Skip to main content

This diary augments my earlier Crisis 101 diary.

It is a primer of sorts that examines some of the cause and effect dynamics at work within the economic crisis we face today. It hopefully looks at some of the problems in a way that helps build a clear understanding of what went wrong, what sounds wrong, and what might be a better way to deal with what looks like the beginning of a bad recession.

It starts here, with a picture of where we are today:

If this is an economic crisis, why do we focus on the stock market?
Under normal circumstances, the market is a good leading indicator for future economic activity. In theory, it is only an indicator and has very little direct influence over the broad economy. The stock market suffered a crash in 1987, but the economy barely noticed. The market actually posted a gain for all of 1987.

The market's behavior so far most closely resembles the 1929 crash, but so many indicators are setting records, that historical comparisons are almost meaningless. So far, 6 of the 20 largest point drops in the market have occurred in the last month, and 3 of the 20 largest point gains have happened in the same period. Viewed another way, record dips are happening 1000 times more frequently than average, and record gains are happening 500 times more frequently than average. Last Friday, the measure of volatility called the VIX set an all-time record. The market is down 40% from one year ago. There is a reluctance to read anything specific into this extraordinary behavior because these events are not caused by normal business-cycle indicators.

There is definitely a negative disturbance in the force, and it appears to be feeding on itself. There was a fundamental imbalance in the economic business cycle that at first appeared to be a mild recession correcting for an overheated real estate market. It was actually a stock market event that began to flush out the extent of the problem, and help create an even bigger problem which is now affecting the broader economy.

It started with Bear Stearns, but the whole cycle can be best viewed for its purity and brevity by looking at the Lehman. The bankruptcy itself was blamed on a stock market activity called short selling, or shorting a stock. This is an act which allows someone to make money on the decline of a company's stock price. The mechanism is not important here, but there is a theoretical way to drive a distressed company into bankruptcy by shorting its stock; this is often referred to as a short squeeze on a company.

Lehman made exactly this claim about the cause of their demise, and they cried foul. They may have the cause correct, but to cry foul is pure bullshit because Lehman failed to fully account for their assets and liabilities. They claimed everything was roses but the short sellers could smell the garbage underneath. If Lehman was solvent, then they could have sold assets and purchased their own stock and actually punished the short sellers and made money in the process.

It was a shame they didn't have any assets they could sell. In this sense, the short sellers forced the true valuation of Lehman, which was zero, and bankruptcy resulted. The powers-that-be hated this and a ban on short selling financial stocks was instituted. This ban is suspected of being very costly as it deprived institutions which protect investments, an important tool to hedge against loss. If nothing else, the action certainly preserved the distrust of financial company valuations.

In my opinion, it also tipped off the government's awareness of the deep distress within the financial industry - an industry the government was supposed to regulate so something like this didn't happen.

The market action on Lehman had the effect of really driving fear into these companies not only for themselves, but fear of any institution which held the same type of investment vehicle as Lehman - the mortgage- backed security, or MBS for short. All the financial institutions held them, and the result has been an increasingly worse lockup in credit because none of the banks want to lend money to any other bank for fear the other party may be next to fold.

One major difference between the stock market and the economy is that the market is very sensitive to fear and euphoria. Investors tend to pile on to a good thing, and flee bad things. These actions can feast on themselves and raise the general level of nervousness. Market volatility is extreme right now, and many of the indicators are off the charts. Market players are jumping out of their skin. Everyone is trying to convince themselves that the are seeing a bottom to the market's decline, but it still marches down. The perma-bull cheerleaders on the financial networks are about the only thing that has capitulated; one of the biggest TV cheerleaders finally told everyone the other day to take enough out of the market to cover their cash needs for 5 years. I don't think he ever told anyone to sell a stock before.

This is one of the very rare moments where market fear has spilled over to the general public - enough so to aggravate the credit crunch by causing banks to hoard cash in the event of an actual bank run. All the factors together causing the credit crunch are now affecting the broader economy and depressing stock prices across the board.

There is now a general sense of fear from all directions, and every time the government announces a new radical action to solve the crisis, it acts to confirm things are getting worse. Maybe they ought to just shut up.

Why is credit so important? Doesn't anybody have cash?
It has nothing to do with that; you have to look at history and the roll credit plays in society.

Wealth is created through efficiency. For example, farming and raising livestock is more efficient than gathering berries and hunting. Like food, knowledge is an asset too, and teachers are sort of like brain farmers. With care, both are self-sustaining and will pay dividends over and over. Refrigeration is another thing that improves efficiency; it eliminates waste by preserving dead meat. Penicillin does the same thing, only with living meat. These are just a few examples of how efficiency improves our standard of living and quality of life.

Currency is another invention to improve efficiency. It acts as a universal asset to be traded with any other asset - including labor. Universal currencies are very popular tools for efficiency. The law is a universal currency which exists to keep the exchange of assets a zero-sum trade. If a price is agreed to by both parties, but one party fails to hold up their end of the bargain, the law notes the difference, attempts restitution, and charges steep interest to dissuade the same behavior in the future.

This even exchange of assets seems fair at face value, but if we only traded with assets at hand, there would be very little upward mobility for most of society. Trading in full, at fair market value can rapidly separate society into castes. Those with assets will quickly overpower those without assets in nearly all aspects of society. A farmer with a tractor will dwarf a farmer without a tractor in just a couple of years. The farmer without the tractor would never even get off the ground because his efficiency could never deliver the food prices the tractor would help deliver. If the farmer without could get a tractor on credit, he could be competitive right away, and through competition, he would help ensure the market obtained the lowest price for goods.

Credit is literally borrowing from your future self, but it requires a neutral party to facilitate the exchange. Credit allows more and more working capital to be obtained in the present by borrowing longer and longer into the future. You can obtain enough capital today to purchase a house by borrowing against 30 years of your future working capital. Credit accelerates and intensifies trade. If used properly, this can turn into improvements to our standard of living. The benefits of credit are huge. It is an efficiency multiplier, and that especially includes time. Despite what the government and advertising says, credit should never be used for shit you don't really need.

What are the downsides to credit?
Banks have to be careful to evaluate as many factors as possible which affect the risk of making a loan. They have to ensure they are compensated, on average, for all risk taken. If the bank itself has any debt obligations, then it has a duty to notify its creditors of the additional risk they will assume from the bank itself taking on new risk. Banks typically compensate for this additional risk by offering interest to its creditors in direct proportion to their exposed risk. The system breaks down if risk is improperly calculated or improperly passed along without compensation.

Banks will first attempt to mitigate risk by demanding a down-payment or by holding a lien on some asset owned by the borrower. If the loan is for the direct purchase of an asset, the asset itself may be considered as collateral, as is the case with mortgages.

Even if everything goes well with the loan, the bank is still exposed to the risk of inflation. In fact, the loan itself contributes to inflation in its own small way. Credit effectively increases the current supply of money, and when the supply of money increases, it has the effect of raising prices. To understand why this is, pretend the government gave everyone $1 million dollars; people will spend a portion of this extra money on things they desire. This might cause an increase in demand for a particular product which will cause an increase in the cost to  manufacturer the product to meet the demand. Factories will have to pay time-and-a-half for overtime, or maybe build expand its operations to keep up with demand. Since demand is high, they will pass this cost on right away to offset these costs. The general trend in a stable economy is always for prices to rise, so that today's dollar buys more than tomorrow's dollar. This can have a huge impact on a business with thin margins if inflation is not accounted for.

Everything has to be done carefully and honestly for the credit system to work, and this means complete transparency in the process. The bank needs to know if the borrower has the ability to pay back the loan, and this includes discovering any other creditors the borrower might have. The bank cannot expect to be first in line for payment without the other creditors agreeing to that, and it cannot expect the borrower to forgo basic necessities to repay the loan. The bank wants to lower risk, not increase risk.

As outlined in Crisis 101, lenders involved in the current crisis were perversely encouraging risky loans. The lenders were repackaging the debt in fancy ways that did not properly reflect the underlying risk. This fact was hidden at first by the asset bubble the lenders themselves created by increasing the money supply directed to the housing market. The way the high-risk mortgages were structured actually increased the risk of default after an initial, affordable 'teaser' rate reset to a higher rate later on. The loans worked as long as the bubble didn't burst - something they always do.

Now, not only were the lenders being deprived of income streams that erased any profit being made on the lend/borrow credit spread, but the complex bonds they were selling were in part valued against collateral (the deeds to the houses) which was losing value - collateral was shrinking, but the size of the loan wasn't. All the big banks and investment funds were holding these instruments that nobody dare value and nobody could sell. Alan Greenspan used to brag about these instruments and say that they smeared out risk, but because the risk assessment was flawed at best, or fraudulent at worst, what they did is smear around distrust.

Will the bailout work?
Work for whom?

The initial plan to buy up the toxic crap that the big banks own was a disgusting top-down approach of solving the crisis. Paulson should be drawn and quartered for even floating it. The idea was to provide the banks with working capital while at the same time removing big chunks of distrust from bank balance sheets. The distrust exists because of the unwillingness on the part of the banks to make a market for their distressed assets by reducing the asset value until they become marketable. They are doing this with the full assistance of the government because if they are forced to discount to a price that would sell on the market, then they would be bankrupt.

If by some chance this form of bailout worked, then it will have done so by effectively re-inflating the housing bubble so only the banks can enjoy the rewards of selling assets at that level. They would be doing so fully at the expense of the taxpayer. In addition to servicing banks, the Fed recently opened up their discount window to non-depositor banks such as brokerages and other lenders and financial institutions. The Fed also extended the loan duration through the window from overnight to 90 days, which allows them to rollover debt and prolong their death struggle and their hoarding ways. I can see no qualitative difference between financial institutions and any other corporation, except any other corporation is probably more solvent and certainly more honest and deserving. Any company that is being hurt by difficulty accessing revolving credit or commercial paper should be eligible for the Fed window, and the Fed could do that right now.

Another problem with purchasing toxic assets is that the amount of money Congress has approved is only enough to purchase maybe the sub-prime securities and does nothing to address the other $5.5 trillion MBS's that are losing value and becoming distressed too. They have already snuck in a $40 billion per month troubled asset purchase facility through Fhonie May and Fradie Mac.

The only thing that will stabilize the further erosion of the MBS's is by having every home and office park occupied by paying mortgage holders.

It is extremely doubtful that housing will lead us out of this recession which is for all purposes, just getting started. There are plenty of indicators suggesting it could be quite deep with some jarring dips. For example, we have to wrap our minds around the fact that Ford and GM might not survive. This will impact the full vertical gambit of markets that service the auto industry - everything from steel plants to car dealerships.

Given the reality of the recession, spending at the top could prove to be very costly since we could be looking at the possibility of having to spend it at the bottom anyway. People are going to need jobs, or they are going to need food, clothing and shelter.

The government is now talking about altering the bailout plan by purchasing stakes in the banks along with buying the toxic crap. The thing is, they have to do this fast, and unless they purchase 51% of the banks, they will not be able to force the banks to lend. The only thing it will do is dilute all the investors. It increases moral hazard and lowers the reluctance of bank officers to raid on the way out. Nothing about it ensures a fix either - it is all just a gamble by Paulson, and his record at the craps table is open for all to see.

The traditional way out of bad recessions is through exports, and we are not making any moves to improve our ability to manufacture and export. I have no idea to the exact degree, but I sense that globalization has put us at a real disadvantage in this area.

Given the rate which the government has been willing to print money for this crisis so far, and given that we are already deep in debt, once there is an uptick in the economy, we will have to pull hard on the reigns to keep from entering a severe inflationary period. That means other countries will probably be poised to recover faster than us. The world could end up flooded in dollars, and countries who thought their pile was something special will be pissed. Pissed enough to hurt our ability to trade, and maybe even pissed enough to let loose a few missiles at a warship or two of ours. China has spent years climbing to the rim of the first-world plateau. If our actions are not in line with their best interests, and we are in a vulnerable state, then we may find out we are not so exceptional after all.

What if this last best hope doesn't work?
Then we stand in line for meals of Soylent Green and wait for Pelosi to ship us government-supplied work boots that are made in China. We can wear them to our new jobs running from line to line signing up for jobs that don't really exist.

So, what might work?
I'm not qualified to answer that, but here is a video of a guy who probably is. Last year, Nouriel Roubini outlined a 12-step process that could lead to the situation we are in right now. Others can claim they saw it coming too, but this guy gave specific events that he saw as likely and warned of the dangers. One thing that he probably can't say for political reasons is that Paulson was incubated in the very system he is trying to save. I know we are supposed to believe Paulson is impartial, but we are also supposed to believe he never saw this coming too. Roubini should be heaping scorn on Paulson, but that might be a bad career move for an economics professor.

One of Roubini's remedies is for Paulson to draw up a list of the banks that are deemed solvent and shut down the rest. It makes sense to me; in fact, if the only bank left standing were the Fed, then it could do everything that it wants to do monetarily without having to rely on the cooperation of other banks. Let the banks fail, and suspend indefinitely the CDS contracts - they won't be needed anyway. Leaving half the big banks standing in a wobbly state in the middle of a recession actually sounds dangerous to me, given their inability to look past their own self-interest. I don't see how a bunch of banks can fail while leaving the CDS market intact. I don't see how forcing them all to stay solvent is feasible either; not without making life miserable for the next 3 generations of our children.

Is there nothing else?
Sure there is; I don't know this for a fact, but Roubini might be viewing this whole thing at a professional level and staying within the sterile bounds of an economist.

I'm not sure if a modern economist can call for a Keynesian plan B without ending his or her career. To me, it would be like a preacher recommending we try the devil since God might not be listening. I'm exaggerating, of course.

This is just a personal opinion, but the US could start right now with a bottom up attempt at fixing the economy. It will be the last time for a long time to work on the infrastructure.

We could be working on a plan right now for the construction of a high-speed mag-lev bullet train which links every city in America. Further, this train could be powered 100% by green energy generation projects. It is probably the only way to take a shot at besting China's awesome supply chain infrastructure. We could build cargo-only train lines which run down the middle of planned total-industry corridors designed to take raw materials in at one end, and spit out boxed, finished products for consumption and export at the other end. Living 100 miles from work would mean nothing if a train gets you there in a half hour. GM or Ford could get the contracts to build the drive trains, and some other company that actually shows good aesthetic taste could build the passenger compartments. Anyone in the world who has a product that could benefit from plugging into our utra-efficient supply chain and (hopefully) inexpensive and green power source is welcome to set up shop along an environmentally controlled industrial corridor. We will handle your waste recovery and reprocessing - you won't.

Maybe someone here might have fun running numbers on this kind of a project just for giggles.

A railroad once kept people employed from coast to coast in this nation. Don't tell me it can never happen again. What the hell else might there be to do if things start coming unglued? The projection is for this recession to hit the globe. How each country uses its down-time might prove to be important. I hate the idea of throwing good money after bad to save a handful of banks. There will be new banks.

Originally posted to MouseOfSuburbia on Sun Oct 12, 2008 at 03:51 PM PDT.

Your Email has been sent.
You must add at least one tag to this diary before publishing it.

Add keywords that describe this diary. Separate multiple keywords with commas.
Tagging tips - Search For Tags - Browse For Tags


More Tagging tips:

A tag is a way to search for this diary. If someone is searching for "Barack Obama," is this a diary they'd be trying to find?

Use a person's full name, without any title. Senator Obama may become President Obama, and Michelle Obama might run for office.

If your diary covers an election or elected official, use election tags, which are generally the state abbreviation followed by the office. CA-01 is the first district House seat. CA-Sen covers both senate races. NY-GOV covers the New York governor's race.

Tags do not compound: that is, "education reform" is a completely different tag from "education". A tag like "reform" alone is probably not meaningful.

Consider if one or more of these tags fits your diary: Civil Rights, Community, Congress, Culture, Economy, Education, Elections, Energy, Environment, Health Care, International, Labor, Law, Media, Meta, National Security, Science, Transportation, or White House. If your diary is specific to a state, consider adding the state (California, Texas, etc). Keep in mind, though, that there are many wonderful and important diaries that don't fit in any of these tags. Don't worry if yours doesn't.

You can add a private note to this diary when hotlisting it:
Are you sure you want to remove this diary from your hotlist?
Are you sure you want to remove your recommendation? You can only recommend a diary once, so you will not be able to re-recommend it afterwards.
Rescue this diary, and add a note:
Are you sure you want to remove this diary from Rescue?
Choose where to republish this diary. The diary will be added to the queue for that group. Publish it from the queue to make it appear.

You must be a member of a group to use this feature.

Add a quick update to your diary without changing the diary itself:
Are you sure you want to remove this diary?
(The diary will be removed from the site and returned to your drafts for further editing.)
(The diary will be removed.)
Are you sure you want to save these changes to the published diary?

Comment Preferences

  •  They always end up longer than I intend (15+ / 0-)

    I'll get it right someday.

    We said we want change, and they gave us a handful.

    by MouseOfSuburbia on Sun Oct 12, 2008 at 03:53:20 PM PDT

    •  Really great diary (1+ / 0-)
      Recommended by:

      Learned a lot reading it. Thanks.

      "Hey! Where's my applesauce?!!!" This comment brought to you by the Bureau of Brilliant Campaign Imagery and the cheese aisle.

      by Parallax857 on Sun Oct 12, 2008 at 03:58:07 PM PDT

      [ Parent ]

    •  That's the hazard of trying (2+ / 0-)
      Recommended by:
      Compound F, MouseOfSuburbia

      to condense a complex and dynamic system into a diary.  Your first section on why Lehman fell is so good that could stand alone as a diary.  And might get a wider audience because it's easier to digest this stuff in small bites.

      Enron is another example of a company crying foul when the truth is that the market only cried foul when it opened its nostrils and smell the stench.

      What FDR giveth; GWB taketh away.

      by Marie on Sun Oct 12, 2008 at 04:04:42 PM PDT

      [ Parent ]

      •  It's the dynamics of the system that... (0+ / 0-)

        attracted me in the first place. It's just a hobby, but the layers of complexity that arise from the system are compelling to a... complexity-compelled person.

        Mix in the philosphy of greed and all the corruption put to real use and it's a source of great angst for someone who loaths injustice.

        Other than that, go Sox!

        We said we want change, and they gave us a handful.

        by MouseOfSuburbia on Sun Oct 12, 2008 at 04:11:59 PM PDT

        [ Parent ]

  •  I will NOT eat Soylent Green! (1+ / 0-)
    Recommended by:

    Something better work!
    Thanks for the good info.

  •  Thanks! (1+ / 0-)
    Recommended by:

    Great diary with lots of good info.

  •  It would be great if the US went this direction (1+ / 0-)
    Recommended by:

    I was just reading an article today about the UN working on a "Green New Deal" to help the world's economy (not to mention averting environmental catastrophe).

    I hope the people in the U.S. see this as a direction they want to go in.  

    Here's the article

    •  Thank you very much for the link (1+ / 0-)
      Recommended by:

      All this stuff has to be scanned for common ideas that will help us for a change.

      A Green New Deal has no downside.

      If need be, I would rather start within a socialist system and work out, than try and fight the self-interest of US-style capitalism to get anything good done.

      We said we want change, and they gave us a handful.

      by MouseOfSuburbia on Sun Oct 12, 2008 at 04:17:15 PM PDT

      [ Parent ]

  •  there is no political will to change. (4+ / 0-)

    Sadly, Paulson, Congress, and even Barack Obama will do everything in their powers to re-float the old unsustainable system, give it one last go.  Good diary.

    We don't have time for short-term thinking.

    by Compound F on Sun Oct 12, 2008 at 04:16:59 PM PDT

    •  You are brave to say it and exactly right (3+ / 0-)
      Recommended by:
      Compound F, Dianna, JG in MD

      In my opinion, Obama has got to get out in front of this fast.

      He doesn't have to scare anyone before election. He can promise that we will keep very busy by turning inward if the recession becomes severe.

      There are many things that I hope he will announce after being elected. Hope and change is what he is peddling. Many will hold him to it.

      We said we want change, and they gave us a handful.

      by MouseOfSuburbia on Sun Oct 12, 2008 at 04:21:26 PM PDT

      [ Parent ]

  •  Military spending is for the most part... (1+ / 0-)
    Recommended by:

    useless waste, the two wars are having a taxing effect on the economy and all of those planes, trucks, etc...wil be of little use a few years from now, obsolete by new generation of planes, trucks, etc....we need to reign in military spending, end the wars and use those funds for something useful, improving roads, energy independence, housing for the poor, etc....

    "Just once, why can't one of our poorly considered quick fixes work?" -The Onion

    by expatinmex on Sun Oct 12, 2008 at 04:31:31 PM PDT

  •  So why then... (1+ / 0-)
    Recommended by:

    didn't the downstream buyers of mortgages scrutinize their true value? Kuz there was always another buyer further away? Kuz of somethig like social loafing arising from the fact that some other institution had already conducted a review of the buyer's credit-worthiness? Fraud? Disinterest in the consequences by the persons actually actually appraising them?

    In other words, what is the market failure here?

    This, BTW, is some good shit.

    •  And I think when the going was good (2+ / 0-)
      Recommended by:
      SadEagle, Pinko Elephant

      investors didn't want to know any more than keep the returns coming in.

      It all becomes so obvious in hindsight. Of course they should have checked, and the government should have too, since the MBS market was larger than the treasury market.

      We said we want change, and they gave us a handful.

      by MouseOfSuburbia on Mon Oct 13, 2008 at 02:16:01 AM PDT

      [ Parent ]

  •  What I'm getting from all this (3+ / 0-)
    Recommended by:
    SadEagle, signals, MouseOfSuburbia

    From what I can see, the crisis happened not because the sub-prime mortgages went sour, but because the failure of a significant number of sub-prime mortgages forced the evaluation of the MBSs, exposing the fact that they were worthless.

    If it was just the mortgages defaulting, the banks might have felt pain, but with title to the collateral, their losses would have been survivable.

    It was the multiple layers of value-inflating securities that drove the financial system over the edge.

    There's got to be a special place in hell for the CEOs and managers of all the financial houses that did this.

  •  Not a very cheerful mess is it? (1+ / 0-)
    Recommended by:

    Thanks for all the work you put into these and I'm so glad it got rescued.  We are living in "interesting times" aren't we.  You've certainly improved my knowledge of what's going on.  The problem is that living on a fixed income I feel just like a chip in a whirlwind and thinking it will probably turn into a tornado.  

    "Vote Your Hopes Not Your Fears."

    by YellerDog on Mon Oct 13, 2008 at 10:16:28 PM PDT

    •  I wish these people could read what you wrote (0+ / 0-)

      Living on a fixed income leaves no slack. How dare they waste your money!

      We should be running surpluses and easing your mind. I am ashamed that you even have to see how poorly our government is serving you.

      We said we want change, and they gave us a handful.

      by MouseOfSuburbia on Tue Oct 14, 2008 at 05:48:36 AM PDT

      [ Parent ]

  •  Fear comes from ignorance (1+ / 0-)
    Recommended by:

    The reason why every lender has to fear that every borrower might be "the next to fold" is that THE LAW THAT WAS ORIGINALLY WRITTEN BY PHIL GRAMM to bring CDS's into existence DID NOT REQUIRE ANY TRANSPARENCY
    or regulation.  In a sane world, everybody would be required by law TO KNOW just what debt everybody else was insuring.  But CDS's ARE UNREGULATED and everybody actually was INTENDING to profit off of EVERYBODY ELSE'S IGNORANCE (and their own superior knowledge) of what everybody else's actual financial state was.  THAT is the root cause of the problem.
    People shouldn't have to rely on "smelling the rot" to learn the true valuation of Lehman or of anybody else: SOME pieces of this (including the CDS piece) SHOULD JUST ALWAYS AUTOMATICALLY BE PUBLIC.
    In a sane or rational regulatory scheme, there would've been a public exchange and general transparency for these things and there would've been no shocks or surprises (and no speculative bubble).

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

    by ge0rge on Mon Oct 13, 2008 at 10:22:50 PM PDT

    •  Exactly. They are supposed to be the pros (1+ / 0-)
      Recommended by:

      And now they are taking our taxes to throw good money after bad.

      It's like going to the doctor for a checkup and waking up without a kidney and then being told it was needed by a rich person who destroyed his with booze.

      We said we want change, and they gave us a handful.

      by MouseOfSuburbia on Tue Oct 14, 2008 at 05:52:19 AM PDT

      [ Parent ]

  •  correction - "short squeeze" (2+ / 0-)
    Recommended by:
    MouseOfSuburbia, SciVo
    definition from investopedia:

    a short squeeze is when those who have shorted a stock get squeezed when the stock makes a run upwards. the shorts scramble to buy stock to cover their positions, driving the stock up further. what you are referring to in your diary is a bear raid, that is, when short sellers attack a stock, selling borrowed shares (or, with naked shorting rampant these days, without even borrowing the shares) into a falling stock price, driving it down further. taken to an extreme, a bear raid can "break" a stock, as well as the company itself. this is what happened to lehman. had the SEC not gotten rid of the uptick rule, as well as the naked shorting, lehman and AIG both would probably still be around as an ordered divestment of some of their assets would have allowed them to stay solvant.

    •  Thank you for the info on this (0+ / 0-)

      If you think about it, to beak a company, some level of nakedness had to be involved. Not every share was borrowed.

      We said we want change, and they gave us a handful.

      by MouseOfSuburbia on Tue Oct 14, 2008 at 05:55:24 AM PDT

      [ Parent ]

      •  you're welcome (2+ / 0-)
        Recommended by:
        MouseOfSuburbia, SciVo
        and yes, there was absolutely naked shorting going on with lehman, as well as AIG. mccain was criticized for calling for cox's job, but that is one of the few points of agreement i have with him, although probably for different reasons. but at the end of the day, cox was just following the laissez faire philosophy of the republicans. the only real solution at this point is to purge our government of the adherants of that mindset and reinstate the safeguards that were created in the wake of the great depression. fortunately for me, i saw the writing on the wall and switched my portfolio over to cash a year ago. now that it looks like obama is going to win i am buying stocks again, although i am staying far away from the financial sector! alternative energy looks good.
  •  Thank you diary rescue! (2+ / 0-)
    Recommended by:
    MouseOfSuburbia, SciVo

    You have done it again.

    And thank you Mouse - great diary.

    I am/was/still am/maybe? planning to buy my first house in the next 2-3 months.  This was "the plan" over 6 months ago - I need to find a place to live in this time frame.  Is this an utterly stupid idea at this point?  Should I rent instead?

    McCain economic policy shaped by lobbyist

    by signals on Tue Oct 14, 2008 at 12:30:59 AM PDT

  •  Attempts to explain the crisis are doomed (1+ / 0-)
    Recommended by:

    if we insist on using conventional economic models and language.  However, regular folks have had no trouble explaining the situation we are in - capitalism sucks.  The absurdities and contradictions of capitalism have been obvious to working people for a long time, its just that they are resigned to their fate.
    Take, for example the notion that "the miracle of compound interest" will produce perpetual prosperity.  Average folks just see it as doomed Ponzi scheme.  Take the idea that individual greed will produce social benefit through the "invisible hand."  Never worked, can't work, and invariably produces wealth disparities and social conflict.  All this is well known to average people.
    Toss out your textbook economics.  Start over.  build a real world based on actual human beings and recognizing real human values, nature, and behavior.  "Economics" is an artificial construct entirely built by humans - let it go.  Our only enemy is ourselves.

    •  And getting the idea to stick is... (1+ / 0-)
      Recommended by:

      nearly impossible.

      I really poured it all out a week ago in this diary.

      I get into how Milton Friedman and the Rational Choice theory have been totally abused by the so-called free market politicians. Nobody read it, of course.

      We are on a very dangerous course, and the most dangerous aspect is the total lack of accountability. Friedman's early and continued interpretation of free market efficiency demanded a lack of accountability. The president of a company is expected to do his job, and that job is to deliver shareholders value. If that means cutting costs at the expense of public safety, so be it. Etc, etc.

      If you have the time, you might want to take a peek because I also dug up a few nuggets in it. For instance, in Friedman's last exchange, in his last interview, he implicitly ackowledged the need for regulations.

      Now that I think about it, it's probably what killed him.

      We said we want change, and they gave us a handful.

      by MouseOfSuburbia on Tue Oct 14, 2008 at 06:45:50 AM PDT

      [ Parent ]

      •  I looked at the diary you mentioned (1+ / 0-)
        Recommended by:

        It is a bit long which probably accounts for the low response.  However you mention Howard Zinn, one of my all-time heroes, and Milton Friedman, one of the all-time purveyors of evil in the twentieth century.

        I am an anthropological anarchist, as I think Howard Zinn is although he may not use the term.  I start with a simple proposition:  We who dominate this planet are all humans, and our nature is best explained by the anthropologists.  They note some basics:  We survived and evolved as a species because we are a social animal, utterly and intrinsically dependent on cooperation (not competition).  Our other fundamental and intrinsic characteristic is that our survival and our lives depend on the possession and transmission of a culture, a shared belief system.  Religion or culture, call it what you will, is as part of being human as walking upright.  Read Jared Diamond (Guns, Germs, and Steel)and others to discover how our different cultures, for unique and transient historical reasons,  brought us to our present perilous position.  We lost our ancient ways and allowed a wealthy, powerful few to dictate our history for several millenia.  They abused culture, manipulated it, and unsuccessfully tried to impose unnatural behaviors on the entire population of the world.  This was a strange side effect of various tribes expanding to cover the earth.  The conditions that allowed that sad history have vanished, now that humankind has reached the ends of the earth.  Those conditions will never return, in spite of those who fantasize about inter-galactic colonization.

        We now must rely on our human nature to bring us back from the brink.  It is self-evident that every human institution depends on belief.  Once we return to the belief that it is immoral to be greedy, immoral to exploit our brothers and sisters, and immoral to destroy our environment, the system will right itself.  New economic arrangements will flower and become permanent, sustainable, and stable simply because they will be in harmony with our own nature and the world God gave us.  Imagine this (think like John Lennon) and you will have an epiphany.  Suddenly the horrible mismatch of the consumer culture that has been foisted on us will be seen as utterly in conflict with our very nature.

        •  Exactly. (0+ / 0-)

          In computers, there are two opposing 'heuristics' sometimes used to solve problems; greedy and lazy.

          The greedy approach always advances toward the goal when an opportunity becomes available. The lazy approach only advances toward the goal when an opportunity is more optimal than the solution at hand.

          The greedy gets things done quick, the lazy gets things done optimally. Knowing when to use which one is where difficulty arises.

          Free market capitalism always favors the greedy approach. A timber company which owned land can quantify the benefit from replanting. A timber company which just leases logging rights cannot justify replanting without being compelled. Only lawmakers can do the compelling, but they are not disinterested arbiters, and that has never been more true.

          Like you say, the free market mentality has to be removed from lawmaking. Society is a third party to free market activity, and it must be entitled to equal consideration when policy is formulated.

          There should be some type of credit that allows society to put up the same resources to compete with the capital used to influence the Capitol.

          Thanks for giving it a look. It was long.

          We said we want change, and they gave us a handful.

          by MouseOfSuburbia on Wed Oct 15, 2008 at 12:04:37 PM PDT

          [ Parent ]

  •  it's too late to recommend (2+ / 0-)
    Recommended by:
    signals, MouseOfSuburbia

    or give mojo, apparently, but this is really fine work, and I'm grateful

    maybe not what I wanted to read over my morning coffee, but it at least reminds me to straighten my tinfoil hat before I go out in public

    which is not snark

    but which is to say that we seem to be entering a very dark time, and our last best hope is apparently a leader from whom the election might yet be stolen and in whom we can only hope, because nobody hoping to be elected could say (nor even have time to imagine) anything like truth to the electorate

    Beware all ventures which require new clothes, and not a new wearer of clothes. -- Henry David Thoreau

    by Shocko from Seattle on Tue Oct 14, 2008 at 03:39:48 AM PDT

  •  Deadly Efficiency and Transit 2020 (2+ / 0-)
    Recommended by:
    signals, MouseOfSuburbia

    I wrote a diary a few weeks back titled Deadly Efficiency, which hits some of the same themes you wrote about here.  The rapid mobility of capital can produce both wealth and poverty, depending on whether, where, and how we hold reserves.  The deregulation wave led to an essentially reserve-less financial system, and that increases market volatility: opportunistic times are very good, but risky times are also very bad.

    Part of getting out of this will be recognizing that there is only so much wealth - only so much efficiency - we can safely wring out of a given production base.  At some point, to safely increase wealth, we'll have to increase our production base.  Now would be a good time to start.

    And your idea about high-speed rail mirrors my Transit 2020 Program, which sets as a goal that by the year 2020 every U.S. city and town both has and is linked by state-of-the-art mass transit.  That would be high-speed rail between cities, and light rail within cities and towns.  This would, as you suggest, create millions of jobs, and jobs here in the U.S., because you can't lay high-speed rail in Indiana from Indonesia.  This wouldn't be a build-then-bust job market, as it would create permanent jobs in operation and maintenance.  But those are only first-order jobs.

    A state-of-the-art mass transit system would also create second-order jobs; rail hubs and stations would be natural commercial nexi, creating demand for small but profitable commuter retail and service businesses.

    And, as your diary implied, rail doesn't require portable energy in the way that cars and trucks do; rail can be powered from fixed plants.  That allows us to break our oil addiction, by shifting over to cleaner, renewable transportation energy sources.

    All of that increases our production base, and thus allows us to increase GDP without resorting to high-volatility, "deadly efficiency" financial markets.

    •  I am going to read it now. (2+ / 0-)
      Recommended by:
      signals, NCrissieB

      How much free time do you have?

      Take a look at this comment from a diary I just wrote today. Someone was still thinking about trains.

      What do you think it would take to do a decent and realistic job of working up the numbers for a system?

      We said we want change, and they gave us a handful.

      by MouseOfSuburbia on Tue Oct 14, 2008 at 07:01:22 AM PDT

      [ Parent ]

      •  Thank you :) (1+ / 0-)
        Recommended by:

        The specific costing of a Transit 2020 Project exceeds my knowledge and experience, I'm afraid.  I'm not a civil engineer, so any estimate I might offer would doubtless miss a thousand details I know nothing about ... and all of those details would cost money.

        What I would do, if I were Barack Obama, would be to hire a half-dozen or so of the best engineers in the country, give them a simple mandate - "Come up with a plan to ensure that, by the year 2020, every city and town in the U.S. has and is linked by state-of-the-art mass transit" - and let them put their training and expertise to work hammering out a concrete plan.  I'd ask them to cost-optimize, but not at the expense of quality and scope of service.  That is, to provide him the most cost-optimal plan that fits the mandate.

        Then take it to the Congress, and the people, and sell it.

        •  I read your diary. I am convinced... (1+ / 0-)
          Recommended by:

          there is a collective wave of thinking passing over this nation right now. The thinking is that, at the worst time, we are not making smart decisions and there are better ways.

          You know, I believe that even if this bailout plan works beyond their wildest dreams, all it will have done is kick the can down the road, and it will have shortened the road considerably. Nobody wants to be the one to say to the public that we are going to have to change our ways.

          Ironically, if they think past that, they may never have to say it.

          Look at healthcare: the free market has not provided it, but the free market would go into convulsions if the government announced even basic remedies, such as eliminating patent protection for drugs. We already fund 48% of the R&D costs for drugs, but the private sector gets to patent them and charge triple for the brand name.

          The government is industry's bitch, and we are all sugar daddies now.

          We said we want change, and they gave us a handful.

          by MouseOfSuburbia on Tue Oct 14, 2008 at 07:45:34 AM PDT

          [ Parent ]

          •  The odd thing is.... (1+ / 0-)
            Recommended by:

            Nobody wants to be the one to say to the public that we are going to have to change our ways.

            From what I'm seeing, the public are way out ahead of the politicians and the media on that.  We are already changing our ways.  That's why the stimulus package didn't work as planned.  Americans didn't simply rush out to spend the money.  They paid off some bills, and put the rest away in savings.  We know the challenges, intuitively if not expressly, and many are already tightening budgets, cutting out conveniences we mistook for necessities.

            It's nearing the point that when some politician finally does 'dare' to give us the "bad news," he's likely to hear in response:

            "Yes, that's bad.  But it's not news."

            •  I don't ttally agree (1+ / 0-)
              Recommended by:

              Democrats are out in front, but you only have to look at the 2008 RNC to see that half of the country is insistent on manufacturing a different, exclusive reality.

              It's nothing less than shocking.

              We said we want change, and they gave us a handful.

              by MouseOfSuburbia on Wed Oct 15, 2008 at 12:07:16 PM PDT

              [ Parent ]

      •  MagLev Bullet Train? (1+ / 0-)
        Recommended by:

        How about just getting the railroads to run as quickly and reliably as they do elsewhere?

        Please read:

        While the rest of the world builds high-speed railroads, we contemplate floating trains.

        Just getting the railroads and transit systems back up to 1940's levels would take a generation.

        •  I was going to use a new power grid... (0+ / 0-)

          as an example, based around the Pebble Bed Reactor design, but convincing people it's safe is difficult because it's pretty technical.

          Here's the thing: I read the article you linked to, and I didn't really see the disqualifiers. Just because Germany didn't do it, really doesn't tell me much. They already have rails, so there is incentive to stay compatible.

          You could be exactly right about the type of train. I just liked the idea of mag-lev because they are much quieter and theoretically safer.

          I guess my main point was that we should be doing something big with our starting price tag of $700 billion. I really hate the idea of giving it to banks so they can lend it back to us. None of it addresses jobs.

          We said we want change, and they gave us a handful.

          by MouseOfSuburbia on Tue Oct 14, 2008 at 11:01:29 AM PDT

          [ Parent ]

Subscribe or Donate to support Daily Kos.

Click here for the mobile view of the site