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George Soros has written an excellent article over at the Financial Timesthat does an excellent job of explaining the current crisis and how to best fix it.

The injection of government funds would be much less problematic if it were applied to the equity rather than the balance sheet. $700bn in preferred stock with warrants may be sufficient to make up the hole created by the bursting of the housing bubble. By contrast, the addition of $700bn on the demand side of an $11,000bn market may not be sufficient to arrest the decline of housing prices

In other words the Buffett deal. If you haven't read about that deal here it is in a nut shell

Berkshire will buy $5 billion of Goldman perpetual preferred stock that carries a 10 percent dividend.

It also will receive warrants to buy $5 billion of common stock, or 43.5 million shares, at $115 per share, within five years, which could give it a roughly 9 percent stake in Goldman.

Congress is ready to give the biggest welfare package to Wall St. in the history of the world and put the people who created the problem in charge of fixing it.

I was wondering what Bush was talking about tonight when he said that emocratic capitalism is the best system in the world. He want's to make sure we get nothing for this. that is democratic capitalism. We go broke and bankers get welfare.

I really urge everyone to call your elected representatives and fill up their voice mail tonight.Let them know that we will not stand for anymore crony capitalism. This is Haliburton on steroids.

This deal will just keep cheap money flowing to the banks, continue to depress wages, and insure that americans remain debtors. We need a real economy that puts people towork in decent paying jobs, not another shell game setting up the next bubble in trickle down economics. They make boat loads of money and we get boat loads of debt.


Originally posted to Tanya on Wed Sep 24, 2008 at 08:45 PM PDT.


Is it time to end triclke down economics once and for all?

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Comment Preferences

  •  Tips for george Soros (22+ / 0-)

    To sin by silence when they should protest makes cowards of men~~ Abraham Lincoln

    by Tanya on Wed Sep 24, 2008 at 08:46:37 PM PDT

  •  There are better alternatives (5+ / 0-)
    Recommended by:
    bablhous, ginja, Tanya, xaxado, CryptoPolitico

    The Soros proposal is better than what the White House and Congress are dickering around with, but there are still better alternatives.

    We need time for them to emerge and be discussed.

    •  why the rush (4+ / 0-)
      Recommended by:
      bablhous, rmx2630, ginja, Edward Murray

      they need to do it before we get a chance to think about it

      To sin by silence when they should protest makes cowards of men~~ Abraham Lincoln

      by Tanya on Wed Sep 24, 2008 at 08:59:32 PM PDT

      [ Parent ]

    •  What better alternatives I am all ears (1+ / 0-)
      Recommended by:
      Edward Murray
      •  Many better approaches (2+ / 0-)
        Recommended by:
        bablhous, Tanya

        My own view is the problem is that financial institutions are frozen mainly because they don't know the value of mortgage-related assets.

        It doesn't take $700 billion to figure that out.

        Those holding mortgages have every incentive in the world to prevent them from defaulting and in fact some are doing a fairly good job of keeping the ones they hold from going under.

        It would be simple to structure a program that supports these private efforts. Right now, if a mortgage goes into foreclosure the average loss is $60,000 and that loss will increase as more foreclosed properties hit the market so banks already have a major incentive to prevent this.

        Although I think it would be a bad idea to prop up artificially high property prices, it makes sense to prevent them from becoming artificially low.

        The government could offer to buy any foreclosed property that qualifies for FHA insurance and make these available at a low cost to local police, firefighters, and others as is already being done under the HUD Good Neighbor program.

        It might still be in the public interest to keep selected companies from going under by providing government equity investments in them while other efforts are underway to address the root problems of the current situation.

        I'm sure other have lots of good ideas. It seems sad that Congress seems to have felt restrained to only discuss the White House proposal and how to modify it so that it is acceptable. I think it is completely DOA, even with modifications, and will simple make the situation worse because it does nothing to resolve the underlying problems.

        •  A reasoned Response (1+ / 0-)
          Recommended by:
          Edward Murray

          However, the premise that those who have defaulted and secondarily effected geometric default had an incentive to maintain their property is flawed. First, it hasn't proved true by experience and second, when the property value reduces by 20%, and you borrowed 125% and the teaser rate dissolves and the payment triples - these people, already carrying tens of thousands in credit card and related debt simply pack up and leave - by the hundreds of thousands they have done just that. But I do like the idea of perhaps prohibiting the activation of the ARM and setting some fair interest rate on these mortgages. It could not hurt when your alternative is assured default.

          •  Very true (0+ / 0-)

            The answer is not just working things out to keep the owner in the property. The appropriate solution may well be a short sale of the property.

            There would be no sense, and probably even less justice, in only doing things to keep an owner in the property.

            The point is that the people holding the mortgage stand to lose $60,000 on average if a property goes into foreclosure and the more properties going into foreclosure, the more they stand to lose because it will drive down property values. This gives them considerable incentive and room to work out a creative solution.

            There are many things that can be done: lower interest rates, lower the principle, just drop these in order to prevent a foreclosure, or add them to the end of the loan by extending it, and so on.

  •  The irony is (6+ / 0-)
    Recommended by:
    JuliaAnn, gmb, Snud, Tanya, xaxado, Edward Murray

    we can't follow the Soros path because it would be called out as socialism.  To much government ownership of the private sector.  So instead, what do we get?  The worst lobbyist-induced money grab since the railroad barons.   I'm so pissed right now, I can't even tie cogent sentences together.

  •  What caused this financial crisis Tanya or (0+ / 0-)

    is it just a charade

    •  Paulson's idiocy (0+ / 0-)

      If you read the soros article it was when the money market fund connected to AIG broke the dollar. there was a run on money market funds and no body wanted to lend money any more. There is plenty of money they just don't want to lend it.

      To sin by silence when they should protest makes cowards of men~~ Abraham Lincoln

      by Tanya on Wed Sep 24, 2008 at 09:13:09 PM PDT

      [ Parent ]

      •  What an erudite explanantion (0+ / 0-)

        My Labrador could have provided a better answer than this misunderstood Cliff Note bastardization. Kind of like the test question focusing on Melville's "Moby Dick" and you only have the Cliff Notes for "Steppenwolf" so you leave the reservation of context with your painful answer. ???? "the money market connected to AIG broke the dollar" - WTF does that mean - AIG Financial, a little noted subsidiary in their "K" reports had no connection with any money market fund - ?????? "there is plenty of money they just don't want to lend it." Whose the "they" in that statement, the Clintons, Harry Reid, McCain, the Chinese, maybe the Clones??????? Who is hiding all of that money - please tell me do.

        The above is your "reasoned analysis?" That's it? You didn't even come close to even repeating what Soros opined and you allegedly read the article.

        You really should stop this collective rant because it is embarrasing to all Democrats - we - the Democrats - the great unwashed and the Great Uneducated - I am tired of having to defend myself against Repubes who are dead-on about the complete ignorance regarding commerce and governement exhibited by the average leftisit Democrat. You don't speak - you just barely manange a pathetic type of primordal pre-Amoeba grunt.

        Pick a topic you have some understanding about like, like the ---- the Lifetime Channel.

      •  Here is Zee Problemo (0+ / 0-)
        1. Plenty money.
        1. No wanna lenda.
        1.  No lend.
        1.  No maka money.
        1.  No one buy stuff.
        1.  No one sell stuff.

        No matta? Wait see? Maybe problemo.

    •  are you talking only about this crisis (0+ / 0-)

      or all of the ones that have been created since the 80's when we started to turn the economics of this country on it's head.

      To sin by silence when they should protest makes cowards of men~~ Abraham Lincoln

      by Tanya on Wed Sep 24, 2008 at 09:23:40 PM PDT

      [ Parent ]

  •  equity stake (1+ / 0-)
    Recommended by:

    doesn't the Frank/Dodd plan include equity stake for participation?

  •  This is the Lifetime Channel Solution Site (0+ / 0-)

    when someone shows sufficient understanding to make a cogent comment vis-a-vis your tearful drivel - then POST IT

    •  are you suggesting (0+ / 0-)

      that you understanding is better than Soros'. Or are you just trusting Bush and Paulson

      To sin by silence when they should protest makes cowards of men~~ Abraham Lincoln

      by Tanya on Wed Sep 24, 2008 at 09:28:57 PM PDT

      [ Parent ]

      •  Yea I am suggesting that (0+ / 0-)

        and maybe you can even learn something about the real world - Don't take any real offense as I am a Democrat also, but I still believe the truth is the best perspective. Soros shorted the financials to make some huge profits and helped accelerate this debacle - never trust a pure capitalist who preaches for the common good while babies are piked and you move into the sewer. Here is your Lesson - read it and weep as I tried to make it as comprehensible as possible - and double-check the events - it's called "reading."

        • I won't explain all of it here, but just so some of you will have more than a Bowery Boy’s understanding of what has transpired I offer this Primer reduced to Lifetime Channel understanding points –
        • Picture this- Banks borrow money at a lower rate of interest than they re-lend it to you – the difference or margin is the profit to the bank so to speak assuming you are worthy of credit and pay the loan back
        • Lending entities that finance business inventory also borrow the money they lend and then re-lend it a higher rate to those hopefully able to repay it – for example, your local car dealer borrowed money to buy the new vehicles he or she hopes you will buy at retail – the entity that loaned the dealer the money to buy the car you will buy next week borrowed the money it lent to the dealer – starting to get the picture
        • Investment banks need borrowed money just to operate and put together large loans or even bonds with borrowed money raised from many sources – the investment bank takes a fee for its trouble and sometimes holds the asset created until a sale can be made to a third party
        • To go even further, there are financial entities that actually guarantee the repayment of loans – this is called a CDS or credit default swap – these are derivative instruments meaning they "derive" from some financial contract – for a large fee I will swap your risk of default on repayment so your loan to Corporation X is risk-free
        • Your car loans, mortgages, student loans, credit cards are all financed on borrowed money – even taking bank deposits and lending them is lending borrowed money
        • All of these transactions collectively make up what is called the financial markets – this is simplistic, but you can understand these real life examples
        • The present crisis goes at least as far back as 1997, some say 1995, and some even say 1977 – However, the LTCM debacle in 1998 should have awakened everyone about the risk models which forecast the probability of default on derivatives – what follows, and I have to be brief, but Greenspan and Rubin in 1999 assist and promote repeal of Glass-Steagall Act in 1999
        • commercial bank and investment bank barriers are removed – every form of loan is sold by commercial banks and bundled by investment banks
        • false bond ratings of AAA are handed out like candy so the big money will buy these instruments
        • profligate purchasing and lending of FMac and FMae under Frank Raines in particular, who literally gave away hundreds of billions of our money to a bunch of bums who had no intention of repaying a loan, no income, no assets, no job - No Problem
        • mortgages sold by regional banks and bundled into mortgage asset backed bonds by investment banks, AAA rated, sold all over the world and no one knows the intrinsic risks
        • The new breed of commerce arrives en masse  "securitized" financial instruments
        • ARMs justified because you are loaning money to the affordable housing community under the CRA of 1995 start to kick in and one default leads to another - each default lowers the value of the property around it
        • Housing inventory becomes gigantic from defaults yet money is so plentiful every builder and realtor in the U.S. are promoting new home building from the beach to the swamps
        • Bottom drops out of housing market - mortgage backed assets become illiquid because people now understand they are highly risky, and possibly wholly worthless
        • Construction industry stops dead, house sales stop - banks won’t lend any more money for such because they don’t know what their financial condition is because they either own or owe on these loans
        • Construction related industry workers (which are many) lose their jobs and now prime loans begin to default
        • Merrill is sold for half its value the month before; Lehman goes Chapter 11 to be cannibalized; AIG’s CDSs start to come due, the nation’s oldest money market fund "breaks the buck" meaning a share is worth less than the dollar you invested - .97 cents to be exact – redemption suspended
        • Major lending countries, pension funds, companies and people of all walks panic and start to pull any and all dollars (money) from our financial system - now every cent is leaving the market literally over night
        • RESULT - You learn how to trade bread for meat; protection for water; guns for butter – in sum, a barter economy is imminent (BTW, Greenspan saw this coming and blocked it all and began the move to give money to low or "no" income people who destroyed their property and had no intention of repaying any loan)
        • Last Wednesday night almost every liquid private dollar in our credit system was headed out-of-country - when you awoke on Thursday the financial system as you know it would have been gone - no bridge or expansion loans, no credit loans for re-lending; no credit cards, no capital loans, no cable television, no debit cards, YOU just moved into the Stone Age
        • GAME OVER – Just what the Hell do you think would have scared the shit of Pelosi so bad as to cause her to seek to solve an economic crisis that guaranteed Obama’s election  
        That’s a blow-by-blow for those without any background or understanding except an emotional knee-jerk reaction to the unknown.
        Stop Here If You Are Confused Because What Follows Is More Difficult

        However, this is not the worst of it. We wring our hands like scared children without a clue over the "mortgage" bailout. The larger problem is that no one knows what is inside the Pandora's Box of the off-balance sheet liabilities in the form of counter party guarantees (Credit Default Swaps) mentioned earlier. Everybody talks about the unknown quantity in the valuations of these Financials so have a quick sobering primer on Credit Default Swaps.  
        The Derivative Markets promoted by yours truly Greenspan (aka JP Morgan) and Robert Rubin (aka Goldman Sachs) is where the Nuke of Financial Meltdown is buried.
        The International Swaps and Derivatives Association, or ISDA, says the industry can police itself; the U.S. Securities and Exchange Commission says it has no direct supervision of trading in credit derivatives; and the CFTC [Commodities Futures Trading Commission] says it is not responsible. Only Britain's Financial Services Authority says that it plans to watch for unusual trading patterns.
        Warren Buffett famously described derivatives bought speculatively as "financial weapons of mass destruction."
        Collateralized Debt Obligations (CDO) ~$3 Trillion
        Asset Backed Securities (ABS) ~$5 Trillion
        Mortgage Backed Securities (MBS) ~$10 Trillion
        NYSE equities ~$18-20 Trillion (not so much lately)
        US GDP ~$14 Trillion
        Global GDP ~$55 Trillion
        CDS & Derivatives Market > $60 Trillion
        The derivatives market is more than four times US GDP and greater than the sum total of global GDP.
        Now let's wrap your heads around that.
        If this CDS market collapses with even a marginal destruction of value could result in the loss of Trillions, and, as with any other financial transaction, he with the commodity makes the makes. The Asians, Gulf States, and so many others have the liquidity and are currently providing Credit to the US Govt and Markets at an ever increasing rate  - if they pull the plug on your credit card, student loan, any and everything falls – and falls hard – it is a given that with the influx of all of our capital in the form of energy money to the Mid-East (that means buying gas and heating oil in common parlance) they will proceed to dominate your global financial future - IF YOU DESIRE A THRID WORLD COUNTRY AS YOUR OWN THEN STOP HERE - IF YOU LIKE YOUR PRESENT LIFESTYLE THEN READ ON BY ALL MEANS
        This is why DRILLING IS NOT NEGOTIABLE UNLESS YOU LIKE CAVES. Wall Street has dominated the global capital markets since the end of WWII, but more recently only as a conduit for global capital. The Black Hole that we fear should not be the one being contemplated appearing at the LHC but the one that has become the US Economy, with its self-imposed energy deprivation sucking capital from other countries all over the Globe so we can live above the fray. HEY FOLKS – GET A CLUE – THE PARTY IS OVER AND EITHER GET BUSY DYING OR GET BUSY FIGURING A WAY TO OUR OWN INDEPENDENCE AND THAT MEANS ENERGY REFORM – AND I DO NOT MEAN WIND OR SOLAR AS THAT IS PIE IN THE SKY – MARKET REFORM - AND BUDGET REFORM – IF YOU KNOW WHAT AN HORIZON EVENT IS THEN YOU WILL UNDERSTAND BECAUSE WE ARE ABOUT TO SEE WHAT INFINITE GRAVITY DOES ONCE YOU CROSS THAT MARKER.

        •  Shorting the financials was wise (1+ / 0-)
          Recommended by:

          Soros shorted the financials to make some huge profits and helped accelerate this debacle - never trust a pure capitalist who preaches for the common good while babies are piked and you move into the sewer.

          You're AN IDIOT.
          Shorting COULD not have made Soros any money UNLESS HE WAS RIGHT
          about the fact that these financial companies had behaved VERY BADLY and
          were going to LOSE BIG as a result.  They DESERVED to get shorted and he DESERVED to make his money for doing it.  Question: WHY DIDN'T THE FED
          AND THE TREASURY ALSO short these companies?  Why were THEY too stupid TO LISTEN TO SOROS?
          And why are YOU too stupid to notice that the fact that Soros got richer by doing this PROVES HE WAS RIGHT and the companies were wrong??

          "You can't nice these people to death."-- John Edwards

          by ge0rge on Wed Sep 24, 2008 at 10:26:44 PM PDT

          [ Parent ]

          •  Your like the French Banks (0+ / 0-)

            that financed the Nazi weapons acceleration effectively paying for their own doom - You are just a bitch in heat to Soros because you don't have any idea what he is or what he does - and YES, I am a Clinton Democrat - Oh how I pray for a return to rational thought and true talent

        •  This person is a troll (1+ / 0-)
          Recommended by:

          "You can't nice these people to death."-- John Edwards

          by ge0rge on Wed Sep 24, 2008 at 10:31:33 PM PDT

          [ Parent ]

          •  No George, sadly, your the Troll (0+ / 0-)

            because in the morning I will still understand what is transpiring and the only thing you have to hold onto to is your obfuscation and stupidity - There is one ray of hope though - you are not advising Obama on how the economy actually works - so make your silly comments because I don't lend much credence to those that react to controversy by spilling emotion anywhere it will pour

            •  I don't believe you understand jack (0+ / 0-)

              And I certainly know you don't understand better than I do.
              There is nothing immoral about profiting from a bubble.
              Everybody who tries to do this is taking the risk that the he will
              not be able to call the turn.  The risks and the rewards are commensurate.
              That is the way it is SUPPOSED to work.  And I do not feel the least bit
              threatened by this alleged possible meltdown.  MY state's treasury and
              pension funds are NOT significantly exposed to this.   My state treasurer
              just in fact volunteered to loan some of OUR money if it will help.
              Not to the US treasury at the usual T-bill rate, but to the actually afflicted
              players, or anybody who thinks he knows how to bail them out.

              "You can't nice these people to death."-- John Edwards

              by ge0rge on Fri Sep 26, 2008 at 05:48:13 PM PDT

              [ Parent ]

        •  Pretty close, imo (0+ / 0-)

          Good overview, but I think there are two important points to consider in all of this.

          The heart of the current meltdown is that borrowers and lenders don't know the value of assets on the books of each other since they are made up of mortgage-related assets. I can't make a loan to you if I can't evaluate your ability to repay it. And/or, I can't make a loan when I don't know the value of my own assets.

          This was not an issue as long as housing prices were going up. Worst case, you valued these assets at their nominal face value. But what is the value of a mortgage in a market that is collapsing? Will it foreclose? At what cost? Can the property then be sold? At what value compared with the underlying mortgage.

          So things freeze up when you have uncertainty like this, although it shouldn't take $700 billion to get better information.

          The second consideration is the CDS and other derivatives.

          I may offer you a CDS against a loss on your $1 million worth of mortgages and charge you $10,000 a year for that. This works out well for the seller as long as there are no losses. When there are and there is no reserve to cover them because the seller didn't anticipate major losses, there is a problem, but is it a $1 million problem?

          I don't think so. Sure, the person who thought they had insurance against a loss is very unhappy to find that there loss is in fact not covered, but the "loss," ie, what will ultimately be recovered, is closer to the value of the premium paid for the CDS than the face value of the CDS, ie, $10,000, not $1 million.

          Big problem, but in fact not financial Armageddon.

      •  Plus Tanya sadly (0+ / 0-)

        you can't even articulate what it is that Soros said - his meaning is hidden somewhere in the text of my last post - can you block and copy it?

  •  Interesting - the best analyses of the CDS (1+ / 0-)
    Recommended by:

    meltdown seem to come from outside the US.

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