Unwinding

So, the POTUS has gone on national television and described unspeakable (literally unspeakable) horrors that are going to come down the pike if we don't hand 700 billion to wall street but the american public (to their credit) are not buying it. In an election year, no less, only 7% of americans polled support the bailout. Oh, yea, congress is going to pass this and go face their constituents!

Of little note in the economic blogosphere (which, imho, has been very instrumental in rallying the public to scream, kick, yell and fight this within an inch of their lives) is this from bloomberg:

http://bloomberg.com/apps/news?pid=20601110&sid=a3PO453H_A58

Sept. 25 (Bloomberg) -- Credit-default swap dealers reduced outstanding contracts for the first time amid efforts to cut risk by cleaning up the derivatives market. The volume of trades in the worldwide market fell to $54.6 trillion from $62 trillion in the first half, the International Swaps and Derivatives Association said in a statement yesterday. It was the first decline since New York-based ISDA started surveying traders seven years ago.

That's a pretty big drop, suggesting to me that the POTUS may not have been talking to us, but them.

A Day of Mourning

700 billion with absolutely no, (i know you don't believe me, so i'll repeat it, louder, NO) oversight. Here's the text:

Sec. 8. Review. Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

2.5 billion to the terrorists at lehman who are now holding us for ransom because no one understands their complicated bs but them.

cohen is one of my heroes, as is kris (freedom's just another word for nothing left to lose.) Cohen is currently trying to recoup from theivery so i bet he won't mind if i quote his words in full:

Everybody Knows
by Leonard Cohen
Everybody knows that the dice are loaded
Everybody rolls with their fingers crossed
Everybody knows that the war is over
Everybody knows the good guys lost

Everybody knows the fight was fixed
The poor stay poor, the rich get rich
That's how it goes
Everybody knows
Everybody knows that the boat is leaking
Everybody knows that the captain lied
Everybody got this broken feeling
Like their father or their dog just died

Everybody talking to their pockets
Everybody wants a box of chocolates
And a long stem rose
Everybody knows
Everybody knows that you love me baby
Everybody knows that you really do
Everybody knows that you've been faithful
Ah give or take a night or two
Everybody knows you've been discreet
But there were so many people you just had to meet
Without your clothes
And everybody knows

Everybody knows, everybody knows
That's how it goesEverybody knows
Everybody knows, everybody knows
That's how it goesEverybody knows

And everybody knows that it's now or never
Everybody knows that it's me or you
And everybody knows that you live forever
Ah when you've done a line or two
Everybody knows the deal is rotten
Old Black Joe's still pickin' cotton
For your ribbons and bows
And everybody knows

And everybody knows that the Plague is coming
Everybody knows that it's moving fast
Everybody knows that the naked man and woman
Are just a shining artifact of the past
Everybody knows the scene is dead
But there's gonna be a meter on your bed
That will disclose
What everybody knows

And everybody knows that you're in trouble
Everybody knows what you've been through
From the bloody cross on top of Calvary
To the beach of Malibu
Everybody knows it's coming apart
Take one last look at this Sacred HeartBefore it blows
And everybody knows
Everybody knows, everybody knows
That's how it goes
Everybody knows

Oh everybody knows, everybody knows
That's how it goes
Everybody knows
Everybody knows

It's a New World

This is the war of our generation.

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

Thomas Jefferson, Letter to the Secretary of the Treasury Albert Gallatin (1802)3rd president of US (1743 - 1826)

As the world scrambles to err on the side of caution, protect the financial system, sacrifice our children to these banker-pigs, we need to hold hands, take a deep breath and treat this like any other natural disaster. We will be fine.

Bankers won't.

Err on the side of caution? What if the revolutionaries felt that way? What about Lincoln?

Americans are woefully unprepared for this, but nothing is going to convince them to include money and economics in the curriculum faster than this mess. We have to get up to speed.

A Day Unlike Any Other Day

At least the sky is grey. Almost no one who lives in the shadows of the towers can ignore this day with a deep blue sky.

Watching Lehman go down fills me with such sadness. I was there when Shearson/Amex bought our firm back in the early 80's. A long, rich tradition, shattered with the closing of the books. At the time of the merger, all of Lehman's windows on the trading floor were boarded shut. The rumour was that Lou Glucksman had read that withholding natural light would make us more aggressive. As it began to sink in that regime change was imminent, salesman and traders started to tear down the boards and let the light in. I'll never forget the image of watching Lou's henchmen (like Mr. Fuld) rushing around to put them back up, disoriented in the wake of the tidal wave of change.

And now Mr. Fuld will shutter the firm, after a run that left him the longest-running CEO on wall street.

More upsetting is watching the destruction of our country. A blog i've been following reports:

I was briefed on the proposed US financial reforms which will be shoved through with minimal review. Short version is that the Fed wins an explicit "financial stability" role which gives it powers and secrecy to do pretty well whatever Tim Geithner chooses to do for his capitalist crony clientele. The role will include comprehensive, global data collection which will give the Fed visibility of all open positions. In the wrong hands, this insight could be used to selectively induce volatility and margin calls which would selectively hurt some and advantage others. That could help the Fed's friends over time.The FDIC will be stripped of financial supervision and prudential intervention powers in favour of the Fed. That makes the Fed totally unreviewable and unchallenged by other authority in the USA.Additionally, the SEC will be forcibly reformed to be more like the CFTC - a service entity for the interests of those who pay good money for bad regulators. Instead of fixed rules, SEC regulation will become "principles based" which will mean that no one is ever held accountable for breaking the law unless they have done something to break the code of omerta and anger their peers.Federal law and regulation will pre-empt all state laws, and states attorney generals will be stripped of authority to investigate or sue. That means no more inconvenient Elliot Spitzers to get in the way of Wall Street excess.This may not meet Professor Roubini's recommendations, but the deal is going through with little review so far because the cries for reform are only going to be met with this one pre-agreed proposal. After all, who in Washington or Wall Street would ever suggest that Geithner, Bernanke and Paulson didn't have the best interests of American and global investors at heart?
Written by London Banker on 2008-09-11 10:27:14

In this interview by Charlie Rose
http://calculatedrisk.blogspot.com/2008/09/charlie-rose-fannie-and-freddie.html
Charlie Rose asks Roubini what should we be talking about and what should we be doing. One of the things that Roubini talked about was 'jingle mail' and he said that at some point 40% of all people with a mortgage will be under water.

One thing that is getting missed is that people who are stable stay in their homes even when they are underwater. They aren't 'walking away' because they think it's fun. The reason that the number is so scary is because those people have very limited options WHEN THINGS GO WRONG.

If there is a job loss, health crisis, divorce, selling the house as a way to ease the strains is no longer an option, and at that point they walk away.

What should we be doing? Reducing the strains on american workers. How?

Universal health care. We are putting billions upon trillions propping up financial entities. We could be taking a HUGE monkey off of everyone's back in this one move.
Tuition relief. Make a peace corp program or something, but get the stress of college costs off of our backs.
Credit relief. Put an instant max of 12 or 13% on credit cards. Let the chips fall.

do these things and put the american worker on more solid footing and he/she will spend again.

On the Responsibilities of Lenders

HUDSON. Bad loan managers were facilitated by repeal of the Glass-Steagall Act. Bad management has been built into the conflict of interest that goes hand in hand with vertical integration of the banks, brokerage houses, Wall Street and mortgage lenders. You find this particularly in Citibank and Countrywide Financial. The October 2007 Columbia Journalism Review includes an article, “A Tale of Two Citis,” that describes how Sandy Weill built his empire on subprime lending. Much of the research was done by Michael Hudson of the Wall Street Journal (not me, a different Michael Hudson). In his article “Banking on Misery: Citigroup, Wall Street, and the Fleecing of the South,” he describes how the banks found it in their interest to
have affiliates that wrote mortgages way beyond the ability of borrowers to pay, because they knew they could turn around and sell these mortgages to someone else and avoid liability. Nobody knows who is liable for the defaults. Is it the current mortgage holder? Is it the mortgage originator? Is it the mortgage brokers who are now going out of business and therefore can’t be held liable? All of this is going to take a long time in the courts.
ACRES U.S.A. Is there a remedy for this situation?
HUDSON. I’ll describe one solution I think is a good one. This approach was prevalent in New York State, where I live, before the American Revolution, and it’s a law that is still on the books here — the law of fraudulent conveyance. Around the time of the Revolution, a lot of New York farmers borrowed from British lenders who would come over, make a loan to a farmer far in excess of the normal ability to pay, and then, just before the crop was harvested, just before the farmer had liquidity, they would call in the loan, that is, demand that it be paid. The farmer
couldn’t pay because he hadn’t sold his crop yet or because the loan was too big to begin with, and the British creditor would foreclose. To stop this practice, New York State passed the law of fraudulent conveyance, which said that if a creditor makes a loan to a borrower without having any idea how the borrower can repay the loan, then that loan is nullified. That law is still on the books, as I mentioned, and it was often brought up in court in the 1980s, when corporate raiders would load down companies with corporate debt. If this law were implemented nationwide, it would apply to subprime borrowers and other borrowers who signed loan agreements far in excess of what they could pay, once the teaser interest rates adjusted to much higher levels.


Debtor Nation
The Hijacking of America’s Economy

http://www.michael-hudson.com/

Soros on bubbles

http://www.nybooks.com/articles/21792
"Some are suggesting that margin requirements for commodity transactions should be raised. Margin rules determine how much in cash or Treasury bills must be deposited when buying or selling a contract. An increase in margin requirements would have no effect on the commodity index buying strategies of ERISA institutions because the transactions are in cash, not on credit. But such an increase could discourage speculation by investors other than financial institutions. Varying the margin requirements and minimum reserve requirements for loans by financial institutions are tools that ought to be used more actively, as market conditions warrant, in order to prevent asset bubbles from inflating further. That is one of the main lessons to be learned from the recent financial crisis."

This is an idea that needs more exploration. I would argue that we DID use margin requirements actively, to PROMOTE the bubble. When we allowed downpayments to get to zero, and then allowed debt to income ratios to get really high, we basically lowered the margin requirements on the real estate market dramatically. Fundamentally, that is the root cause of this crisis. No one can make the margin calls. (i.e., pay off their mortgages.)

Here Are Five Things Republicans Won't Tell You: Caroline Baum
Commentary by Caroline Baum


"4. Reality of Bush tax cuts underperformed theory.
President Bush reduced the top marginal tax rate to 35 percent from 39.6 percent and cut the rate on long-term capital gains and dividends to 15 percent. Such ``supply-side'' tax cuts are touted as an incentive to work, save and invest.
Oops. Saving and investment were ``anemic'' during the Bush years, according to Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago.
The plunge in the personal savings rate to a post-World War II low of zero during the Bush years coincided with a decline in the labor participation rate, Kasriel says.
Business investment seems to have missed the tax-cut incentive as well.
``The only time the net stock of nonresidential fixed assets grew slower than in recent years'' was when Poppy Bush was president, Kasriel says. "

http://bloomberg.com/apps/news?pid=20601039&sid=a33YVKQ7OoaU&refer=home

Money for oil

Do we really want to be independent of foreign oil? It occurs to me that all we are giving the mideast for a valuable resource like energy is dollars. Dollars come and dollars go. Oil gets hot.

The two-step crisis

One of the things that is very confusing about this crisis is that it is at least a two-edged sword. The first edge is the huge bubble created in the housing market. People who live in california, or florida or las vegas have visible evidence of this every day and can see the devastation all around them.

In my neighborhood, though, we didn't have land to build, so there are no new developments, no new houses. Turnover is relatively slow, so we don't have a lot of people who bought/built in the last couple of years, borrowing bubble-amounts of money that they can no longer pay back. Most people have been in their houses for at least 5 years, if not 15 or 20 (or 25, like me). Unless they pushed home equity loans to the max, the falling of housing prices simply means that they will make LESS on their investment than they thought, a disquieting thought, but not terrifying.

People in my neighborhood, unless some crisis presents itself, have no real reason to sell, and can afford to tell themselves that the market will improve, and so they will wait.

It's an uneasy quiet. It's astounding how few sales one can find on zillow. In a town of nearly 8000 homes, zillow shows that 6 or 7 have sold in the last couple of months. Those sold at reasonably high prices, so our politicians and such are all patting themselves on the back like they have averted all the troubles.

The real mortgage crisis will hit us in the second wave. The fact that seems to be missing from much of the analysis is that the BANKS have all gone national and their lending was heavily concentrated in the go-go areas of california, nevada and florida for the last couple of years. Even worse, as the market got saturated and competition got stiff, more and more of them found ways to get around the inconvenience of finding a buyer for the mortgages they were creating and kept them on their balance sheets (or so barely off their balance sheets that they are quickly finding their way back home.)

The BANKS are insolvent. They are hemming and hawing and such, but bottom line is that their assets are less than their liabilities. They were so leveraged that a crisis less than this one could have brought them down, but this crisis is so big that there isn't anyone out there big enough to prop them up.

That leaves no one to lend, and that is when we will begin to see the crisis hit us. When someone finally does need to sell, the pool of likely buyers has been greatly reduced by tighter lending standards, requiring bigger downpayments and higher incomes.

This credit crunch will take no prisoners.