegal but certainly disastrous if unchecked) and in some cases crooks. But our elected representatives are supposed to be paying attention. They were too busy collecting campaign contributions and kissing ass to check into how the store was being run.

 

It's got to be fixed, but the folks on the hill have some serious explaining to do. They may be looking for new jobs next year.

[DrTodd13]

If the main point is the Fed kept rates too low for too long creating too much easy credit,I agree.

 

Easy credit caused inst. to be willing to make/want bigger loans on lower standards, I agree.

 

Politicians pushed for more "affordable housing" so FNMA took on roughly 600 billion in subprime loans in the last few years. No one forced these people to borrow but everyone encouraged more affordable housing.

 

Investment banks took on short term loans/leverage from roughly 12 bucks for every buck of capital to roughly 40-60 times for every buck of capital. They asked for the loans and inst. gave it to them.

 

To be fair to the Fed it always overshoots/undershoots on the issues of creating credit. I do think it tries to act in good faith.

That's like saying that Robin Hood always stole exactly the right amount of money from the rich man. We sit around and argue about how much he should have stolen but never question the fact that it is theft nonetheless. Of course the FED always overshoots or undershoots...they don't have perfect knowledge. No one does and no one can. That is why central planning is always doomed to failure. All that should be necessary to know about them is that the FED is a private institutions and we taxpayers borrow money from them and pay interest to them when we could just print the money ourselves and pay no interest. Whose interests do you think a private bank serves, their own or ours? They have everyone brainwashed that there can be no other way. You try telling this to people on the street and that won't believe that the system actually functions this way. Hell, something like 20% of the members of the house of representatives banking committee think we're still on the gold standard!

[hrothgar]

I strongly recommend the Diane Reim show for some serious discussion on this subject.

 

http://wamu.org/programs/dr/

 

I just listened to Monday morning's 10:)) AM show while I was in the gym. I thought that both the main speakers raised some very interesting points.

 

This morning's show will feature a noher round table discussion on the same topic.

[hrothgar]

If the main point is the Fed kept rates too low for too long creating too much easy credit,I agree.

 

Easy credit caused inst. to be willing to make/want bigger loans on lower standards, I agree.

 

Politicians pushed for more "affordable housing" so FNMA took on roughly 600 billion in subprime loans in the last few years. No one forced these people to borrow but everyone encouraged more affordable housing.

 

Investment banks took on short term loans/leverage from roughly 12 bucks for every buck of capital to roughly 40-60 times for every buck of capital.  They asked for the loans and inst. gave it to them.

 

To be fair to the Fed it always overshoots/undershoots on the issues of creating credit. I do think it tries to act in good faith.

That's like saying that Robin Hood always stole exactly the right amount of money from the rich man. We sit around and argue about how much he should have stolen but never question the fact that it is theft nonetheless. Of course the FED always overshoots or undershoots...they don't have perfect knowledge. No one does and no one can. That is why central planning is always doomed to failure. All that should be necessary to know about them is that the FED is a private institutions and we taxpayers borrow money from them and pay interest to them when we could just print the money ourselves and pay no interest. Whose interests do you think a private bank serves, their own or ours? They have everyone brainwashed that there can be no other way. You try telling this to people on the street and that won't believe that the system actually functions this way. Hell, something like 20% of the members of the house of representatives banking committee think we're still on the gold standard!

Who controls the British crown?

Who keeps the metric system down?

We do! We do!

 

Who leaves Atlantis off the maps?

Who keeps the Martians under wraps?

We do! We do!

 

Who holds back the electric car?

Who makes Steve Gutenberg a star?

We do! We do!

 

Who robs cave fish of their sight?

Who rigs every Oscar night?

We do! We do!

[Al_U_Card]

Doh!

 

Not THEM again......